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Trade the Bollonger Band Squeeze

Archive through February 03, 2013

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ody
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Post Number: 5800
Registered: 10-2006

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Sunday, October 14, 2012 - 07:24 am:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



WHAT DOES MERKEL ACTUALLY MEAN?


From Bloomberg:


Merkel Sees No Alternative to ‘Arduous’ Euro-Area Overhaul
By Tony Czuczka - Oct 13, 2012 10:08 PM GMT+1030
----
German Chancellor Angela Merkel said there’s no way around economic overhauls for euro-area countries struggling in the debt crisis and pledged to help them defend the joint currency.

Merkel said she will hold countries to commitments to make their economies more competitive and attract investors. “It’s arduous, but I see no other option that leads to a decent outcome,” she said in a speech to a regional convention of her Christian Democratic Union party today. “It isn’t some kind of pressure that were creating to make you suffer.”

While the euro area needs to regain the confidence of financial markets, Germany would bring on “the risk of a recession” if it refused financial aid to stem the crisis, she told delegates at Celle in the northern state of Lower Saxony.

Many investors “are betting that we won’t have the political strength” to defend the euro, she said. “I am determined to make the effort, even if it’s hard.”

“Trust means that everyone fulfills their commitments,” she said. “Trust is good, but verification is better. That’s what I’ll continue to fight for in Europe, every day.”

CDU-led Lower Saxony, home to companies such as Volkswagen AG (VOW) and Continental AG (CON), holds state elections on Jan. 20.
----
COMMENT: There has been a very marked shift in Merkel's attitude over the last year and a bit longer. She started with the strong, harshly realistic "German" attitude that people should be frugal, not borrow, work harder, etc, and that Germany was not going to waste its money on a country that did not meet very severe conditions. As it is clear that Greece neither can nor wants to meet those conditions, one would have thought, in logic, that she would have become MORE demanding. In fact, despite rhetorical words repeating what the Greeks should do, she clearly sees herself as having no option but to pay, pay, pay. It might ultimately have been much easier and wiser to let Greece muddle on and not to offer to "help it out", given its appalling record and inability to pay - probably for ever. In the event, however, the Europeans are so besotted with "unity" (leading even to a ludicrous Nobel prize as a reward for this quest!!) that the idea of ANY country surrendering the Euro now seems to be firmly off the agenda. Despite much hollow talk about the need for austerity, and "monitoring" of how that is coming along, anyone can by now see that when it comes to the crunch Germany and other wealthy European nations that have a record of hard work will bend over backwards to pay, pay, pay, in order to keep the grand but unrealistic ideal of a Euro-united Europe alive. And sure, it can be done, but only if it is clearly understood that it means a lowering of living standards all round: Greece, Spain and several other countries will cost the Northern nations a huge fortune, and already the pressure on their (the Northern) nations is becoming quite marked, with economic downturn visible in various ways. It will be a matter of "getting poorer together" for the sake of the unity of economically incompatible nations that supposedly otherwise would engage in warfare (hence that Nobel prize!). The PRICE (as distinct from PRIZE) of economic unity in Europe will be horrendous, and for years to come. HOWEVER: as they cannot, in those countries, see themselves any longer as "going it alone", and are fully committed to unity, the only implementation then open to them - and this is the way they are heading - is greater unification, not less, so as to create something like a United States of Europe. It will be an extremely difficult - in many ways unrealistic - exercise, but it is true that IF you pursue unity, then you MUST have fiscal as well as monetary unity, surrender individual sovereignty to a large extent, etc. That is what current movements are about, and although there are fears of failure, the determination of Europe is such that I think we can reasonably assume that we do, now, know where things are heading. That, at least, is giving markets on the one hand the jitters (they are still nervous, and rightly so), but on the other hand a sense of security, because there is an intended "arrangement", a "policy", being stated, which does seem to be believed in, and which is indeed being backed by astronomic amounts of money being shifted around in a desperate effort to make the plan work. So, as an investor, I am cautious, but I am not currently worried about having some money in the share market, as that is where the best gains seem to be lying. As America has (not for the first time) been showing the world, you can have a heavily indebted and unsound economy but still get people to invest in assets: the price of them simply gets pushed up when other choices no longer reward investors. One worry being that the Americans, at least, may already have overshot.


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gdd3
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Friday, October 19, 2012 - 02:01 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Hi Ody...

Thanks for your "upfront and revealing" yielding stock list and assessment. Some worthy alternatives and better performing yields than "cash".

Others on my "yielding" stock list include SKI, GOZ, PTM, PBG, HIL and, as mentioned above, EPX.

Now I highlighted HIL because it had another big day yesterday...but down. Its seems the management finally made it "formal" what the market has been perceiving(or actually telling them) for a long time..."Another Aussie Icon" biting the dust. However, I wouldn't be surprised that this may prove the turning point in the company and a bottom in its SP for awhile. If the 2013 and 2014 divi forecasts(10c/share)are to remain, or even downgraded 20%-30%, you would think at today's share price of 70c, after falling from Tues's close of $1.15, is just too good an opportunity to miss. Admittedly, the chart looks pitiful and I'm going against my preferred "tool of trade' but I'm in for a few this a.m. for the SMSF.





cheers
Dolphin}







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baysider
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Saturday, October 20, 2012 - 05:16 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Hi Ody

Thanks for sharing, a most interesting selection of stocks. You've certainly picked many with great momentum behind them - to say the least! There's several there that I'd love to pick myself but I have to admit I haven't been able to press the buy button after the stellar run up they've had, I find myself constrained into thinking the moment I buy will the moment they experience a significant pull back and I kick myself! REA, BKL, BRG, CTD, MMS, RHC and ARP are all very much on my watch list, they just never seem to retrace much to present a really good buying opportunity.

I'm not sure if you follow Roger Montgomery much Ody but he also favours many of the stocks you've selected. I know healthcare, internet based stocks and telecoms (minus Telstra) are amongst his preferred plays and he's staying completely away from mining and mining services.

I'm torn at the moment between feeling the US and European markets are very high, have had a great run and probably don't deserve to be where they are which suggests a strong pull back could start at any unexpected moment to catch everyone off guard (fear) vs with all the stimulus being applied the markets may rally even further into next year, maybe March (greed). For the most part fear is holding me at bay though I am adding, and have been for some time, long term (Superannuation) stocks when real value presents itself such as COH last year at $50, my favourite buy as they make such a great product.
Good luck with the portfolio and do update us if you think the situation is changing.

Cheers


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ody
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Monday, October 22, 2012 - 04:18 am:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Today (Monday) will see a fall, as just recently Europe has been in dispute again as to how much help the stronger nations should provide to the beggars, and how soon. Germany, after seeming to follow the crowd recently, appears all of a sudden to have gone more hard-headed and hesitant again, and this creates unrest and lower, less confident markets. For the markets to perform, we need unity, within Europe, as to just what plan is going to be implemented and how soon. We seemed to have got that, but it looks like fragmenting a bit. While such troubles last, the market in Australia will not feel confident. This is the NO 1 problem. As against that, there are very few places where one can get a decent yield or capital gain outside the share market. The very large number of retirees that we now have and which is still growing WILL need yield (preferably also capital gain) to sustain them, and this explains the strong support for the banks and Telstra, never mind whether those stocks are at some risk of becoming possibly a bit overpriced. The market also does, in essence, want to go up, but that is so far a matter of minority behaviour, with many still hesitant. Hence it is important to have some patience about this; not to invest too much; and to place it in stocks with either great dividends or great - virtually guaranteed - earnings. Those will still go up and down, but be the most likely winners. Probably THE most important thing to realise that in a market like this one must concentrate on stocks in STRONG UPTREND. It does not matter that they have gone up already: what does matter is that the trend must be there and must be intact. Experiments with hesitant stocks, supposedly undervalued ones, fallen angels etc are at this moment dangerous. I would expect that Europe will fairly soon come to a clearer agreement again: the Germans are being tough, but each time when it comes to the crunch they get conciliatory again, for they don't want to see the Euro in danger. Europe is BESOTTED with the Euro, particularly the Eurozone, and has now firmly decided to keep it, and even to pay Greece. Sure, they will push for austerity, the Germans - but they will not fail to pay up to keep the Euro supposedly "safe". The choice has been made, and very clearly. That is the main driver of share markets, along with an emerging appetite for "risk on" after a very long drought. America is seen as reasonably "safe" now (more positive than negative), and China probably has already had its hard landing (new figures show it went as low as about 6.5% but has since gone up). For today, however, almost all the old fears will be back, and they will continue to resurface from time to time. But the overall mood, globally, is improving rather than deteriorating, even in a climate of deleveraging, as people have a better sense as to where they are going and what will happen. The rich nations within the Eurozone would rather pay and get poorer than lose the currency. But in buying stocks selection is essential: DO NOT BUY THE INDEX - BUY THE WINNERS. And still keep a lot in cash, deposits, etc. On the whole, buy stocks with good yields (at least 4% preferably franked), for those will be more popular than those that show growth only, although some of the very strong growth stocks are exceptions. In general avoid resources stocks and ALSO stocks serving resources stocks, as that whole industry is very iffy just now. Aim for modest returns rather than the sky, and go for solidity in inherent business performance plus upward graphs. Be prepared for some correction, too. Don't worry about the world's debt unduly - all sorts of treaties and forms of obfuscation are setting up to make sure that noone will actually PAY those debts, while those who are unlucky, like most Germans, will be expected to lose money by buy buying junk bonds from Greece, Spain, Italy etc for which they will be rewarded with losses. In that respect it is like the US: it is not the perpetrators of the disaster that will be made to suffer, but ordinary citizens who will be expected to keep the perpetrators afloat. That is the world we live in. The Keynesians are firmly in charge: throw good money after bad, and eventually the world will go on living.


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ody
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Wednesday, October 24, 2012 - 06:20 am:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



MARKETS TURNING?

It would seem so, as falls have been quite bad, and the futures market for the ASX indicates that we too will be down (for the index as a whole) by more than 40 points. In the US, earnings results are sluggish despite all the pump-priming that has been and is occurring (zero interest rates, effectively, and 40 billion $$$ per month being printed and injected into the economy). In Europe, too, earnings are disappointing, with many projects getting shelved (as elsewhere including Australia), and there is renewed disagreement (which appeared to have evaporated in recent months) as to how to approach the crisis. Germany had softened, but is getting more stern again, and in Spain - perhaps the major cause of despair worldwide - the economic situation is very bad, although the country is reluctant to ask for a bailout. If only it did, that would create more "comfort", as no doubt if would receive a large amount of money to smooth its path, even though Germany is showing itself more severe again, and inclined to postpone much of what it thinks is nevertheless necessary. Such situations create unrest, and lead investors to become highly nervous, as earlier with Greece. There is, therefore, at the moment, little to encourage optimism. However, the Hang Seng looks like an exception, and some believe that in China matters are past the worst. Australian investors look unconvinced, otherwise the futures would not be down so very clearly.

So: all in all a bad day is certain, and globally matters look sufficiently grim to warrant the belief that we may be moving into a corrective phase. I even so do not believe that it will be a truly major one - not as yet, as investors must seek a way of making money somehow, and a major flight to bonds is not very probable as those in most countries yield so little. Nevertheless, we might see a shift in emphasis towards cash and fixed interest and away from equities unless the international situation stabilises more. In Australia, however, yields on shares in many cases are still attractively high and a number of companies are making good money enabling them to pay out, so those will not all be routed. But selling will not pass us by.


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pjf000
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Wednesday, October 24, 2012 - 06:41 am:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Ody, you are such an optimist.
It is remarkable that there is a dip just 2 weeks out from the US elections. If it wasn't an election year do you think the S&P would be so high. The big picture is so horrible I suspect the markets just consist of gamblers and robots.


