Monthly Archives: November 2012

Analysis does not support growth in China

If an investor was to look at the headlines he could well be persuaded that things are going very well in China and that China’s growth will continue. These headlines over the last 12 hours include:
Chinese industry powering along nicely
China’s manufacturing growth quickens in November
China’s growth to pick up

But these headlines are not supported by the performance of China’s major index the Shanghai Composite. The weekly chart of the Shanghai Composite below, shows the continuing fall in the index over the past four years. This chart is more typical of a nation which has significant economic problems and is not the index of a world leading nation with a booming economy.

The daily chart of the Shanghai Composite below now shows the Shanghai Composite index sitting on weak resistance at about 2000. Should this resistance fail then a further fall of the Shanghai Composite to the… Continue reading

Extended life expectancy and financial literacy.

We are all aware that life expectancy has increased dramatically over past decades due to medical advances etc.  The data below from the US Social Security Administration show the life expectancy for males at age 65 in the US and compares the data for 1986 and 2006.  Life expectancy in the US has been extended by 5 years in just two decades. 

The interesting but perhaps not surprising fact is that there the higher earning individuals have had a very significant increase in life expectancy compared to those of lower earning status. 

It is reasonable to assume that there has been a similar trend in longevity in Australia, with the average male living to age 86 and that will continue to increase. There is an important consequence of these data.  Those with a higher earning capacity are the persons whom the government expects to be… Continue reading

Opportunities for the value investor?

The current market is volatile, uncertain and likely to fall further. It is a time when many investors particularly those who invest mainly on technical grounds will be selling stocks which reach their stop losses. By contrast this is the time when the value investors are looking to buy stocks on their watch lists which have value and have market prices below their intrinsic value.The following is a list of stocks filtered on the basis of:

a market price which is more than 10% below the intrinsic value
a debt to equity ratio of less than 10%
a return on equity of greater than 20%
a fully franked dividend yield of greater than 5%

The V/P ratio reflects a price discount to the intrinsic value (e.g. EZL is undervalued by 11.5% to its intrinsic value).Some interesting stocks amongst them and logic suggests that buying a stock which is going to… Continue reading

With low cash yields, what are investors to do?

What are investors to do?  Yields on cash are low and will continue to fall.  Corporate bonds are still attractive but we can expect yields to continue to fall. The RBA made a mistake in not cutting interest rates in November but will now be forced to act in December.  

Will Australian investors follow their American counterparts and be forced back into the market because of low yields on fixed interest investments?  Investors are no doubt being attracted by high yields in the market.  But is it smart to enter the market now?  Investing in high yielding stocks such as the banks could result in significant capital losses.  It happened in 2008 and could happen again.

Might not be a good time to enter the market! The economic situation in the EU continues to be of concern: the debt problems have not been… Continue reading

Market volatile and falling.

Volatility will continue but with the EU now in recession, China in a very uncertain position and Israel now having a go at Gaza on one side of their country and the same could happen on their eastern border with Syria over the Golan Heights. These are the more distant and prevailing influences but the US “fiscal cliff” is of more immediate concern. Obama lacks Clinton’s conciliatory skills but despite this there is little doubt that they will muddle through and reach a decision at the last minute.

Where does this leave us as investors? Consider the monthly chart of the DOW below.   After market activity this week, the DOW chart is very bearish. Note in particular the similarity between the RSI pattern now and at the start of the bear market in 2007. Significant further moves down are now likely.
Despite potential solutions for the critical US… Continue reading

RSI suggests DOW reversal

Lots of volatility in the markets now and this is unlikely to change until the predictable Congressional impasse in the US is resolved. Of course the EU is in a terrible mess and best estimates are that it will take years to recover. Who knows what is happening in China?

Technically the markets are fascinating at the moment. There is no clear picture. On one hand Coppock analysis suggests that we are on the cusp of a bull market recovery but there is another conflicting technical view. The following monthly chart of the DOW Jones index gives some overview of the potential movements in the US and world markets.

The RSI divergence has given warning of change for some time. Another application of RSI is more precise and uses the RSI trend line to find probable critical changes in market trend. In the past it has been very successful in… Continue reading

Is there promise in our market?

Despite fundamentals in the EU and the debt situation in the USA, technically there are indications of promise for the markets.  The Coppock indicator is positive for all major markets which have not shown strong rallies and  when this indicator gives a signal on most world markets it should not be ignored.

Over the past month the Australian market has outperformed the American markets,  in large part driven by the inflow of money mainly from the US. There are good reasons for this.  Yields on US stocks are weaker and likely to fall further after a weaker than expected reporting season. The Australian market is now very attractive to overseas investors.  Our economy is stable and many of our blue chip stocks are showing in a yield in excess of 5%.  This compares very favourably not only with the yield from European and US… Continue reading

The RBA got it wrong!

In Australia our current Central Bank rate is 3.25% which is very high by world standards. To me the lack of a rate decrease today was unexpected and a missed opportunity. I think that the RBA got it wrong.

Consider our situation. Australian inflation rate is not an issue despite the carbon tax and housing prices are not overly strong. We have a retail industry finding it very tough and a resource industry which is weakening and likely to become much weaker. As a result of poor decisions by governments over the last 15 years we have a very weak manufacturing sector.

On the other hand we have a rising unemployment and falling job vacancies.

The European situation is far from certain and despite the best outcome from the US elections, that economy does have some serious problems. Maybe the RBA is counting on a China recovery. If so, I… Continue reading

Australian superannuation funds need to be regulated

Thanks to the planning and foresight of an unloved former treasurer Paul Keating, the Australian superannuation system through the super guarantee is potentially one of the best in the world. While the pension systems of most countries are badly underfunded, Australia’s is in reasonable shape. But these advantages are rapidly being lost because of the way in which superannuation contributions have been invested.

Most super funds over the past 5 years have posted significant losses for their clients.   (see    This represents not simply a loss to that increasing number of Australians who will need to have a government pension. It also means that there has been a destruction of capital that could well have been available to Australian business to further develop the nation.

Future Australian governments will have limited capacity to provide pensions to any but the very needy. There is a… Continue reading

The myth of Australia’s superannuation

With Australia’s superannuation system most Australians should be able to live well in self funded retirement but the chances are that few do at present and this is not likely to change in the future. Why? There are at least three reasons.

1. Australians generally assume that the professional fund managers are competent and will invest assets profitably. Nothing could be future from the truth. For example the following table shows that over a five year period the top five large equity funds in Australia on average when taking inflation into account, destroyed 6% of clients funds every year over a five year period.

2. Australians take no responsibility for their super assets. Merely taking a little time at the end of each month to monitor their investments would very quickly let them know if their fund manager was competent. But alas very few Australians make any effort to… Continue reading

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