Monthly Archives: March 2013

The correction we had to have

The Cyprus crisis still has the potential to be the black swan that could cause a significant market correction but while this issue has yet to be resolved the bull market on the DOW is intact.

But is this a real bull market? There seems to be the perception that the bull market will continue as long as the central banks of the USA, the EU and Japan continue their monetary easing policies. But how long can cheap money and low interest rates push up share prices?  Mohamed El-Erian, of PIMCO believes that if the rally in equity markets is to continue, “the current phase of assisted growth needs to give way to genuine growth”.

Many seem to assume that the strength of the Dow is a result of optimism about the American economy but historical studies have shown almost no correlation between GDP growth and equity returns. For… Continue reading

Is this the expected market correction?

As long as we have a bull market based on central bank monetary easing and not on GDP growth, this makes our world equity markets vulnerable. Is this the black swan I discussed a month ago? Yesterday equity markets in Asia panicked with theNikkei plunging 2.7% and the Australian market falling 2%, suggesting that markets in Europe and the United States will follow Asia’s lead.

Cyprus is the EU’s smallest state, accounting for just 0.2% of GDP output. Markets are very vulnerable if a sovereign event in such a tiny state can cause a 2% sell off in our index?

But there is more to the story and this may well be the sign that the ECB will get serious with other recalcitrant southern EU nations.  The terms issued to Cyprus seem draconian and this is the first time such a strategy has been employed in the EU… Continue reading

Is this market insanity?

Market insanity prevails at the moment and of course this is not unusual in a bull market.   But this time it is different.  Some financial markets are at new highs and others are approaching previous tops, yet growth in real terms is falling or collapsing across most world economies.   Yes we have a bull market but it is a bull market based on the intervention of central banks with monetary easing and declining interest rates forcing investors into higher risk assets such as equities.  There is now a classic disconnect between the drivers of this bull market and fundamental reality and it is only a matter of time before we have a market collapse.  When this does happen many of the experienced players will retain profits and be out of the market while the late comers and most of the “mum and dad”… Continue reading

Is China the unlikely black swan?

With China the major trading partner for Australia we have a special interest in anything that affects China’s economy. A recent article in the Wall Street Journal is of special significance.

The article is titled “China, spending its way towards a crisis”.  China avoided the depths of the GFC with massive stimulus of infrastructure developments and used a huge amount of credit to fuel that boom.  Since 2008 China’s public and private debt has exploded to more than 200% of GDP, ignoring the warnings of institutions such as the Bank of International Settlements.  Private debt in China includes all kinds of borrowers, particularly local government and state owned corporations. Warnings now come from the IMF that private credit growing faster in an economy for more than 3-5 years is an indicator of financial stress.  The IMF warns that private debt to GDP in China now places… Continue reading

Harry Dent is at it again.

Investors seem to love to indulge in masochism and reflect on the possibility of a nasty market event. Such investors would be long time followers of American economist Harry Dent.    This time Harry is predicting the DOW falling to at least 6000 and even 3300.  His latest prognostications include US unemployment of 15% and a further dramatic fall in house prices.  And this is in addition to an increase in personal bankruptcies and a ballooning US debt.  Dent has a good record of predicting economic performance.   Could he be right this time?

Dent’s work is based largely on demographic trends, particularly the baby boomer generation which is now in retirement or about to enter retirement and are now savers and not spenders.   Dent of course is concerned primarily with the American economy but anything that has a dramatic affect on… Continue reading

The issues of financial education

I read an interesting item in The Economist related to evaluating community financial literacy using the following test.  “Suppose you had $100 in a savings account that paid an interest rate of 2% a year. If you leave the money in the account, how much would you have accumulated after five years: more than $102, exactly $102, or less than $102?”

Apparently only half of Americans aged over 50 who were surveyed gave the correct answer to this test and there is no reason to suspect that the test results would be any different in an Australian population.  If a survey found that so many people are mathematically challenged, it is hardly surprising that they struggle to deal with the simple contracts, much less the complexities of investing.

The solution seems obvious: provide more financial education which is an important deficiency in the Australian education system.   … Continue reading

Is there a potential opportunity with Telstra?

Telstra went ex dividend on February 18 with a fully franked dividend of 14c per share. On the exdividend day the share price closed a mere 7c lower reflecting the extraordinary market demand for this stock.  But is this about to change?

Telstra has been the market darling for the past two years, showing a significant capital gain and an attractive yield.  With falling interest rates, investors have been attracted to equities and Telstra has been the star attraction.  But all good things come to an end and at long last the share price rise has slowed.  The question is whether this is the end for Telstra or can it go further?  The fundamentals are very attractive.  It has a return on equity of more than 30% but while its debt to equity ratio at about 100% is high, a dividend yield of 6.2%… Continue reading

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