"There is no security on this earth; there is only opportunity."
Douglas MacArthur

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ody
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Wednesday, October 24, 2012 - 07:52 am:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



I don't think that the fact that it is an election year is the primary mover of the SP 500 as (a) there is no guarantee at all that Obama will not be re-elected, while (b) Americans find shares attractive as there is little else for them to opt for (not even gold, they seem to believe). In that regard, Bernanke's policy, absurd though it may seem, does work: if you relentlessly keep interest rates low and pump money into an economy you will create higher prices for growth assets. Dangerous that policy certainly is, but for considerable periods it does bear that particular "fruit". In Europe there is a somewhat similar situation. You don't charge people for borrowing money, print loads of it, and flush economies that otherwise don't perform at all. You will not save those economies with this approach, but you WILL drive up share prices. No presidential election there, but rising share markets. Of course, if some of the drugs look like not getting supplied, people get restless, and may decide to keep some money in their pockets. But if you provide enough comfort and obfuscation, the masses will push up growth assets. Even here in Australia we have seen a similar thing: lower interest rates push up house prices and shares. And this may well continue, as the government is so irresponsible, and the international economic situation so bad, that the Reserve Bank will likely enough continue to cut, or at the very least keep interest as low as they are. More likely cut, I would think. That means that e.g. all retirees will give serious thought to buying bank shares, property trusts, etc because of the dividends/yields. How else are they going to generate a cash flow, which they need to have??


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rdumas
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Wednesday, October 24, 2012 - 08:37 am:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Hi Ody,

You may find the long term monthly chart of the SPX of interest below. It covers around the last 19 years of price action. My view is that Bernanke's games have inflated the share market pricing and fooled people into believing that their assets are gaining value. If you price the SPX chart in terms of the price of gold you would get an entirely different picture.

As a matter of interest when priced in gold the US market peaked around 2000 and has dropped around 80% in value since that time.

At present the leg up since March 2009 has appeared bullish however technically the overlapping nature of the move indicates that the move in fact is corrective and not a new bull market. I think that you and I know that governments don't have the political will to do what is required to get their spending in line with their revenues or debt burden. That is the fault of the people because they would throw out any government that tried to do the right thing.

The constant printing of money and increasing debt can only lead to ultimate financial disaster. It is only a question of time. From a technical perspective I would suggest that reaching the all time market highs for the third time in the last 19 years may just be the catalyst.

How long do you think that banks and companies like Telstra will be able to pay good dividends when the excrement hits the fan and fiat currencies are seen for the bits of worthless paper that they are becoming?






The views expressed in this post are purely mine and may not necessarily line up with reality - Rudy

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ody
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Wednesday, October 24, 2012 - 02:25 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Share markets, crises, etc.

Thanks for that response, Rudy. I am quite familiar with the fact that if weighed in gold American shares are worth a lot less than the historical graph suggests - it is a point repeatedly made, and undeniably a good one. However, the average American does not deal in another currency than US dollars, so even if the dollars are "devalued" against gold, that does not mean that if you live in the States you don't want more dollars. You cannot eat gold; it will not pay you a yield; and, although on the whole a good investment in recent times, is nevertheless itself subject to valuation: it no longer has the same importance, broadly speaking, which it had when it was considered the only "true" form of currency, figured in a prominent way in the making of coins, and jewellery. The latter is now found mainly in India, where indeed gold still has some of its traditional standing, and Asian investors in other countries too like gold. But it is mainly bought in order to compensate for value lost in other asset classes, and particularly popular when they decline: as they regain value, gold is seen as less necessary, and tends to go down in price.

You cannot run an economy on or in gold alone, and people will always need a more useable form of currency and holdings in other asset classes as well. Indeed, if that was not so, Americans would be bright enough not to buy any shares at all.

It is true, of course, that our shares, too, are subject to some of the same forces as those in the US, but, thanks in part to the high value of our dollar, our market has not gone up nearly as much - indeed has stayed largely flat for quite a while. Should the Aussie dollar fall, shares may rise more than they have done. The most important thing of all, though, I believe, is to realise that, when all is said and done, to judge the merit of shares for investment by an index like the Dow, or the SP 500, or the ASX, is a dumb thing to do, as none of them indicate - and this is very true in Australia's case - that some companies are far better than others.

The leading stocks on our index are a hugely varied bunch, and this means that some stocks are far more worthy of purchases than others. If, for example, at the beginning of this year you bought strong defensives with good yields, you would have done a lot better than someone buying just resources stocks. I did very well with that policy in terms of both yield AND increases in share prices. There are real distinctions to be made. If it comes to some of the smaller stocks that are really growing and making very real money (even if in over-valued Aussie dollars), you are buying a REAL asset, and not just a market-driven one. In truth, for many people who are successful in the market over time it is stock selection which brings them success, not the total performance of the index, which is so very indiscriminately bought by lots of fund managers and ignorant mums and dads.

In a way, this point can also be strengthened by pointing out that it is not "time in the market" which will get one gains, but "being in and out of the market at the right times". In that respect, I would agree that a market like the present one needs to be clearly watched with care, but during much of 2012 it has been possible to make money, in Australian dollars, which have on the whole maintained real value, in contrast to the US dollar: in that respect it is so far not really very useful to quote American performance, except that SOME of the factors driving markets up in both cases are no doubt the same, and may well last even if they are the result of monetary (and fiscal) policies that you and I see as misguided.

For example, I myself see no really good reason for interest rates in Australia to go yet lower, and I believe that if they do, it will be for political reasons, not economic ones. Nevertheless, if a decrease in interest rates pushes house prices or shares up that is something which investors will take advantage of, particularly if the currency does not "tank".

Sure, at SOME point another big fall is quite possible, but I doubt it will be at the 2008 scale, as at that point we came down from huge over-valuation and huge over-hanging debt. I don't think that, in Australia at least, the situation is the same now. I don't think we are as yet near the point of that significant fall in terms of Australian fundamentals. Nor do I think that we have arrived there in terms of global sentiment.

Every time there is doubt about e.g. a "treaty" being arranged in Europe, the markets fall (as now). But every time, despite a lot of wrangling, the Europeans have decided to "fix" the problem, however inadequately, and so long as Germany and the other successful countries are determined to preserve the euro by buying junk bonds from "the periphery" a significant fall in share markets is not likely. Going by the European fanaticism concerning the supposed need to preserve the euro, I would predict that the "fix it" attitude will see us through for a while yet. In America, similarly, people like you and I have felt that no doubt a significant fall would before long come after the 2009 rally, but it has not done so, as every effort is made to keep people happy enough not to trigger off a new crisis by panic.

The main real danger, as I see it, right now, is that economies are too inactive because people refuse to spend. If that situation continues, the global recession will worsen, and then shares will certainly be impacted significantly when once there are hardly any companies left that can actually make money rather than lose it.

I do not imply any APPROVAL - let me be clear - of either Bernanke or the ECB: but I do think that undeniably their policies have helped equities, and in essence are still doing so. Any investor should realise, of course, that the situation is intrinsically economically dangerous and unsound: I have often said so in the past, and haven't changed my mind. What I have observed about market conduct, however, has taught me that I was far too early in predicting a second big fall, and underrated the chances of people being successfully manipulated (to an extent) by Keynesian policies. I should also point out, by the way, that it is actually quite normal for crises at some stage to give way to gradual improvement even if there has NOT been a solution for debt problems etc: bailouts and such-like are a common feature of economic history that have not invariably led to disaster. The can just gets kicked further down the road once again, with debt building up over decades. If that happens, then it will be the next bubble (probably already a reality in the case of some American shares), which will lead to the next big sell-off. Indeed, on the whole people worldwide are significantly worried, which means that usually they look for safe places to park their money, as has been happening, rather than that there are huge bubbles to be deflated in a sudden collapse. It is at least as probable that we shall in essence continue with "fix it" policies leading to prolonged recession or stagnancy. I am reminded of the 70s rather than 1987 or 2007/2008, or the dotcom bubble. Those were all events which did lead to collapse, because prices were far too high. That, on the whole, is just now less likely to be the case - as yet.


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rdumas
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Wednesday, October 24, 2012 - 03:04 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Hi Ody,

I was looking for information on the net relating to what problems could affect Australia and I found this little jewel of information that gives what appears to be a pretty rational and informative insight into the risks facing Australia in the future. I think that you will find it very interesting.

http://www.rba.gov.au/speeches/2012/sp-gov-240712.html

One of the issues that it doesn't address however is the problem of our aging population and the effect that the ratio of workers versus retirees will put onto our financial system in the future. I have heard figures quoted such as around 50 years ago there were around 16 workers supporting each retiree whereas now we rapidly approaching the 5 to 1 ratio. With the public mentality within Australia that appears to believe in a 'government handouts' mentality I wonder how long this mentality will be able to be catered for in future generations.

The following article suggests that by 2050 there will only be 2.5 workers for each retiree. You may have to cut and paste the link if clicking on it fails to work.

http://www.mccrindle.com.au/_blog/The_McCrindle_Blog/post/The_National_Barometer _2012_How_we%27re_travelling/


The views expressed in this post are purely mine and may not necessarily line up with reality - Rudy

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ody
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Wednesday, October 24, 2012 - 04:34 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Things that could go wrong ...

Thanks, Rudy, for that material. And yes, there is plenty that could go wrong: rather more, I would say, than we have seen for a number of decades. So I am by no means an allround optimist about either the world economy or Australia's. I try to seize whatever chance I can to eke out the odd dollar here and there, but on the whole it is not, and for some years has not been an easy task. All in all, this is the hardest time, I feel, that I have faced since I fully took charge, about 10 years ago of fully looking after our own super.

As though to tell us that things ARE going wrong, here is a relevant article from Business Spectator. I do not think that the commentator is a giant in Australian finance, as some do, but I do believe he gives quite a good survey of disconcerting news and factors. You have a good point, by the way, about the ageing of the workforce, for sure ...
---------------------
Did the US bulls just go over a cliff?

Stephen Koukoulas

Published 9:09 AM, 24 Oct 2011


The green shoots of optimism that were being seen on the US economy, its stock markets and in global commodity prices look like being dashed.

The near 4 per cent drop in the S&P500 index over the past week is in itself no disaster -- it followed a rise of 15 per cent from the June low. But the reasons for the decline, namely lower corporate earnings growth, economic and policy ructions from the Eurozone and a fragile outlook for China, are unnerving and appear to be getting more problematic.

Some big US companies are posting disappointing profits. Du Pont, 3M and United Technologies are all under-performing. There are more high profile job shedding which can only undermine the already fragile confidence of US consumers. The various surveys on manufacturing activity are turning lower after what may have been a temporary uptick during the US summer.

US politics is looking particularly messy, with the Presidential election too close to call, and with that, there is more posturing from the candidates about “taking the fight to China” over currency manipulation and the dumping of cheap goods into the US. Whatever the merits of arguments about the Chinese yuan and its dumping of manufactured goods into the US, the last thing the US economy needs is a trade war with China.

A close election in the US is also bringing the so-called fiscal cliff into view. This is clearly unsettling markets. While it is widely assumed the fiscal disaster would be avoided as common sense in Congress prevailed, the probability of some disruptive economic event from a fiscal blow-up post election is growing by the day. No longer is it clear that the fiscal contraction will be averted in full and as a result of this and the recent news, it is increasingly unclear whether the US economy will grow by as much as 2.5 per cent in 2013.

In the Eurozone, the problematic news continues. The Spanish government has downgraded its already dreadful economic outlook with GDP now forecast to fall for a fifth straight quarter which means GDP will drop by 1.7 per cent through the year to the September quarter. Amid this, Prime Minister Mariano Rajoy is still reluctant to implement the reforms that will see Spain qualify for the financial assistance it needs as it faces a huge debt financing obligation over the next year. The markets will not take kindly to any failure of Spain, the fourth largest country in the Eurozone to meet its debt refinancing task.

There was also news from Greece where the government has failed to get agreement on the reform agenda that aims to cut its spending by a massive Euro 13.5 billion in order for it to meet the conditions for further financial aid. There remains a fear that the conditions imposed on Greece are too draconian, with the leader of the Democratic Left Party, Fotis Kouvellis saying the demands which focus on mass lay-offs, cuts in severance pay and the reduction of the minimum wage “will be of no fiscal benefit to our country … they will simply feed unemployment and further burden a recession that is huge already”. Kouvellis has a point.

