What is the retail equity investor to do? By most measures the retail investor in Europe has not participated in the bull market. This market isn't exhibiting classic signs of peaking and it doesn't look terribly expensive on traditional metrics. But who is stepping up to buy? The moderately risk-averse are reading daily Northern Rock headlines and are not keen to participate.
Which - as Philip Manduca, our guest host on Wednesday, conceded - could be an error. Apparently both the Fed and the BoE have stepped in to underwrite risk. If the price of risk on Monday seemed too high, today it was clearly low enough to drive money back into equities. Equity markets globally reveled in the opportunity and the interest rate sensitive stocks that have suffered in recent weeks enjoyed a relief rally.
There are still plenty of unknowns. What is the 'right' book value of European financials? The sector is still under suspicion, and with good reason. If the banks won't lend to each other, what do they know or suspect? A suspicious interpretation of the move by the central banks might ascribe their haste to inside knowledge about the potential problems. We may have had any equity market rally but the degree of central bank intervention shouldn't be viewed as a magic plaster.
That said, they have crossed the Rubicon. The BoE's reversal in particular speaks volumes about the financial authorities' apparent willingness to brush aside previous concerns about moral hazard.
As for the Fed - the rate cut will ease pressure on American homeowners and shift the focus on to the money to be made in equities rather flipping condos.
That buying opportunity many of our guests have been looking for appears to getting closer, if indeed it didn't just arrive!
Stocks are not for Philip however, he still prefers to find his return in the commodity markets. He has been a long term fan of gold and thinks it is still worth buying at current levels. Philip likes the inflation aspect of the trade and says higher commodity prices, and lower interest rates only look positive for the precious metal.
I am out on assignment for a few days.
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