Monthly Archives: November 2014

Technical evidence suggests 2015 could be a positive year for equities

There are many different indicators in technical analysis and most suggest that the coming years could be very negative for the equity markets. But not all indicators are in agreement. When looking at market cycles, the so called decennial cycles show some interesting relationships.   The ten year pattern of stock movements in the S&P500 show a variety of relationships and perhaps the most interesting are the stock movements in year 5 if each decade.

When one considers the S&P500 index, year 5 of every decade since 1880 has been a positive year for the index. The average price increase of the S&P500 for the fifth year is far higher than in any other year within the decade with an average of 22% gain. The next best year is significantly lower and this is the sixth year of the decade where the average increase was 12.6%. The table below… Continue reading

Deflation poses a serious threat to the world economy.

As investors we have lived through periods of inflation which we have come to view with trepidation but we have never experienced deflation although the consequences of deflation can be much more severe.

During a deflationary period the prices of goods and services fall and the consumers and business expect prices to continue to fall. As a consequence purchases are delayed with the expectation that goods can be bought in the future at a lower price. The result is that demand for goods and services falls and prices continue to fall, so businesses see their sales decline and are forced to reduce staff. The economy falters with rising unemployment because demand for labour is less and less. Consumers spend as little as possible leading to a deflationary spiral as happened in the Great Depression.

We are now seeing the likelihood of deflation in the European Union despite actions by the… Continue reading

Can the bull market continue?

I have been bearish on this market for some time and find that it is essential to continue to evaluate the market and try to maintain objectivity. There is always the risk for any investor whether bullish or bearish to reject those data which do not agree with his beliefs and thus ignore real changes in the market. Investors who do not remain objective can significantly underperform. In the light of available data I continue to ask if my bearish stance is appropriate.

There is no doubt that the main driver of equity markets over recent years has been quantitative easing programs from central bankers. As a result of increasing liquidity and very low interest rates investors have had no alternative but to invest in stocks. While in recent months the improving United States economy has started to contribute to the rise in equities the prime influence remains the excess… Continue reading

Are Central Bankers in control?

The bears are becoming rather isolated in an economic environment where the major international stock indices just keep rising despite some very concerning world fundamentals. The current unprecedented world economic environment is largely due to the actions of central bankers.

Central bankers have done a great job in avoiding the threat of a serious recession/depression arising from the global financial crisis of 2008 by using monetary easing programs. An economic crisis was averted but as a result of these strategies by central banks most economies have unprecedented low inflation and low interest rates with asset inflation and very high debt. In this environment investors have little alternative but to invest in assets such as equities or real estate and their actions in turn contribute to the inflation of the value of these assets.

While central bankers continue to offer optimistic guidance on economic outcomes, such forecasts are often inaccurate and… Continue reading

Bonds are a viable alternative to equities.

The equities market is now high risk with investors chasing the higher yields available from shares but some investors seem to be unaware of the risks. A viable alternative to equities are corporate bonds which are a debt securities offered by public companies. Bonds not only provide diversification to a portfolio but have the advantage that an investor knows exactly what future earnings will be through the periodic interest (or coupon) payments and that capital will be returned in full at maturity. As with any investment, bonds are not without risk and there are two risks that investors must consider.

Credit risk. A low credit rated company could well go bankrupt with no repayment of capital to the investor. So there is a risk in investing in bonds which have a lower credit rating and thus a higher risk even though there may be a higher return. Investors need to… Continue reading

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