Commodity markets are looking at this rapidly deteriorating scenario with trepidation. The RJ/CRB index of commodity prices has fallen by 8 per cent in US dollar terms from a mini-peak in September. It is now down close to 20 per cent from the level in August 2011. For Australia, the fall in commodity prices is more precipitous with the Australian dollar remaining well above parity. While it is too early to be sure about the veracity of the Treasury forecasts in this week’s Mid Year Economic and Fiscal Outlook, much more in the way of bad news from the global economy would pose threats to the economic and fiscal outlook.

The commodity price falls last night were broad and severe. Oil fell a further 2.4 per cent overnight, copper was down 1.5 per cent while the market darling at the moment, gold, fell 1.1 per cent to US$1,708.

A strong US matters to the world -- it is still the biggest economy and the driver of global demand. A recovery in the Eurozone is also vital if the world economy and markets are to register decent growth in the year ahead.

The recent trends on both these fronts are disconcerting, a point showing up in stock and commodity markets.


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ody
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Wednesday, October 24, 2012 - 05:57 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Roger Montgomery on stocks in hard times

Written for the Eureka Report


[From Ody, first and by way of introduction: Please note, this copy of Roger's work is a reduced version - part of the end is omitted, as I wanted to quote only the material which I think is important to our reflections on the share market here on ODB in recent days. I would add to Roger's otherwise excellent analysis that the results for a shareholder would, of course, be always yet more satisfying, however good a stock is, if it was sold at a high price late in 2007 and bought at a much lower price subsequently. As usual, he doesn't, as a fervent shareholder who invests ongoingly, consider that one advantage of investment in shares is that you can actually do what I just described, which locks in money, prevents one from disaster, and enables one to make the next investment, e.g. when shares were low at the end of 2008 or even more so in March 2009, to be particularly successful, as it was obvious we'd get a strong rally, just as at the end of 2007 the 2008 fall could be foreseen. It is often claimed that such events can NOT be foreseen. To my mind, and in my experience, this is sheer nonsense, when it comes to such major moves. The meandering in 2010 and 2011 could also reasonably be foreseen, but I must admit that I had expected some significant fall during those years which did not eventuate; however, I had no difficulty seeing that 2011 would NOT end on the high note which about 90% of experts predicted - one wonders just why.

I will here and there add, in square brackets, some comments on Roger's article where I feel the need is real!]

Here is Roger:

A matter of quality control
Roger Montgomery 24 October 2012
[in The Eureka Report]

PORTFOLIO POINT: Irrespective of your investment goals, focusing on high-quality companies should be the primary objective.

Recently I was shown a comparison of four ‘investment’ strategies that purported to demonstrate how smart investors have done well in stocks through the GFC.

While the mass exodus from stocks, as witnessed by fund manager outflows and corresponding increases in bank deposits and purchases of annuity products, suggests investors have indeed had a gutful of poor stockmarket returns, I thought it would be more than a little useful to look at the claim and respond.

The report I was shown compared the returns an investor would have received had they purchased Commonwealth Bank shares at the height of the market before the GFC and didn’t sell, to those of the investor who sold at the same time and remained in cash since.

An investor who invested $100,000 into CBA shares at $59.34 at the top of the market in December 2007 would have purchased 1685 shares. Those shares, at today’s price of $57.12, would today be worth $96,247. This is encouraging, notwithstanding the fact that the market value has previously declined to $40,558 when CBA shares traded at $24.07.

By owning CBA shares however, you also participate in the cash flow the business generates and that which is determined by the board to be distributed to the company’s owners. Indeed, $24,230.30 in dividends have been paid by CBA since.

Those dividends could be reinvested in more CBA shares or reinvested in the bank.

Reinvesting the dividends in CBA shares is now worth $125,493. [We could do with a bit more detail and precision here, like a breakdown of the exact figures, how many people actually would do this step by step, etc. - Ody.]

Had you sold your CBA shares at the top and invested your $100,000 in 90-day term deposits in December 2007, you would have, according to the analysis, $121,493 at September 30. [I - Ody - would add here that it has been very easy to invest in deposits which would have yielded a good deal more. This is a slanted comparison, though one gets the point.]

The third scenario is arguably a very common one, and that is the scenario that involves selling CBA shares at the lows of the 2008 market crash out of fear and crystalising a loss of $20,237 and parking the remaining funds in 90-day term deposits. This scenario produces a September 30, 2012 value of $95,805. [Comment from Ody: this is the hoary chestnut that equities enthusiasts always come up with, forgetting that there would be people who would NOT sell at the bottom, but, say, after losing 10%, if they did not sell at or before the top. The assumption that the extreme scenario is arguably a very common one is not, in my experience, ever accompanied by a precise breakdown as to how many people do actually sell at the very lowest point.]

The final scenario is that of the Australian super fund, mimicking scenario one and benefitting from franking credits. According to the analysis, your $100,000 at the peak of the boom would now be worth $143,444. The note points out that the return is twice that of the term deposit scenario.

I delight in this kind of analysis because it demonstrates the very real consequences of acting with emotion. Very few investors have a strategy that they can apply with consistency. I care, more than anything else, about ensuring I have a highly replicable and repeatable process.

But the analysis lacks something. Clearly it only works if the stock selected for the comparison has a substantial rally after its fall. The fall allows the dividends to be reinvested at a low price and the subsequent recovery of the share price ensures that not only are the original shares restored to previous values, but additional shares, purchased at lower prices, add to the balance.

There is nothing remarkable about this. What would be remarkable is an ability to identify the companies that are most likely to do this.

Last year Cochlear had a fall from grace when it announced a global recall of its hearing device. The shares slumped from the mid 60s to the low 40s, and while analysts wrote of permanently damaged reputations, we accumulated a material position for our investors. The shares are now trading at more than $70 and like the CBA example above, the returns are even higher with the reinvestment of dividends.

What is common to CBA and Cochlear however (no, its not that they both begin with the letter ‘C’) is they are very high-quality companies. Had you selected BHP, Fortescue, Lend Lease, Leightons or Qantas for the above example, the genius in the room would have been the fearful cash investor. [I wholeheartedly agree with this, and with the implied view that one CAN muster the brains to buy CBA and Cochlear yet avoid all or at least most of the others. If one did buy them, one would - if one thought like Roger or me - probably get rid of them pretty smartly if one thought one's choice was mistaken. But, to begin with, people like Roger and me would not buy such stocks as Fortescue or Qantas, though at times we might purchase BHP.]

And this brings me to an important point I’d like you [to] consider carefully. Time is the friend of the extraordinary business, however it is the enemy of the business with poor economics.

Irrespective of whether you want income, yield, capital growth, short-term or long-term gains, there is really only one thing to focus on; high-quality companies. The above analysis looks great simply because a high-quality company was selected for the comparison.
[Some material omitted from here.]


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ody
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Thursday, October 25, 2012 - 04:07 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



In retreat!

During the last few days my portfolio (a word I don't like - "selected group of shares" is better,really) has certainly gone down in price. Some profit taking at some stage was always a likely event, but it is also the case that it's harder, just now, with markets struggling, for one's shares to stay ahead.

I was interested to read comments by John Abernethy, Chief investment of Clime Group (which I find fairly congenial, as will not be found surprising). He commented among other things:
---------------------------------
In my view this rally is not based on a general positive outlook for earnings growth. Indeed, there are very few large companies that are confident of achieving earnings growth of greater than 10% this financial year. Rather, this rally has more to do with asset allocation on a large scale following a slight uptick in confidence pursuant to the great debt workout in Europe.

Clearly, major international funds, including those domiciled in Australia, had been easing down their exposure to Australian equities for a few years. Now, following a sustained rally in Australian bond prices (reduction in yields), there is a clear need to seek out returns from other asset classes, and so Australian equities have come back into favour – even if there are very few real growth opportunities.
---------------------------------
While I would agree that international investors would be in particular the ones attracted to high yields unobtainable (virtually) elsewhere, I think that many mums and dads, and particularly retirees dependent on their super funds, are in much the same position of choice. As I think I have already indicated, I do not think the economic fundamentals are good for most companies, but the share market does enable one to select companies producing better yields than one can get elsewhere. As well, there are a number of stocks that do earn quite a bit of money - but although I do like to invest in a number of these, overall yield remains my primary concern, and even among smaller stocks I prefer those which return at least 4% fully franked. I would strongly stress, however, that what I am doing would not necessarily suit everyone: I do regard the market as containing some significant risks, but still think that even so a number of investors, at least, will continue to expose themselves to at least a number of SELECTED stocks.


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rdumas
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Thursday, October 25, 2012 - 06:44 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Hi Ody,

The chart below is the XJO daily chart showing the last 2 years of price action. After the significant decline between April and August 2011 the index the index had been range trading roughly between the 4000 and 4400 levels (green 100% level).

In October 2012 the index finally managed to break through and stay above that 4400 level and started reaching for new highs. It managed a high of 4581.8 which is fractionally above the 61.8% Fibonacci level of the April/August 2011 decline.

A false break and failure of the 61.8% Fib level of a major move is a common turning point and we are quite likely to see a move down to retest the old high fractionally above the 4400 level. Whether it breaks through is remains to be seen.

Naturally enough we could also just keep on climbing the wall of worry. It is statistically common to reach an interim top around the Full Moon date +/- 3 days so anything is possible.

There are certainly a mix of bulls and bears in the market place at present which will probably mean that we'll continue to range trade in the coming months but possibly at slightly higher levels.






The views expressed in this post are purely mine and may not necessarily line up with reality - Rudy

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ody
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Thank you very much, Rudy, for that comprehensive consideration of the possible prospects for the market, which makes excellent sense to me. When all is said and done a pattern of range trading, of some sort and of course with volatility here and there, does, I do agree, remain a very likely scenario. Certainly there have been a number of factors during recent sessions that suggest some loss of confidence compared with what we saw before, but the situation remains sufficiently complex for it to be hard to say quite what will happen. As you point out - and I think that is a very weighty factor - there are both bulls and bears in the market. We have been seeing this for quite some time: rotation in and out of sectors which may for a few days suggest a particular direction but which is then often suddenly followed by its opposite, e.g. from banks to resources and back again, etc; also from up to down, and up again. In many ways it is all in all a rather directionless market in the case of Australia, which seems to respond fairly acutely to events in Europe, for example, with a mixture of fear and hope. It does mean, I feel, that it would on the whole still be quite unwise to seek heavy exposure to the share market, but for reasons I have mentioned before I don't expect a big exit either.


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rdumas
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Friday, October 26, 2012 - 08:04 am:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Correction to previous post

I did mean to say that it is statistically common to get lows +/- 3 days around the Full Moon date not highs as stated in the previous post. The next Full Moon is on the 29th October.

Whilst there are some pretty extreme bullish and bearish views in cyberspace about our market, from a technical perspective I remain neutral and believe that money can be made by range trading in the short to medium term.







The views expressed in this post are purely mine and may not necessarily line up with reality - Rudy

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baysider
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Friday, October 26, 2012 - 09:53 am:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Hi Ody

The point you make about people the world over trying to find yield is a good one. You make the case that they have little choice, particularly in the USA and Europe where interest rates are very low. The other aspect of these investors that we also need to bare in mind is that they can not afford to lose their capital so this may make them extremely flighty and on edge if there is any sign that the trend may change. There are some signs particularly on the Nasdaq and I notice that both Amazon and Apple missed targets last night so that index is highly likely to go down further Friday night.

The other issue in Australia is that the highly sought after companies are very highly priced leaving only the higher risk business as tempting 'value'.

As both Rudy and you have suggested the outcome may well be more up and down for a time yet with no clear direction. I'm confused myself!


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ody
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Friday, October 26, 2012 - 04:49 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Baysider: direction of market

I've invested seriously in the share market (though not always equally active in it!) since 1983, and I shall admit to you that I have found no time as confusing as the last few years. They have been full of bizarre and seemingly illogical events. Who would have thought, for example, that the Americans would actually REWARD Bernanke for keeping interest rates at virtually zero and printing money at the rate of,currently, $40 billion a month for as long as he sees fit, and having already had 2 QEs before. From a commonsensical point of view it seems highly irresponsible management, and will no doubt be found to be such over time. But ... it has achieved one of his primary goals (for now), i.e. that the share market would go up, and even the housing market is at last responding. The trouble remains, of course,that FUNDAMENTALLY matters have not been improved (one could argue that he has made them worse): but if I had been in the US, I think I would nonetheless have participated in the rally. I do that from time to time especially when the strength of it seems very real, and particularly also when there is little "competition" for one's money - in the sense of offering investors much - outside the share market. That said, I do not LIKE to invest in markets of this nature.

