Although the recent price action is not sufficient to call a definite turning point for the FTSE 100, nonetheless over the recent few weeks it has become quite compelling and so it might well turn out to be the key turning point. FTSE lost its upward momentum in mid-October, when it just exceeded the previous high for the year of 6134 set in April. From there, the activity was primarily sideways which remained the case until 23rd November when FTSE fell quite sharply. On Tuesday 28th November, the low was 6012, then on Wednesday it bounced. We will put a great deal of weight on what happens next. If, in due course, FTSE turns over without first making a new high, then we will expect a continued fall leading to a test of the low set on 13th June of 5467.
Two issues ago on 2nd November, we published a chart showing FTSE 100 compared to the Informed Buyers' Index, this is published again, it implies that throughout the June rally Informed Buyers (eg, institution investors such as pension funds, etc.) were selling into the rally. If that is correct, then FTSE's recent weakness should transform into a significant sell-off.
Bear funds held in RHAM portfolios might be approaching a period of strong profitability. If, however, our view proves to be mistaken, then there will, later this year, be a meaningful close above the high set in November which would trigger an exit from those positions.
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A bleak Christmas for the UK retail sector?
Recent forays by the writer into Croydon, Bluewater and Lakeside shopping areas turned out to be relatively easy. The shops were much quieter than expected. As we understand it, conditions are mixed with a few shops such as Marks and Spencer (click here for a free company report) and Primark prospering whilst others struggle. Seymour Pierce's retail analyst, Richard Ratner, has recently warned of dire trading in the run-up to the Christmas trading period, warning that Christmas could be the worst in twenty-five years. He believes that retailers will lose their nerve and begin discounting before Christmas.
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The UK housing market continues to thrive; it is reported that market strength which was centred upon London is now spreading wider. We don't think the Bank of England will like that very much and it could be enough to trigger a further rate hike in 2007.
The natural leader of our four Horsemen of the Apocalypse, the white horse of false peace, the Volatility Index (VIX), recently sensed danger.
The white horse - false peace - The Volatility Index (VIX)
In the previous issue we said that a move above the level of twelve and a simultaneous break above the eight-week moving average would suggest an onset of fear in the markets. On 28th November this happened; immediately afterwards Ben Bernanke soothingly provided lumps of sugar, saying that the slowdown to more moderate growth was proceeding largely as expected. Simultaneously, in London, America's newly appointed Treasury Secretary, Hank Paulson, also with sugar lumps in hand, made a speech saying that the US economy was making a successful transition to a more sustainable rate of growth. Our white horse remains skittish and vulnerable to a further surprise and having recently been alarmed, will probably react more violently next time.
The red horse war and destruction The Philadelphia House Market Index
The Philadelphia House Market Index is pretty well unchanged from a fortnight ago. Encouraged by the Fed remarks, a soft landing in the housing market is still expected, there are many, including us, who disagree. News has not been particularly good, in October housing starts were down 14.6% compared to September; 27% down compared to a year ago much worse than economists had forecast. Building permits, without which there can be no housing starts, were down 6.3%. House prices in October were down 3.5% to an average of $221,000 whilst unsold inventory rose to 7.4 months' supply the highest level since 1993. October house sales were mixed, existing homes sales rose 0.5% and new home sales were down 3.2%.
America's housing story will play out over the next year or so. Its implications for the American economy are just huge. New York University economist, Nouriel Rubini, recently wrote "My 0% forecast for quarter four, is based on a series of recent economic indicators suggesting that the economic slowdown is even worse than I originally predicted. Today's data on faltering goods orders and falling consumer confidence strongly signals that the housing recession is spreading to consumption and investment, the housing recession is becoming a non-residential construction recession, an auto recession, a manufacturing recession, a real investment recession and soon enough, a retail recession."
The black horse famine and unfair trade Dow Theory
A state of non-confirmation continues, the Transports still fail to confirm the high made by the Industrials. It seems that for each issue of Onassis some new survey or statistic pops up giving further clues about the potential downside of the global economy. This time it is the "Truckers' Index" which is an index of tonnage shipped by American haulage companies, in October it was down 1.8%. It is a leading indicator of contraction. Merrill Lynch called the decline "borderline recessionary" no wonder the Transports still fail to confirm the Industrials.
The pale horse sickness and death The Inverted Yield Curve
America's yield curve has recently deepened considerably. An inverted yield curve is a fairly reliable prediction of recession. Recent stock market weakness could be the start of stock markets preparing to be much lower for when that recession arrives, which, if the forecasters are correct, will be next year.
By John Robson & Andrew Selsby at RH Asset Management Limited, as published in the Onassis Newsletter, a fortnightly newsletter that gives insight into the investment markets.
For more from RHAM, visit https://www.rhasset.co.uk/
