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Liquid refreshment

Some months ago, I raised liquidity within the portfolios that represent my family’s modest wealth with the understanding – and agreement even – of my stockbroker. Four years of steadily rising markets seemed reason enough to indulge in a little profit-taking. Yet last week my broker was on the phone to warn me that my portfolio looked vulnerable in the context of a market that was continuing its upward trend. I was, he surmised, being left behind.

His remarks coincided with comments from a strategist I respect suggesting that equity retirement will force prices in some markets still higher. He was referring to the US, where corporate activity, including the seemingly unstoppable march of private equity houses, is shrinking the supply of shares.

This is the oldest bull argument in the book and can be condensed into more buyers than sellers. But it happened in the US in the late 1990s when share buybacks were all the rage. A shrinking equity stock coupled with the public’s insatiable appetite for technology stocks laid the foundation for the worst bear market in a generation. This time, the risks do not look quite as great although the jury is out on how the Chinese market will end up.

But there were factors not on the side of my broker. No sooner had he persuaded me to commit some of my cash reserve to shares, than Morgan Stanley came out with a sell signal on the market, citing a number of bearish indicators. Apparently, this combination of measures, including such criteria as appetite for risk, valuations and investor confidence, have predicted market falls in the past which have averaged over 15 per cent. The only mitigating factor was it could not detect any irrational enthusiasm among investors. All this was sufficient to send wobbles through Wall Street and our own market. It was hardly surprising that investors took profits but the real surprise was the speed at which shares bounced back – initially at any rate.

Speaking to a packed house of private investors at the Dunblane Hydro, I had to deal not only with bearish noises but the impending interest rate decision. The monetary policy committee left rates unchanged but few would bet against a rise later this year. Perhaps more significant, close observers of the monetary scene in the US are retreating to a position of no further cuts this year.

What has changed in the US where the state of the housing market was already putting a brake on economic progress? Confidence in the corporate sector is, remarkably, rising. Forecasts for economic growth are also being revised upwards. It seems US consumers are largely shrugging aside the effects of a weak housing situation while inflation continues to raise some concerns. This is what is driving interest rate policy in this country, where house prices appear reluctant to retrench.

If you believe the latest survey of housing needs in this country, we have further to rise in terms of prices and their relationship to earnings. This forecast is based on the continuing mismatch between newbuild in the residential property sector and demand. Driven by immigration, we have the highest birth rate for a generation and these new citizens will all need somewhere to live.

Drawing meaningful conclusions from this wealth of opinion and data will not be easy but some pointers emerge. Interest rates are not coming down soon. They are rising in Europe, too, so the outlook for bonds continues to appear cloudy. Higher birth rates – and immigration for that matter – are good for the economy so the longer-term growth prospects look intact. But in the short term, the battle between surplus cash and economic and geopolitical uncertainty – between bulls and bears, in other words – is likely to hold back the market. It looks a good time to take a long summer break.

Brian Tora ( is principal of The Tora Partnership.


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