Considering we seem to be going through a worrying phase at the moment in the markets there are large percentage of very positive statements coming out. Lots of companies reporting best ever results and saying the outlook is good. Shell, BT, BAT, Rolls Royce, L&G, Reed Elsevier all reporting excellent figures today amonst 1 or 2 bad ones today.

John Piper (tech analyst) predicting the very worst for the markets in the coming months. I think if we can keep a lid on inflation, some peace in the middle east we will see a good rebound. How do you read it??????????

xstrata, cadburys, alfred mcalpine and lloyds alll with very positive results. I think its top up time ladies and gentlemen. Fste100 could end the year around 6400 - 6500 iMHO.

Kivver, the market looks to the future and only sometimes the present.

doesnt look like it at the moment Stan, superb results and outlook day after day by big companies, but market down if anything. When all return from holidays i think we will see a bounce depending on the middle east of course.

RBS better than expected results, BA good results despite oil prices, ubc on target.

One thing your missing, Kivver.
The human element.
The markets are made by human beings making fallible decisions. it is all about sentiment. Remember the boom days of the 80's? Even when it was obvious to everyone that the economy was a house of cards with too few on the bottom, people still rushed in, buying up everything and sending the market sky rocketing. It was followed by an almighty crash and a long drawn out recession that brought down the curtain on the "Greed is good" culture.
What we may be seeing now is a smaller version of it in the negative. despite fairly benign economic conditions, people don't feel too good about it all and are hesitant to invest. Perhaps, when the light of realisation dawns we will see an almighty bull run. Perhaps not, but the human factor will dictate it in the end.
Alan

Well put Alan, im banking on a moderate bull run come sept - march, to reflect the excellent results and positive outlooks of many top companies. Inflation and the middle east depending of course!!

Inflation looks under control to me, Kivver.
the middle east will never be under control, while ever people have a "my God is better than yours" attitude.
A good illustration of the point I was trying to make above is Yesterdays interest rate rise. A 0.25% rate rise has been made and commentators are saying it will slow / cool the housing market. It may well do, but a rise of that magnitude will add about 15/month to mortgage payments, and I suggest that if people reflected on this, they would push ahead anyway. After all, you move house or buy your first one because you need to or want to. Will such a small amount deter you? it is the equivalent of paying 2000 more for your home, yet if you wanted that particular one, you would happily pay an extra 2000 to make sure you got it.
the reason it will effect the housing market is the media fostered perception that it will crash the market and that mortgages are too expensive.
It will have the effect the bank desire, but not for the reasons we think. Its that old human fallibility thing again.
Alan

Kivver

It's always about interest rates -- US rates are "risk free" return that all other assets are benchmarked from. -- at 5% that is not bad as they were 1% a couple of years ago that will attract plenty of money from risky assets

Plus rate rises cut money supply -- i.e. short term rate rises have 1 specific goal to slow things down. At the moment, the economy seems to be ignoring what the FEd wants as it is still strong so the Fed raises rates further - slowing the money supply further. But the economy is still growing and demanding more money -- through savings and borrowings to build more -- so the money has to come from somewhere as money supply growth is below economic growth, it comes from the financial markets, which are also losing money to the "risk free" rate. Hence when things look very strong for the economy, interest rates are rising and companies are reporting great earnings and so likely to invest more in their businesses -- the market dives.

This is obviously a simplification and there are plenty of timing issues etc but the relationship between interest rates, money supply and economic growth is the basis of market movements (up or down), of course only my opinion but you did ask.

The capitalist model demands that equities and bonds must always give a higher return than the base rate.
In simple terms, if the base rate is 5%, then businesses must give a return of greater than that if they are to retain their inward investment. This may be by dividends or capital gain, but they must do it, otherwise the money others are investing will head off to deposit accounts.
it is a very simple view of the model and only holds true as an averaging. After all, companies do go bust.
The point is, that an increase in the repo rate is to be welcomed, providing it does not lead to deflation or stagnation. if this holds true, then the effect will be to raise real returns on equities, which is of benefit to us all.
The real problem is for heavily leveraged companies, who must grow exponentially, to satisfy both the loan repayments and the demand for higher returns for investors.
Alan

Thanks you 2,, loads to ponder there. I would have thought, a good economy, good results from companies would lead to a postitive market, but maybe not.

The markets tend to be forward focussed, e.g. you buy a stock because you think it will have better results, good news etc. over the course of the next year or between interims. Results are a sign of past performance, and if economic conditions change, they may not be repeated or bettered in the future. At the moment the market is undecided as to how severe the affect of inflationary pressures and higher interest rates will be. My concern is that we are currently offseting inflation from energy, with deflation from imports from China and the far east (clothing etc.). Assuming China (etc.) continue to expand, a point will come when wage pressures increase, as the locals want to enjoy some of the western style luxury items. This will make imports more expensive, and will eventually remove the deflationary cushion for economies in the West. This will of course have a knock on affect to Western companies. The increasing levels of debt should also be a concern. Even at low levels, interest rates rises can be very severe if you (or a company) are over leveraged. It's not very good for the banks either....

In my opinion anyway......

Strawbs.

In actual fact, the mortgage banks tend, on balance to enjoy higher rates as it gives them much more margin to play with in attracting borrowers. The only real downside is if borrowing falls, but that seems unlikely in a high credit society.
As always, the key is in a sensible approach to a companies lending requirements, just as it does in your personal life.
Alan

If enough people over leverage, and then decide to take bankrupcy, the banks get nothing back, regardless of how good the initial margin may be. Given that the banks are raising provisions for bad debts, it's clearly something of a concern to them. I suspect the economy will worsen at some point in the future. The question is by how much, and it's the same question the markets are asking themselves at the moment.

IMO...

Strawbs.

Re your point Kivver

"I would have thought, a good economy, good results from companies would lead to a postitive market, but maybe not. "

I would say not if we're looking at short and medium term moves -- its about ratings - PEs. These can be v high as we have seen in the late 90's or reasonable low as we see now or in the 70's. It is the de-rating or re-rating of the market that is the biggest factor in market fluctuations -- not v.long term market direction though.

When interest rates rise - esp long bond rates -- and/or inflation rises PE's fall, and vice versa -- hence now earnings are great but the market goes nowhere.

I think it is, that when the Fed raises rates, PE ratios rarely rise and infact normally fall as we are seeing now.

So a market rally will depend on 1. Whether the Fed stops
2. Whether the bond market rallies - yields fall
3. Whether the slowdown the interest rate rises have been trying to achieve hits earnings too hard

Either way the market seems to be indicated that the derating of the market could at least be stopping for now -- look at recent bond rally and possible Fed stop after August rise. But there is a saying that the markets discount everything twice - so when the companies start reporting weaker earnings in Sept and October due to the slight slowdown we are now seeing they, individually, or the market as a whole could fall further. It is at that point - when your "good economy, good results" have disappeared - when the market might just put on a bit of a show -- re-rating the earnings albeit lower earnings.

November seems a good bet to put some money in -- Indeed I think I have just talked myself into it !!