I liked Rudy's statement about range trading in the short to medium term: a good outlook, I feel. I would not commit myself to holding shares for three years, say, for I think during that period a significant slide AT SOME POINT is surely likely. Or, to put it the other way round: how could one have a bull market lasting for three years from here with so much militating against it?? I can't see that happening. But ALL share market investment, I feel, should be in a way "tentative". One is weighing risks, and this should be ongoing, with a willingness to change one's mind. We don't really know, any of us, just what will happen when, precisely, and although some of the major moves are easy to pick, there are many times like the present when it is far harder to be prescient.


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ody
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Tuesday, November 06, 2012 - 09:02 am:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Some comments on a few high-yield stocks

When buying stocks chiefly for their yields my main worry is always that the share price may drop, thus - if that drop shows something is really amiss - making me fear that what I gain on the roundabout I lose on the swing (in the share price). That is why I was delighted with WBC's progress. I have for many years been a Kelly fan, and she certainly as far as I am concerned "came good" this time, much to my relief.

The other thing I wish to mention as a modification of my portfolio is that I bought back into TLS. I had feared the share price would hit its limit, but am now less convinced of that, as there have been several pieces of news which suggest the company is very genuinely improving, with quite a bit of scope for it actually to make more money.

Other stocks have stayed on as before. I accept that we see rotation, but not just in one direction, so that what is down one day may be up the next and vice versa. That is one of the things typical of a market that is range-trading. People differ in their views as to what will do well next, and that gets expressed in what happens to the market from day to day. I still feel very strongly that speculative stocks of any kind are OUT: this is not a time for high risk "on". Speculative stocks are as far as I am concerned those with very uncertain and unpredictable earnings, and can be of any kind: notably "unproven" mining stocks, but also "fallen angels" of which it is hoped that simply because the price has gone down it will no doubt soon improve. I strongly concentrate on known, proven earnings as well as a sound balance sheet. And on fundamentals within the economy which will support certain categories more than others.

I don't buy many stocks with low yields - in fact hardly any. Yield is my main concern. But I do have some with a yield lower than I like which I think will probably make up for that by good earnings. I look at debt as a central factor, plus past earnings, projected earnings, and what the company is doing. We are going through vast changes: to mention an obvious point, what can be put on-line as distinct from getting printed will be. What can be bought on-line instead of in a shop in most cases will be. Exploit what the new technology is now REALLY achieving as distinct from what it promised around 2000. The English industrial revolution showed in the early 19th c that those who only backed "ideas" came a cropper, but that companies which really took off and produced more cheaply and successfully than before were often not just winners for a short time, but for quite a while. It will be the same time today, provided they have enough of a "moat". I do not suggest that EACH stock should be carried, as it were, by the new technology: it is an important asset for a company to use well, but there are also other things that can be and should be done well. I always ask myself what the world truly needs and wants, and like companies that supply accordingly. I also look much at the T/A at times like these, but do accept temporary declines if they are limited and natural, particularly if the yield is otherwise high and/or the earnings good and preferably growing. The stock should, however, move within a tram-line pattern.

And I even then limit my exposure, for we live in dangerous times. Particularly as far as Europe is concerned, and to some extent the US. I am a European born and bred, and know how strongly Europeans want the Euro. It was a silly idea to create that, but they will spend any kind of money, in all probability, to preserve it. Greece MIGHT just prove the exception, but it would be a dangerous policy to go down that path, so I suspect Germany etc will once again pump money into it, at the end of the day, though insisting on austerity, which will only make things the harder for the Greeks, but without which it would permanently do all the wrong things, economically. In any case, the money paid by the wealthier, hard-working nations to the disastrous ones will not come back to the donors, as they will turn out to be. Europe is set for - comparatively speaking - long-term decline.


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ody
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Monday, November 26, 2012 - 10:15 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



FURTHER STOCKS BOUGHT

Actually I should first mention a SELL. I found the TGA (Thorn Group) result disappointing, and I could not persuade myself that it would necessarily be a one-off, so (despite it actually increasing its dividend) sold it on the assumption that I can get the same yield from another but better stock. I never stay with weakness in stocks if I feel that to be somehow inherent and fundamental. TGA made at least one basic mistake, and although e.g. Motley Fool thinks it still a BUY, I feel its appeal has greatly diminished. On to hopefully greener pastures, I decided.

I have in recent times added three stocks which are all in the area of property, and hence do not produce franked dividends, but each is due to make (let us hope they will!) more than 8% p.a. (total yield). They are Ardent Leisure Group (AAD) with which I did well long ago in a somewhat different format, AEU (Australian Education Trust) and CMW (Cromwell Property Group). They all have decent fundamentals as well as a potentially strong yield.

Further, like many other people who like smaller companies, I bought AP Eagers (APE; I owned this in the early years of this century), MTU (MT Telecommunications Group - a very popular stock, which I have owned before), and - as may surprise my readers - the Magellan Flagship Fund (MFF). The first two are sound very Australian stocks, with solidity and good yields, but MFF, though managed by an excellent Australian manager (MFG, itself a great stock) invests mostly abroad, and does it extremely well. This is a growth stock - any yield is negligible, so far. I felt attracted not only to the quality of the management, but also to the idea of having a LIC (which is what it is) giving me ready access, through purchase on the ASX, to some outstanding - well selected - stocks from outside Australia (which has a weakening economy), not least from the US, which, after all, does have some of the best big companies in the world, without question. And that country is helped by low labour costs, a lowish US dollar, state-of-the-art technology and inventiveness, and by its ability to operate on a massive scale. (Most of these qualities are lacking or less impressive in Australia.) Shale oil will also greatly help the US - and they are working on that intensively and ruthlessly. There is much wrong with the US, but I'd much rather buy some of the best companies there, on the whole, than in Europe, which I think is so beset with problems that even German companies will to an extent struggle. And on the whole I feel I know too little about Asian stocks (which MFF does not exclude): I used to invest in the BT Pacific Basin Fund in the good old days, when that made excellent money in Asia, but these days it seems harder, though I am interested in the prospect.

An advantage of Australia remains that here I can actually gauge the economy quite well, and assess at least a number of companies, with access to a good deal of information. And, perhaps above all, Australian companies, particularly if they pay franked dividends, can give a fully retired couple an excellent yield - exceptionally so, on a global basis. I add, moreover, that I personally feel that the best Australian managers are among the best I have come across, even though I have also often invested in other countries. I particularly like, in this country, those who run smaller companies. But there have been times when some of the big companies have also been very well run, like News Corp (no longer Australian), even NAB when still managed by Nobbly Clark and then Don Argus. Frank Cicutto ruined it, and it has never recovered anything like its former glory. CSL has also been superbly managed, and there are many others.

(Message edited by ody on November 26, 2012)


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ody
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Thursday, January 24, 2013 - 05:37 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



MARKET GOING WELL, BUT WILL IT CONTINUE THAT WAY?

I could not help but smile, even if complacently, when I read the following today:
----------
The market closed at its highest level since May 2011.

On the ASX 24, the March share price index futures contract was 28 points higher at 4,781, with 21,108 contracts traded.

RBS Morgans private client adviser Bill Bishop said many investors were now looking at high yield stocks such as the major banks and Telstra because of Australia's low interest rates.

"The low interest rates are driving some money out of bank deposits and into the stock market," he said.

"There's some offshore interest also."

The four major banks all made gains on Thursday.

Commonwealth Bank jumped 57 cents to $63.24, National Australia Bank surged 34 cents to $27.09, Westpac gained 35 cents to $27.10 and ANZ added six cents to $26.00.

Telstra was up 1.11 per cent, or five cents, to $4.56.
----------
The reason why I found this statement amusing is that I did what these investors are doing - but not just recently: I bought three of the big banks and Telstra on 3 January 2012, not 3 January 2013, leave alone 24 January 2013.

I also bought more stocks than these, in principle for their yield, but the rise in their prices was such that just before a major European meeting in September I decided to play it safe, and sold everything so as to make sure to lock in a very hefty profit. Once it became clear to me that the Europeans had decided to throw everything at saving the Euro as well as the Greek and other weak economies, and that that decision becalmed markets, I went back in on 2 October.

I should stress, as I have done in earlier messages, that I do NOT believe that Europe is financially sound in what it is doing, and for that matter that I have hesitations about approaches in the US and China as well (and to an extent here in Australia, where Labor has been quite unnecessarily wasteful). However, I do play the market for gain even when I don't necessarily agree with its assumptions, and I am glad to have gone back in on 2 October, and can report with satisfaction that once again the three major "quality" banks (ANZ, CBA and WBC; I refuse to buy NAB) and Telstra have gone up attractively, as well as paying sky-high dividends (to which I can add 43% which will be given to all people who, like myself, pay no tax). It has on the whole been very enjoyable to be back in the market.

But ... the Australian share market has gone up for more than a year, and I do rather worry about those rushing in now, a year or so after they should have done so. When I look for anything to buy now, I note that PE's (indicating the cost of what one buys) look out of kilter, increasingly, with predicted earnings, and there is no particular reason to believe that actual earnings will be better than predicted. In other words, there is now a fundamental discrepancy between PRICE (what you pay) and VALUE (what you get) - to use WB's well-known language. Many in the market are unconcerned about that. They see that bank deposits don't produce a yield at all as high as the banks' dividends do. And that is certainly true. But prices cannot be pushed up for ever without at some stage cracking, and I feel convinced that bank prices are now actually no longer cheap, and possibly too high. And alas, the same is true of many other stocks. Indeed, I have trouble, now, finding stocks that look to me "fair value" as distinct from cheap: most seem rather highly priced.

I am still going to "hang in", as among a majority of investors sentiment has only very recently been improving, and probably those moving in will push up prices yet further, in the short term. However, if they reach a point where I find those prices highly implausible and quite over-optimistic - a point indicated most likely by T/A and much talk about shares doing so miraculously well - I shall be a seller. To quote WB once again, I am fearful when others are greedy. I am prepared to live with minor "corrections" (as I also did last year) but not major ones, yield or no yield, as a great profit should in my view always be seized, and never be allowed to go to waste. Sure, bank deposits now pay usually not even 5%, but 4% up is much better than what could be 15 or 20% down. And, of course, if one exits at a high, one can always - especially when there is no tax to pay - go back in to buy the dip.

There is little doubt about current strength, and the likelihood of that still continuing for a while, perhaps, but I am certainly getting concerned about the market overdoing it, and I feel that much of the good, easy money has actually already been made by those who went in early last year or indeed before. I cannot quite see matters developing so positively from January 2013 to 2014 as they have done from January 2012 to January 2013, but I may be wrong, and shall proceed opportunistically. One needs to be pragmatic, in the share market, rather than a theorist, if one is to make money. I fondly remember the money I made in 2009 - not because economies were recovering or well managed, but simply because the market went up after a big fall. Today, I think people in the Australian market remember that 2011 ended badly for our market; feel in many cases that they have "missed out" during 2012; and are now moving into the market while prices are no longer to my mind low. Still, if they want to make me richer by pushing prices up, I shall happily go along for the ride, and jump off in due course.


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fibonacci
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Thursday, January 24, 2013 - 07:14 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Dilbert


John

You've got to
know when to hold 'em
know when to fold 'em.

