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Is Italy the next black swan?

There are a number of economic issues in the world which could provide the next economic shock and shake world markets. A prime candidate is Italy and its banking. system. Italy in the past has relied on currency devaluation to maintain its international competitiveness. Italy’s entry into the European Union made devaluation impossible and the economy is now in very bad shape. In recent years there has been an accumulation of bad assets on the balance sheets of Italy’s banks, where 18% of all loans are now classed as non-performing. The Italian banks alone have USD 400 billion in bad loans, equal to about 20% of Italian GDP. The Italian economy is ten times larger than the Greek economy and there is no way that the European Union has the ability or capacity to bail it out.

In October or November there will be an Italian constitutional referendum and Prime… Continue reading

Should I be fully invested?

The frantic activities of central banks in recent years shows no signs of abating and yet quantitative easing and falling interest rates have failed to stimulate any economies.

The effect has been to inflate and distort the value of assets worldwide. Future movements on equity markets are now in the hands of investors who have no alternative but to invest in stocks. In the United States, the markets are at record highs. It is interesting that at a time when there is so much economic uncertainty that there has been such little volatility on major equity markets, with the VIX remaining at very low levels.

It seems that it will now take a crisis to bring reality to the market place. Such a crisis could come from:

a.    A banking collapse, with the Italian banks seen as likely candidates. Italian banks alone have USD 400 billion in… Continue reading

Market Top?

The equity market is now looking expensive but it could well continue to go higher. With interest rates continuing to fall, investors in desperation are looking to the equities market. And yet a lot of money is not committed and remains on the sidelines. Will this money now flow in and fuel an already overheated market? It does seem to be a risky time to commit new funds to the market at a time when the policies of central banks have pushed asset values to very high levels and world growth continues to slow.

There will be the tendency for some investors to think that they are missing out and try to chase this market. However, September, a time when there is a higher probability of a market correction is fast approaching and there are emerging issues which could provide the ingredients for a market panic.

With the world political… Continue reading

Managed funds fail the investor

The financial services industry in Australian does not serve investors well. For example, some 70% of managed funds underperform the index over a five-year period and for this underperformance investors are charged high fees. According to the ABS, the managed funds industry in Australia controls nearly $3 trillion of Australian investors funds. If the average fee is 2% then this is an income to fund managers of about $60 billion and that is just from the managed funds industry. If you add on the other non-performers or poor performers in the financial services industry to include brokers and advisors, then the figure is truly enormous.

In the case of financial advisors there have been many instances in recent years where investors have lost significant amounts or in some cases all of their capital. These advisors are not small outfits because all of the major banks have been implicated in this… Continue reading

Caution needed with this “bull” market

The ASX200 index has now convincingly taken out resistance at 5427. From its low in mid-February of this year, there have been a series of higher highs and higher lows (see chart below), so this move no longer has the feel or appearance of a bear market rally and has the potential to continue. It is now becoming difficult to rationalise the market move over the past few weeks with my Elliot wave model of a continuing bear market! There has been some support from the financial sector and the gold sector has been particularly strong with increasing support from resources stocks many of which are showing interesting up-moves from based patterns.

xjo july

Despite these promising developments investors should be concerned about a number of world events which could potentially impact on the Australian market. These include the on-going effects of Brexit on the world economy, the alarming state of Italian… Continue reading

Is this really a bull market?

It is interesting that the Dow Jones Index and other American markets have gone to new highs. The Australian market is also very buoyant although in our case we are still in a confirmed downtrend so it could be argued that we are seeing a bear market rally rather than a new bull market. If the high of 5428 on the ASX200 is taken out, then this gives some support for a strong uptrend.

It remains to be seen whether this move on the Dow Jones Index is really a bull market move or merely a false breakout. The fact that the Dow Jones Transports Index lags considerably behind the Dow Jones Index suggests that it could be a false breakout.

Investors are desperate for yield and this is the main driver for this market since in the light of historically low bank rates there is just nowhere else to… Continue reading

Brexit and the investor

The unexpected happened and the UK will leave the European Union! World financial markets have been caught completely off guard. The immediate consequences are significant volatility on world markets and big currency fluctuations.

Other consequences can be expected, including:

  • further falls in world economic growth forecasts.
  • a recession for the UK and the European Union.
  • difficulties for Asian markets exporting to Europe.
  • a lower AUD and lower interest rates for Australia
  • falling commodity prices consistent with lower growth.
  • increased political instability in Europe – more opportunities for Putin
  • other EU countries calling for an exit vote

What can investors do?

The volatility will produce buying opportunities but is the current market exuberance warranted? At this stage it is imperative to stay with the investment plan. A world event such as this is an opportunity for the media to give their “expert” opinions but no one knows what the fall out… Continue reading

Brexit and the bear market

Brexit

So, the UK will leave the European Union!   The issues were very complex and there were merits on both sides of the argument   But in the end, voters obsessed over a frustration with their political leaders, neglected to look at the big picture and evaluate the real economic and political issues.

What lies ahead for the UK is economic uncertainty. By contrast the future for the European Union is much more certain because that organisation is now very unlikely to remain politically and economically stable. It is likely that other members will leave the European Union resulting in a union which is economically and politically feeble. Such political instability is at a time when Europe is under pressure from refugees and the political aspirations of Putin. Will NATO now be strong enough to deter Putin from picking off the Baltic States?

The world is really… Continue reading

A bear or the start of a bull market?

When economic views are very negative then this is often the time for a new bull market to start. Current sentiment is very negative so can we expect a bull market to soon?

Consider the economic and political negatives.
• Falling world growth and falling inflation.
• The inability of central banks to control very slow economic conditions.
• Historically high levels of sovereign debt
• A coming crisis for the European Union, in part due to refugees
• An unknown impact of a changing Chinese economy
• Japan continuing a multi decade recession with little hope of change
• A weakening United States economy.

Of immediate interest is the UK vote to leave the European Union. Should the UK vote to leave the European Union, then it will be weakened economically and there is the likelihood that Scotland would then leave the UK.

 
The European Union is at… Continue reading

Should investors chase yield or growth?

This is a difficult time for investors. Markets are uncertain and interest rates are at record lows. Most investors have little alternative but to invest in the equities market in an attempt to get a reasonable return. From the viewpoint of safety most investors tend to buy the higher yielding blue chip stocks. Certainly many investment advisors have been concentrating on yield and for the past 18 months have been advising investors to buy high yielding blue chip stocks. Their advice is presumably based on the fact that the dividends would be secure and that the blue chip stocks are safe. Let’s examine just how poor this advice has been.

 
Consider a strategy which compares the performance of a buy and hold blue chip portfolio with a managed portfolio of growth stocks. Both portfolios had a starting capital of $100,000 in January of 2015 and each held 10 stocks.… Continue reading

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