November 20, 2008 | posted by Michael Baxter in Automobiles, House prices, Markets |

News of John Sergeant’s resignation from Strictly Come Dancing hit the markets hard last night and this morning. In the US the Dow Jones fell by more than 400 points, closing at its lowest level since March 2003. This morning, markets in Asia followed suit.

It is hard to believe a dance competition could have such a dramatic impact on the value of stocks.

But, now it is time to let you into a secret. It appears that the Come Dancing hero’s shock departure wasn’t the only event in the news yesterday. No doubt traders in Japan were distressed over the development; no doubt traders in New York were up in arms over comments made by the competition’s judges; but it appears there were other, even more dramatic, events behind the latest financial panic.

You have probably got the message about deflation now. And if you are an avid reader of this newsletter, you probably saw it coming. But confirmation came in the form of the most dramatic data yet, this time from across the pond. US consumer prices fell faster than a tumbling dancer in October, dropping by a full percentage point. The annual headline figure for US inflation fell from 4.9 to 3.7 per cent. It seems certain the index tracking annual US inflation will fall some more in November, and may well go negative within weeks of that date when the victor of this year’s Come Dancing competition is chosen.

You can’t have it both ways of course. For months we have been told that it is not headline inflation that matters, rather it is underlying inflation with energy and food taken out. Well, even core prices fell in October, not by much it is true – they fell by 0.1 per cent – but, quite frankly, any fall in this index is a rare event indeed. It appears prices of vehicles fell by 0.7 per cent in the month, clothes by 1 per cent, while the cost of hotel rooms fell by a stunning 1.6 per cent.

For the organizers of Strictly Come Dancing, this news is mixed. Sure, it will be cheaper in terms of dollars to put their judges up in American hotels; sure, it will cost less to travel the country; and sure, the costumes may be a tad cheaper; but then since the pound has fallen even more sharply, the sterling cost will actually have risen.

Maybe, instead, they should consider buying a house, rather than renting a room in a hotel.

US housing starts reached their lowest level ever recorded in October. In all, the annual rate fell to just 791,000, from 820,000 in September. Capital Economics said: “The number of permits being issued fell to 708,000, suggesting that the slide in residential construction activity will continue over the coming months. At this rate activity will be down to zero soon.”

Fears are also growing over the fate of the big US car makers. And here the markets provided yet more evidence to demonstrate how illogical they are. As you know, a share price is supposed to reflect all future dividend flow from a specific company, with future dividends discounted to provide a net current value. One of the reasons given for yesterday’s fall relates to fears that the US government will not bail out the Detroit Three: GM, Ford and Chrysler. There is no doubt, if the three US car makers go under, the knock-on effect will be enormous. The short-term costs of the three companies going bust will be high indeed. Yet, there are good reasons to believe that in the long-term, corporate America will be better off if the companies go under. The vacuum which is left by the collapse of these companies will eventually be filled by new, dynamic businesses.

In the long-term, the collapse of the Detroit Three may be good, so why then are US and Asian shares, which are supposed to reflect long-term dividend flow, lower as a result of fears the US government may not rescue the three companies?

But here is the really worrying news. Both the X Factor and that celebrity programme in the jungle featuring famous and not so famous people eating live bugs, are due to come to an end soon. Just imagine the financial implications if one of the favourites is voted out early – what then?

According to research from Mintel, amongst wealthy Brits (those with at least £100k to invest) one in every four is planning to take a gamble and expand their investment portfolio in the very near future. This begs the question, of course, what are the three in four who are not planning to invest thinking. Maybe they are saying to themselves: “I am an investor, get me out of here.”