Investor Update: May 2010 Webcast
Peter Spann, Chief Executive Officer of Freeman Fox and Chief Investment Officer of Excela Funds Management, delivers his latest Investor Update
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Market Commentary: 26 May2010
It’s not often that you know definitively what is going to happen in the share market, but now is one of those times – it will either go up or down!
Funny I know – one of my favourite jokes.
But seriously the market IS on a knife edge.
We’ll either see a further sell off with nowhere for it to stop until about 3700 or the market will recover again and we’ll see a 10% to 20% upside.
There is some support at 4000 but it is not strong.
The market closed today at 4330. It was a funny day, taking its lead from a funny night in the US.
It spiked up on open retreating for half the day resting for a moment on 4323 at about 12.30 before heading up again to the close and then falling off again at the last minute.
Now, I wouldn’t normally be bothered by intra-day trading, indeed I wouldn’t normally be bothered by weekly or sometimes even monthly trends, but the market is behaving like a two year old and we should bring back spanking.
Personally, whilst I appreciate I am going out on a limb here, I would give 3 to 1 on an upward break from no lower than 4000.
In the portfolios I manage, I am in cash to about 30%, I am holding calls as an upward hedge (against me losing gains if the market swings up while I am still in cash) and have about 40% of my active portfolio hedged against the downside with puts. So my trading appears quite schizophrenic. There is a method to my madness however.
What I’ve done is like a long straddle – I have purchased both puts and calls. Why? Because my best feeling is that any movement is going to be big regardless if it is up or down.
I am still holding 70% of my shares (for two reasons: 1. Because that’s my strategy; and 2. Because in the MOO Fund I am required to be invested) so on balance my trading wants to see the market go up, however the cash and the puts protect me on the downside if it falls.
How can I lose? If it does nothing! Yup, the worst case for me now would be for the market to track sideways. I would have lost a lot of equity for no gain.
Whatever it’s going to do, I wish it would get on with it. I have to write calls by Monday!
Let’s take a look at some of the things that could push up the market.
Shares are cheap again!
After falls of 12-15% over recent weeks forward price earnings multiples in Australia, the US and Europe are all running well below long term averages. I’ve not seen such attractive pricing in about a year.
Dividend yields, in absolute terms and relative to Government Bonds, are similarly at attractive levels.
When you look at earnings growth rates, current and prospective, again we are at levels not seen for several years as economic activity returns to trend.
Growth out of the US has consistently surprised on the upside over recent months. A major contributor here has been the turn in the jobs market which reflects companies getting back to “business as usual”.
And it’s been a similar story in the “Euro-zone” despite the bad news coming out from Greece and Spain (and lesser Baltic states). There have been big gains in jobs, manufacturing and exports.
China remains the key in Asia, although we’ve seen significant improvements in economic activity from Japan, Korea, Taiwan and Singapore.
China has proved a challenge of late. Over recent weeks, investors have reacted nervously to concerns that the authorities were going to tighten credit too much. But China has done capitalism better than the capitalists, and I think they are going to get it right again. I think China will slow, but that will be modest.
SO that just leaves Australia. The resources super-tax has been seen as a major downside in the last few weeks, but I think the Government backtracking and the industry consultation will get that on key and the impact will be much less than what market fears at the moment.
So, on balance, I see the market as a short term downswing with a fair bit of volatility, but a break to the upside.
Cheers
Peter Spann
Watch this FREE webcast for Peter’s observations:
On market patterns and what they might mean
“... A good look at the big picture reveals a whole other story. That's a story of the market repeating old patterns, and when it repeats patterns it gets a whole lot more ‘predictable’...”On how world markets are impacting investors
“Many world share markets have been in broad trading ranges for the last few months after the initial strong rallies off the March 09 lows…”“As we speak many equity markets have tested the upside of those trading ranges and have fallen. We now have to see if they will hold at their low points...”
“The world economy still has many “issues” to deal with over time…”
On what investors might expect over the coming years
“Tight credit constrains normal growth...”“Well placed companies take advantage of huge opportunities...”
“Markets always wrestle with a barrage of good news and crisis news. Everybody who trades is looking for the "next thing" and that drives short term pricing...”
“More importantly confidence is returning to global business leaders…”
On how investors might make money in times like these
“Which part of "license to print money" weren't these short term traders getting...”“Professional investors are excited because that type of market mania allows us to buy high quality companies with excellent profit outlooks at a discount to their true value...”
“In February, March and April of last year we said it was time to buy...”
“seriously consider this dip as an opportunity to get in...”
On the residential property market
“Residential Property performance has been patchy lately with some areas and sectors receiving above average gains and some areas falling...”“The [residential property] market has already started to take a breather in a number of places across the country...”
On Warren Buffett
“In times of crisis and opportunity, like the past few years, Warren Buffett gets a lot of attention…”“For quite a long time, the shares of Berkshire had an elite association. Shares were at nose-bleed prices…”
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