The Speculator

Every twist in the market can seem full of meaning if you stare hard enough, but last week had the look of something genuinely different. It was the breadth of the buying that impressed. The FTSE 100 touched a four-year high and the Mid 250 index achieved an all-time record. Japan is almost at a five-year high. In the US, mid-sized firms were also at record levels while the technology-heavy Nasdaq Composite passed its four-year peak. Many smaller markets, among them Greece and Poland, entered new territory.

To my mind, there are plenty of valuations – like Google’s surge from $85 at float last year to $400 – that are classic cases of hope triumphing over experience. But this column, an exercise in speculation, can’t afford to become too distracted by the big picture. Standing in the way of market momentum can be a quick way to lose money. My time is better spent on questions such as: is the Footsie more likely to rise 5% or fall 5% over the next three months?

That’s a question about which way investors will vote, not which way they should. The fact is that markets were offered plenty of reasons to worry in October (Refco, the Federal Reserve’s fears about inflation, bird flu) and chose to rally strongly in November. None of the worries proved strong enough to trigger the end of the three-year bull market. I still suspect a crack is overdue, but 2006, rather than 2005, now seems the most likely date. It’s time to run with the bulls with a little more enthusiasm.

With spread-betting, the method this column uses, enthusiasm can be measured with precision. The firm I use calculates the amount of capital one needs to support open positions – what is commonly called “margin”. During the short life of the portfolio, my figure has generally ranged from £600 to about £1,600 and stood at about £1,150 on Friday. In other words, given that the Guardian handed me £10,000 with which to trade at the outset, I have been punching hugely below weight.

That has been largely deliberate – I saw too many potential demons in the market, particularly during October. What I propose now, if this end-of-year rally looks like holding, is to step up a gear. A margin figure of at least £2,000 is in order. Many will regard that as still erring on the side of caution, but too bad – I am still learning to appreciate the gulf that exists between trading on paper and doing it with real money.

Empire Online, I understand, is the stock sent to torture me on that point. Regular readers may recall that I first mentioned Empire as a possible short a fortnight ago. I didn’t believe PartyGaming would follow through on its threat to bid at anything close to the market price, about 115p at the time. I dallied, opening the trade only when the price had dipped below 90p – but still thought it could go below 70p in short order. How could a company with 60 employees and 174,000 regular customers be worth £300m as its optimistic supporters hoped? At that price, each customer would be valued at £1,700. But online poker players, on Empire’s own numbers, cost a fraction of that sum to recruit.

This analysis gained ground rapidly and I saw a notional profit of close to £100 within a couple of days of opening my short position at Empire. Then came the unnerving bounce and, as you can see from the table, I jumped ship to take a mere profit of £32.50. It was a horribly weak play, born entirely of a determination not to lose money on a stock that I had analysed correctly.

Naturally, Empire then plunged further to end the week at 63p and it counts as a big opportunity missed for me. I should have made £200 or more from the idea. The only encouragement I take is that, despite the City being over-populated with analysts, situations still arise where the market can still get prices spectacularly and obviously wrong, even when all the facts are supposedly in the open. It will not happen often but I will have more resolve next time.

Empire capped a frustrating week. Vodafone’s veiled profits warning was expensive and most of my profits from GlaxoSmithKline disappeared and I felt obliged to get out. The reason for Glaxo’s stall is not clear. It may be no more than the sluggish nature of the share prices of its US counterparts. If that turns out to be the case, I would happily buy Glaxo again if the price drifts much lower.

Many names in the list of potential buys are repeats from last week. Additions from within the FTSE 100 include Antofagasta, National Grid, InterContinental Hotels, Barclays and Royal SunAlliance. The latter two I see as “geared financials” in the jargon; they should enjoy rising markets.

The rest of the list, with a couple of exceptions, concentrates on cash-generative businesses with an industrial bias. They have been the drivers of the bull market so far; if I’m betting on an end-of-year rally, they are the obvious place to start. I’m not giving up entirely on shorting, but the list is smaller, as would be the size of the bets.

This entry was posted on Tuesday, November 22nd, 2005 at 9:40 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.