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ody
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Saturday, January 26, 2013 - 01:56 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



WHY REDUCING INTEREST RATES FURTHER WOULD DO MORE HARM TO OUR ECONOMY THAN GOOD

The evidence seems strong that the reduction in interest rates has had some impact on the housing sector, and a very strong influence on the share market, as people have been shifting money from cash (including maturing deposits) into equity in a search for yield (and also some growth). So the RBA has achieved those results, though one wonders, in this country, whether they were the intended ones. The purpose of the injection was, surely, not to boost asset values, but to assist those sectors in the two-speed economy that were doing it tough and were clamouring to be stimulated. In those areas, the impact has been negligible or invisible. In other words, in the areas where it was MEANT to "work", the 3% has done little, while it has boosted prices in areas where the central bank (in this country) does not intend to speculate. Given all this, it logically should decide that (a) a further cut would run counter to its own desire to avoid an asset bubble while (b) the cuts have not provided stimulus in the areas of the economy where they were intended to do so. Ergo: the 3% should be put on hold, to wait for further developments. If those were to be in the same direction, as I suspect, then rates should be raised to keep rising prices for (mostly existing) houses and flats in check, and to make the share market grow less fast than it already has done, as in that market earnings are not keeping up with prices paid by hopeful investors. Money has to go into the right places, for the benefit of the country at large, and is actually not doing so. High prices for houses and equities will not do us good, as a nation: we need to stimulate manufacturing and exports, which are still suffering. Lower interest rates do not appear to impact much on the dollar either, so other ways will have to be found if the price of that is to be pushed lower, or to be counteracted. Probably it will not fall much for quite some time, and businesses will have to adapt. In most of Australian history, a high dollar (previously a high pound) used to common, a fact which those complaining unrealistically ignore. Lower interest rates by themselves certainly don't rescue the economy, and indeed to an extent harm it.


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ody
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Saturday, January 26, 2013 - 04:19 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



RISK ON, AT PRESENT


I have just been looking at Colin's latest post and see with interest that The Twiggs money flow looks quite promising, already, for a possible lift to 5000. That is, if nothing else interferes, and simply looking at the figures. However, quite a bit more money needs to come into the market to show us a repeat of a rise to 5000 such as we have seen in recent years (a long period during which 5000 has proved the maximum). Assuming that 4800 holds (and this currently looks plausible, despite high share prices), it is not at all unlikely that the money for 5000 WILL be forthcoming, as there is a huge mountain in cash in this country (and outside it), with the share market not yet trading on high volumes. It is hard to believe that there won't be a further shift, though it is more difficult to say how soon that will occur. If it happens VERY soon and in a great hurry, the market will be setting itself up for a correction, which in fact I personally think would already be logical right now. But with so much money not having the means for a good return, as cash is not capable of producing it right now, the flow to shares could well continue to be strong and quick, so 5000 may well be reached much sooner than most of the "experts" were predicting (to be truthful, they are very often wrong, as in 2011, when many thought we'd reach 5500). I do think that if we are going to 5000 within possibly weeks, the market will become more dangerous, with the risk of a correction increasing, and there would be sure to be some real contest between bears and bulls as to whether the market can really perform above 5000. Still, that, at any rate (nothing further yet) is what we are now looking at as a possibility.


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rdumas
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Saturday, January 26, 2013 - 07:34 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



It's always interesting to attempt to guess where the market is heading in the coming year. One way of doing this is to go back and compare how the current year has performed so far against a data base of previous years.

I have an Ipad application that has 127 years of data for the DJI. What the application does is compare the performance of a target year (in this case 2013) with the performance of all years in the data base. The following table gives the results for those comparisons. Now it is important to understand that the correlations relate to direction of trend during each week and not to the absolute pricing. Hence the methodology only suggests the direction of trend for the charts being compared and not the absolute changes in pricing. Non the less it at least gives us some idea of whether the year will be bullish or bearish.






As we can see from the table, the best correlations to 2013 so far occurred in 2011 (95.31%)and 1985 (94.09%).


The next chart plots those years against the current 2013 and also gives an average of those two years.





To simplify the comparison chart I will eliminate the two years and only leave a trace of the average of the two years (shown in red) against the current period for 2013 (shown in white).





We can see from the chart that there is a 96.64% correlation between the average (of 2011 and 1985) and the target year of 2013 as of this weeks price action.

Now of course there are no guarantees that this correlation will remain in tact throughout the rest of 2013 however if we must make comparisons then it is useful to at least use years that have had a similar trend to the current year.

If the correlation remains in tact then it flies in the face of the dooms dayers that predict the end of the world as we know it.


The views expressed in this post are purely mine and may not necessarily line up with reality - Rudy

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hailoh
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Sunday, January 27, 2013 - 10:03 am:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



U.S. based blogs posted since Davos ended are suggesting that some of the cash mountain that has been hoarded against debt concerns has already been loosened, a prerequisite for a spectacular reaction in equity markets.


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ody
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Sunday, January 27, 2013 - 12:09 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



COURSE OF SHARE MARKET (AUSTRALA)

I think it is certainly true that it is increasingly likely that this year will not show us a "doomsday" result. I agree with Rudy that precedents of years showing similar charts would not suggest that, and I would even go further as regards sentiment as I remember it being in 1985. To my mind the potential is actually better this time, as until recently the Australian market was very sombre - more so than most other share markets - and we now seem to be seeing a turnaround in sentiment, whether justified or not, ultimately based on what has been happening internationally: not just on share markets, but in terms of things slowly starting up again in a number of fields and interest rates universally low, with those in Australia almost FORCING people to buy stocks for cash-flow.

People are still wary, but the almost universal sense appears to be that "the worst is behind us", and "we shall survive this crisis". As all sorts of manipulation have been practised to bury - or at least make invisible - the huge debt problems, there is something like a silent pact that we go on living and will re-invest again. Such changes in mood - and in Australia it is occurring in a striking way - often unleash enormous enthusiasm, corresponding to people's previous fears. I don't recall 1985 as showing quite so strong a sense of relief as we seem to be seeing in Australia right now, not such a huge appetite for yields (particularly, today, franked yields as introduced by Paul Keating). And as for 2011: that started with a degree of optimism (idiotically incompetent predictions from the financial industry), but it ended disappointingly (compared to what the predictions had claimed). I think the mood this year is intrinsically different, notably because there has been almost hypochondriac fear until very recently. I was looked at askance when I invested substantial money in major banks and Telstra on 3 January 2012: now, to do so is becoming commonplace. But there is surely further to go: as Hailoh says, the mountains of cash are now either maturing or freed up to go into the share market (internationally), so if anything I fear we may see a rush. Many people (like myself, and others more so than myself) have already seen a very good rise, but the majority of would-be investors is still not back in the market.

My point about caution in my previous posts is that investors should beware between what looks like a probable disconnect between prices paid for shares and what companies are earning. That disconnect is in many cases very real at this point, and in many cases it is unlikely that earnings will suddenly go up. So, in one's choice of stocks, and also in one's overall investment strategy, such fundamental facts should, I feel, be borne in mind. However, if a bull really rages - and I think it is already doing so right now even though many investors are still on the sidelines - such fundamental considerations tend to be forgotten, and we might well see some very steep rises (possibly after a correction which could actually occur fairly soon "to clear the air"). In fact, I am inclined to wait for a dip before possibly buying more, as meanwhile I have quite substantial exposure anyway, and have been frankly almost startled by the rate at which my stocks are going up.


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rdumas
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Tuesday, January 29, 2013 - 01:20 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



XJO Reaching Key Resistance Zone


The XJO is rapidly reaching resistance levels that have been a problem for this index during the GFC. I would expect the current rally to stall at these levels even if only on an interim basis.




The views expressed in this post are purely mine and may not necessarily line up with reality - Rudy

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ody
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Tuesday, January 29, 2013 - 04:35 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Rudy: market about to stall?

I agree entirely, Rudy, as it has again and again proved impossible in comparatively recent times for the market to get - or at least stay - beyond 5000. It has had a good run, and I have certainly seen some profit-taking occurring here and there, although the sum total of my own paper profit is currently rather worryingly high (and that is on shares bought on 2 October or after!).

Nevertheless, at this juncture the market, or at least the segment of would-be investors taking part while most are still on the sidelines, is truly storming upwards. I have been surprised, not by the general upward trend, but by the ferocity of it, and the way earnings are in many case quite obviously disregarded in the prices that people pay - or else they must feel that the companies will earn considerably more than predicted. Now it is true that the analysts have been too modest in their estimated SHARE PRICES, but that does not mean that they are as "wrong" in their estimated EARNINGS. But apart from that, even, and simply looking at the increased prices per se, and the rising PE levels, I do feel a sense of discomfort, which may be itself "wrong" for the time being, but is probably also a healthy warning sign that a correction may be not far off.

Just now the market doesn't actually seem in the mood for it yet, and optimism appears to be the "right look" to adopt, with talk about people missing out, etc. Even more conservative investors like myself do not seem to feel quite definite about selling yet. The main generally mentioned argument for buying continues to be that only the share market - even now - offers a yield that cannot be matched elsewhere, and that remains true, though for many shares the force of that reasoning is diminishing. But it is also, and in any case, an argument of limited value, for if prices continue to go up yields relative to purchase prices become less attractive. And one must wonder, as well, for how long the yields that can at present still be paid out can be sustained next time the companies are to pay. But one's main fear, all in all, is that there will be a growing perception that the market is getting ahead of itself, and if you have a significant profit, the question becomes when that should be locked in. Does one do it now? Does one expect the market still to go up at least a bit? Could it this time actually "crack" 5000? Or is it wise to sell and seize the profit in the hope that one can later buy in again at a lower price? These, I think, are the questions that experienced investors will be asking themselves right now, even though the upward pressure at the moment is still strong.

The chances of a drop back from 5000 must be considerable, I would have thought, although I do not mean that the drop itself will necessarily be big unless there is some pernicious trigger to provoke it other than a struggle to get beyond 5000. There obviously is considerable - and it appears growing - appetite for people to get back into the market. But as I said before, I find myself thinking of the phrase "we are fearful when others are greedy" (whether those are the exact words or not).

At the same time, one can also argue that this time is "different" in that the previous climbs to 5000 took place under dissimilar circumstances. For example, it IS true that it is now not very easy to make money in deposits, bonds, or residential real estate: and with all those classes less than attractive, the constellation for the share market does remain strong, at least in terms of superficial appeal. Many investors (or should that be just "buyers"?) hardly look at technical or fundamental analysis, and probably see the share market as merely attractive.


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rdumas
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Tuesday, January 29, 2013 - 05:01 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Hi Ody,

I can remember in late 2007 we were starting to get worried about the market getting over priced and that was before we really understood just how vulnerable our financial system really was. We had our sell trigger fingers poised and when the market had dropped around 2% by December we decided to pull the pin. Something that we were very grateful for as the coming months realised the fears we had been expressing for so long.

Now, having been given first hand evidence of just how serious our problems were in 2008 investors appear to have forgotten that whilst the subprime market issues may have diminished sovereign debt issues have only worsened with no government appearing to have the answer as to how eliminate this huge problem. The continual practice of money printing and the lack of other avenues of generating cash flows seems to have lulled investors into a false sense of security.

Now whilst I doubt that the doomsayers are right purely from a technical perspective, I really can't from a fundamental perspective see how the insipid global growth can possibly support the continuing market price increases.


The views expressed in this post are purely mine and may not necessarily line up with reality - Rudy

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ody
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Tuesday, January 29, 2013 - 05:54 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Still discussing/worrying about the market ...

Good comments, Rudy.

Yes, in some respects I do have a feeling somewhat similar to what I experienced in December 2007, but it is not identical, as I do not, at this juncture anyway, feel as certain that the market is about to fall - and fall heavily - as I did then. I think it was on 14 December 2007 that you and I both finally exited, at 2% below the top (which had occurred in November). A good enough result, for sure, which many others subsequently felt was a wondrous one and ought to have achieved themselves.

The message that a truly deep fall was imminent was so clear to us that we really had no doubt at all about what to do.

Today I am not yet so certain, and I suppose that (a) I have a problem with timing, and (b) I do not think that the situation, while there is a similarity, is the same. Ultimately, one could well argue that it is worse, but in the short term it seems to me less ominous, in that the manipulators of sovereign debt issues etc, such as central banks and politicians, seem to have - for the time being - done a thorough enough job of misleading people for it to be unlikely that many of them are standing ready, right now, to leave the market. Although I do see the fundamental situation as you do, I think that most people who determine the direction of share markets do not see it our way at all, and continue to believe that, globally, economic matters are actually improving, looking only at the superficial positives and ignoring the major negatives or believing that they have either gone away or are deeply enough buried.

However, I do feel concern, as you do, and along the same lines. We are not alone, of course, though I suspect that we are, as in December 2007, in the minority. Here is the beginning of today's Australian issue of *The Daily Reckoning*, which appears to be on a similar wavelength:
---------------
From Greg Canavan in St Kilda:

--While you were off enjoying the Australia Day holiday, which was actually on Saturday, markets around the world mostly went up...again. This is all pretty standard in the era of the omnipotent central banker.

