Optimism gripped the markets for about five minutes at the start of this week. Greece had narrowly voted to accept austerity rather than heading down the road to a quick eurozone exit.
But as John Stepek pointed out in Thursday’s Money Morning, by the end of the week, investors were starting to realise that the indecisive election result “was about the worst outcome they could have ended up with.”
A mass panic would have forced policymakers to do something. Even if the Europeans couldn’t get their act together, the threat of a Greek exit would have forced the US Federal Reserve’s hand.
As it is, while the US and the rest of the world is undoubtedly slowing, things aren’t quite bad enough yet to justify another round of quantitative easing. The Fed extended Operation Twist, but that doesn’t add new money to the market – just recycles it from one end of the bond market to the other.
That leaves short-term investors in an uncomfortable position.
“They’re too afraid to buy in case something nasty happens. And they’re too afraid to be out of the market because if something nasty happens, they think that policymakers will flood the world with money.”
So what’s the answer? Try not to worry too much about the short-term. Buy sound assets at cheap prices. A good starting point is to look in last week’s MoneyWeek magazine, where Merryn Somerset Webb showcased the The MoneyWeek model portfolio.
She picked her favourite six investment trusts to construct a model portfolio – it’s well worth reading, particularly if you have never considered using trusts in your portfolio before. If you’re not already a subscriber, get your first three issues free here.
Or you could always learn to read charts
Of course, perhaps you’d like to learn how to take advantage of short-term market swings. Trading is a risky but perfectly respectable way to make money. But it’s not for everyone, and it’s not easy.
Unlike fundamental investors, short-term traders can’t rely on being right in the long run. They have to have a strategy for getting in to the market at the right time – and a strategy for getting out once they’ve hit their targets, or if it turns out their hunch was wrong.
The way to do this is through technical analysis, or reading charts. John Burford, MoneyWeek’s trading expert, is a charting expert. He looks for patterns forming in price movements. If he thinks the price is heading down, he takes a short position, which means he profits when stocks fall.
John had a great call this week. In his free email this Wednesday, he asked Is the top in for the Dow? A day later, the US market had a massive plunge, falling 2% in the second-worst trading day of 2012.
Given that the piece was written before the Fed’s decision on whether to print more money or not, you might wonder how this potential fly in the ointment affected John’s thought process.
The answer? It didn’t. Here’s what he said on Wednesday:
“Of course, all eyes are on the Fed right now. Later today, we’ll know what attitude Bernanke and Co are taking towards policy action – if any – in the face of a deteriorating US economy. Given the Dow’s new bear market rally high yesterday, the market clearly believes more quantitative easing (QE) in some form is on the way.
“But we’re interested in the charts. So let’s see what they’re telling me now.”
And that’s the beauty of John’s approach. By just analysing the charts, he cuts out the ‘noise’ coming from central bankers, politicians, and any one else with a view on the market. You can Is the top in for the Dow?.
Of course, spread betting isn’t for everyone. It’s risky, and if you’re not careful you can end up losing far more than you started out with. However, if you do want to learn more about trading and how to analyse charts, you should sign up to John’s free MoneyWeek Trader email today. Even if you’re not interested in trading, John’s emails can give you a fascinating and useful insight into the thought processes of other players in the market.
One commodity that’s on the way up
If it’s good old-fashioned long-term investing you’re after, there are still some great opportunities out there, says David Stevenson in Tuesday’s Money Morning.
One that’s caught David’s eye at the moment is tungsten. This metal “is ultra-hard, dense and strong. It’s also highly resistant to corrosion and wear. And it’s fire-proof.”
That gives it plenty of uses, from light bulbs and welding to drill bits and military applications. For example, “the metal’s ability to withstand extreme heat makes it irreplaceable in the manufacture of rocket engines.”
In fact, “global demand for the metal has been growing at around 6% a year for ages. And the world has now become totally dependent upon it.”
