Monthly Archives: June 2012

The dilemma for self funded retirees

As investors none of us have ever experienced the investing environment we now face.   The self funded retiree in Australia faces a particular dilemma.  In recent years many Australian pensioners have depended on fixed interest and have done well by investing in very low risk term deposits.  But these retirees are now facing a real challenge with falling interest rates and unless they monitor their situation with care they will not sustain the “self funded retiree” status for long.

What are the alternatives?  While bonds should have an important role in the superfund, Australian super funds have significantly less exposure to these securities than their overseas counterparts.  With global economic uncertainties the yields on bonds have been driven down.  Corporate bonds, particularly fixed coupon corporate bonds still look interesting and while returns have fallen in recent months they still offer yields of 5-6%… Continue reading

Value in small cap stocks?

In times of market uncertainty and downturn it is the small cap stocks which really get slaughtered. A quick scan of ASX stocks on fundamentals yielded the following stocks of interest. The search aimed to select those stocks which met the following criteria. All stocks on the list are fully franked and they mostly have:

  • a return on equity (ROE) of greater than 20%
  • a dividend of greater than 5.5% and fully franked
  • a debt to equity ratio of less than 10%
  • an intrinsic value that is 15% higher than the market value.
FPS Fiducian   Portfolio S… $0.99 $1.40 41.90% Banking & Investment… 10.00%
HHL Hunter Hall Internat… $3.30 $4.74 43.70% Banking & Investment… 13.30%
IMF IMF   (Australia) Limi… $1.37 $2.01 46.60% Banking & Investment… 10.90%
IRE Iress Ltd $6.21 $7.16 15.30% Banking &… Continue reading

Europe is a basket case but the risk for Australia remains with China

It is an understatement that Europe is a mess at the moment and there is little agreement on the actions required to solve the problem.  France’s Hollande wants growth and Germany’s Merkel wants austerity. Almost without exception southern European countries want further handouts.   In this latter case many of these countries are at the limit of their capacity to repay existing loans.  To make matters worse, as the market becomes more and more cautious about lending to these countries the bond rate that must be paid for new loans as existing debt rolls over, continues to rise.  This is a recipe for sovereign default.

So how will this affect Australia?  In the first instance it destabilises markets and increases volatility on our markets.  It will also make it increasingly expensive for our banks to borrow overseas.  So our banks will have higher… Continue reading

An Elliot Wave interpretation of the Australian stock market

Elliot wave theory has been a very useful predictor for this current bear market since it started in November 2007. Application of Elliot Wave analysis is a valuable tool to help investors make the best of market opportunities and preserve capital.

From the ASX200 top in November 2007 there was a five wave market decline to March 2009. This 5 wave pattern confirmed that this was not the bear market low but it was only the end of the A wave correction. The severity of this 5 wave correction suggested that there would be a significant bear market rally. The ASX200 did in fact rally strongly to about 5022 in April 2010 and this level was very close to the expected correction at the 50% Fibonacci level. I have taken this as the end of the B wave (see the weekly ASX200 chart below). Since that time in April of… Continue reading

The potential dangers of fundamental analysis

As investors we have access to two tools in our efforts to analyse companies and markets. These are fundamental analysis and technical analysis.   In my view both are essential tools if we hope to maximise profitability in the equity markets. These tools have different applications, with fundamental analysis telling us which companies are worth buying and technical analysis telling us when we can profitably buy and sell stocks.

In the current market there are real problems when using fundamental data. These data may be up to 6 months out of date and the fundamentals of the Australian (and world) economy are now changing on almost a daily basis. If there is a deterioration in the Australian economy it is likely that the profitably of most companies will be very different in 6 months time so any ratio such as P/E and ROE etc such as can be very… Continue reading

The 10 best books on investing

We probably all have different books in our top 10. The following, listed in order of preference, are the ones I regard as my top 10.

 1. The Ascent of Money by Niall Ferguson
2. Building Wealth in the Stock Market by Colin Nicholson
3. Secrets of Profiting in Bull and Bear Markets. by Stan Weinstein
4. Trade your way to Financial Freedom by Van Tharp
5. Trading in the Zone by Mark Douglas
6. Trend Trading by Daryl Guppy
7. Trend Following by Michael Covell
8. Trading Chaos 2nd ed. by Bill Williams
9. Blue Chip Investing by Alan Hull
10. Technical Analysis of Stock Trends by Edwards and Magee

Greece and the European saga

To look at recent market reactions after the Greek elections on June 17 one could be persuaded that the EU issues have been solved. I very much doubt it!

Assuming that the new Greek coalition can reach agreement they will have to come to grips with an economy which is in serious recession and has a significant sovereign debt which eventually will have to be repaid.   Superimposed on this are the problems that Greece has a very high unemployment rate, a very poor work ethic and an expectation that the handouts from the EU (read Germany) will continue.  Clearly these handouts cannot continue without certain assurances from the new government .  The danger now is that the contagion of Greece will spread to other southern European countries which are much more significant to the health of the world economy.

The volatility on world markets can be… Continue reading

Inflation or deflation?

With uncertainties prevailing in world markets there seems to be ongoing confusion about the potential for inflation.

Although there is a need to stimulate growth with lower interest rates, understandably those few central banks that still have the option of lowering interest rates are very cautious about doing so because of the potential for increasing inflation.  But what are the realities of inflation?  With severe economic problems in Europe and significant problems in the US economy it is very likely that we will see deflation and not inflation in the foreseeable future.

The reasons for this are that the developed world is now in a stage of low growth and falling commodity prices due to falling demand for commodities.  This deflationary phase is now being  driven by high unemployment, high debt, and increasingly limited access to bank credit.  In this low growth environment we… Continue reading

The fallacy of Dollar Cost Averaging

There is an erroneous view that dollar cost averaging is a smart investment strategy. With dollar cost averaging an investor buys more shares when the price of a stock falls and buys additional shares when the price falls further, etc.  So the logic is that over time you pay a lower average cost for the shares you hold. Is this a wise strategy?

It works well when the net movement in the share price over the long term is up. But what happens if the net movement in share price over the long term is down or even worse if the stock that you are averaging down, goes into receivership?

Consider the following case where dollar cost averaging was applied to Centro Properties Group (CNP). This is actually the experience of a friend who invested in CNP using DCA.

Bought original 1000 shares at $10.00
Bought another 1000 shares… Continue reading

What is technical analysis?

There is ongoing confusion about what technical analysis really is.

Technical analysis looks at the price and volume of securities with a view to understanding the behaviour of market participants. It is an approach which is very different to, but complementary to fundamental analysis. While it is not a method of market forecasting per se, it is able to provide a probability of future market outcomes.

Technical analysis comprises a wide variety of techniques some of which are understandably regarded with sceptism. The important thing is that technical analysis is the only approach which allows the investor to quantitatively analyse the behaviour of market participants.

Investor reaction to market events always seems to be the same. It does not matter if the securities are stocks, futures or forex, the reactions of the market crowd are the same now as they were 100 years ago. This means that investors as a… Continue reading

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