Online Trading : Published Trading Articles
Christmas present and Christmas future
There are many in the financial markets for whom 2007 is proving to be extremely painful, and I am certainly not referring to the problems currently afflicting the great and the good at investments banks such as Merrill Lynch where the chief executive, Stan O’Neil is preparing to fall on his sword for a price reputed to be not less than $169m – such is the price of failure! It is impossible to feel any sympathy for O’Neil or indeed any of the investment banks because in my opinion, it is they who have sown the wind, and we are all suffering the whirlwind. If you would like to read about how the markets are manipulated on a daily basis by the market makers, please visit my site at how the stock markets work which will explain in detail how these companies make so much money – legally!
Instead I am referring to the pain being felt by homeowners whose homes have been repossessed – estimated at 30,000 alone in the UK and set to rise next year. The pain of investors left holding toxic investments concocted from derivatives, which even the professionals have no idea how to value, and lastly the pain felt by Northern Rock shareholders, bewildered by the speed of the fall in their shares and at a time when the FTSE is still making new highs. The investors in each of these categories did not believe they were being reckless with their money. Indeed the rise of buy to let has been due in part to the loss of confidence in traditional pensions, which until the problems with Equitable Life and some company pensions, had always been perceived as a somewhat dull, but safe way of saving for retirement. How can the investment landscape have shifted so much, so quickly and what of the future?
It is my opinion this turbulence and volatility are only reflecting the fear element of the classic greed/fear cycle which grips the market in varying degrees on a fairly regular basis. The difference this time is that it is not confined to the share market but has spread to the property market and has even contaminated seemingly safe investments such as simple bank accounts.
Market cycles of fear and greed; boom and bust happen in varying degrees in all time frames and as traders and investors we have to understand firstly where we are in this cycle, and secondly how we want to fit within it. Put simply, risky volatile markets will always yield the greatest returns, since higher risks provide higher rewards, and greater losses. As investors we have to match our own appetite for risk to the returns but which allow us to sleep at night! My own personal view, and a particular hobby horse, is that many investors do not spend enough time either researching or understanding the markets they want to invest in. This has been particularly true of the buy to let market where novice property investors have rushed headlong in this arena with little or no research on the area, demand for rental property or even a basic understanding of yield. Seduced by developers’ cash back, no deposit down deals and guaranteed returns these investors are now starting to pay the price as interest rates bite and rentals do not cover mortgage payments. Having been a property investor myself I spent a long time researching an area, types of property which would be demand and only invested where yields would be a minimum of 10 to 15%.
However, it has been the speed at which these problems have erupted and affected so many so quickly. At the moment the markets do seem to be pointing to a slowdown as traditional markers such as falling consumer demand, rising oil prices and falling house prices can only lead to this conclusion. Sadly we also have to add geopolitical tensions with Iran and possibly Russia, to this brew to conclude that 2008 is going to be even more difficult and troublesome for us all.
My predictions for 2008 will have to wait until the next article but all I should like to do is to wish everyone a Happy Christmas and prosperous New Year (yes it is possible despite the current climate – just choose your investments with care and understand what it is you are investing in!)
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