The cover of the latest AFR Smart Investor was a worrying sign for me this morning. Emblazoned with the words “Ready, Set, Rally” I was reminded of the cover of a similar magazine many years ago. The older magazine had the words “Takeoff” – or something similar – with a subtitle that read; “how to buy tech stocks without getting burnt”. That magazine was released in March 2000 – a month before the tech wreck began.
Trading the opposite direction to magazine covers has been a profitable pastime for many private and professional investors but should we conclude that this month’s magazine cover means a correction is in the offing?
As you know we don’t like to predict the market or the economy because we simply aren’t any good at it. But we are reasonably good at thinking about the implications of an assumption and at digging up evidence.
The local stock market traders, analysts and commentators have now turned 180 degrees and jumped aboard the idea that reporting season isn’t so bad after all. You might recall I mentioned to Ticky Fullerton on the ABC before Christmas that I had anecdotal evidence of a retail turn around starting back in October that would drive retail and banking stocks higher – in some cases above already overpriced levels.
So given the locally benign conditions, anyone looking for a stock market correction here, would presumably require a correction offshore as the trigger.
In 2005, the Shanghai Stock Exchange Composite Index was trading at 1000. Less than two years later it had jumped to 6,092. The Chinese government had announced that it wanted the market to trade at a higher market cap to GDP ratio.
Last week, the Japanese Minister for the Economy, Akira Amari, made a statement that the Japanese Government wants the Nikkei at 13,000 by the end of March 2013. It currently sits at 11,361.
Analysts and economists spend their lives trying to understand and interpret what a particular, inflation, unemployment, GDP or BoP statistic could mean for the stockmarket. Examining the entrails of the economy is a well-paid occupation and its goal is to help discern where the stock market (amongst other markets) might be in a month, a quarter or a year’s time.
So what is there to interpret when a government state explicitly, ‘we will do everything to get the stock market to 13,000 in the next six or eight weeks?’
When governments tell the world they want the stock market to be at a level of x by date n, the job of analysis is made pretty easy.
As they say; “don’t fight the tape”.
The only thing that is clear to us is that since 2008 debt has been rising astronomically. The only way out is to press on the accelerator and create inflation – reducing the real cost of debt repayment.
Cash sitting on the sidelines is earning negative real returns and our own Reserve Bank Governor mentioned before Christmas that he was surprised at how long people were talking to make the switch to equities observing, ‘it never ceases to surprise me how long it takes, but eventually investors switch’. I’m paraphrasing of course.
Evidence is mounting that money will flow from poorly returning cash to equities and real estate. Indeed it already is.
For those who are rational and can see this all ending in tears, you’re right. Rates will eventually be much higher (bond yields have already started rising) and the tears will one-day flow. But maybe, just maybe, that time is not just yet.
Having said that, the market may now correct just to prove my earlier point – that we are no good at predicting the direction of the market.