Here's another view courtesy of
www.tridentpress.com.au (Lance Spicer)
These keeep appearing in my email (though am happy to read another view on the market)
"Wednesday, 19th November 2008
Déjà vu – Remember back in 2001-2 when everyone was panicking due to terrorist attacks and the tech bubble? Remember when everyone was expecting the world to fall into a deep recession? Remember when everyone was dumping stocks at any price?
Remember by the start of 2003, the market then started recovering? The economy didn’t for another 6 months.
Then, 5 years later, the market All Ordinaries Index had gone from around 2,700 to over 6,700 – Do you remember thinking back… “I should have bought some shares back then?”
Well, “back then” is NOW!
It's clear right now, the bargain hunters have entered the markets everytime the market panics. The closing low of the S&P 500 of October 10 is still in place after several retests now - this is very encouraging and it's now clear - this may, in fact, be the bottom. If not it's very close to it. Those bargain hunters are coming in late and buying, are picking up possibly the best stock buys of the last 40 years! In a year from now, they will be sitting on profits of 100%+. This market is not unique, nor are the actions of bargain hunters.
I wrote the following article in 2001 (yes, this has all happened before). A reader came across it and asked if it would be a good time to remind everybody that these stock market conniptions happen from time to time, and that they are either a disaster or an opportunity. It depends on your perspective and foresight, I suppose.
“There’s a degree of panic and depression out there among investors. Why? Haven’t we seen this all before? Yes we have—we have been down this road many times before. Many people ask me, should I be selling or should I be buying? Often, before I tell them what I would be doing, I tell them they can work it out for themselves, if they understand the share market cycles. The share market cycle works in 6 Phases until it all starts again. These cycles operate generally every 5 to 10 years. The current one we are in has lasted about 10 years. Let’s have a look at the 6 Phases before working out where we are right now.”
Phase 1
Recovery of Confidence
In this phase we have emerged from recession and business and consumer confidence is returning. Interest rates are at their lowest. The share market has been heading up for a little while now as savvy investors are returning to the markets in anticipation of improving company profits.
Phase 2
Earnings Increasing – Growth Returns
Those savvy investors were right—things are improving and companies are becoming more confident about their earnings. Interest rate cuts have now stopped and have reached a plateau. The bulk of investors are now returning to the markets, albeit a little late—all the great bargains are gone. This is by far the longest phase, it could last 5-7 years.
Phase 3
Irrational Exuberance
Consumerism is now rampant. BMWs and Mercs abound. Everybody is a stock market expert. “You can never have too much money in the market!” people will tell you. Markets are hitting records. Interest rate increases are on their way. The end is nigh!
Phase 4
Reality Bites
Interest rate speculation becomes reality and rate increases temper the markets. The share traders are exiting and starting to short-sell their shares. Smart investors start to preposition their portfolios and reduce margin. Consumer and Business confidence takes its first couple of hits, but remains relatively high. The markets start coming off over a period of several months. Some investors who missed the spectacular rise, dive in thinking this is a correction and an opportunity, sometimes it is, depending on economic conditions and when it is, their purchases will come good over a longer period than they first thought.
Phase 5
Earnings Decrease – Growth Slows
Consumer confidence drops as interest rates increase to temper growing inflation fears. Mortgage costs increase and ensure consumers stop spending. Businesses feel the pinch and expect earnings to fall. Pessimism grips the markets, there are dramatic falls in shares as the bulk of investors try to exit not realising it is all too late. Interest rate speculation starts again, only this time to cut rates.
Phase 6
Panic and Misery
The final phase. The heavily leveraged investors are wiped out. Business and consumer confidence is at its low. Investors are depressed. Talk of depression and recession abound. The Reserve banks are cutting interest rates with gay abandon. Company earnings are down. More share market falls and panic selling—the largest falls in the markets occur now. Too late to sell anything. The savvy investor lurks! He starts quietly buying all the panic stricken bargains. Company failures start to occur and bankruptcies increase. PE ratios are lower than their historical averages indicating this is the time to buy. Interest rates hit their lows and people start recovering a little. Some even start building houses again and the recovery into Phase 1 begins. Here we go again!
This is where mug investors who bought at close to the top in Phase 2 and 3 are starting to sell. Their adage, “Buy High—Sell Low”. Selling shares in the later stage of Phase 5 is pointless, you’ll be just losing money—patience and nerves of steel are required
This is how it works—time after time.
