Angry men have been wreaking havoc across London. Fueled by aggression, fear, and a disregard for the long-term, they’ve been destroying value that’s taken years to build.
No, I’m not talking about the riots on the streets of Tottenham, Hackney, and Ealing, and the fires in Clapham, but rather the share traders that have sent the FTSE 100 index down around 20% from its high of the year – most of it in a record-breaking run of 100+ point declines.
Traders in suits and hoodlums in hoodies have more in common than just testosterone, however. Both justify running rampant on what seems like a convenient excuse, rather than any changed reality.
- At the heart of the London riots are ugly truths – poverty, racial tension, an alienated underclass, police bungling, and the death of a man with loved ones.
- At the heart of the stock market crash are ugly truths, too – the US deficit, the unprecedented downgrade of its AAA bonds, the contagion in Europe, unemployment, and a lack of political leadership.
Yet in both cases most of this was true last month, too.
Rather than rationally responding to new information, youths looting electronic stores and traders dumping holdings are behaving like animals.
Cheap, and getting cheaper
I can’t see any good reason for the FTSE 100 to be trading on single-digit current and forward P/Es, based on what’s emerged in the past week. It implies a change in earnings expectations from very strong growth next year to a sharp decline. The data doesn’t yet support that.
But take my opinion for what it’s worth. True, I was worried about the US downgrade, and I’ve been tilted much more defensively this year – but I was still absolutely overweight in equities. I was holding Unilever, Diageo and the like on valuation grounds, not because I saw a big correction was imminent, let alone a crash!
Even last week I quickly put my recently liberated cash back into equities. Needless to say, everything I bought has fallen further!
It reminds me of the old stock market joke: A long-term investment is a short-term trade gone wrong.
Equity income on sale
I am in this for the long-term, though, and if you are too then you’ll agree it’s hard not to salivate at some of the apparent bargains on offer.
The markets look utterly oversold, at least in the short-term. Yet once this kind of panic sets in anything is possible. You have to assume anything you buy now could fall a lot further.
If you’re looking for long-term income from quality shares, however, now looks a great time to buy. Even the FTSE 100 index will probably be yielding 4% on a forward basis by the time you read this, and its dividend-paying companies are generally in great shape. The 4% yield is more than a 1% spread over 10-year gilts – very high. Ideally, you’d buy a high yield portfolio and ignore the capital fluctuations.
Having said that, some of the real bargains appear to be at the more speculative end of the spectrum – small cap miners, little oil explorers, and the like.
What I suspect is happening here is both private investors and bigger leveraged funds are having to dump holdings to meet margin calls or as stop losses are triggered.
We’ll probably also discover in the months ahead that one or more big funds have completely failed, if history is any guide.
5 Comments
Looks like traders read Monevator…! Euro markets have turned higher, and FTSE 100 ticking the green… don’t think the yield made 4% in the event… still high though!
Rot, meant ‘tickling’… You know what I mean.
Pedant alert: I understand that not all ‘traders’ are male. 😉
I find your comments helpful and constructive – thank you.
@OldPro — Hah, I can’t really claim credit for that, especially as the market fell most of the middle of the day! Some guy called Bernanke said something in the US that seems to have made a difference, though. 😉
@Alex — Nor are all the looters! Prose would be dull if we caveated everything, and I do too much anyway.
@JDC — More than welcome, thanks for saying that. Always nice to hear positive reader feedback.