But what about China’s slowdown? David thinks tungsten can withstand it. For a start, China’s demand is a big part of the problem. “The country has been buying up raw supplies of tungsten and curbing exports of the metal. As the Chinese control 60% of the world’s reserves and 83% of global production, these restrictions have had a big impact. In fact, China is now a net importer of tungsten and expects to use all its supplies to support its own manufacturing firms.”
And its ambitious military plans mean it will need more tungsten for bullets and missiles, says David.
Better yet, no less an investor than Warren Buffett seems to agree with David’s conclusions.
The great pension robbery
David is also the investment director for the Fleet Street Letter. For over 70 years the newsletter has been helping investors keep their wealth through world wars and market crashes.
Now, David and his team think they have found another grave threat to your wealth. They’ve been investigating pensions, and uncovered a scandal that could cost most of us £10,000. If you’ve got a pension, this report is a must read.
Is Right-to-Buy wrong?
Elsewhere this week, Merryn Somerset Webb took to her blog to investigate the Right-to-Buy scheme. Conventional wisdom has it that the scheme, which allows social housing tenants to buy their houses for huge discounts, is a great deal for the lucky buyers.
Merryn is not so sure. In particular she looked at what happens if you need to sell the house within five years of buying it.
“If you sell in the first year you have to pay back all the discount (as a percentage of the sale price). In the second year, you would have to pay back 80%, in the third, 60%, in the fourth, 40% and in the fifth, 20%.
“So let’s say the house is ‘worth’ £100,000 and you get it for £60,000 (a 40% discount). You then sell it for £110,000 under a year later. You now have to pay back the full discount – 40% of £110,000, or £44,000 – (regardless, by the way, of any improvements you may have made to the house to get the higher price). You will have probably spotted the problems by now.”
One issue, says Merryn, is working out how much the house is worth to begin with. “The state-provided information on this all talks about the discount coming off the ‘market value’. But we already know that in a low-volume market such as this, the clearing value of a house is very different to the perceived market value as suggested by the indices.”
The reason that matters is because it determines what the tenant pays, says Merryn. “The Housing Act requires it to be set via ‘direct comparison’ – ie, looking at prices recently paid in the open market. But what if, as is the case now, the open market isn’t working? (Let’s not forget that volumes in the UK market are down 40% in the last five years.) I suspect there is a pretty high risk that the tenant will end up paying too high a price.
“Look at any of the official literature on Right-to-Buy and you will see nothing on what happens if house prices fall – the scheme appears to simply assume that they will not (there may be a contingency plan to prevent buyers ending up in negative equity as a result of discount paybacks, but if so, I can’t find anything on it).”
If the scheme really doesn’t consider house price falls, then it is based on “a dangerous assumption”, says Merryn.
Anything involving houses or government policy normally attracts a lot of response from readers, and this was no exception.
‘Mike’ felt the “real risk” is that “the discount may encourage him [homeowner] to pay way over the market value in the first place especially if the mortgage is cheaper than the rent. However, if interest rates rise significantly he may end up paying far more in mortgage repayments than he did in rent, not to mention insurance and maintenance costs which may have been overlooked or underestimated.”
However, ‘Mic’ felt the government has little choice. “Government simply has to keep (prop!) house prices up in this recession (or worse). If houses prices are seen as falling all consumer confidence will be lost (there ain’t much now) and the economy – what’s left of it – will go down the plug hole.”
How to force yourself to sell bad shares
Before I go, I’d like to point you in the direction of this week’s video tutorial where MoneyWeek’s deputy editor, Tim Bennett, tackles one of the most difficult investment questions: why do investors hold on to losing stocks, long after it’s clear they have made an expensive mistake? He gives tips on how to spot a mistake and how to let go. Unless you have a 100% success rate – and you know that you don’t – this is essential viewing.
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!
• MoneyWeek
• Merryn Somerset Webb
• John Stepek
• Tim Bennett
• James McKeigue
• Matthew Partridge
• David Stevenson