A little archeology always helps
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.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Duncan Lenton
:
hi Roger
i understand that the link above is a sales pitch but it seems some of what he states goes against your opinion. The reason i have taken any sort of notice of what he is saying, is that he does reiterate much of what you advocate and predict.
Are circumstance as severe as he states, he reminds me of Steve Keen, and is the end really likely to be as quick as he believes? i.e. 2013
It’s funny as i was talking to my boss on Wednesday that we haven’t heard from Europe in a good while then Thursday, BANG it rears it’s ugly head. We know Europe wont go away. we know china is growing a nearer 3-4% rather than 7-8%. We know mining work is reducing and iron ore pricing is heading south, even after the current rebound.
Is it really possible for Gold to reach $5000 an ounce? Unemployment to reach 8% especially on the way the government currently calculate it? House prices to drop further?
To answer my own questions, yes it is possible. But is it likely???
Thanks so much for your time
Duncan
Roger Montgomery
:
Hi DUncan,
I have to remove the link because it links to those emails that keep filling your inbox with “The world is coming to an end and buy this newsletter to save yourself”. I know Greg and have watched his career progression over many years.
Daniel Falster
:
Hi Roger,
You conclude by saying “we are no good at predicting the direction of the market”, yet you picked this correction: market down 2% on the day of your blog post! Perhaps those headlines on AFR smart investor (usually posted outside the newsagent) are useful after all?
More seriously, you are suggesting markets will rally substantially because of all the extra cash that is already floating on the sidelines and all the money that is being printed overseas. That makes good sense. But is this a good thing for value investors? In the short term, it is great, as it allows us to take profits. But if the market rallies for several years, as is likely under the money printing scenario, a value investor might find themselves with little to buy AND little to sell.
The broader question here is how do value investors behave when prices are rising, because of the increased weight of money in the market, and Intrinsic Value is going down over a sustained period of time? In that environment, you would make a lot of money trading the index, but how could a value investor outperform that?
Presumably money printing would also lead to an eventual increase in Intrinsic Value. But this will require a substantial bout of inflation for that to occur. So the question is what comes first, a rise in equity prices or inflation in prices of good and services, and thus company profits?
Does anyone have know how value investors faired during the 1980s, when inflation was high for a sustained period of time?
With best regards,
Daniel
Roger Montgomery
:
Hi Daniel,
We’d be delighted to see a correction of course, because we aren’t finding many opportunities to buy quality companies cheap right now. In the past, that has preceded a correction.
David King
:
Hats off to Roger! Mate, though you claim no pschycic powers, you do seem to have a good nose. Hands up those who are tempted by the past one to two days’ falls in CAB, SLR and DCG, to name 3 examples from my Skaffold research. And what about Forge? Even if its IV falls as forecast, it’s still going to double in the next 2 years. How much half price ice cream can one eat?