Your editor writes from the sickbed this morning *cough*, so don’t be surprised if we cut things a little short *sniffle*.
Looking at the Aussie market we’re wondering, will it break out higher this time?
If you look at the chart below you can see the market has put in another rapid gain:
It’s added about 5% over the last six weeks, taking the index close to the recent peak in January.
But as I’ve told subscribers to Australian Small-Cap Investigator and Australian Wealth Gameplan the market is just as risky today as it was one year ago. The only difference is that stocks were much cheaper back then.
That’s why, in both newsletters I’m pretty comfortable with only having a few positions open. Sure, there’s a chance this market could take off. But there’s an equal chance it could crumble. So, after a 50% move in the index in the space of a year there’s nothing wrong with taking some of your exposure off the table.
And that goes for whether you’re a small-cap, large-cap or income investor.
And we’ll also guess it’s the same for traders as well – although we haven’t been able to ask Slipstream Trader editor Murray Dawes, as we’re quarantined at home.
I’ll be honest, it worries me when I read stories such as the one in the Sydney Morning Herald recently: “Plenty of force left in the bull”.
According to the subhead, “The sharemarket has charged 54 per cent higher in a year, and it’s still not too late to join the party.”
It’s got something of the “buy property before it’s too late” ring about it.
Take the quote from Lucinda Chan at Macquarie:
“We’ve had a positive earnings season with very few letdowns and there are some profit upgrades on the way through for quality companies… We’ve had some wonderfully uplifting data from China, the job news and business confidence is strong. I think the overall market is turning upwards again.”
Maybe she’s right, who knows?
The main problem I have with the ’stronger for longer’ approach of the mainstream analysts is that it ignores investor psychology.
Look, we can barely spell psychology let alone understand it. But when we look at the longer term chart for the index we start thinking about the risk/reward payoff.
Take a look at the ten-year chart for the S&P/ASX200 index below:
Obviously you can see the massive bull run between 2003 and 2007 which took the index from under 3,000 points to nearly 7,000 points in just under five years.
Already, since March last year the same index has moved from around 3,000 points to nearly 5,000 points. During the previous bull run it took the index about three years to cover the same ground.
In other words, using that previous move as an example, investors have locked up three year’s worth of gains in the space of twelve months.
That’s not a bad effort by anyone’s standards.
But that’s only half of what concerns us. Now take a look at the one-year chart below:
In actual fact, it only took around seven months for the index to cover the same ground. Five months later and the market is still at the same point.
And it’s that which concerns us. Let me explain what I mean.
Last October the index had locked away about a 50% gain. Annualised, you’re looking at around a 90% gain – give or take a few points.
Today that annualized gain is, well, it’s roughly the same as the seven-month gain from last October, about 50%. If the index is trading at the same level in six months time – which is entirely possible – then your annualized gain drops to around 33%.
And if the index is still at this level this time next year then the annualized gain drops even further to 25%.
Look, don’t get me wrong, that’s still a pretty good return. But don’t forget, you’ve only locked in that annualized gain of 25% if you had picked up the start of the run from March 2009.
If you take the Sydney Morning Herald’s advice and tuck in today, then your annual return is zero – assuming the market moves nowhere between now and March 2011.
Anyway, what I’m getting at is how likely is it that big institutional investors are going to risk leaving up to 50% gains on the market? I don’t think it’s very likely at all.
Especially not when many of them will have seen their bonuses slashed in 2008. And that will be fresh in their memories. The last thing they’ll want to do is give back a whole bunch of profits by staying overexposed to a market that’s already risen by 50% in such a short timeframe.
Let’s make no bones about it. We want the stock market and share prices to go up. We’d love it if shares only ever moved in one direction – UP!
After all, we write two newsletters every month offering stock tips. But we’re not so one-eyed that we can’t see the risks that this market holds.
Are there still opportunities? In our opinion, yes. But the idea that the whole market is undervalued, or as AMPs Shane Oliver puts it, “a long way from being described as overvalued” is far from accurate in our opinion.
