Is Now The Time To Start Buying?

Published in Investing on 13 April 2012

The recent pullback looks tempting.

I don't know about you, but my trigger finger is starting to get itchy. With the FTSE 100 shading 5,600, it is starting to look like a tempting time to start gunning for stocks.

I said starting. Because this could only be the beginning. There might be plenty of tempting targets in the troubled months to come.

To LTRO and back

I knew it couldn't last, that shock first quarter rally. I stopped buying, waiting for the backlash. Why? Because aside from some feisty US jobs numbers, there was no strong fundamental reason for markets to fly.

The main market driver was phoney, another burst of loose liquidity, this time courtesy of Mario Draghi at the ECB and his €1 trillion long-term refinancing operation.

Ever since the financial crisis, stock markets have become hooked on central banker stimulus, and they show no signs of kicking their addiction.

Junkie money

In February, HSBC produced analysis showing how markets just love that QE sugar rush. They were mad for it in Japan between 2001 and 2004, and the US and Europe after 2008.

In the US, stocks rose on average 6% after each bout of virtual money printing. They rose 8% in the UK and 15% in Europe. Every time central bankers turned off the taps and let their balance sheets shrink, markets suffer rapid withdrawal symptoms.

That's what has kept markets going since March 2009: QE1, QE2, LTRO, and until recently, the prospect of QE3.

When the Fed recently poured cold water on QE3, markets took an instant bath. Last week's disastrous Spanish bond sale added some ice, and as LTRO winds down everybody catches a chill.

Trouble and strife

Politically, it's going to be a rocky summer. In May, there are elections in Greece. Who is going to vote for more austerity over there?

There are elections in France, where Nicolas Sarkozy could easily lose to socialist candidate Francois Hollande, who has pledged to rewrite the eurozone's hard-fought fiscal pact.

The real action could be on the streets, where civil strife Greek-style could easily spread to Portugal, Spain, Italy and France. I can't see any feasible solution to the imbalances caused by the euro, except the death of the single currency. There will be a lot of pain before EU politicians let it die.

Till debt do us part

Every single one of these events could spell disaster for Europe. It's tragic, and I don't welcome it. But it is a great opportunity for investors.

Europe is hurtling headlong back into recession, killing itself with self-inflicted austerity. Its banks have a crazy €600 billion in redemptions this year. Italy has to refinance €600 billion of debt over the next three years, Spain has to roll over €300 billion.

The US is no longer sitting so pretty either. Its latest set of employment figures weren't nice to look at. And it still owes an awful lot of money.

Don't be fooled by Wednesday's fightback. Markets were celebrating a successful Italian bond sale, failing to notice that these were three-year bonds, and therefore covered by LTRO.

Yes, I see more buying opportunities ahead.

What will the Germans say?

I've got absolutely no idea how low markets can go, but I'm not expecting a wipeout. If markets fall, say, 10% from here, the Fed will inject more stimulus faster than you can say QE3. The Bank of England might add to its £325 billion of bond purchases, too. And the ECB may finally slash base rates below 1% and embark on full-blown money printing, whatever the Germans say.

Stock markets will no doubt respond in the time-honoured way, although with less enthusiasm than before. So don't squander the summer looking for the perfect time to buy.

But as I said, my trigger finger is getting itchy. I'm ready to lock and load.

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Comments

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AleisterCrowley 13 Apr 2012 , 10:33am

I feel it's a good timer to buy - but what?
I am sitting on cash, but have just topped up Vodafone (good yield, diversified, people would rather starve than be mobile-free these days)

I'm currently worrying about my possibly overweight holdings in Aviva and RSA. I really don't know if I should dump or top up

stupudfool 14 Apr 2012 , 2:33pm

I am also keeping my powder dry and waiting in the wings with cash. I think you must be raving bonkers not to be tempted to buy RSA right now at the price £1.03 and yield. Is this even taking a chance? To me it's not what they are worth now it's what they are worth in 20 years that matters, and all those divs dripping in between. However, I agree with the author of the above article that there is "white water" ahead and good clean stocks will go out with the tide; including RSA. When they go under £1.00 I will be buying.

wordofandy 15 Apr 2012 , 1:21pm

If all these dangers are so visible that they can be summarised in a few hundred words, you must consider the possibility that they are priced into the market.
Sometimes the market goes up(!) when an event perceived as risky unfolds in the worst case scenario - fear of the unknown is as powerfully depressive as certainty of a bad thing.

GoldenSoldier 16 Apr 2012 , 3:25pm

“There will be a lot of pain before EU politicians let it [the euro] die.”

Yes, we all seem to take it for granted that democracy is a good thing. However our present form of democracy is the reason why politicians do not make the decisions now, which are necessary to avoid all of that pain.

AleisterC I’m puzzled. If you think you might be overweight in Aviva or RSA why are you even contemplating topping up. What’s wrong with diversifying into all of those “other fish in the sea”?

Tara1492 16 Apr 2012 , 3:41pm

Do you think RSA and Aviva are cheap because people fear what sort of bonds they have on their balance sheets? That is the reason I don't buy them anyway - there are plenty more fish in the sea even i they yield is not so exciting.

I am also tempted to buy on dips but can't help feeling there is going to be a huge wobble when the Euro finally collapses - will it be after the French election? I have read that the US wants to Euro to survive until their election because the US banks are so exposed to European debt, but can it keep going that long?

snoekie 16 Apr 2012 , 5:17pm

Harvey, I too have concerns about the lack of will to address the debts, and this has been my concern for many months.

I have been treading water for sometime now, and am looking two boring companies, one, SSE, has dropped and the other GSK has climbed, having briefly dipped below £14, has risen decently. More funds coming shortly, and I fret that may not arrive in time for a sharpish correction (to reflect the concern about inertia (incompetence?) in tackling the huge debts, all over the place) that I anticipate will happen in the coming weeks.

As for Aviva, I have a decentish holding in this already and being sub £3 at the moment (they were down to £2.66 not so long ago, and I had set, optimistically a target of £2.50, and it never happened, just as BP didn't drop as much as I had hoped at the time). On RSA, my target is sub £1, nearly there, but too early, maybe it will wait some 6 weeks. That is one of my long term losers.

I am not going to follow the herd and diving in as the market rises. I am still haunted by my impatience in 08, when had I waited a couple of months, I could have bought double the amount of investments for the money spent. Too cautious? Perhaps, but when one door closes, another usually opens elsewhere, and for me BP was one of those, an opening door.

RobinnBanks 16 Apr 2012 , 7:52pm

Ask Stephen Bland about Aviva - he's got a 70% holding, or he pretends he has. How many other investors fell for his fantasy apart from me?

ANuvver 17 Apr 2012 , 2:48am

Aviva seems to me to be pretty much a euro-sentimento-barometer. I have some and I'm underwater on it, but 70% in anything is - shall we say brave?

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