--The belief that these guys have engineered an economic recovery and can ward off recession is so deeply ingrained it's bound to cause trouble. Does it cause trouble now, or does the trouble arise six months down the track and after another 20% surge in the equity market?

--That's the question nobody seems too concerned about, which is why we're concerned. It's like 2007 all over again and everyone's dancing while the music is playing. Only this time we have a far more sinister and tricky bubble...in government debt. It's a bubble that nobody recognises. Or more accurately, nobody wants to recognise.

--After all, government debt is super safe, right? It's the basis for most of the world's borrowing - or at least most of the world's liquidity, in the form of repurchase agreements, or repos.

--The repo market is huge, and those holding highly rated sovereign debt can turn it into cash by entering into a 'repurchase agreement' and posting the debt as collateral. This is a favourite pastime of the hedge funds. They take the cash and plough it into whatever investment theme is working at the time.

--Which is fine while yields are low. But who knows what happens to the whole leveraged system once inflation seeps in and yields start to pick up. The current yield on the US 10-year Treasury is 1.96%. That's the highest it's been since April last year.

--But who cares...the music is still playing right?

--And right now it's playing very loudly in China. It's all thanks to China's credit boom Mark II. China had a crack at economic rebalancing last year, but they didn't like the results. Now, China's leaders have gone soft on efforts to normalise economic growth. Instead, they're back promoting the 'old' infrastructure led growth model.

--It's a theme we've been on about for a while, and it's a theme we'll continue to follow as it's a crucial one for Aussie investors. China's economy is horribly unbalanced, and no one wants to make the tough decisions to carry out the painful rebalancing process. Last year's trial run had no follow through. While state-owned banks withdrew from the property market, the non-bank or 'shadow-banking' sector emerged to supply credit to the property and infrastructure market.

[ETC.]


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ken
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Tuesday, January 29, 2013 - 07:17 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Hi Rudy, Ody, members,

I have been concerned for the last month or so about the market. In 2007 from about June my trading systems were not working; there were breakouts that I bought which were normally successful and they all fell back, and the same is happening now.

I note that the RSI(14) of XAO is 84.5 today. It hasn't been this high since 1993. We just had a blowout day of over 1% on the market, and many small stocks are falling.

The emerging companies index XEC (stocks between 350th and 650th largest on the market) fell 0.6% while the large stocks took off.

Looks like a potential market top to me, combined with a Elliott Wave pattern suggesting the same.

I took some cream off the big gaining stocks in my super fund today (MTU, AHE, CDA), and also scaled back to only one of my trading systems, selling stocks from the other two.

I am interested in anyone's advice on something I have been straining over - the stocks in my super fund have been mostly bought 6-12 months ago for good dividend levels but I have made more in price gain than the potential dividends are worth even with franking. Being a trader normally, I still have training wheels on regarding investing longer term.

With these stocks they often fall by more than the dividend plus franking after going ex-dividend.
Should I sell now or hold if I believe that the market is topping? And If I sell some but not all, should I sell the losers or the winners?


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ody
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Tuesday, January 29, 2013 - 11:28 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Ken: market - selling or holding?

A very interesting post, Ken. I felt personally drawn to it for more than one reason. One is that after selling off a few stocks as early as February in 2007 because of the then fall in Chinese stocks, which I saw as a possible warning sign, I decided - you may even remember this - to sell ALL stocks around the middle of the year (I cannot remember the exact month right now - possibly late June, but it may have been July). The reason was that I felt that the market would go down by 15% and that that might be the beginning of the end. It did go down by exactly 15%, but that was *not* yet the beginning of the end!

Interestingly, my disquiet in mid-2007 coincided pretty much with the timing of your systems - though at the time I did not know that (I do now!). HOWEVER ... remember that your systems correctly predicted a CORRECTION at the time, but probably NOT THE RALLY THAT FOLLOWED. I think this is a very important point to bear in mind. June 2007 was not, in the event, actually a moment of crisis, and after the 15% correction the market still performed very strongly in the second half of the year, which is why (I think in August) I put one third of the amount I had in cash for the market back into it (i.e. one third of the 100% I got when I sold all shares). I eventually sold out completely, with Rudy, and some others following us, on 14 December, by which time the market was 2% down from the November top (so I overstayed), but well before the collapse.

In 2007 I went back into the market(in August?)- simply on the basis of the strong rally. Can you check whether your systems actually predicted that rally, or at any rate withheld warnings so that one could know that it was OK to go back in??

As to the problem of money in profit versus staying in the market for yield: I am struggling with exactly that myself. When I sold all shares I held in 2012 on 3 September of 2012, that was partly because of the imminent negotiations about the Greek situation (I wanted to be in cash before going further), but also because I too found - then - that my profit was well ahead of the total amount of yield. I went back in on 2 October, and I am astounded at how much I have made since, on paper, with a profit very far in excess of my yield, though that is high indeed, particularly if franking is included.

I am retrospectively not at all distressed about selling on 3 September 2012, because I did lock in the profit I had then made. (I hope I remember the dates correctly - but I cannot be far wrong with them.) I feel that if you and I now saw the prices for our shares slide deeply - particularly if that happened really badly and for a long time - we would not be happy with just the yield, looking back at the profit we could have made! Just what we would feel would probably depend on the size and duration of the fall. I feel that a temporary fall of as much as 15% would not be a big deal if a few months later we'd actually recover that amount and gained some more - that's what happens often in bull markets, and it may be that we are actually, at long last, struggling towards a bull market. If we were to see something far more serious we'd greatly regret not selling now. However, I very much doubt that something like the 2008 fall is imminent.

Still, the size of the profit (both of us are concerned about that) is one reason why I too feel tempted to sell ... but the problem of yield does, of course, remain. Where does one get it if not in the share market? Probably the answer would have to be: we sell to lock in our profits, and re-invest at a lower level. And if I felt certain that there is no immediate further gain to be had and that we are heading for a 15% fall I'd probably sell. To be truthful, that is exactly one scenario I am contemplating. But my sense of this happening is not overwhelmingly strong yet.

Personally I do not, if the market displeases me or if I want to lock in a big profit, differentiate between one stock and another: I just get out, and get back in when I feel good about doing so. In your case I might act differently, however, as I think we probably don't select our stocks quite on the same basis.

At the moment I am still inclined to stay put a bit longer, and almost all my stocks went up today. But I must confess that I shall be watching the market like a hawk, and will not be averse to selling if I think that we could have a correction of 15% or even more. At the moment I don't feel that very strongly, though the fact that your systems do indicate - as I see it - a correction does strike me as important, as a kind of confirmation of my own concern. I am not yet alarmed, but very, very alert about the situation!

A difficulty I have with my own stocks is that they are actually on the whole still very clearly going up. Today, for example, only five out of the 24 I have went down, and those that went up (two did not move) often went up quite strongly. And I see something like this virtually every day, though with some rotation not untypical. This situation does not yet indicate an immediate fall to me. I also think that - systems or no systems - the stocks with strong dividends will probably not be abandoned very readily by those owning them. However, if you have a number of e.g. volatile mining stocks and want to select stocks to quit: I'd sell all those that have no dividends or only negligible ones as they would be at risk in any sharp correction, leave alone a more substantial fall. (But if 2007 is any guide, then I think we must remember that what your systems indicated in June was a correction, which turned out to be 15%, not yet the big fall at the end of the year.)

Personally I ONLY hold stocks that I have some intrinsic, fundamental belief in - I have no stocks for trading, and it may be that that is one reason why I am not yet feeling panic about selling. Another way of putting it is that I am "concerned", not yet "worried". But if I had stocks which did not meet my fundamental criteria I would certainly sell those. As you know, I believe in cutting losses, but letting my profits run. As I have no stocks which have disappointed me, at present, and as they are still performing for me, I think I will need a bit more persuasion to quit - in the form of market behaviour or other signs that it is better to exit. At the moment I still feel considerable doubt; I don't have a really clear sense yet. I think I shall probably know, either way, fairly soon. It will perhaps depend on how the attempt to move through 5000 will go, if that attempt is indeed made. It is just possible that this time it will succeed, though not without a battle, I imagine.

Not a very satisfactory essay, I know - but it reflects strongly felt uncertainties. I just hope that some of this is of some use.


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ody
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Wednesday, January 30, 2013 - 01:32 am:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Size of a possible fall

Actually looking at the charts and trying to estimate what the size of any fall would be from 4889 on the XJO I would find even a fall of as much as 15% quite unlikely unless some major trigger were to be provided, and even then I doubt that the market would for long stay that low. I think a percentage of more modest proportions would be far more probable: in round figures, 4400 would to many seem quite low and I feel sure would bring in a significant number of buyers who are all set to go in but waiting for a break, and at around 4500 I would guess they would also see the going as very good. While 4400 is a fairly arbitrary figure (not really related to any particular point of resistance, I believe), that would be as much as 10%.

Of course, any major catalyst internationally, such as a "Grexit" or some truly significant unexpected losses or signs of significant decline in the US or China, might trigger off a fairly drastic fall which could easily exceed 10%.

I must admit that under current conditions I don't find the market hugely attractive as a buy at Tuesday's close of 4889, personally, and one of my problems is that I am not sure how many buyers would be really happy to see the market go beyond 5000 at this comparatively early point. So we may well be at or near a top, with a correction not at all unlikely - but perhaps not a very dramatic one. I have a fairly large deposit maturing on 3 February, and if the market did by any chance go down to 4400 I would almost certainly become a decisive buyer, with 4500 also likely to offer attractive enough opportunities.

I suppose that is because I could certainly see the market repeatedly go to 5000! What it really needs to do to become "convincing", as a place for capital gains, is to break through 5000, and clearly so. A difficulty would then become, however, that if earnings don't go up, it would at that level become clearly overvalued. In fact, many prices seem to me stretched already, unless earnings improve or evidence emerges of strikingly better prospects for companies than they appear to have at present.


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rdumas
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Wednesday, January 30, 2013 - 07:21 am:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Hi Ody,

To me the most obvious levels to fall to are either the previous resistance (now support) at around 4600 or that 76.4% level marked on the chart near the 4700 level.





The views expressed in this post are purely mine and may not necessarily line up with reality - Rudy

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ody
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Wednesday, January 30, 2013 - 11:56 am:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Levels of possible fall

Thanks, Rudy. That is very helpful, and makes obvious sense: the market does look at previous critical levels in what it does. Obviously we could fall below these levels, but 4600, leave alone 4700 (to stick with round numbers), would not to my mind be a significant drop to worry about, and as someone not involved in short-term trading I'd accept such a fall as a perfectly normal corrective move. I think we may very well see it, and for anyone buying it would be a better level than what we have today, leave alone a higher level. I am not suggesting that at 4600 stocks in general would be cheap, but at least they would be somewhat less expensive, and if that is where the market paused I think there would certainly be buyers quite happy to drive it up again, under present circumstances. If one ignores the big unpaid debt mountains, as share markets are only too apt to do, then there are certainly factors to lure buyers. The main one is that "there is nowhere else - in any definite sense - where you can get so good a yield", and the other one is a more general picture of some things improving in particularly the US, but also China, and in some respects even Europe. All this has resulted in a more positive attitude among (would-be) share market investors.

I am simply judging likely market psychology as I see it - not suggesting that all is well, by any means. For example, despite Europe's (or rather the Eurozone's) strong theoretical determination to throw unlimited money at e.g. Greece, there is actually quite a bit of wrangling going on as to who will pay what, and the Greek economy is in terrible shape, with no genuine ability to repay its debts, so that a default remains a very real possibility. In practice, there will be a limit to just how big a sacrifice other countries will be prepared to make. Should Greece indeed default that would undoubtedly throw share markets into severe disarray. However, although costly, the disaster would not ultimately actually be that important, as the size of the Greek economy is piffling. If a default did occur and did send markets down (as would certainly happen), I think we'd get a very good buying opportunity. But I am theorising, and in any case there is little point in getting only 4+% on one's money in the meantime. Even with the prospect of a correction the general outlook for the Aussie market to my mind continues to look good for the short-medium term - ultimately because of what people are likely to do, whether or not one thinks they are being sensible.

