Archive through June 23, 2008

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rdumas

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Post Number: 1479
Registered: 11-2006

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Sunday, June 22, 2008 - 12:43 pm:

BEAR MARKETS

Below is an extract from the following link which discusses bear markets http://www.vanguard.com.au/Personal_Investors/Tools_and_education/Plain_Talk_library/realistic_sharemarket_expectations/

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Bear markets are part of investing

Over the past 50 years, the Australian share market experienced what was generally regarded to be a bear market, on average, once every five years. During the last major market downturn in October 1987, the ASX All Ordinaries Index dropped by 42 per cent over a month.

Although no one can reliably predict the timing of bear markets, or bull markets for that matter, investors need to be aware of the extent to which share prices can fall. The big danger from bear markets is that investors will panic and sell at or near the bottom of the downturn. Many investors did just that in the market decline of late 1987.

The graph below shows that an investment of $10,000 invested in June 1987 grew to $12,802 before it dropped to $7,408 in October 1987. It recovered to its original investment value of $10,000 around two years later. Investors who stayed the course, rather than selling and cutting their losses, would have received around $81,000 in June 2007 (before fees and expenses).

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The important point to make about the above extract is that the worst case scenario of the what happened to the investment in 1987 was that it recovered two years later. Is our current situation worse than the 1987 crash? I doubt it.

The second important point to make is that the above two year recovery situation was on the basis of being invested at the top of the market prior to the crash. The situation that we are in now is that we are already 22.8% down from the top. In my opinion investments made at this level and further down in the right stocks will lead to a much faster recovery that during the 1987 crash.

paddy

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Post Number: 185
Registered: 03-2008

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Sunday, June 22, 2008 - 02:14 pm:

Rudy : I used a longer time frame than you and for me 4753 will be a 38.2% Correction and the likely place for a rebound .

I still think that there is much more bad news ahead that if revealed all at once would probably create a major panic .

Regards,

Paddy

rdumas

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Post Number: 1480
Registered: 11-2006

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Sunday, June 22, 2008 - 02:46 pm:

Hi Paddy,

Wow. If 4753 represents 38.2% then as I see it your 100% range must be a base level of around 1358.

6852 - 4753 = range of 2099

Range of 2099 is 38.2% therefore 100% is 100 x (2099/38.2) = range of 5494.

Therefore 6852 - 5494 = start level of 1358

Did I slip up on the mathematics ??

That would take the ASX200 (if it existed at that time, which it didn't) would have been around 1988. Where have you taken your base from ??? You have me intrigued.

philr

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Post Number: 416
Registered: 04-2004

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Sunday, June 22, 2008 - 03:14 pm:

Rudy

Longer term standard regression chart. Worst case back to 3500 area probable range 4500.

xao

Phil

** Let blockheads read what blockheads wrote.
Warren Buffett

rdumas

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Post Number: 1481
Registered: 11-2006

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Sunday, June 22, 2008 - 03:54 pm:

Hi Phil,

A drop of 49% would be pretty drastic and difficult to believe for Australia but not for the US as they are a basket case in my opinion. I would much more believe that 4500 (34.5% drop) would be achievable.

ody

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Post Number: 2543
Registered: 10-2006

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Sunday, June 22, 2008 - 08:01 pm:

TOMORROW FIRST ...

My major concern with my own stocks is that I may have left selling WBC and WOW for longer than I should have. My attention to events on the share market has been quite patchy of late, so that I have not acted, either, in the way I otherwise might (probably would) have done. Indeed, it is possible that I would have sold other stocks as well, in that event.

As I said, I am very seriously thinking of selling just the two stocks, because I think those are the most vulnerable.

However, I am not yet decided on this: for I think it likely, with all the very bad news I have read, that the market may well PLUNGE tomorrow, and that possibly I will then feel that I am selling my WBC and WOW too cheaply. That is, not only would I crystallize a very real loss, but a significant fall in the value of either stock would make me feel, somewhat paradoxically, that it would begin to look more like a buy. For example, do I think that WBC should be sold at $19? Leave alone $18? As Rudy says, the dividend is, proportionate to its current price, very high indeed, and usually a company like WBC would be able to pay it. Not only do I get that divvy, but it is worth an additional 43% in a super fund, so that adds up to quite a bit.

On the other hand I don't buy stocks for their dividends if their share price is in decline. Admittedly, I too would have thought that probably the extent to which the market will fall before it finds support is probably not as big as the most negative forecasters here would have it. I may be quite wrong, but intuitively I would have thought that a fall of another 10% from here, for example, would be sufficient to find support.

However, I feel no doubt whatever that as from tomorrow there WILL be a fall, and that it will be significant. All the signs I can find are unanimous on that score.

