Monthly Archives: February 2013

T’is the time for volatility

The European crisis is not over and the reaction of world markets to the almost predictable result of the Italian election shows just how precarious the European economic situation remains. Throughout Europe there is increasing unemployment with growth now stagnating and unlikely to be positive in most EZ countries.  The downgrade of the UK economy was to be expected and more downgrades will likely follow.  Perhaps a particular concern now is France.  With a socialist government coming at a time when France needed economic leadership and an increase in productivity, Mr Hollande’s policies which included decreasing the retirement age and a punitive tax on the wealthy seem stupid in the extreme.

With the second and third largest EZ economies now experiencing increased political and economic uncertainty, the responsibility increasingly falls on Germany.  With the German election due later this year, there is a concern that the… Continue reading

Yield – big caps vs. small caps

It is understandable that with falling cash and term deposit rates that investors are attracted to the higher yields available in equities.  But most of this cash seems to be going into the big caps such as Telstra and the banks which have had a spectacular rise over the past 6 months.

But what is surprising is that the midcap and smaller stocks have been neglected.  The following chart of the All ords vs. the small ords shows that over this period the big cap stocks continue to significantly outperformed the small stocks. The small ords is shown in red.


With many of these smaller stocks having ROEs greater than 30%, a strong record of dividend payment over at least 6 years with rising eps over this same period, what are investors missing?   Also most of these stocks have fully franked dividends in excess of 7%.… Continue reading

Investment education

Why do people take so little interest in investing?  I have always been intrigued by the fact that so many very intelligent Australians will work very hard over their lifetime to accumulate assets but on retirement hand those assets over to an investment professional.  While some investment professionals do perform well, some, perhaps many of these professionals have a very poor investment record.

During the global financial crisis I witnessed many of my family members and friends lose up to 50% of their assets because they took no interest in their investments and left that responsibly to the professionals.   This is the one thing that has stimulated me to become active in investor education.

I have been presenting investment courses around Australia for the last 4 years for the Australian Investors Association and the Australian Shareholders Association.  Recently I have made the introductory course available… Continue reading

Factors affecting the secular markets.

This blog considers the factors which influence the secular market and is taken largely from recent newsletters by John Mauldin.  The data are for the American market but closely reflect the Australian secular market.

Secular bull markets are periods of rising valuations, while secular bear markets are periods of falling valuations. Stock market returns can vary widely and over the long term returns from the stock market have a high correlation with GDP and inflation. In the USA, GDP has a long term average of about 3% but it is suggested by some economists that growth rates over the next 5 to 10 years will be much lower, even as low as 0.4%. Even if GDP is as high as an optimistic 2% then the impact on market returns will be significant for investors.

Secular markets are not random and are not related to periods of war or… Continue reading

How this bull market relates to the secular bear market

The secular market is a long term market trend which can last anywhere from 5 and 25 years. In Australia our last secular bull market lasted 25 years from 1982 to 2007. We need to understand that these long running secular markets have both bull and bear phases: for example, this last secular bull market in Australia included the significant 1987 bear market. What is important is that over the course of a secular bull market there is a significant net increase in asset values over the period. The secular bear market is similar but has a net decrease in asset values over the period of the secular bear market.

Importantly, we are now in a secular bear market which started in November 2007 and at a level of 5063 on the ASX200 we are still significantly below the market top of 6840. We need to understand this secular bear… Continue reading

How close is a correction on the ASX200?

It has been a wonderful run on the ASX 200 since June of last year with an increase of nearly 25% over this period.

But all bull markets come to an end or at least have short-term pull backs.  So we are due for at least a pullback on the ASX 200.  When looking at the charts, indicators show no signs of a weakening trend however the index is now approaching the 5000 level which on three previous occasions has given strong resistance to the uptrend.

There is also the interesting Elliot wave pattern which shows a strong third wave which is probably nearing completion.  The Elliot Wave pattern that I discussed in an earlier post at  remains a likely outcome. This suggests the strong possibility of a correction but under Elliot wave rules this correction will be no more than about the 4600… Continue reading

Interest rates, the Australian dollar and inflation

Interest rates are of critical interest to the investor, particularly those with investments in fixed interest securities.  With a slowing economy, rising unemployment and a low inflation rate the Reserve Bank of Australia (RBA) is likely to continue to reduce interest rates over the next year.  This means that the return on cash and term deposits will be increasingly unattractive and more investors will turn to the share market.

One problem for the Australian economy is the very high Australian dollar which makes our export industries non competitive on world markets and so is an impediment to the growth of the Australian economy.  Normally the RBA would be able to control the value of the Australian dollar by lowering the interest rate.  The problem is that Australia has one of the highest interest rates in the world which encourages the carry trade, with a resultant flow… Continue reading

Human emotion is the biggest enemy of the investor.

Human emotion is the biggest enemy of the investor.  I have been very bearish about this market for some time and this poses the risk of missing the next bull market and I need to constantly re-examine my attitudes to the market.   So I am always aware of the problems of psychology which can cause me to miss a profitable rally.

It is crazy to invest on the basis of a gut feeling or a hunch.  Currently we are in either a bull market or a bear market correction depending on your view.   But either way there is little doubt that this is a market that the investor needs exposure to simply because of the increasingly low returns from cash and fixed interest:  but you have to do your homework.  My approach is as follows.  There are… Continue reading

Does Elliot Wave help us understand this market?

This market offers investors some real opportunities particularly when compared with the low returns from cash and fixed interest securities. But how far can this market run? The ASX200 has had an uninterrupted run for the last 11 weeks and is up 23% since June of 2012. Is this time to take profits or will the market goes much higher?

Elliot Wave analysis provides some powerful insights into market action and might be of interest here. Elliot Wave is based on the observation that most stocks and markets move in wave patterns and these patterns very often provide an opportunity to analyse the market and take profits or avoid losses at specific points. An impulse move such as we are seeing in the index at the moment has 5 waves which are followed by a three wave correction. Consider the chart of the ASX200 below which shows the wave pattern… Continue reading

How should we invest in a bull market?

With falling interest rates there has almost been a stampede to get back into the share market.  But how many investors really understand what they’re doing?

There are times to be out of the share market and times to be in the market.  The year 2008 was one time to be out of the market and in cash but now we have a bull market and investors need to have some exposure to equities.

In the USA and in Europe, very low interest rates and quantitative easing has driven investors to equities over the past few years.   Australia investors have been slow to buy equities because by world standards our interest rates have been very high so returns from bonds and term deposits have been quite good.  But while our interest rates are still high by world standards, they are falling.  They will continue… Continue reading

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