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COMMENT: Where next for speculators?

Created:
24 September 2008
Updated:
25 September 2008
Written by:
Joshua Raymond

It was a week to remember in more ways than one if you are a speculator. Between 15 and 19 September, you could have either made enough money to last a lifetime, or lost enough to end a marriage. It was a week pure speculators dream of, and chief executives dread.

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Now let us be frank. Speculators are not the white knights of the marketplace. They are bad mouthed on Newsnight, scorned by pensioners and admired by the City freshmen. And why? Because in certain conditions, when the markets are on edge, speculators are incredibly powerful and make a considerable amount of money. Now before you side with Newsnight, think about the 'free market' principal and what it is supposed to mean. Think about the use of short selling to hedge a portfolio in times like these. And think about the fact that speculators do not just limit themselves to the downside, they speculate on the upside also, with oil and mining being relevant recent examples here.

For the sharks among us, HBOS fell 69 per cent before Lloyds came to the rescue, AIG fell 90 per cent before its Federal Reserve bail out and Morgan Stanley and Goldman Sachs looked likely to follow suit. But now, following the new restrictions placed upon us, I am constantly asked, where’s the next prey?

To pick out individual stocks is a million dollar skill and I wouldn’t want an ear bashing from a chief executive when this goes to print, so I’ll forego that for now. But we can look at sectors where subtle clues can point to potential pitfalls.

Remember, banks were a target long before 15 September. Part of speculating is timing and the week in question was simply perfect. It didn’t take much for nervousness and stress to turn into full-blown panic and Lehman’s failure was its trigger.

Away from the banks, where are your gravest financial concerns? The majority of you will most likely think; house prices. The housing crash in the States is at the centre of the credit crunch. The UK real-estate sector has followed the lead of the banks, falling 58 per cent to its lows. Fundamentally, both banks and real estate are over leveraged in rising bad debt and loans and the fact that UK housing prices have fallen more than 10.5 per cent for the year alone is causing sleepless nights. It is an incredibly worrying time. Is it enough for some of us to pull our investments out of housebuilders or for a significant fall in share prices to trigger a panic sell? Worrying enough for executives to lobby regulators to include real estate in the short sell restriction? Are the clues less subtle now?

Joshua Raymond is market strategist at City Index

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