Monthly Archives: October 2013

Corporate bonds: the hazards of the search for yield

The search for higher yields has always lured investors into high risk investments. In this market, investors are looking for high yielding equities but high yielding bonds are also tempting.

The other day a broker suggested that I invest in a corporate bond. This was senior debt in an Australian company and it was returning 9% with a 6 year maturity.   What are the risks with this bond?  The following is my evaluation of this bond, (without actually naming it), based on available technical and fundamental data.

Let’s start with the chart which is not the chart of the company in question but is a chart which is very similar. The chart of this stock reveals some underlying problems: it is out of favour with the market and shows a strong downtrend for the past two years with a recent recovery. The old adage is “never buy… Continue reading

Do the Jaws of Death predict a bear market?

At this time both the Dow Jones Index and the S&P500 are showing a significant reversal pattern which has preceded most of the great bear markets over the last 100 years.  The pattern is variously called the jaws of death, a broadening top pattern or a megaphone.   The pattern is shown on the monthly chart of the Dow Jones below.    JAWS ON DOWThis expanding pattern typically shows the waves a, b, c, d, e, with the downward sloping boundary given by the lows of waves b and d and the upper boundary provided by the tops of waves a, c and e.   In all examples of this pattern, wave e is by far the longest but wave e is variable and may terminate at the upper trend line or move much higher before reversing.

This pattern appeared immediately prior to the crashes of… Continue reading

The dilemma of the United States Federal Reserve

I was fascinated by a diagram in John Mauldin’s latest newsletter. The following is largely based on the article by Grant Williams in the Mauldin newsletter.

Successive tranches of quantitative easing have had less and less of a stimulatory effect on the United States economy and yet the diagram below shows the dependency of the United States economy on quantitative easing.  This is a cycle which is now going to be very difficult to break without significant disruption to the United States economy with very significant flow on to the world economy.  The United States economy and the markets are now dependent totally on the Federal Reserve.

131015 Mauldin

What a dilemma!  With its quantitative easing policies the Fed is now in a dreadful position.   The Federal Reserve is dependent upon hope to extract itself from this cycle because its policy demands a fall in the unemployment… Continue reading

Unemployment, interest rates and the market

Australia’s unemployment rate has climbed to a post GFC high of 5.8 per cent, up by 0.1 per cent in August.  While the unemployment rate in Australia is rising this is a worldwide problem. During the global financial crisis many employers replaced full-time jobs with part-time roles, and they are yet to change them back

But what do the official unemployment rates mean?  The problem is that the unemployment data which are released are in fact an underestimate of the real unemployment figure.     The reason for this is that the long term unemployed lose hope, do not continue to seek work and so do not participate.  They are thus not included in the calculation so the unemployment data may significantly under estimate the actual rate.

For example in the United States where the official unemployment rate is 7.3% the actual unemployment rate according… Continue reading

Raising financial literacy in Australia. Education vs Information

Financial literacy is all about understanding how money works in the world, how to manage it and how to invest it.  Australians need sufficient background in financial literacy so that they are able to make informed choices about the way in which they use money, use financial products and make investment decisions.   The problem is that the level of financial literacy in Australia is poor, reflecting an inadequacy in our education system.

Financial literacy as applied to investing can be improved in two ways, through education and information.  There needs to be a clear understanding of the difference between financial education and financial information. Not all investors need or want investment education and for many people investment information is all that is required.

Financial education aims to raise the level of financial literacy through a series of planned and relevant courses at different levels. … Continue reading

Australian market defies the broader sentiment.

Despite the problems of a dysfunctional government in Washington and a negative reaction on most world markets, the Australian market and part of Asia, has defied the odds and had another positive day.  Is this part of the honey moon period with the new government or is there real reason why Australian investors should be optimistic?

The monthly United States nonfarm jobs figures are due out tomorrow and it is likely that these will suffer as an aftermath of the Washington debacle earlier this week.  United States markets are unlikely to take these figures lightly particulary since the decision on the debt ceiling now needs to be made by October 17.  At this time a positive outcome for the debt ceiling seems unlikely with the Republicans emphasizing their position over Obamacare and the President not in a position to compromise after having an electoral mandate to implement… Continue reading

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