This week there's been more positive data from the US on retail sales, though the latest consumer confidence readings weren't so good. But markets have been rising steadily in London and New York. And investors are still feeling very bullish, says David Stevenson in Money Morning.
But here's the caveat - lots of bullishness is often a cause for alarm. And it may not take too much bad news to jolt investors.
"Consensus thinking among investors tends to be wrong. When sentiment changes, the impact on markets can be nasty. And the higher stocks have climbed, the bigger the potential damage to prices. What might be the catalyst for such a change in trend? Often the biggest threats to markets stem from unexpected events. Or from something that had been discounted as a risk factor."
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And David thinks there is one risk that everyone is far too sanguine about rising food prices. "This time last year, one statistic was freaking out politicians and markets alike: global food prices had risen by more than a third within a year".
"What was the problem? Demand was growing faster than supply. Bad weather had caused poor harvests. Soaring feed costs made animals more expensive to rear. So farmers had to push up selling prices to make ends meet".
Further, bankers and traders started punting big chunks of new QE cash on the commodity markets. "That made matters worse. Then the surge in the cost of basic foodstuffs filtered into supermarket prices. This drove up overall inflation". Food shortages caused riots and were a major factor in the Arab Spring uprisings.
Now early warning signs are flashing again. "Global inventories of wheat and soybeans are falling more rapidly than expected. This could drive supply and demand out of kilter again, which would drive
prices higher once more."
It's early days, but investors should keep an eye on food prices. We're not keen on betting on soft commodity prices directly, as they're pretty volatile. But other beneficiaries of food price inflation are UK's supermarkets. And my colleague Phil Oakley recently ran the slide rule over Wm Morrison.
How to beat Warren Buffett
What makes a good stock picker? Poring over a company's figures until you really understand it and its markets is one way to success. This is known as 'bottom up' investing - it ignores 'top down' macro-economic trends.
Dr Mike Tubbs, a committed stock picker and author of the Research Investments newsletter, has just launched a defence of his way of doing things.
"Here at Research Investments we don't get too hung up on what the broader stock market is doing", he says. "We prefer to focus on individual stocks. Of course, big market moves can affect all stocks. But as long as we focus on strong individual companies, with excellent long-term prospects, we shouldn't worry about short-term market noise".
"What we look for are companies that have the potential to grow using their own strengths, whatever the market is doing. The portfolio at the end of each issue is full of examples of this sort of company with different risk/reward balances."
It sounds pretty simple, but that's good. It's amazing how many investors become distracted by complicated investing theories. Of course, the real proof is in the performance figures. And Mike stands up pretty well on that count too. In fact, he's been comparing his results with one of the world's most famous investors none other than Warren Buffett and his Berkshire Hathaway funds.
"In 2009 the Research Investments portfolio was up in value by 39.1% compared to Berkshire Hathaway's share price up 2.7%. Berkshire's book value was up 19.8%. In 2010 the RI portfolio was up 36.6% compared to Berkshire's share price up 21.4%. Berkshire's book value was up 13.0%. In 2011 the RI portfolio increased by 4.9% but Berkshire's shares were down by -4.7%. Berkshire's book value was up 4.6%."
That's not to take away anything from Buffett. After all the 'Sage of Omaha' has an impressive record that stretches back to 1965. Nevertheless Mike is understandably pleased that he's beaten one of the best over the last three years. And he's working on another new idea, which should be ready soon.
Dr Mike Tubbs' Research Investments is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares; never risk more than you can afford to lose. Please seek independent financial advice if necessary. Customer Services: 020 7633 3600.
A property market where you shouldn't lose money, says Merryn
One of the main causes of the financial crisis was the US housing market bubble. And home values on the other side of the Atlantic still haven't started to recover. But in her blog on Tuesday, MoneyWeek editor-in-chief Merryn Somerset Webb wonders if American house prices could now finally pick up.
"Last year, we started to think that even if house prices hadn't bottomed, they were at least looking cheap. I told you in an editor's letter to go to Florida and buy a house, fast. Now they might even have begun to bottom".
"Prices in some areas have risen (prime Miami, for example) and elsewhere there are increasing numbers of signs that if you buy now you won't necessarily lose money. Renters are finding fewer vacancies and slightly higher rates, while US housing permits for single family homes which utterly collapsed from 2007 on seem to have bottomed and are even turning up a tiny bit."
Another boost is coming from the wider US economy itself, where the recovery has started to pick up steam in recent months, says Merryn. Here's one clear sign of this:
"Vehicle sales in America hit a four-year high in February, and look as if they are getting a bit of momentum behind them partly thanks to the fact that loan rates are falling as defaults on car loans fall." Of course, "none of this means that we are likely to return to the boom days any time soon But it does suggest that the very worst for the property market might be over."
Here's what you think about this
Merryn's opinions aren't shared across the board. Several readers have been posting to disagree.
"I'm less sure, Brent at $126 a barrel is going to start hurting, it just hasn't fed through into the surveys yet", says 'Alex'. "Oil at these levels has consistently led to recession, and that impacts house prices no matter how cheap they already are."
But 'IJ' reckons Merryn is on to something - and had a tip for us. "If you compare US and UK housing charts, you will see US houses have fallen way more, completely erasing the bubble and even dipping below where they were before it started. Those of you who believe US housing is recovering should consider buying the banks."
If you haven't seen it yet you can read the piece in full here.
Would you lend to the government for 100 years?
Another big story this week has been George Osborne's reported scheme for launching 100-year UK government bonds. In Thursday's Money Morning John Stepek explained why Osborne is considering it. And why it's a bad idea for investors.
There are lots of reasons why Osborne likes the plan, notes John.
"Britain would get to take advantage of current low lending rates. It would get to extend its average debt maturity even further. This stands at an already healthy 14 years, which is twice the figure of Italy and France. What this means is that we are less vulnerable to short-term spasms of panic in the debt markets, because we don't need to roll over our debt as regularly."
"It would also be a nice publicity stunt. "Look", the chancellor could say. "Britain is so safe, so credit-worthy, so well-managed, that investors are throwing money at us." And at the back of his mind, he's probably thinking, "Maybe the ratings agencies would cut us some slack if we had a longer debt maturity. That means I could spend a bit more money on winning the next election"."
What's more of a mystery is why anyone would consider lending money to the government for 100 years, says John. "Investors might be dim enough to lend to the government over ten years for a sub-inflation return, but they're not keen to do it for the next century. Even those seen as the most natural customers for the product pension funds, who have to match liabilities to life expectancies aren't keen."
Gilt yields won't stay this low forever. "If quantitative easing ends, gilt yields will have to rise. Indeed, that may be one good reason why the government is trying to make hay right now." Indeed government finance could be even worse than we think. My colleague David Stevenson has been warning about the state of the UK government's finances recently, I'd suggest heading over and checking out his latest video.
How to spot a Ponzi scheme
And finally, a quick word on Ponzi schemes. This week saw the court case of 'Britain's Bernie Madoff' - Kautilya Nandan Pruthi. We profile him in this week's magazine (if you are not a subscriber subscribe to MoneyWeek magazine).
Ponzi schemes are always easy to spot after they happen. But many people fall for them, which shows that being duped is a mistake many investors can make. But what are Ponzi schemes all about? This week, Tim Bennett investigates. In his latest video tutorial he explains how they work and how you can spot them.
To hear about other bits and pieces on the internet that have amused us or made us think, sign up for our Twitter feeds we've listed them below.
Have a great weekend!
John Stepek
Tim Bennett
James McKeigue
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