I think I shall sit tight, without at this stage adding any more purchases, and accept a correction if and when it comes. As I said before, I have a significant deposit maturing in early February, and I shall not hasten to invest that unless I see very good opportunities. I'll stay in cash with that amount at the ready, to spend it if we do get a correction, or if I see attractive possibilities outside the share market. I must admit that I do not find it easy, these days, to identify REALLY attractive purchases. I am very pleased at the thought that I still have a large sum in high-yielding deposits not maturing in the very short term.


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ody
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Thursday, January 31, 2013 - 10:46 am:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



MARKET PROBABLY CORRECTING

I think that the signs that this is happening are becoming more definite. There appears to be a growing sense that the market has had a good run and is due for profit-taking and correcting. The underlying mood still remains positive, however, to the extent that few seem to be expecting anything worse than a correction, with only the extent of it being in some doubt. The general view that in the short to medium term the Australian market will overall probably go up (even if moderately) rather than down remains intact.

There is currently more rotation in the buying and selling - always a sign of things on the share market getting harder. People lock in profits, which often means that the share price for the chosen stock goes down, but other stocks get bought in the expectation that they will still go up. As time goes on - and this appears to be happening - more stocks get sold down, and fewer are pressured upwards through buying - all of which points in the direction of an overall correction. In essence it is a matter of - for the moment - demand weakening versus supply.

Any negative sign, such as overnight evidence that the US economy appears to be stalling somewhat, gets seized upon as an excuse for doing what several investors or trading want to do in any case, i.e. sell.

I still do not feel that we are likely to go down much further, in this correction, than 4700 or 4600, though I would not be truly surprised if we went yet lower - but not, I think, as far as the 15% or so which I first raised as a true possibility. The fact remains that e.g. banks and Telstra will continue to be bought on any real weakening, and as they are an important part of the index that provides a cushion.

For myself I remain strongly interested in buying more (though still within limits!). I have decided to sit through the correction, as I believe I have no weak companies, and that all of them in principle not only will perform well enough as companies, but would get re-rated upwards again after a moderate fall. Meanwhile I will not lose my entitlement to dividends.

The minimum expectation I have for the index is that it will do what I read in one of the free newsletters, i.e. that it will head (probably after the correction now so widely believed in) for 4986 points in the short to medium term, which is the 50% retracement of the 2007 high and the GFC low of 2009. That does not seem to me an excessive level for the market to be at, provided that it does correct before it gets there. If it does get to 4986 or indeed struggles through that, then I think a correction would probably still follow. But the likely scenario now seems that we'll correct before it does. That would be better, as then the jump up will be undertaken with more conviction.

I have no doubt that there are still many on the sidelines very eager to buy the major banks and Telstra, and indeed other comparatively stable stocks (such as Wesfarmers and Woolworths), if prices were to go down attractively.

There are good prospects for stocks in several other sectors as well, particularly after a correction. BUT ONE HAS TO DO ONE'S HOMEWORK AND SELECT - NOT JUST SECTORS, BUT SPECIFIC COMPANIES. The stocks that would worry people the most are on the whole mining stocks, although those serving mining, construction etc with great track records, such as Monadelphous (which also has a good yield) will probably continue to be wanted.

Smaller stocks with truly good earnings and clean balance sheets will be popular, as they often offer both decent dividends and better growth prospects than big companies. Among the big companies the dividend payers will however be seen as essential possessions as they usually pay substantial dividends and are often thought of (rightly or wrongly) as safer than smaller companies.

Risky plays should on the whole be avoided at this stage, except as a very minor activity. People will look for solidity, and only buy e.g. high PE stocks with very obvious great earnings potential, usually through advantages in on-line activity, such as REA and SEK. For the moment these will however probably rather go down, in a correction, than up.

Personally I intend to sit on the stocks I have and see them go down for the time being. At the same time I am holding my (considerable) amount of powder dry until prices become more attractive, i.e. correct. I probably would not be a substantial buyer at these levels, even if we get no correction to speak of and continued to go upwards, as I cannot find many stocks that I find less that fully priced or indeed overpriced.

As well, I would not even invest 50% of our capital in the share market in any case - my figure will stay well below that, in all probability. The situation is still far removed, in my view, from that of the 2003-7 bull market, when I moved most of our capital into shares, with wonderful success. So good a period may well not soon re-emerge. Of course then, too, people were in share markets although debt mountains were getting much larger than before. But today, people are more aware of debt problems, and in any case those problems will continue to be far more actively worrying than before the 2008 collapse.


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baysider
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Thursday, January 31, 2013 - 05:37 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Hi Ody, Rudy and others

Great to see the ODB thread back in full swing, I've certainly missed your informed commentary over the last few months - great to hear your shares are doing so well Ody.

I've been very much toiling with the a similar issue myself as the market rises seemingly inexorably towards 5000. After the stellar run of the last 6 months in particular it would seem highly likely - if not a certainty that a correction is in order if only out of profit taking. For me the hard bit is not the act of selling, I've thought to myself for months, if not years that if the market were to get back to 5000 I'd be happy to take profits there - it how to get back in.

Like you Ody I'd love to see it retrace back to 4500 as a much better place to re-invest BUT what if as Rudy suggests, and also seems quite likely that it only drops back 5% or so to say 4700 and then quickly rises back to have another go at 5000. It's unlikely any great value will have shown itself by 4700 so I may not have bought anything (hoping for lower prices) only to miss out altogether when the index races back up as it may do as everyone who's been in cash the last few years tries to jump onboard shares.

Inside my Super for the last few years I've had a decent lump sum in a 'lazy', cheap, Index tracker on the ASX 200 and it's this is what I'm thinking of selling so I can re-invest in individual shares that I think will do well. Like most lately I've had some good ones, COH, SEK, CSZ and ALQ being my best performers. My worry is that the tide seems to turning for shares in terms of momentum and positive vibes and I may mis-time any buying and end up missing out altogether and holding a large sum of cash hoping for a very large pullback.

Rudy, do you have a view for later in the year? I know some think it will be fine until April and that may be it for the year in terms of gains - just when everyone thinks it's safe to come back into the water!

Good to hear from you all.

Cheers


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rdumas
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Thursday, January 31, 2013 - 06:39 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Hi Baysider,

Based on my cycles work I do have a decline coming soon which should bottom out by the end of February at the latest.

I can only see any decline as a retracement in an ongoing up trend.


The views expressed in this post are purely mine and may not necessarily line up with reality - Rudy

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rdumas
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Friday, February 01, 2013 - 04:16 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Some World Indices Reaching Critical Levels

James Glover from Finance News network made the observation recently that a number of world indices are reaching critical overhead resistance levels. The US SPX and German DAX indices are good examples. Following are 20 year monthly charts of those indices. Note the levels that presented strong resistance in the past.

Gann's observation is that often an index or stock when reaching a strong resistance for a third time will once again falter at that level. He also observed that if it reaches that level for a forth time, the chances are very high that that resistance level will be breached.

Using this knowledge we can be very cautious when reaching key overhead resistance for a third time but be quite bullish when approaching for a forth time.







In my post 5124 on the 29th January I made the observation that our XJO was also reaching some critical overhead resistance at 4962 ~5025.

Some of you may have heard of Hurst Channels. I have spoken of these in the distant past. Basically Hurst observed that the market moved in cycles. A large number of cycles are always in play in something as complex as a share market however it is possible to extract the primary cycles in play at any time. Two of these cycles are shown in the following one year chart of the XJO. There is a lower frequency red channel and a higher frequency blue channel that traces the price action of the index. Usually the index will remain within these channels around 99% of the time but at times will touch or exceed these boundaries. Unfortunately in attempting to meet the sizing requirements for the file, the resolution is not the best however hopefully it is clear enough to get the gist of things.

Currently the red channel boundary is around the 5009 level which indicates that our index could top out somewhere around that level. This is in the ball park of the 5025 mentioned previously.

The lower panel in the chart gives a couple of indications. One is the sinusoidal wave pattern shown in green which reflects the current predominate cycle and the other trace shown in red is a momentum indicator which has the characteristic of calling tops and bottoms with relative certainty when it reaches the value of 1. This momentum indicator is better than most in that it doesn't tend to saturate like many momentum indicators. In the case of those indicators the price action can reach overbought (or oversold) conditions and then saturates as the price continues to head higher.

This indicator seldom saturates. When it reaches the value of 1, you can be pretty certain that a change in trend is about to occur. One caution is that a top (or bottom) can be formed prior to reaching the value 1.







The views expressed in this post are purely mine and may not necessarily line up with reality - Rudy

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baysider
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Saturday, February 02, 2013 - 09:58 am:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Great post and charts Rudy, thanks


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rdumas
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Saturday, February 02, 2013 - 12:32 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Seasonality

Hi Folks,

There may be some readers who will be interested in the following seasonality tables for the SPX and XJO. Basically they provide the monthly profit/loss figures expressed as percentages for both indices over a number of years.

Note that aside from the 1997 figure for the SPX, the last two January figures have been the best for a number of years. People can make up their own minds about what a good start in January can mean for the rest of the year.








The views expressed in this post are purely mine and may not necessarily line up with reality - Rudy

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rdumas
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Saturday, February 02, 2013 - 12:54 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Star Performer

Continuing on the subject of seasonality, one really outstanding performer was the stock Magellan Fin Group (MFG).

Check it's performance over a number of years and in particular the last 9 months. This is one stock that Ody mentioned some time ago in his list of admired stocks.






The views expressed in this post are purely mine and may not necessarily line up with reality - Rudy

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ody
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Saturday, February 02, 2013 - 04:52 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Seasonality and MFG; and some reflections on managed funds investing overseas

Interesting posts, Rudy!

The figures show clearly - and to my mind perhaps most significantly - how performance varies not just for individual years, but also for individual months, and that, for example, it is perfectly normal to have corrections downwards in what is overall a good year, or rallies in what is overall a bad one. I think that we often allow ourselves too much, as humans, to be swayed by what happens short term. That said, I would tentatively suggest that a good start to the year MAY suggest something positive for the rest of that year, though usually probably not on its own, but as just one factor that one could take into account in for example a year like the present one. For example, many would feel that they cannot "safely" invest in shares unless they have seen some real evidence - in the share market's own performance - that the market is strengthening and has built up a "platform" over some time in doing so. I would suggest that for them 2012 may be seen as providing such a platform and that 2013 shows promising momentum. The momentum is due for a correction, but both the year 2012 and the beginning of this year may suggest that the market is less weak than it was. In fundamental terms we would probably like to see a stronger economic situation underwriting the move up, but the classic answer to that is that the market looks ahead, and that even if earnings are not going to be strong for this half of the year, they may well improve during the second half, or certainly - so many believe - during 2014. In any case, we would probably need to see really bad earnings and predictions from companies to stifle the market. I think that there is a widespread view that a correction will occur, but that the overall direction of the market is likely to be up rather than down, although we might dispute as to just how far up it can go, even after the presumed correction.

I should like to make some comments on MFG (Magellan) and matters related to MFG's field of activity. It is indeed a very good example of a stock that has truly soared, showing very strong upward momentum over the last year, and indeed at the beginning of this year. But the rise, over 12 months, has now been 359% (I use round figures), and as it is on a PE of about 80 (depending at just when and where you look), it does need very strong earnings figures, of course, to justify its upward (almost vertical!)rise . So far, it has had those earnings in recent times, and the predicted earnings per share growth remains also very strong for both 2013 and 2014. So the rise is not surprising, although perhaps the extent of it is.

Even so, I do find myself thinking that during a correction this might well be one of the stocks to be sold down somewhat - not for fundamental reasons perhaps, but simply because many shareholders will by now have a large profit to think about, and they may want to lock some (or all) of that in. I don't think that prospect is worrying: indeed, it would probably be a good thing if the price got reduced temporarily, as new buyers might then feel that they have a good opportunity for purchasing. If the price does not correct and just goes on and on the way it has done, that would increasingly make me worried about the fall - or at best plateauing, that must surely at some point or other occur.