We won’t say that top-of-the-market complacency has completely taken over, but some of the signs are there. Headlines in the mainstream press are a pretty good indicator of that.
That’s why, right now, it would be a mistake to completely exit the stock market.
But cutting back on your positions and using risk management tools such as trailing stop orders makes a lot of sense. In other words, give yourself some exposure to further upside gains, but don’t fall for the mainstream propaganda that it’s blue-sky all the way to a 7,000 point index.
Cheers,
Kris.
{ 24 comments… read them below or add one }
PF – Following up on an earlier conversation, what do you make of sudden revelations like this?
NAB finally reveals $1.3b loss
http://www.theage.com.au/business/nab-finally-reveals-13b-loss-20100316-qcnz.html
Aren’t these precisely the hidden time bombs that might be ticking away on our banks’s off balance sheet accounts? Aren’t these the kinds of things that the 13T are made up of?
So, the earlier questions remain: What exactly are these off balance sheet assets and how much are they really worth? Is there a market for them at all? Would there be a buyer for them, and if so, would they sell at their current recorded valuation? Somehow I have my doubts regarding answers to these questions all being to the affirmative. And if that is right, then the only thing keeping our banks from going bust is the pretence that these assets are worth what the banks claim they are.
sorry to go off topic again, but here is an explanation for the climate change we are talking about…defiantly not manmade and certainly something that all the tax in the world will not stop.
Predicted by Edgar Cayce, sure, possibly a “nut case” but strangely proven correct by NASA many years later.
“ In the late 1920’s and early 1930’s, Cayce was the first to describe the concept of the shifting of the pole as a result of the crust of the Earth moving independently from the core of the Earth to bring different a surface area over the spin axis. During the past 30 years, this concept has received more and more attention by geophysicists, some of whom now seriously argue that the crust does move independently. Some geophysicists now also argue that the best way to explain a variety of paleo sea-level and other data is that it moves and shifts fairly frequently and more rapidly than previously imagined.
Cayce predicted changes to the Earth surface to begin some time between 1958 and 1998. The cause of these dramatic Earth changes will be the shift in the world’s magnetic poles around the year 2000. Cayce predicted that when this pole shift occurs it would begin reversals in the world’s climate so that:
“..where there has been a frigid or semi-tropical climate, there will be a more tropical one, and moss and fern will grow.”
Cayce’s prediction of a pole shift occurred in 1998. According to NASA’s Goddard Space Flight Center, in 1998 something changed the Earth’s gravitational field which moved the magnetic poles closer together. The NASA article explained that as the ice on the poles melted, ocean currents moved water toward the equator, which factors researchers believe to be partly responsible, in conjunction with shifts in atmospheric patterns, for this ongoing shift in the Earth’s magnetic field. This NASA finding affirms Cayce’s prediction of a pole shift.”
But cb – I thought Sayce was a goose for saying the Banks were risky?
Y0ur position changes with the wind
this may be a sneak preview of the attitude that lies behind the ivory doors of our banks.
http://nymag.com/daily/intel/2010/03/lehman_executives_nonchalant_a.html
cb, PuntPal
Sayce wrote an aricle about the Lehman collapse recently and i got to thinking about how the gist of the article is comparable to Australian banks
He said Lehman decided to aggresively grow the company after the sub prime crisis hit in Aug 07 thinking that the economy was not in a depression and things would go back to normal. They wanted to gain ground on their competitors.
Westpac and CBA have done exactly the same thing since Lehman collapsed, i.e. they have grown their companies aggressively over the last year
So could WBC and/or CBA be the next Lehmans?
How fortuitous!
Channel 9’s 60 Minutes programme had a segment tonight on dangerous pesticides, which have been banned in many countries, but are being used freely on our fresh foods here in Australia. This follows my previous post about the APVMA & Govt. biased regulation. Yet local, safe products are waiting years for approval. Not surprisingly the APVMA refused to be interviewed…funny about that!