I now turn to the Vanguard statement that Rudy quoted:

"The graph below shows that an investment of $10,000 invested in June 1987 grew to $12,802 before it dropped to $7,408 in October 1987. It recovered to its original investment value of $10,000 around two years later. Investors who stayed the course, rather than selling and cutting their losses, would have received around $81,000 in June 2007 (before fees and expenses)."

A problem here is that obviously the dates chosen are a bit arbitrary. But even leaving that fact aside, quite what is an investor to take from this? That it would have been unwise to sell at $12,802, and that one should have let one's money fall to $7,408, just in order to get back to the original $10,000 two years later? The Vanguard case is invariably designed to "prove" that one should do nothing, and simply keep one's money in the market indefinitely.

If we WERE at $12,802 now, I'd definitely sell. Indeed, even if my $10,000 had grown to $11,000 and I feared that it would go down to $7,408 I would happily take the profit of 10% and would not dream of waiting for it to go down to $7,408. I see the notion that it is meritorious to let it get down to that point as utterly inane: contrary to all logic and the investor's best interests. (I must add here, though, that I pay no tax when selling.)

What I DO see sense in is that IF one is down to $7,408, one should not THEN sell. And although I think that WBC and WOW are very likely to go down yet further than where they already are, I even so feel that just possibly the fall will be limited in extent. Closing price for WBC on Friday was $20.63. Imagine a fall of 10%. Price becomes $18.56. Would I think that the stock looks like a BUY at that level?

Well, yes, I think I probably would - even though I cannot deny it might well go down further. If one went "down" this path IT WOULD BECOME ESSENTIAL TO HOLD ONE'S NERVE AND NOT SELL IF THE STOCK WENT DOWN ANOTHER 10%. I must say that the very worst fall I can imagine WOULD be 20% from here - anything beyond that would be absolute panic buttons and not reflect anything other than utter fear. I just cannot see on any rational ground why the stock would not be entitled to a price at so low a level, and I would, in fact, be surprised and shocked to see it - though if I kept it, I think I'd have to live with the situation.

For, obviously, if I could not accept living with a price 20% below $20.63, then I should sell right now. I think it important to define one's own tolerance levels in that regard, and what I imply is that I think I shall probably not be able to sell the stock at $20.63 tomorrow (which even by itself I find low); that I am prepared to see it go down by 10% as a matter of course; but am even prepared to live with it going down by 20%, since my expectation of a 10% drop may be too optimistic. I am prepared to bet that it will not fall more than 20%.

Have I actually experienced falls of 20% in a similar situation before? Well, yes, I have, and I have accepted them and lived through them, though I do dislike the experience intensely, which is why normally I invest in bull markets only and sell stocks quickly when they lose. That is the investment climate that suits me much better than one in which I would have to wait, say, two years before I'd get back to square one!

If, indeed, one did... Now I shall raise two points AGAINST the kind of optimism shown by Vanguard.

One: I DO think that the financial situation now is worse than in 1987, in that I think it is more unsound. We did not at that stage have anything like the current credit crunch and unsound financial management that the US has shown on this occasion. So if I am to compare the two periods, I would think that trouble this time could well last longer, and prove fundamentally worse. I think we are in an intrinsically VERY serious crisis: more serious than any I can remember being involved in. In this area, I agree with Paddy that probably a lot more bad news is to come out.

Two: Vanguard of course thinks in terms of the market overall, of the Index. I don't invest according to the index. Usually I beat it, but by the same token it is possible that this time I shall do worse. In that respect, generalisations as to where the market as a whole will go are actually little help unless one is invested in that market in its totality. The stocks that I have are not a reflection of the market as a whole, for better or worse.

Actually I would add one further observation on Vanguard and its reasoning. Its underlying assumption is that history repeats itself. The whole implication is: look at 1987, and you will see how things will develop. I do not accept that reasoning, as it misleads one into thinking that situations that look similar will no doubt also in essence BE similar. I do not think that cycles work quite in that regular a fashion. I really hardly dare suggest that as we know what happened over a previous period of 10/20 years we can also predict a similar pattern for the next 10/20 years. Such automatism would not be able to predict either a truly huge crash or a truly huge boom with any accuracy, and yet we know from history that such events occur.

One thing I do know, for myself: that is that I shall be very happy to keep most of my powder dry just now. And I am not at all convinced that if prices will go down by e.g. 10% I shall interpret that as mere investors' nerves, for I think that there are some quite good economic reasons for a decline. In other words, if people sell the market down it is not because they think the market is "toppy", but because they believe that there are a number of serious economic problems which may significantly damage companies for some considerable time to come. And THAT sense, I must admit, I share. So I am very happy, at this stage, to have only a quite modest percentage of our money in the share market.

ody

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Post Number: 2544
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Sunday, June 22, 2008 - 08:17 pm:

CONCRETE SUGGESTED FIGURES FOR THE XJO (ASX 200)

My figure of 10% in my long post was not in any way calculated, or arrived at by charting. I merely assessed, on the basis of my usual way of observing the market, where - if one considers all possible factors of significance - it might well go.

