Will we see a FTSE 100 Breakout?
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Trading Features / Strategies from Simon Denham of Capital Spreads.
Trying to find some sense in any market activity is getting a tad difficult with almost random direction being the apparent order of the day. The most successful traders at the moment seem to be those who are fastest on their feet.
The FTSE 100 and Dow Jones are swinging wildly during each session.
This type of trading activity is generally an indication that we are about to break out from the current range but nobody is too sure which way.
On the face of it valuations appear generous (good p/e levels and solid yields versus Treasury and cash rates). On the other hand the continuing (and seemingly accelerating) rate of decline of the Global economy leaves many investors wary of taking the plunge.
Added to this, yields on corporate bonds are now so generous, and afford greater protection than straight equities, that they are affecting the possible attraction for stock.
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One of the major problems for any rally is that the banks seem to be on a one way trip to oblivion. Without a banking system able (or willing) to lend at some point in the future the chances for solid growth once the recession has run its course are getting slimmer and slimmer.
Nationalisation of the banking system sounds attractive at the moment. However, State control is never efficient and without incentive to perform (sorry, but this means bonuses and dividends) banks may retreat into safety first which could stunt growth for years to come.
The financial sector is not exactly the flavour of the month with tales of cut backs in lending, readiness to go to court etc but the Repossessions rate out yesterday seems to tell a slightly different story. 13,161 homes were repossessed in the third quarter of 2008 (this is just to the end of September) yet 340,000 mortgages were in arrears at the end of the same period. This loosely suggests that less than 4$% of mortgage arrears cases are ending with the repo man.
People tend to forget that when they buy a house they can only do so because the bank has lent them money to do so. If they fail to uphold their side of the bargain (i.e. make their mortgage payments) then, like any business which has not been paid for its services, the lender is quite within its rights to seek redress. In this case the return of the asset (i.e. the house).
The arrears number is very worrying as the big increases in unemployment have really only just started to come through since the end of September and most of these (pushed out in the first wave) will probably get the best redundancy packages. This would seem to indicate that the arrears figure for the end of the fourth quarter will be much worse.
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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'Will we see a FTSE 100 Breakout?' edited by DB, updated 23-Jan-09
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