John Stepek highlights some of the best bits from our free emails, newsletters, blog and MoneyWeek magazine that we’ve published in the past week.
● It was another wild week for stock markets. The Dow flirted with the 10,000 mark while the FTSE 100 skipped back and forth over the 5,000 line. In the end, it was an ‘up’ week, as investors decided that Greece – which was going to end the world last week – was all a fuss over nothing.
But don’t count on this calm lasting.
“16 September 1992. Black Wednesday. That was the day when I had my first experience of the power of markets over politicians,” says Tim Price.
“The British government had been struggling for months to keep sterling in the European Exchange Rate Mechanism. Our politicians had vowed total commitment to the system and pledged they’d do whatever it took to hold the line.
“They were in way over their heads.
“The truth was Britain was in recession. And the government could do nothing to support the pound as it weakened. When aggressive investors (the likes of George Soros) got it into their head that a government was being caught out, they piled in – and sterling went into a death spiral as the rest of the market followed suit.
“The lesson? Never back the government when it tries its luck with the market.
“Trouble is, that’s exactly what governments across the globe are doing right now. And there are more than a few George Soros types lining up to give governments a serious beating.”
Tim reckons that the efforts of governments in the eurozone to prop up the region are doomed to fail. And he’s making sure that readers of his Price Report newsletter are prepared for the fallout when it happens.
● Speaking of fallout… I knew Dominic Frisby’s Money Morning piece, measuring house prices in terms of gold, would pull in lots of reader comments this week. He’s a popular writer for one thing, and of course, gold and house prices are still the most popular topics with our readers.
However, I didn’t expect quite as vociferous a reaction. We had people threatening to cancel their subscriptions, describing the piece as “nonsensical” or even “deranged” (I imagine that anyone who hasn’t already read the piece is by now already clicking the link furiously to find out what the scandal was).
Dominic is writing a response, which we’ll post on the site next week, to address some of the points made. But I’ll give you my tuppence-worth for now. I think it’s perfectly valid to use gold as a way of looking at the value of other assets, even if it’s just to give a different perspective on things. US pundits frequently compare the Dow Jones to the gold price, for example, as one measure of how cheap or expensive the stock market is.
Gold’s strength as an asset class is that it’s about the closest thing we have in the financial world to a fixed point. It’s certainly not perfect, but it’s a lot more consistent than sterling, for example. Or even Mars bars, for that matter.
I also think that Dominic’s view on whether now is a good time to buy property or not was pretty clear. He said that even if house prices were now historically cheap compared to gold, they’d get a lot cheaper from here – so he has no plans to switch out of gold yet.
I would point out however, that unlike Dominic, I don’t think house prices are likely to stay where they are in nominal terms. I’d explain why, but our editor-in-chief Merryn Somerset Webb did rather a good job of that last week on our blog, so I’ll just direct you there: Here’s why British house prices will fall.
● Another controversial topic – although less so – is whether or not it’s time to buy BP. On the one hand, both Paul Hill (who writes MoneyWeek’s share tipping column and the PGI newsletter) and Riccardo Marzi (who writes the Events Trader newsletter), think it’s worth buying. On the other, my colleague David Stevenson reckons there’s just too much risk of further fall-out from the Gulf, and possibly even a dividend cut, as he pointed out in Money Morning yesterday: Is it safe to buy BP?.
To be fair, it partly depends on your investment horizon. Riccardo, for example, is a trader, so he’s basically buying it for the rebound. David, on the other hand, is currently more interested in either extreme value stocks, or those offering a rock-solid long-term income – and BP doesn’t quite fit the bill on either measure.
My own view is that BP is a bit of a gamble now. If you’ve got it, I’d hold it. But if you’re looking to buy a stock for income, I’d be more inclined to go for a dull defensive stock with fewer clouds hanging over it – we’ve tipped loads of them in the past year or so.
And if you’re specifically interested in taking a punt on an oil stock, you should wait for next week’s issue of MoneyWeek magazine. I’ve persuaded Tom Bulford – a man who put readers of his Red Hot Penny Shares newsletter onto the Falklands oil story back when the notion of ever drilling there was scarcely credible – to tell us where he reckons the next big finds will be made. Don’t miss it. If you’re not already a subscriber, sign up now so that you get this issue as part of your subscribe to MoneyWeek magazine.
● Tom was in campaigning mode on the behalf of small investors this week in his free Penny Sleuth email. “Just before they were shown the door, the Labour government was actually threatening to do something useful. This was to review the issue of whether shares listed on the Alternative Investment Market (Aim) should be eligible for inclusion in tax-free Individual Savings Accounts (Isas).
“Whether the new administration will pursue this issue remains to be seen. But since we are in an era of cost-cutting and do not want civil servants sitting around in endless committee meetings, let me provide a simple answer. Yes they should!
“All Aim shares (and not only those that currently qualify through the back-door of a parallel overseas listing) should be eligible for Isas. Why? The purpose of Isas is to encourage people to save. Given that the looming pension funding shortfall dwarfs that of any previous financial crisis, the importance of this cannot be exaggerated.
“But successive governments have got in a real muddle over the nature of eligible investments within Isas. They hate the idea that Mr Joe Public, having been persuaded of the merits of the Isa, will then lose his money,” says Tom.
Hence the ban on Aim stocks. “Yet this crazy rule misses two key points. The first is that just because a company is small it does not necessarily mean that it is risky. Several Aim-listed companies have sound balance sheets, are profitable, pay dividends, have been around for years and show every sign of being around for plenty more – James Halstead (LSE: JHD) and RWS Holdings (LSE: RWS) are just two.
“But these clearly sound investments are off-limits to ISA investors. Instead they have been permitted to invest in the likes of Royal Bank of Scotland and British Airways. These, despite all their talk about risk management and corporate governance, are basically corporate basket cases that no sane investor would touch with a barge-pole.
“The other point the government needs to understand is that there is a trade-off between risk and reward. Allow people to back small companies and some of them may, indeed, turn sour. But, as long as they spread their money over a few different companies, they are far more likely to make money over time than by investing in the ex-growth giants of the All-Share Index.
“What is more, they can provide a useful source of finance for hard-pressed small businesses – the very sort that the government should be doing everything possible to support.” Feisty stuff – let’s see if Dave ‘n’ Nick are listening.
● That’s it for this week. Have a great Bank Holiday. David’ll be back on Tuesday – he says he’s been looking at a very interesting stock from Germany, of all places.