Why does the FTSE keep going up?

Alex Masterley explains why, I just wish he'd told me this a year ago!

"The main reason the FTSE didn't drop is because it is already overvalued. Does that make sense? No, well then you weren't listening last week when Charlie Bean (of the Bank of England) told the world that the purpose of QE was not to fill the banks with cash, but to raise the value of the assets they held. This would boost their balance sheets and plug them full of Tier 1 equity. [As an aside, if that was the reason, I fail to understand why the BoE didn't simply subscribe for £175m of bank equity paid for in the same way, by printing electronic money transferred into the selling bank's account at the BoE, but I digress].

So QE is all about hyping markets and that spills over into the FTSE. More recession means more QE, and more QE means more cash chasing the same gilts and equity, which means higher asset prices (or lower value of money depending how you look at it). So the economy is still in a mess but the FTSE stays at the same price because the market expects more dodgy government money to be on its way any time soon."

It's financial meltdown

The BBC Business news page looks rather scary at present...

"UK IN RECESSION

MARKET DATA - 17:35 UK
FTSE 100 4713.97down -47.55 -100.00%"

FTSE down 100%, that's a bad day...

The FTSE and the economic genius that is Gordon Brown

FTSE 100 1979 to date.
Notice the long, pretty consistent, Conservative boom in share prices followed by a Labour bust, a Labour boom back to the level of the previous boom and then another Labour bust. Gordon Brown's economic genius has taken share prices back to 1996/97 levels; it's almost as though the last 12 years of Labour misrule had never happened, if only that was the case...



Thanks to Guido Fawkes for the graph.

Are we in a "bear market" yet? (update)

Further to my post on Tuesday, I can confirm that we are now in a "bear market". The FTSE closed at 5261.6 yesterday considerably below the 5,377.28 that I believe was the "target".

This will be a long and deep "bear market", the bottom may be around 4,000 and a fair while off.


Just to show you that "experts" should rarely be believed, The Independent reported on 28 December 2007 that:

"Brokers and money managers struck a bullish note yesterday about the market's prospects, forecasting yet more gains for equities despite mounting fears of a slump in growth and the possibility of new sub-prime skeletons in 2008.

Investors will be rooting for Lehman Brothers, which reckons that the FTSE 100 will climb to a high of 7,300 by the end of next year, predicting a rise of more than 800 points on yesterday's closing level of 6,497.8. The American investment bank, which expects GDP growth to drop down to 1.7 per cent, said that a recession was unlikely, highlighting the prospect for UK equities such as those from the real estate and retail sector, which it believes are already trading at recessionary multiples and should therefore ride out a slowdown.

...

Lewis Charles Securities was also optimistic. The stockbroker's chief exec-utive Stavros Loizou said: "I still think we are in a bull market, albeit at the top of the recent trading range. Therefore we could go one of two ways, 5,800 or 7,200. I will go for 7,200." The firm erred on the side of caution last year, when it forecast a flat 2007, predicting that the FTSE 100 would end this year at the 6,100 mark.

...


Hargreaves Lansdown, which forecast a record 2007 for the index, expecting it to reach 7,000, was conservative compared with its peers. The broker still thinks that the index of the 100 leading shares will grow, but only to 6,900 by the end of 2008, 400 points behind Lehman's prediction. Hargreaves expects the first half of the year to be "challenging", but said the market should bounce back in the second half.

Capital Spreads was at the back of the queue with its prediction of 6,800 for the end of next year."

Does anyone believe that the FTSE will end the year between 6,800 and 7,300? I think not. A prediction of 6,800 seems over optimistic now.


This is Money reported on 12 December 2007 a more accurate prediction:

"Where will shares be 12 months from now? One of the world's most respected investment banks, Morgan Stanley, believes there is a chance the FTSE 100 index could plunge more than 1,200 in 2008. Are other experts just as gloomy? Philip Scott rounds up their forecasts.

Morgan Stanley's 'worst case' prediction that shares could plunge during 2008 will dismay investors hoping to see signs of an end to the global credit crunch.

...

David Miles, chief UK economist at Morgan Stanley, believes house prices will fall 10% next year with the possibility of further declines into 2009. 'We believe that house prices will fall over the next 12 months given a combination of lower credit availability and potentially at a higher price, weakening consumer confidence and a general economic slowdown.'"

That's was more realistic, as was:

"Stock market historian, David Schwartz is not too optimistic either and anticipates that the FTSE 100 could finish up in 2008 somewhere between 5,900 and 6,100. He says: 'We are in a bear market. I believe it may bottom out sometime within the next 12 months but stock market conditions do not look so great over the coming years.'"

Do read the rest of the predictions in that article, quite interesting retrospective reading and even the most pessimistic seem rather optimistic now.

The Telegraph had a long list of predictions which are well worth a read as your house and stock portfolio drop in value by the hour. The highest prediction for the FTSE was 7,850 by Alan Steel the Chairman of Alan Steel Asset Management (mmm must invest with him, he seems really on the ball), the lowest prediction being 6,000 by Gavin Oldham the Chief Executive of The Share Centre.

Experts? Pah!