Now, where are we now? We are at the very start of Phase 6—you knew that didn’t you? So, to answer the question “What should you be doing when it comes to investment?” You now know the answer don’t you? Now you know how the cycle works, you can count yourself as a “Savvy Investor” and start buying up some bargains. Start by investing in the best blue chips, as they always recover first. US Markets seem to be the most over sold and most likely to rebound first, but I’m cheating here, the US market always recovers first. Just look at every crash and recovery. Good Luck. (written in 2001)
Isn’t that spooky? I wrote that in 2001….. and here we are in 2008 in Phase 6, but a lot further into Phase 6, actually quite close to the end and by early to mid 2009 we’ll be in Phase 1.
Click here to take Advantage of the Phase 6 Opportunity you missed last time
The Economy and The Market
The current market woes right now seem to be split 3 ways:
1) The market is being sent south due to the great unwinding of leverage. Leverage of hedge funds, some corporations such as banks and investors on margin. Once this unwinding is done, the selling will disappear. We are seeing this now in that the volumes being traded are very low. The problem for the market is that the buyers have yet to return.
2) Consumer confidence is very low and shoppers have put their wallet away temporarily until they feel that their jobs are no longer under threat. Consumer confidence is much higher in Australia than the US, although there are signs that US consumers are beginning to calm down. US housing prices seem to have bottomed, based on the latest data. All good signs.
3) Banks and financial institutions have taken a real hit to their balance sheets with bad loans, which caused them to stop lending up until October. In October, US banks lent $200B in new loans, which is higher than the total of the previous 6 months. So, they are lending again, but only to their best clients at this stage. The credit crunch officially ended when the LIBOR (interbank lending rates) dropped from 5% to around 1.5% - This is almost normal and it means the banking system is returning to normal. Again, good news.
This brings us to one other issue unemployment, both in the US and Australia. In US, they could be faced with unemployment stretched to as much as 7.5% early next year according to the IMF (who are traditionally bearish). Not, a depression, or even a bad recession with those numbers, you need 20%+ to qualify as a depression. In Australia, some economists are predicting a 50% increase! Sounds dramatic, but it will see our unemployment peak at just over 6%. For years governments have been telling us 6% is near full employment. For the last few years our unemployment rate of 4.5% has been seen as “inflationary”. Again, I see no reason for the widespread concerns about deep recessions or depressions. None of the numbers, point to this in any way shape or form. It seems the media is driving this – full stop – it sell papers and advertising. In Australia, our biggest export markets (excluding Japan) are still growing, so our exports will still increase, just not at the rate we have enjoyed for the last few years.
The IMF also said Australia won’t even have a recession just a “slowdown” to around 1.8% growth, so there you go!
So, why is the stock market getting slaughtered?
Sentiment…not reality. Oh sure, banks are having a bad time right now, making lots of provisions for loans that will default and lots that won’t. You see, I used to be a financial controller in several listed corporations and know when bad times occur, you always over do it and get all the bad news out in one go… over provide for bad debts, losses and other issues if the auditors will let you, so all you do is start reporting good news after one bad period. That’s what’s happening now with banks.
Also, China’s growth is slowing on the back of US consumer sentiment and therefore commodities have dropped. Is it all over done? What do you think? Of course it is.
We are bouncing along the bottom right now and we have had several retests of the lows as more bad economic news has hit us. Well, I have bad news, we’ll get more bad economic news, particularly out of the US and Europe for another month or so. After that, news will turn “neutral” or be “as expected” and then slowly turn slightly “brighter” into next year.
We are definitely on the bottom right now and I suspect that the downside could be a further 8-10% at worst (if for instance GM were to file for Chapter 11 bankruptcy), and a bounce of up to 25% could occur just as easily over the next few weeks if any good news at all comes out…. And it will, even if it’s bad news, that is just not as bad as expected. The downside risk is very limited in my opinion. The risk of missing the upside is far more severe at these levels. With a market this low, not having some exposure to stocks right now is a big mistake. Having said that, you have to make sure you are in the right stocks.
Think about this….Ian Cumming, Jean-Marie Eveillard, Joel Greenblatt, Ken Heebner, Mason Hawkins, Mohnish Pabrai, Ruane Cunniff, Steve Mandel, George Soros and Warren Buffett….some of these names you know, some you don’t, but these are some the best investors in the world and run some of the very best managed funds in the world. What do they all have in common? They all bought large volumes of shares last week… massive in fact. I know exactly what they have been buying as I subscribe to a very expensive service that tells me what they purchase, and you know what most of them are buying? Many of the same stocks that are in my Trident Confidential Portfolio. They are buying “growth stocks” right when everyone else hates them. That’s how they will get rich (richer) when this chaos all becomes a blip on the screen and is retired to history… about a year from now. Take note.
This buying opportunity will probably last for another month or so, before the bad news starts to wear out or not matter anymore. Until then, we’ll see plunges on bad news (BUY DAYS) and rises when bargain hunters turn up anytime we get close to the 52 week lows as we have seen recently."
