The bearish take their honey out of the stock market

Published on Sunday 26 August 2007 00:56

BEARS, even bears of little brain, are famously good at finding the honey. In searching for his sticky treats, Winnie the Pooh argued that it was better to seek advice from someone who didn't use long difficult words but rather short easy ones such as "What about lunch?"

Lunch indeed. Isn't that what all saving and investing is about, squirrelling away today in case of hunger tomorrow? Small savers are not unlike little bears. They like to be sure their honey, sorry money, is tucked away securely where they can easily get their paws into it. They distrust gobbledygook and clever-dick Eeyores. Far better to keep their honey somewhere safe they know and understand.

It is understandable therefore that investors have begun moving their investments into safer havens, and some institutions are reporting a "flight to quality" under way. Stock markets steadied last week, but uncertainties remain.

The big unknowns are will the Fed cut interest rates further, to take the pressure off the US housing market, and if it does, will the Bank of England follow?

Or will we see higher borrowing costs still in the UK, probably not as soon as next month, but maybe around October time? This will not be good news for borrowers, the housing market or business. The only silver lining is the higher they go, the faster they will fall again.

That's not to suggest that everyone should sell their portfolios and move into cash. The conventional wisdom has it that provided you have a 10-year horizon, then equities will always outperform deposits. It has to be said that faith in that particular orthodoxy is being severely tested. Despite closing up on Friday on better news from the US, the FTSE 100 still only reached 6,220, well below its 1999 peak of 6,950.

Anyone who invested just before the turn of the millennium has had a very long wait indeed to get their money back, and unless the markets improve significantly over the coming 18 months or so they may breach this golden rule. Those who have made money from stock markets have probably done so by moving in and out, buying cheap and selling high.

So if you have had enough of the current storms, where is the safest place to put your cash? The securest haven of all is National Savings & Investments, as if we reach the point where the British government defaults we are all lost.

NS&I is currently paying some good returns on, for example, its Direct Isa, yielding 6.3%, its tax-free savings certificates, giving up to 3.8%, or index-linked ones returning 1.35% above inflation.

However, investments into the first are limited to 3,000 and the last two, though attractive to taxpayers, require you to tie up your money for a few years.

If you want to stay liquid until prices settle, NS&I is not competitive. Better returns can be had, for example, from Sainsbury's Bank, which is paying 6.25% on its instant access savings account.

But remember what Pooh said: "It always makes sense to watch carefully where you are going. Otherwise, you may step on a piece of the forest that was left out by mistake."

I suspect there may be quite a few hedge fund managers who might find themselves disappearing down big holes they hadn't watched out for anything like carefully enough.

No more cheap loans

POOH was only partially right when he said those who are clever, who have a brain, never understand anything. In time they learn. The biggest lesson currently being digested is that some mortgages have been far too cheap, feeding a property bubble.

On Friday, Northern Rock became the latest lender to increase the interest it charges higher-risk borrowers. More significantly, though, spreads are widening on mortgage securities generally. These could well push up home loan prices in the medium term for us all.

Bank fees halted

REGRETTABLY, no precedent was set when Barclays customer Nadine Fry won a victory at Luton Crown Court after Judge Abrahams ordered the bank to stop levying punitive unauthorised charges after she pleaded particular hardship.

All complaints about overdraft fees have been frozen until the outcome of the court case between a group of banks and the Office of Fair Trading. However, banks are continuing to levy them as normal.

In Scotland, Clydesdale Bank customers have become the latest to see their charges increasing, with some accounts now levying a 25 daily charge if you go over your agreed overdraft, up from 22.50.

A spokesman for the bank said anyone in difficulties should speak to their banking adviser. After Fry's victory, that probably goes for all account holders.