Companies: IGG    LCG   

After the dot.com crash, property became the next US bubble. Deals were done at 100 per cent of the purchase price (and in many cases at 110 per cent of the value) and you could flip properties in days for massive profits. As US home prices spiralled higher, people felt richer and borrowed against their houses through home equity loans and remortgages. Lenders were happy, since loans were backed by property and were then packaged and sold on to funds and banks. Money raised from home equity loans was spent on cars and holidays, keeping job creation, and the US economy in general, ticking over.

Pyramid collapses
However, like all pyramid schemes, it all had to come to an end. Interest rates had to start moving up and property prices had to start falling. To make matters worse, many homeowners took out loans with an interest rate even lower than the already low rates for an initial period (low starts). Many of these low starts are coming to an end or resetting and higher rates are coming in. Needless to say, if you can’t afford your low start payments, you’re not going to be able to pay the normal rates.

Furthermore, many loans were ‘self-certification’ loans and, of course, if you now own a property with negative equity in an area in which prices are plummeting, what’s your incentive to keep paying? You simply leave, hand in your keys and it’s the lender’s problem.

Higher oil and food prices – which I have been warning about for months – are now also hurting the consumer. The Fed has cut interest rates to 4.75 per cent, but will that cut make the monsters go away?

Well, we could see a quick relief rally but a cut is not going to save the US housing market. I am becoming more bearish on US markets and, apart from the mining and oil sectors, I don’t see much to be bullish about for the rest of 2007. For now, the Dow, which boasts safer consumer stocks such as Proctor & Gamble, is holding up better than the broader S&P500. If the Dow closes at around 13,000 for the year it would still be up four per cent. The S&P500 is holding above the March 2007 lows of 1,380. We did get below this intraday but we then saw a strong snap back thanks to the discount rate cut and some soothing words from the US administration. Overall, this market remains weak and I would continue to be short going into an October low. We can then look for some sort of year-end rally. Don’t be fooled by recent calmness in financial markets, we still have a lot of bad news to come out and complex derivative trades to unwind.

IG a great bet
I would guess many of you are clients of IG Index; but, how many of you are shareholders of FTSE 250 parent IG Group? IG Index, the world’s leading spread betting and CFD company, has expanded into new countries including Australia, Italy, India and Germany, and offers foreign exchange, contracts for difference and binary bets as well as spread betting. The business thrives on market volatility and in recent months has proven very profitable. While the UK market for spread betting is becoming more competitive, overseas expansion will more than make up for any loss of market share in the UK.

I see no reason for the recent strong share price trend to stop. We could see a pullback to the £2.90 level but expect any sell-offs to be short with new buyers coming in. You can spread bet IG Group (but not via IG) or buy shares through a stockbroker.
Meanwhile, newer spread betting outfit London Capital Group, the parent of Capital Spreads which floated on AIM in 2005, is small fry in comparison to IG, yet is on course to post a £7 million profit for 2007. The company is doing well, with joint ventures and a recently signed deal to offer spread betting to Paddy Power customers, and it remains well priced despite having come a long way.

Vince Stanzione has produced a home-study course to teach private investors how to benefit from trading financial spread bets and fixed odds, priced at £347. For more details, visit www.fintrader.net or call 01189 476630 (24hrs)