The Fed Rally and Active Investors
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Trading Features / Strategies from Simon Denham of Capital Spreads.
Markets continue to whistle around as we digest the latest Fed led rally in the States. Since mid January we have had five Fed initiative rallies (two liquidity injections and three rate cuts) which have all caused major moves to the upside on their respective announcements. In between times the direction has been, as you would expect, singularly grim. If we remove the Fed inspired rallies down days have outnumbers up by two to one since the turn of the year.
But oddly enough the net effect has not been as bad as one might have expected.
For all of the pain felt by many across the financial landscape the US markets are actually just 10% off (roughly) from the close at the end of 2007 and pretty much unchanged from the end of 2006. The FTSE, even though it has a heavier weighting of mining and petroleum stocks which might have been expected to help a bit, has actually performed worse since the end of 2007 but is also almost exactly where we started from at the back end of ’06.
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Yes, the western world might be entering a period of slow or even negative growth but the equity markets have not (in the main) shown a great deal of evidence that investors are overly concerned. Even more, if you remove financial, building and retail stock from the equation (I know this is like removing housing and energy from inflation numbers) the markets have actually not done too badly. Obviously this is not what we would normally consider to be recessionary equity market activity. To date there has not been a ‘broad’ market retreat and it is this possibility which might now be worrying the various Treasury departments in the UK and the US.
Recently there have been one or two nasty little corporate numbers that are beginning to squeeze through into the headlines. Companies which had geared up for growth or borrowed to hand back (!?) asset value to stock holders have suddenly run into very expensive rollover costs. It would be difficult to over estimate the damage done to various companies by those champions of the share holder registers the “active investors”. The financial engineering structures insisted on by these persons to realise a one-off pay out have invariably ended up destroying shareholder value and, it is likely, in some cases the actual existence of the companies involved. Weak boards who have kowtowed to the pressure will now be left exposed and we can expect some director shuffling in the coming months / years.
The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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'The Fed Rally and Active Investors' edited by SD, updated 20-Mar-08
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