Podcast not released yet but go to this link and watch for it in a couple of days.
http://sixtyminutes.ninemsn.com.au/article.aspx?id=1029050
Also PF, you laugh at me now, but wait until you hear that sunscreen is linked to skin cancer! Maybe then you’ll enlighten us on why Building No7 collapsed!!….how many of you have heard the saying that “he who laughs last, laughs the most”..unfortunately, it is not a laughing matter.
If you still think that real estate is not headed for a “correction”. Have a look at what has happened to the rural market and how it was caused. Then apply it to the real estate of us clever city folk. The difference is only that farms are income producing. McMansions are not.
Go to this ABC Landline link. Click on the “commodities report” icon and go to about 2.30 minute mark.
sorry.. here is the link http://www.abc.net.au/landline/
cb – I don’t know anything about the $1.3B NAB loss. I couldn’t tell from the article, it seemed to suggest that it was a write off, but sometimes they are provisions for loss, which often have a different result, but reporters don’t know the difference.
Sorry mate I can’t enlighten you on that.
Nick – mate I go with orthodox medicine so although you may have something, I will stick with the boring choice until proven otherwise.
Your comments on the poles are interesting, but I assume you are referring to the magnetic poles which constantly move. The actual poles themselves don’t unless we spin off our axis. Most people when reading maps and using a compass for direction, are unaware that the magnetic direction is not true north.
GB – I have no doubt that was the point Sayce was making…the parrallels are strong. I cant believe the propertyganda going around today…Just a few:
- Australians living in prosperous times, says CommSec http://www.news.com.au/money/money-matters/australians-living-in-prosperous-times-says-commsec/story-e6frfmd9-1225843535281
….this is the final straw for me. James comments in this article will be like Greenspan and his great moderation comment. If we are going so well – why did the Government need to spend billions of $ of debt? Cant you see PF what is happening or are you still a naive bull that doesnt see the total contradiction in mainstreamn economist outlook
- Sydney property prices set to double http://www.news.com.au/money/property/sydney-property-prices-set-to-double/story-e6frfmd0-1225843302974
…ah this old chestnut. Yeah sure, we are all going to be millionaires. PF another one for you – this is the indsutry you support and think is not a total sham?
- 100pc home loans a thing of the past
http://www.news.com.au/money/banking/pc-home-loans-a-thing-of-the-past/story-e6frfmcr-1225843616271
This article touches on the risks of 100% LVR loans, but as always fails to highlight why the Banks are doing this (as they know they have overextended themselves).
nick- wats in the sunscreen that causes s/cancer? ingredient?
have u a direct link to that landline report ? cant seem to find it
cheers
cb – I would say that the accuracy and honesty of mainstream information is far less reliable today than when the GFC was first reported on. At that time I don’t think many understood what had happened or where it was leading so the mainstream had little to report but the facts. Since then the whitewash has slowly been added to with complicated terminology and vernacular. The story has been half told and embellished with more double-talk and most importantly the guilty have been identified so now we can all get back to work and deeper debt safe in the knowledge that it’s all over.
In one of my posts some months ago I mentioned an article that I had read which detailed the Oz Banks $13.5T derivative exposure it also explained that these would net out at about 10% of that as they are trading baskets of salami’s of infinite sizes and varieties. So in a trade I may have walked off with the bigger salami but your still wind up with a salami and therefore we need only concern ourselves with the difference.
Add to this the credit default swaps on both the trades of salami’s and their differences and things get even more complicated. So you’re left with the exposure to Oz banks 1st and 2nd tier being $1.3T approx. and that is still double their combined cap. Now if we factor in that the underlying true capitalization of our banks is roughly 8c on the dollar as recently reported by NAB then things just get worse.
As for mortgage backed securities where better to package those up than in a market with skyrocketing prices and a belief that those prices will endlessly rise…. everyone’s a winner just ask the good folk of those united states.
Etch…regarding the Landline link.
