Could the bulls be right?
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There’s an article on Thisislondon.co.uk this week about a new reality TV show, the aim of which is to persuade a group of nine people (already apparently in seclusion somewhere) that they have been blasted into space. They will be told that they have been chosen to visit the final frontier and will undergo intensive training in Russia in preparation. In real life, they will never visit Russia or space, but will be “trained” in a disused airbase in a secret location in the UK and “blast off” in a ex-Hollywood spacecraft with a giant screen outside the window showing them scenes of space.
On the face of it, it doesn’t seem very likely that the nine will be taken in (they must have read the press about how the next real space tourist – a Japanese man planning to travel dressed as his favourite cartoon character – is paying $20m for his trip, for example), but that doesn’t mean they won’t be. People are great optimists: they tend to believe what suits them best. And nowhere is this more true than in the stock market. Consider the current situation. After a nasty October, London’s investors have suddenly come over all bullish. The FTSE, says the Evening Standard, is set to “take off”. According to ABN Amro, that means it will hit 6,200 by the end of next year, a forecast that analysts at Brewin Dolphin and Charles Stanley seem happy to go along with. It’s also one that regular MoneyWeek contributor James Ferguson is happy with. So what is driving this return to optimism? Takeover fever. Rumours over the last few months have suggested that over 40% of FTSE 250 firms are possible targets and already executives have embarked on such a spending spree that the second half of 2005 will “turn out to be one of of the best six months ever”, say analysts at Bedlam.
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To some this makes sense. It is, says James, all about interest rates. Right now, the earnings yields on stocks are not far off double bond yields, making them look very attractive in relative terms. And assuming rates stay low, that will stand. The question is whether interest rates really will stay low. Last month’s inflation numbers showed UK prices rising slightly less fast than the month before, but as John Stepek points out on Money Morning (www.moneymorning.com), that was largely down to falling bank charge levels, something we all know can’t last, and at the same time core inflation in the US and Europe ticked up. This means that low interest rates aren’t a given, and nor is an ongoing bull market. The optimists may be right, of course – and James in particular often is – but I remain to be completely convinced, just as the nine ‘space tourists’ holed up in a disused airbase in Essex should be.
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