Weekly international investment round up to 26th September 2008

With all the current mayhem on Wall Street it’s easy to get distracted away from that other crucial ingredient which can greatly contribute to the direction of investment markets, oil.
At the end of June with prices spiralling ever skywards I quoted Isaac Newton’s famous retort in my article entitled, ‘Oil prices to slip?’ He was once asked for his opinion on the fortunes of the ‘South Sea Company’ whose primary product was selling slaves into South America. He said ‘I can calculate the motions of heavenly bodies but not the madness of people!’ Soon afterwards the stock collapsed leaving thousands of investors ruined.
At the time not only could I have applied this quote to oil prices but equally to many badly run financial institutions some of whom are no longer with us today.
With the true extent of the toxic waste of bad debt still to have been revealed plus slowing world wide economies I felt it was crazy for oil prices to stay at such levels for any prolonged period of time. Not long after the article oil prices peaked at a record all time high of just over $147 a barrel but then has spectacularly fallen over the last couple of months, touching $91 for a time amid the recent panic on Wall Street.
However, the last few days have seen the markets digest the US Government’s planned bailout of the financial sector, initially boosting confidence but in turn fuelling oil prices. Last Monday, oil recorded its biggest one day gain on record jumping $14 to $120 before slipping back to $106.
The unprecedented $700 billion dollar rescue plan aims to end the paralysis of the financial markets by pooling contaminated debt away from the blundering banks and placing this burden upon future generations of American taxpayers. Although this may prise City brokers from their windowsills the devil will be in the detail and this is bound to cause some unexpected results.
If implemented, the plan may see the value of the US greenback subside as the enormity of the potential debt takes hold in-turn causing oil prices to rise. This is because traders have tendered to build up a negative relationship between the dollar and oil, as one weakens the other seams to look more attractive to them. Gold also looks undervalued at $870 per ounce and is likely to strengthen amid the confusion while stock markets continue to see-saw as market-makers heard like sheep around either good news or bad.
The ban on ‘short shelling’ may help stabilise volatile shares. Shorting stocks is a technique used to seek a profit on falling shares. Often the trader doesn’t actually own the shares but ‘borrows’ them in the expectation that these can be purchased later at a lower price. Some regulators have blamed short-sellers for overwhelming markets with sell orders forcing prices down. However, could the speculators now turn their attentions to gold, oil etc.?
In reality, America’s addiction to both oil and debt is unlikely to be cured any time soon and will continue to have a profound effect upon global markets.
Mark Lamb is Director of FPC Investment Consultants who are Independent Financial Advisers and regulated by the MFSA to provide investment services under the investment services act 1994. For further details please contact Mark Lamb, by email on marklamb@fpc.com.mt by phone on 21318008 or through FPC’s website www.fpcmalta.com
This article does not intend to give investment advice and its contents should not be construed as such. Information in this article has been obtained from various public sources and is given by way of information only. Readers are always encouraged to seek independent financial advice before making any investment decision.