Go to this link. It should be the “Landline” page on the ABC website. http://www.abc.net.au/landline/
Then click on the icon, on the right had side, which has the title “commodities report”. (it has an image of a man in a suite with no tie) . It should then run the segment on rural land price downturn the was “bank created”.
Just watched the latest Max Keiser report and Goldman Sachs has a derivitites exposure of 33,823% so on the strength of a deposit of just under $30k these wizards can conjure up a $1b loan. They call it Fixed Market Capitalism.
I’d like to buy me a bag of that action.
etch…the chemical reaction with the ingredient of the sunscreen and the sun is being linked to skin cancer. Do you remember the product ‘Pink Zinc” used on the noses of kids years ago? Well that product is forbidden to be used on cats and dogs. So we use it on kids instead??? Slip slop slap campaign made everyone drown their kids in stronger and stronger sunscreen, without questioning it. Liver & kidney disease is also being linked to the transdermal (absorbed through the skin) creams.
Just like the 60 minutes program on Sunday showed, blind Freddy can see there is something going on but No authority is listening. (remind you of the Madoff affair? )
When your kid had a sniffle, first thing everyone did was put them on “antibiotics”. Another one I warned against years ago and the industry laughed. Now they are telling all GP’s NOT to recommend antibiotics for common colds as it reduces the immune system. “Helloooo!!! Cigarette smoking was also an accepted thing. “Experts” said it was safe. If you stood on a mountain top and yelled out that smoking causes lung cancer, think of the roar of laughter. Show me the evidence they would say! Now what are they saying? Drug companies finance governments in a big way. Do you seriously think they will shoot the golden goose?
I can go on forever, however, this is basically an economic forum so I will not digress except to stress the point that this is no different to the financial deception that is being rammed down our throats.
Yes indeed Nick and it’s this very important aspect of Government collusion that boosts further the imputed GDP that adds ever increasing numbers of public serpents to ignore your correspondence.
Fitch…amen to that!
For all the negative discussion surely it must have become apparent to you guys that the world as we know it is not ending.
China is NOT falling over, and house prices are NOT falling.
Peter…no one is saying the world is ending, any more than those who endured WW1, WWW11 and countless conflicts prior to that. The issue is to recognise a crisis so that there is some chance that we can survive it, financially and/or otherwise, should the crisis turn to reality. Prior to all the conflicts of the past everything was “rosy” until it hit. Those that sensed that there was a potential of a crisis ahead put their “house” in order to at least stand a chance to weather the storm. Those that didn’t heed the warnings were wiped out. This is fact, engraved in history and the hearts and minds of those who lived it. The horrors they saw gave them much more reason than us to think the world was ending..but they didn’t. Neither should we.
However, if we are to listen to those who ONLY preach that all is well and there is no negative side to the trends both locally and abroad. Who try to convince us to believe that Government and Media propaganda is “gospel”. To believe that Govt. and big business has only our interest in mind, and NOT to question their motives. Then we deserve to suffer the consequences.
I would rather listen to someone who gives the pros and cons than one who only gives the positive view. What makes them any different to a used cars salesman who only gives you the rosy side?
Nick – we have moved from “how do we stop house prices crashing” to “how do we stop house prices from going to the moon”
That is a significant shift.
PF – in my view, house price crash or drop does not mean the end of the world as we know it. The world as we know it includes a gedree of sanity. The current prices don’t. Which means they don’t belong to this world.
PF – in my view, house price crash or drop does not mean the end of the world as we know it. The world as we know it includes a degree of sanity. The current prices don’t. Which means they don’t belong to this world.
Fitch – I fear that your description of our banks’s off balace sheet assets might be too close to the truth for our own good. When it all falls into a heap, we must never forget, it is not the banksters or the politicians who will pay for the bailout.
Nick, SV – Your cynicism regarding the growing army of government minions, not to mention the unholy communion of politics and big business, is amply justified. Sometimes I think that ignorance of these matters would be bliss. Knowledge of them is nothing short of depressing.
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