Reasons To Be Cheerful, Part 2.

9th September 09 – Reasons to be cheerful, part 2

Since the diary entry of 14th August (the worst is over) things economic have spiralled downhill. But, unless my faithful friend the UK stock market is leading me up the garden path, there just has to be some reasons to be cheerful to build on the indicators set out in that earlier item. After all, the FTSE 100 is up 38% since early March and yet has 20% further to rise to reach the point it was at just one year ago. The stock market looks forward. Can we find pointers to its optimism?

We can think about contrarian investors (a definition of which can be found elsewhere on this website). A contrarian might look for two flashing green lights. First, experienced investors holding record levels of cash. Secondly, private investors being extremely pessimistic. According to Alan Steel, chairman of Alan Steel Asset Management Ltd, a survey some six months ago showed that experienced investors had the highest level of cash on the sidelines at 45% (almost exactly mirroring my own position). This figure compared with 11% in the late Nineties just before the dotcom bubble burst. The moral is – low cash equals euphoria and high cash extreme pessimism. Two weeks ago, cash levels had fallen to 25%.

Most of the cash used in the latter part of that six month period to end August 09 went back into equities. What this means is that for private investors in the market, the extreme pessimism had turned to something approaching a dismissal of all the economic indicator woes. Furthermore, global economic indicators do support a view that the worst is over. For the first time ever, all 39 countries’ composite leading indicators recorded monthly increases. The aggregate increase is the highest since records began 47 years ago.

My personal shares portfolio is up 21% in the last three weeks. I am determined to be cheerful. What else can I find?