Monthly Archives: October 2012

A move to bonds – is the crowd wrong?

There is no doubt that investors are risk adverse at the moment and rightly so considering world fundamentals and there has been a significant move out of equities into bonds based on the perception that bonds are low risk. Bonds are not low risk securities.

Assuming one buys quality bonds, the risks depend on what future interest rates will do. Personally I see interest rates in Aus falling further, perhaps another 75 basis points before end of the financial year. I don’t see world interest rates rising soon given high unemployment, low growth and deflation rather than inflation. I believe that we have another two years of declining interest rates, but that situation could change quickly. When interest rates rise there will be significant capital losses with bonds so bond investors need to be careful.

While some of the bonds that I hold have given capital gains of up to… Continue reading

Is this the expected market correction?

With the American market rather overheated given fundamentals in the US and in Europe a correction can be expected but is the pull back of the last few days the start of this correction? Consider the daily chart of the S&P500 below.  The S&P500 has moved in a channel over the past 4 months for a gain of some 17%.  If this current correction moves below support at about 1400 indicated by the dotted line then a further move down for this index is likely. 

Consider now the monthly chart of the S&P500 below.  This chart shows a strong RSI divergence which indicates a high probability that a reversal of trend in the S&P500 is likely.  But my interpretation of this chart is that a reversal is not likely to occur yet – the RSI needs more time to develop.  

Supporting evidence for… Continue reading

Equities or fixed interests – it’s all about risk

Investing is always about managing risk. In the current environment equities must be considered high risk.  There are just so many influences which could bring a dramatic correction to the equities market, including the US, the EU, China and the Middle East.

On the other hand, with markets now looking somewhat positive despite the world fundamentals there is the temptation to increase exposure to equities. In Australia there is the added temptation to invest in equities because equities carry dividend imputation which makes high yielding blue chip stocks very attractive.

 I can sympathize with the American investors who need to live on investment income.  With the return from fixed interest and bonds being effectively zero, there seems little alternative but to invest in equities.  But in Australia the situation is very different largely because of our higher interest rate environment.

What is the appropriate exposure to… Continue reading

Addressing the problem of investor education.

The Australian education system does not equip persons to understand investing and this leaves them no alternative but to use professional fund managers.  Professional managers have overall performed very badly and most funds significantly underperform the index.  The table below which shows data on the top 5 performing large funds illustrates the depth of the problem.

Considering that these funds are the best of the larger funds, an after inflation return of minus 6% p.a. creates a significant problem for Australian investors.  If Australians are dependent on investment funds of this type they cannot avoid significant loss of assets.  It emphasizes the critical state of investment generally in this country but this of course this goes further because a loss of investors’ funds means that there is a loss of capital for investment by business in Australia’s development.

How can the deficiency in financial education… Continue reading

Where is the Australian market going?

International deleveraging of debt continues and with world fundamentals in apparent chaos most stock markets seem to be in denial and there is a persistent bull market mood.  But why the apparent disparity between fundamentals and the markets.  With interest rates effectively at zero in most developed economies, investors have little alternative but to invest in equities.  So even the hint of positive news provides market stimulus.   But how far can it go?  Using technical analysis we can get some insights into potential targets.

There is little doubt in my mind that the bullish market mood will be short lived.  The bearish divergence on the S&P500 suggests a dramatic turnaround within months, see http://aust-investor.com/2012/10/08/the-sp500-suggests-a-correction-is-due/.  So consider the technical prospects for the Australian market.

The weekly chart of the ASX200 suggests an eventual  move to completion of the bear market… Continue reading

Investor education in Australian is critically lacking.

The average Australian has a very poor understanding of investing.  The consequence is that in most cases they leave investing to professionals who may have a poor investment record.  It is a matter of record that very few fund managers are able  to beat the index and many whose funds have shown losses every year for 5 successive years.  Why is this so? There are four propositions:

  1. The education system does not provide a useful preparation for investing.
  2. Australians are too busy raising a family and developing a career to learn to invest.
  3. There is a general perception that investing is too hard: leave it to the professionals.
  4. Finance professionals actively promote investing as being too difficult.

Let’s consider each proposition.

  1. There is little doubt that the Australian education system provides little information that is of direct use to Australian investors.   This is unlikely… Continue reading

The Australian superannuation system is under threat

The Australian system of superannuation which was the brain child of Paul Keating is under threat. Lauded as one of the best pension systems in the world, it aims to provide funds to support Australians in retirement but also makes available much needed capital for business development.  While it is acknowledged that pension contributions still need to be increased, by world standards the Australian government should be in a much better position to pay pensions than most almost any other country.

But the whole superannuation system is now under threat.  The superannuation and pension system is now threatened by the poor performance of managed funds, many of which have produced negative returns for up to five successive years and this performance is much worse when inflation is taken into account.  Australians who have invested with these funds will have virtually no prospect of a comfortable retirement and… Continue reading

Is exposure to equities high risk?

Many investors believe that they should always be fully invested in the stock market.  This is a fallacy and can be an expensive mistake when the market becomes volatile.  Investors who did not take note of the signs and remained fully invested during the 2008 bear market lost up to 50% of their capital in this market.

To lose such a significant portion of capital is devastating particularly if invested in managed funds, the majority of which have averaged returns of less than 5% p.a. over a long period of time.   In this circumstance it takes many years merely to regain the lost capital and over the long term it is almost impossible to make up for big losses in  a bear market.  If investors had switched from equities into cash the return was about 5% but capital was preserved and this strategy then… Continue reading

Is this a turning point for the markets?

 There is nothing in the world fundamentals to give me any optimism about the markets.  The outlook is bearish with confusing and conflicting views by market commentators not helping and QE3 seems to have failed.

 But there are suddenly a number of unrelated technical data which together make me question my bearish proclivities.  For example:

 1.    While the Shanghai Composite is still in a long term down trend it has recently rebounded from its lows, even to the point of showing a bullish RSI divergence on a weekly chart.

 2.   The Coppock indicator is now giving entry signals for most major world indices.  The American markets are the exception but these are already in a strong recovery phase and have been bullish since June.

 3.  The Baltic Dry Index which is a very good index… Continue reading

The US debt is a headwind for Australian markets

Although China now is Australia’s major trading partner and its economy has a huge impact on our economic future we must still be aware of the effects that the USA economy has on us.  The United States of America and been the world’s engine of growth for 60 years. That growth is now under serious constraints for several reasons but the main one is the huge debt burden now facing the USA.

While the Debt to GDP ratio in the US is now in excess of 100%, the less often discussed debts are those relate to unfunded medical and pension liabilities and these are truly formidable.  The US debt clock at http://www.usdebtclock.org/  lists the unfunded liabilities as being in excess of $120 trillion.

While it is evident that the engine of world growth will not be the US alone in the long term, we will look to… Continue reading

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