Monthly Archives: April 2016

Sell in May and go away.

This adage is one of the oldest on Wall Street but it had its origins in the UK in the form of “Sell in May, go away, buy again on St. Leger Day”

St. Leger Day is the day on which the oldest and longest classic race of the UK racing season (the St. Leger Stakes) is run. This is traditionally on the second Saturday in September. According to Investopedia “the ‘Sell in May’ effect tends to be particularly strong in European countries and robust over time. Sample evidence, for instance, shows that in the UK the effect has been noticeable since 1694. Note that – since 1694!”

In Wall Street “Sell in May and go away” is based on strong historical data. There is persuasive evidence from the United States markets which show that the months of November to April offer significantly higher returns than the months of… Continue reading

The Australia dollar

The Australian dollar (AUD) recently traded at 78 cents against the USD. It is extraordinary that the AUD can remain above its long term average at a time when the prices of commodities remain very low. Just how high can the AUD go?

It is expected that since the AUD is a resource dependent currency, in the current economic environment its value should be closer to 60 cents against the USD. But as shown in the chart below, at its current value the AUD remains at about its mid-range for the last 25 years and as such it seems to be significantly over valued. AUDUSD AprilThe recent rise in the AUD is due in part to the weakness of the USD, where the USD index has fallen some 6% over the past 3 months. But the following daily chart which compares the AUD and the US dollar index shows that… Continue reading

The myth of searching for yield

With very low interest rates which are barely above the inflation rate, investors are looking for yield. Professional advice over the past year or so has been to buy the high yielding blue chips. Was that advice sound? Take for example the investor who took this advice and bought 10 blue chip stocks (including the banks, TLS, BHP, WPL, CSL and RHC, in January of 2015. The returns from this buy and hold, blue chip portfolio are shown by the blue line in the chart below with a loss of 16% for investors over this 15-month and hold

By comparison investors who had bought a managed portfolio of strongly trending growth stocks with a very high ROE in January 2015 would have performed much better. A performance of 10 such stocks in a managed portfolio is shown by the red line in the chart above and provides a 30% return for… Continue reading

Central banks and the Japanese crisis

The role of a central bank, aside from being a lender of last resort to commercial banks is to manage a nation’s currency and interest rates, taking into account such relevant matters as employment and inflation.

But the role of many central banks has changed. Since the GFC of 2008 and accompanying world economic instability, central banks have become progressively more responsible for the direction of the world economy. This is because central banks have had to use quantitative easing and lower interest rates to stimulate their respective economies. The levels of quantitative easing and low interest rates are now at record levels so the world economy is at the mercy of central banks. Asset values including real estate and equities, are inflated as a result of central bank activities such that current values of these assets bear little relationship to their underlying intrinsic value.

Japan provides a prime example… Continue reading

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