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Brian Tora’s Investment View
Shifting sands
Last week saw the FTSE hit a new high for the year. It also saw Dubai seek a moratorium on the debt incurred by the government’s flagship holding company. Using the availability of easy credit, Dubai World financed a number of ambitious property developments, accumulating debt of around $80bn in the process. The request for a standstill on this debt raises fears of default. It would seem these extravagant property projects have indeed been built on sand.
To say the news came without warning is an understatement. Investors had been reassured constantly that all obligations on this debt would be met. Indeed, Dubai was raising money immediately ahead of the shock announcement from state-controlled banks in Abu Dhabi. The fact that less was raised than expected suggests Dubai’s neighbours are tightening the pursestrings, which may have triggered the statement.
Unless you are unfortunate enough to have been an investor in Dubai’s embattled property sector, you may consider the news of little relevance. It does serve as a reminder, though, that the period of imprudent lending and over borrowing could well have created a few more problems, yet to emerge and unsettle the still fragile financial sector. The full price for easy money has still to be paid.
Investors were generally shaken by this development but not massively so. The Footsie dipped significantly but its performance was tempered by the London Stock Exchange suffering a system collapse and closing for four hours, together with the absence of American reaction as Wall Street was closed for Thanksgiving Day. It did prompt me to look at some other indicators though.
Among the more unusual measures of what is happening in the market is the Investors’ Intelligence ratio of bears versus bulls among advisers. Last week, the proportion of bears fell to its lowest level since June 2004 at 17 per cent. The bulls, in contrast, account for just over 50 per cent of advisers - actually quite a low figure, given the absence of bears, suggesting there are more that are undecided than is usually the case.
When the number of bears reduces to a figure like this, the study suggests a market correction of 5 per cent is likely. Except there are fewer bulls than has been the case in the past when this has happened. So one reader of the runes decided to take into account risk appetite, something which again has been quantified. Apparently, euphoria is 5 on the scale they examined. Currently, investors’ appetite for risk is measured at 2.6.
It is at this point I start to worry about the value of these so-called indicators. On the face of it, neither the bear/bull ratio nor the risk appetite index are delivering clear signals. The fundamentals, on the other hand, have sounded a warning signal. Perhaps the spectre of a default in the Middle East will recede but, in the near term Dubai’s problems are spooking markets. Credit default swaps, for example, soared.
December is traditionally a good month for equity investors. Aside from the prospect of a seasonal holiday and lots of good cheer encouraging investors, for some reason, year-end adjusting by professional managers tends to drive prices higher. On this occasion, these seasonal factors might stave off profit- taking, but I will be watching closely to see if this potential problem turns into some- thing more serious.
Brian Tora (brian.tora@centaur.co.uk) is principal of the Tora Partnership
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