For those who don't know the company, I'd like to say something about the reasons for its success. The company runs three global funds, and it has done so in exemplary fashion. Obviously, the share price of any such manager will depend on the amount of money it is asked to manage, and that has gone up hugely as it is one of the few in this country to concentrate - and successfully - on investment overseas. What one sees is that an improvement in the outlook on, and indeed performance of, international shares makes people look for a manager (few Australians invest in international shares directly), and that if that manager is highly capable an awful lot of money is mandated to that manager. The combination of a turn in markets and a great manager means huge commercial success. I see no inherent, fundamental reason why the manager should not still receive more mandates, and score further success in investment as well. In this case, I have hardly any doubt about the fundamental prospects, but some concern about just when one should buy in, feeling that a correction would provide perhaps a better opportunity than the current moment.

At this point I should also add a further consideration which should not make one pause, but which some may want to take into account if they do not want to limit themselves to just one company that runs a successful business by investing overseas.

The "classic" investment manager in this area, when it comes to choices on the share market, is of course Platinum Asset Management (PTM). That stock has been much mentioned during 2012 as a potential buy - not just because of the manager's investment expertise, but also because of the yield. And, indeed, the stock has gone up, but by only 50%, during the last 12 months. The reason why it has lagged MFG, I believe, is that overall its investment performance in somewhat recent times has disappointed relative to MFG's. However, I feel that this view is not only exaggerated, but being overtaken by the facts. The most recent figures suggest that Platinum's investment performance is now actually improving again, and notably in its Platinum International Brands Fund. That has always been one of its strong funds, and is by the way well worth investing in, but it has done particularly well in the quite recent past, and looks very robust. There are the following good reasons for having faith in this fund: (1) the manager has great experience and expertise in this area; (2)the manager has little competition in this specialised field; (3) the whole idea of focusing on international brands is excellent, and particularly now that Asia is becoming wealthier. Asians in general - and this is an objective fact - greatly love buying established, prestigious brands, and do so with enthusiasm. The prospect for this Platinum fund would seem to be excellent, and it appears also to be doing well in Europe, and in its flagship International Fund. The Brands Fund, in particular, is being recommended time and again when I look for the views of others.

Australians are to my mind in general right to specialise in their own market, particularly at a time like this when yield is so very important. It is also the case, however, that there are many weaknesses in the Australian economy, and there is an obvious case for investing in overseas shares as well as our own. The way to do this, if we dare not do it ourselves, is through managers with proven track records. This would mean that one should think of both MFG funds and those run by Platinum. So I feel that the prospects for Platinum as a relatively "beaten down" stock are improving, not just in terms of the share price, but in terms of the company's performance. It is likely to once again attract investors to its funds, and hence to perform more strongly as a business. It is on a PE of just over 22 at present, and even pays a yield of 4.23% fully franked (MFG pays next to nothing).

So my own feeling is that both Magellan and Platinum probably have good prospects, as companies, provided that there is enough scope in international markets for them to make money there, and I would think there has to be. My task here, as I see it, is primarily to draw attention to good Australian investment companies, and I think these two probably do fit the bill - if we disregard corrections, and untoward upsets which might ruin international share markets. Both these managers, by the way, are not "index huggers", which to my mind makes them the more appealing. Even so, in a year like 2008 of course investment companies like these are at risk.

It is the COMPANIES that I am in particular commenting on, but a further point is that Incredible Charts is of course not only concerned with Australia or direct investment in shares (as distinct from share funds). If it comes to investment in overseas shares then investment in funds by these two companies would probably have to rank very high on anyone's list. They are not, of course, the only ones. But I am giving serious thought to investigating the funds more closely, so as to diversify risk away from Australia at least to an extent. In my younger years I invested overseas with frequency, through e.g. Jardine Fleming and BT - usually with very good results. During the past decade I have not felt a pressing need to do so, but I feel that with our high dollar and in many ways mediocre economic performance there would be point in investing not only in Australia but also overseas through managers who know how to pick the best stocks in other countries.


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ody
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Saturday, February 02, 2013 - 05:36 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Baysider: some comments

Sorry not to have reacted directly before, Baysider, but I shall do so now.

Like Rudy, I see a reaction to the huge rise we have seen as very likely: in some ways the rotation we are witnessing, particularly in smaller stocks which have run hard, may suggest that it has already started. It "should" otherwise start fairly soon, though at times of bullish sentiment, and particularly when people can make little or no money in cash or deposits, it is sometimes surprising how long a market can go up for without a break.

Again like Rudy - and indeed many others! - I see in any case upside rather than downside for the market generally, which is to say that if it fell by 4600 or 4700 I would expect it at the least to go back up again to 5000, and probably relatively quickly. For, as things stand, I feel firmly that any selling off will not be the beginning of a steep downward slide, at this juncture. It is a different question as to how well the market will do in its attempt to go beyond 5000, which is really what it needs to do to impose an irresistible offer to us. All in all I think that probably we will actually break through that barrier, but perhaps not without a great deal of struggle or perhaps not lastingly. But even if we were to take the view that it will move between 4600 and 5000, I would still feel that in that case buying at 4600 or even 4700 is worthwhile, notably - and this is where I remain very firm in my own approach - if you go for yield. It is really not at all difficult to get a fully franked yield of 7-8% on Australian shares that are reasonably safe and reliable. If, as well, one manages to get something like 5% in capital gain, that would actually be a very good return if one obtained that over a year. It does not sound like an over-ambitious goal - but possibly more easily achieved from 4600 or 4700 than 4950 or 5000.

Personally, though I feel that the market is fairly high given modest earnings and the speed with which it has gone up, I nevertheless don't feel it to be necessary to sell my shares at this stage. However, I am holding money in cash to buy MORE, in the hope that a correction will provide me with better opportunities.

A word about index funds. I see you are inclined to sell your holding in an ASX 200 index fund, and I would indeed strongly encourage you to do so (if meanwhile you haven't already). Personally, I think that, certainly in the AUSTRALIAN market, we don't need to have holdings in all of the 200 biggest shares, and indeed it contains as far as I am concerned a great many stocks I'd not want to invest in. I also believe that we are not only always in a stock-picker's market in that a stock picker will usually outperform even a strong market, but our present market remains very uncertain, and some companies are to my mind very much better buys than others. You are perfectly capable of choosing your stocks sensibly, and I would do so, in your case. It focuses your mind, gives you a far better sense as to how the market is actually moving, and where its strengths and weaknesses are. Above all, it enables you to choose the strong stocks, in any sector which you have faith in.

So I would certainly sell such a holding, and you could either already begin to use the money for buying some individual stocks right now, or hold it if you believe that the market will offer us a correction. I do not believe that this is already the time to have ALL of the money which one has available for the share market actually operative in it. To take myself as an example: I feel I am in a position where the most that I would invest of our capital, in any share market, would probably be about 50%, if the market(s) seemed to me strongly favourable. I am currently at around 30%. If matters continue to look positive, I would like to go to 40%, but I am holding fire in the hope that I can add that 10% at a lower level. I don't generally believe in trying to play "catch up" or acting on the feeling that I might "be left behind", as the risk is that you pay more than you really want to, which also means that there is more likelihood of your selling too quickly again. I feel you should only act if you feel internally confident about your action.

One reason why I am holding what I've got is that I believe in those shares, even if I have to face a correction in them, but that confidence is also boosted by the fact that I think I did not overpay. Additionally, if I sold I might (a) see the stocks actually go up further, and (b) might find it difficult to decide just when to buy back in again. But even these same stocks are at such a level that I would not currently myself buy them. As far as I am concerned they are on the whole currently HOLDS, not (yet) SELLS, but not truly BUYS either. If they were all even 8% less in price I'd definitely see them as solid BUYS. And probably even 5% less would make me feel better about buying them.

(Message edited by ody on February 02, 2013)


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ody
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Saturday, February 02, 2013 - 10:20 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



A PARAGRAPH BY SHANE OLIVER

I came across this paragraph by Shane Oliver (part of a longer piece) in the Eureka Report piece published by Alan Kohler today. It happens to be very relevant to things we have been discussing, including the "seasonal" factor! That is: since January started so well there is a good chance that the year as a whole will go well, but February is likely to show us a correction (and indeed I have to agree it is often soft, as Oliver says). Here is his statement:
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January has wrapped up with strong gains in shares. There’s an old saying, “as goes January so goes the year” which is often referred to as the January barometer. While it’s not reliable when shares fall in January, since 1980 up Januarys in Australia have had a 70% hit rate of going on to see gains for the year as a whole and in the US the hit rate has been 90%. So the fact shares have started the year well augurs well for a good year. That said, while January is seasonally a solid month, February is often soft and after the huge gains since the last correction in November shares are overbought and vulnerable to a short term pull back or consolidation.
-------------


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baysider
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Sunday, February 03, 2013 - 01:36 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Thanks for the feedback Ody, always good to hear from you and delighted your shares have performed so well.

My inclination now is that it seem too hard to imagine that the index can go straight through 5000 at the first time of asking after such a huge run up already. There must be a large number of people ready to bank some profits at the 5000 level so a pullback of some sorts seems very likely and I think the mentioned 4800 or so seems a likely place for people to get back in - or those that have waited too long in cash and have a dose of FOMO (fear of missing out) to jump in. I think my best bet is sell half the Index fund now, early this week, and if/when the pullback comes add to my current positions or start some new ones. If by some miracle the index continued straight through 500 I'd be looking to sell the other half around the 5200 level.

I also have a reasonable amount of cash in a term deposit that matures end of Feb should a really good pullback occur through 2013 or if a particular share collapse but still appeals as a good business - as COH did and has now fully recovered it's price fall and almost achieves a new all time high - as have a lot of health stocks.

Rudy - if the market heads north through the year, after a smallish pullback lets say, would you imagine that 5000 would then become very strong support given the resistance level it's been for so long or do your Elliot Wave counts still suggest the potential for a very strong fall back?

Cheers


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rdumas
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Sunday, February 03, 2013 - 03:35 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Hi Baysider,

I haven't spent much time on Elliott Wave analysis during the last few months as I found that it didn't really help me with my trading.

Here is a 30 year weekly chart for the XJO. What is obvious from the chart is that the 5000 level has been a pretty strong overhead resistance for many years now. Once it does get through that level it would normally become a strong support level.

Previous attempts at breaking through the 5000 level have resulted in falls to levels between 3766 and 4551. I suspect that this time we won't fall anywhere near that much as my cycles work suggests that the decline should be completed at the latest by the end of February and we may not have seen the interim top just yet (even though it should be very close). In an upward trending market the up legs tend to terminate late in time and the down legs tend to terminate early. This is not the scenario where a deep fall would normally result.

Once the decline gets underway it's pattern should give us the best indication as to how far it may fall.






The views expressed in this post are purely mine and may not necessarily line up with reality - Rudy

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ken
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Sunday, February 03, 2013 - 03:47 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Ody,

In relation to your advice to baysider that he sell the ASX 200 index fund;

My view is that stock picking in the smaller stocks is not working very well at the moment and the growth has all been in the larger stocks.

This is a characteristic of final waves in the Elliott Wave area, that breadth (the spread of stocks participating in the gains) reduces in fifth or "C" waves.

I think we are in a "C" wave which has further to go, and don't forget that the crowd get into the market too late every time, and that's what we have now.

As a result of all this, I am intending to allocate less money to my normal systems and more to index or investment funds till the end of the "c" wave.

In relation to my comments about a top in the market, it is probably a temporary top as the highest RSI's for the index tend to come at penultimate or earlier peaks, and the final peak has a lower RSI than the earlier peaks.

Ken







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rdumas
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Sunday, February 03, 2013 - 03:48 pm:Edit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Hi Baysider,

I know that the DJIA index doesn't replicate the pattern of the XJO but it should give us some indication of the general state of our market.

In one of my previous posts I showed that the average price of the years 2011 and 1985 gave a good correspondence to the year 2013 so far. I note that 1954 is also giving a good correspondence to this year so far.

If the future market moves were similar to that of 1954 then as you can see we would not expect much of a downdraft in the coming weeks. Note that throughout 1954 the large retracements were only of the order of 5~6%. The retracements in 1Q of 1954 were only around 2~3%.





The views expressed in this post are purely mine and may not necessarily line up with reality - Rudy

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