Financial questions remain but you can stick glib share predictions up your Nikkei

Published on Friday 4 April 2008 22:18

IN THESE wild financial markets my paper and pencil (pap) analysis has done the Investment Club proud calling the Footsie's gyrations and war loan buying opportunity correctly.

But have I done the club proud? Alas no. Last month pap analysis pointed to a buying opportunity in war loan around the 75 mark. After having sold all our equities, I said the club was a buyer of war loan at this price. On 25 February the opportunity arose as the stock traded at 75.50, but I made a complete Bear Stern of it and did not buy. The excuse? Red tape.

When the club was in its infancy I used the Bank of England's own in-house gilts' purchasing and selling department, the bonds and stock office. This was, at the time, by far the cheapest way of trading gilts, but cumbersome.

Internet brokers are now cheaper and quicker. Opening an account with one to invest the money raised from the sale of equities is no easy task. It was while the club was attempting to do this that war stock fell into pap analysis's buy zone and then out to 80; I missed the moment.

In spite of this failure, the club's unit price managed a small up-tic to 2.44. Is war loan still worth buying or should the club look for an alternative strategy?

It is worth buying because currently pap analysis has a high of 92 pencilled in by the end of 2008.

However, there should be a better buying opportunity this month. If pap analysis is correct, the Footsie should go thorough a hopeful phase and climb to the 6,100 level, when war loan could fall and become a buy at 76 to 77. After this rebound, the Footsie should start making its way down to between 4,750 and 4,500.

Do not be fooled when the Footsie climbs back up in its hopeful stage.

As someone remarked, if the subprime debacle is supposed to have wiped half a trillion dollars out of the world economy where are all the dead bodies?

They are still emerging. UBS has just announced another $18 billion write-off making a total of 37bn at the last "guesstimate".

Credit Suisse has admitted to about 6bn loss thus far. The French banks could be harbouring still-to-be-revealed large losses after BNP Paribas dumped its takeover of Socit Gnrale who is $4-odd billion down. The American banks are behind by up to $100bn.

British banks so far have been small fry, with RBS seeing a $4.2bn write-down. As yet it is not at all clear where the sub- financial mycelium will reach to cause the next panic problem. So until all the credit-crunch dirty washing is out in the open it is fingers crossed.

What is needed for the gilts investment policy to pay off handsomely is for money supply to fall as the government reins in spending because of lower revenues and banks' lending to be severely curtailed due to their dwindling capital. This could give a Japanese experience with low inflation and interest rates. Then war stock might just exceed the 93.13 it reached on 24 January 2006. Remember, the Nikkei stood at 12,677 on April Fools' Day 1985. Twenty-three years later on April Fools' 2008 it stands 21 points less at 12,656.

Next time your financial expert tells you it will be all right in the long term tell them to stick their advice in the Nikkei.