The Speculator
With markets so slippery, the fool who rushes in is likely to take a
tumble
Nils Pratley
Monday October 17, 2005
Guardian
There is no point bleating about markets - they're meant to change
constantly - but I am starting to curse the timing of this column's
launch. A month ago, it was possible to believe we were in gentle
territory. The FTSE 100 had been rising steadily for two and a half
years and there was a consensus that two big variables, inflation and
interest rates, were not about to misbehave, or at least not badly.
Then, bang. Or, rather, semi-bang. The Footsie suffered its biggest
one-day fall of the year last Thursday, to complete a 250-point fall
in a fortnight. It was not the stuff of front-page headlines, but
4.5% at that speed is still significant. It's too early to say it's
the end of a bull run, but the debate has been opened.
The result was another losing week for the portfolio, but I am not
going to weep about £150 in such circumstances. I made one irritating
error (not getting out of Northumbrian Water quickly enough), but at
least I had very few chips on the table anywhere - indeed, I removed
more during the week.
If this fiddling with small numbers looks timid for a supposed
exercise in bold speculation, apologies. The cash, I promise, will be
committed on a grander scale if and when the odds look more
attractive. For now I'm sticking with an old piece of Jesse Livermore
wisdom: "The desire for constant action irrespective of underlying
conditions is responsible for many losses in Wall Street even among
the professionals, who feel that they must take home some money every
day, as though they were working for regular wages."
So, why are the underlying conditions suddenly slippery? It's Wall
Street's obsession with rising interest rates and the Federal
Reserve's war on inflation. Capital Economics, the research house,
says it now expects US interest rates "to rise by 25 basis points at
every meeting up to, and including, Alan Greenspan's last as chairman
in late January."
Make no mistake, that's a big shift for fund managers to absorb,
given that they've only just stopped worrying about deflation. The
Dow Jones, currently at 10,287, could easily test 10,000 at some
point in the next few weeks.
Yet I still think the better medium-term bet is on a rebound. Big,
strong companies generally are still generating a lot of cash. Medium-
term thinking is the thing, and below are a few sketchy ideas for
possible trades. If they start to take a grip, I'll add to the
positions; if not, I'll get out.
· Airlines. I've already dabbled with British Airways and, if 300p
holds, I will get in deeper and perhaps add easyJet, where there's
always the chance of a bid from the Icelanders. Airlines are doing an
excellent job of passing on higher fuel costs to customers. If the
oil price weakens, so much the better.
· BAE Systems and GKN. Defence and engineering stocks have been stars
for the past two years. The argument here is nothing more
sophisticated than buying on the dip created by the wider market's
little wobble.
· Unilever. For fans of charts, this looks interesting. Almost three
years of downward momentum in the share price seems to have broken.
Unilever is a lumbering beast, but it does tend to lumber in the same
direction for years at a time.
· GlaxoSmithKline. This was on last week's list of possibles and it's
growing on me. There's just a sense in the market that Glaxo's
pipeline of new drugs is healthier than for years. If so, £14.50 for
a stock that once traded at over £20 sounds a reasonable long-term
punt.
· Jardine Lloyd Thompson. My one success of last week - it jumped 9%
the day after I bought it. I sold to protect the profit, but I'll be
back on any weakness. Insurance broking tends to be feast or famine
and there's a lobby that says the switch has happened.
· Reuters. This would be speculative. A great recovery stock from
March 2003 until February 2004, it has gone nowhere since. Many
investors are sceptical of the planned increase in capital
expenditure, but the pressure on the share price seems to have eased.
Analysts are getting excited about the third-quarter results in 10
days. When it moves, Reuters' share price can explode.
· Anglo American. I'm itching to get back into a big commodity stock
at the right price. The cyclical upswing for commodities has not gone
away yet.
· Shorts. The UK consumer is still where it's at - the high street
could get a lot worse before it gets better. So I'll stick with my
winning short position on DSG International, or Dixons, unless
there's an outbreak of buying.
But the idea that pubs and leisure stocks could be the next to suffer
also seems to be taking hold. Enterprise Inns finished the last two
days of last week below 800p, where it hasn't been since June. I went
short at that point, and made essentially the same bet with Greene
King. Maybe I'm too late on both, but we'll see. Both stocks have had
massive run-ups and ought to be vulnerable to the threat of weaker
trading. Enterprise reports on November 22, which gives time for the
market to fret.
But on all of the above ideas, I repeat the big caveat: I will not be
rushing in given current conditions.
[email protected]
· Readers thinking about actively trading in the stock market should
seek independent financial advice. Spread betting and contracts for
difference are complex financial instruments that carry high risks
and are not recommended for inexperienced investors. Specifically,
their use can lead to an investor losing substantially more than
their initial investment. The capital for the Speculator exercise is
the Guardian's, and half of any profits will be donated to charity at
the year-end.
· Nils Pratley welcomes feedback, but he cannot enter into
discussions on specific investments and cannot offer investment
advice. The Guardian's editorial code incorporates the editors' code
overseen by the Press Complaints Commission.
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