A 10% drop would take the XJO down from 5288 to 4759, and I see arrival at that figure as quite a real likelihood. As things stand now, I don't think that 5000 would hold and be regarded as representing a sufficiently large fall. A figure like 4750 would be seen as "more like it".

However, a fall of 20% would be POSSIBLE if things get really nasty. That would take us to 4230. I should have thought that we probably shan't get there, or that if we did, we'd probably fairly quickly go back to about 4500. Indeed, I'd see 4500 as an important psychological barrier, but it would not actually greatly surprise me if we did go down as far as that. By contrast 4230 WOULD surprise me, and as I say, I don't think we'd be there for long.

A yet lower figure is, I think, extremely unlikely to occur.

I am psychologically entirely ready for a 10% fall, and think that that figure is probably the minimum needed to satisfy expectations and express people's fears. Possibly more - e.g. a figure between 10 and 15%. In practice, I view a figure bigger than 15% with suspicion (i.e. see that as unlikely to be reached, or to last if it were reached).

(Message edited by ody on June 22, 2008)

ken

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Post Number: 511
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Sunday, June 22, 2008 - 09:27 pm:

Rudy,

Regarding your post 1479, the US market has just broken a trendline 34 years old from the low in 1974, within which the 87 crash did not break that trendline. This makes it potentially more serious than the 87 crash, the 82 low, and the 2002 low, as the bear market will be in a higher degree Elliott Wave cycle than these declines.

resillent1

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Post Number: 494
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Sunday, June 22, 2008 - 09:50 pm:

How to say what’s on my mind without causing offence? Just spit it out and hope I guess.

Not so long ago some did not expect prices to make new lows - now the expectations seem to be for further lows based on the latest developments.

Sometime in the future, will there be new expectations of even lower prices based on further developments?

How will your fixed purchase price look against those developments as they unfold? A hard question to answer because you don't know what the developments may be - but imagine them to be bad, (example - Aus real estate values fall)

Mental anchoring to what price "should" be is dangerous

Do you "know" the value (based on a full economic cycle) and is it better than the current price - Do you see further falls as nothing more than an even better opportunities to add further?

Only hold against the trend if you know the value and have the financial and mental capacity to be a strong hand as others wilt - can you hold against a stampede? Be prepared to take large losses if things fundamentally change whilst prices are at subdued levels.

Trends CONTINUE until they end. Are you on the right side of the trend that suits your approach and time frame? Are you predicting the end of the current trend rather than managing the possibility that it may end?

The best loser wins.

How much money are you prepared to loose and how long are you prepared to wait just to be right about the timing of a purchase?

Try 1970 as opposed to 87 for how long you may need to wait. there is actually numerous occasions in history when the market has taken over a decade to reach new highs in REAL terms - hope your health is well.

Cheers

paddy

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Post Number: 186
Registered: 03-2008

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Sunday, June 22, 2008 - 11:06 pm:

http://news.tradingcharts.com/futures/7/9/110294797.html

India urges global price band for oil

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http://edition.cnn.com/2008/WORLD/meast/06/22/oil.summit/index.html

Saudi will increase oil output to cut prices

9 million bpd to 9.7 million bpd

Regards,

Paddy

paddy

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Post Number: 187
Registered: 03-2008

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Sunday, June 22, 2008 - 11:24 pm:

Rudy : I used the High of 6852 .

The Low I used occurred in the month 11/01/1992 .

The Low was 1356 .

Using those values from High:

23.6% correction : 5555

38.2% correction : 4753

50% correction : 4104

61.8% correction : 3455

Interestingly a 76.4% correction would take XJO back to 2653 - close to your Low I believe.

In theory, as long as XJO remains above 3455 the uptrend remains in place . If it gets that LOW then it will be a "nuclear winter" on the global Markets and perhaps in the world.

Looking for a normal correction in a short time period, geologically speaking, but still a long ways to go.

Paddy

paddy

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Post Number: 188
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Monday, June 23, 2008 - 12:50 am:

Rudy : One further observation . The Lower Boundary of the Up Channel [ from 1992 to the present ] and defined by the Lows 1356 and 2693 projects to a value of about 3330± . That is Close, IMO, to the 61.8% correction value of 3455 . If anything the projected value could be on the low side .

Regards,

Paddy

paddy

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Post Number: 189
Registered: 03-2008

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Monday, June 23, 2008 - 01:46 am:

Ken , Rudy, Ody : check my posts in Way of the Dow.

Still a long ways to go - Down with the Dow.

Paddy