Batten down the hatches or business as usual?

March 11th, 2011  |  Posted in Investments

By Peter Spann
 

One of the most frustrating things for Australian investors would have to be how our market is still so intrinsically linked to the US.

Especially considering, excepting nostalgia, our trading partners in the Asia Pacific now influence our economy more than the US.

What goes up must come down I guess, and even though the Australian market was far from over valued, the US has had a pretty straight line Bull Run for two years and given the doldrums they are experiencing with their economy, it was due for a breather.

And in the last few weeks we've been given that break in the market.  Typically the Australian market has overreacted and fallen about 7% despite our buoyant economy and positive outlook.

Two speed economy

Looking under the surface though there are some concerns about what is becoming known as the "two speed economy".  Essentially what it means is that in part of our economy, some of our citizens are experiencing boom times, whilst the majority are doing it tough.

This is even more prevalent in the US where the top 500 wealthiest people now control more money than the bottom 50% of the population.  No wonder there is so much resentment rising in that country.  And unfortunately for Obama "Hope" wasn't enough - real, effective policy was needed as well.

It's difficult to know what role our compromised government is having on the Australian economy - only history will tell.  Hard to grasp, for a person like me, how the Labor dream, embodied by the Kevin 07 campaign, has gone so far off the rails.  At the moment, I wish either party could produce a real leader - I am sure that would have a significantly positive effect on our morale. 

For example, even though issues like the environment should be solid socialist policy it seems this particular government is handling it so badly that just about everybody is against it; and that has to have a flow on effect to the nation's state of mind and the economy.

Small corrections are good for the market

So, back to the market ...  This fall is undoubtedly temporary, but how temporary we'll have to wait to find out.  Corrections of a relatively small magnitude (say 10% to 15%) are actually good for the market.  As investors we really don't want the market to overheat and this type of retracement gives us the opportunity to buy in where we may have stayed out.

The Australian market has, as I mentioned in my last update, struggled to break the (psychological) 5000 barrier on the All Ordinaries, and this time was no exception.  Remember that number because when it gets up there again one of two things will happen: Either it will correct again or it will hold above that mark - genius I hear you say!  Why, thank you.

That might seem trite to point out, but 5000 has just been re-affirmed as a very significant point in market psychology and so therefore we can have a good deal of certainty about one thing - when the market approaches that number we need to pay attention.  Even more importantly if and when it holds above that number a new bull run will follow.

So for now...

4680 is the next significant support and below that 4250. 

I think there is a good probability the market will hold at around the 4500 to 4700 mark.  It would surprise me if it fell below 4250 at this point, simply because the next major support is 3800 and Australian stocks would be ridiculously undervalued at that point.

Should you take advantage?

It is not unusual for the market to vacillate significantly in the 5 years or so after a major correction like we had in 2008 and I think it will be a number of years before we get back to the heights of 2007.

So you really should consider this type of market behaviour to be normal.  In fact you should take advantage of it. 

The increase in volatility should help people trading the Buy-Write and of course those of you in the Accelerator Fund.

Long term investors will benefit from buying quality stocks cheaper.

The herd only buy when the market is going up...  smart investors take advantage of dips like this to add to their portfolios.

Take BHP for example. Nothing has fundamentally changed in the last two weeks. Their income streams are still the same, their outlook identical, their prospects unchanged and yet their share price has dropped by 8%.

Lately I notice the price of milk has dropped. Apparently sales have increase by 9%.  I find that funny  - just because it's cheaper all of a sudden we are drinking more milk? Weird!

And yet when the same opportunity is presented in the share market people shy away. Even weirder!

And this is where the cash flow strategy of the Buy-Write strategy comes to the fore - regardless of market conditions option premium is always there, which means the income is always there.

Find out how an investment in Accelerator could benefit you. And Excela has a brand new website. Take a look while you are at it.

With June 30 fast approaching it's time to review your superannuation strategy. So many clients have benefited from our Super Charge Your Super reviews in the last couple of months.  Seriously, if you have a Self Managed Super Fund you need to pay attention to this, especially if you are 55 or over.

Call our team on 1800 000 369 to find out more.

Happy investing!

 

 

 

 

Important Information

Peter Spann is a representative of Excela Equities Ltd (ABN 17 010 763 041) and Freeman Fox Pty Ltd (ABN 47 062 481 378), holders of an Australian Financial Services licences (AFSLN 246510 and 220622 respectively).  This general advice is provided by Freeman Fox Pty Ltd. It does not take into account your investment objectives, financial situation, or needs. You should consider the appropriateness of this advice having regard to these matters, and read the relevant Product Disclosure Statements (PDS) before making any decision to invest.

Fundhost Limited ABN 69 092 517 087 AFSL 233 045 (“Fundhost”) as the Responsible Entity is the issuer of the Excela Australian Equity Income Accelerator Fund™ ("Accelerator") ARSN 139 641 946. Excela Pty Limited ABN 25 124 028 244 (“Excela”) is the Investment Manager for Accelerator. Excela is a Corporate Authorised Representative of Freeman Fox® Limited which is the holder of an Australian Financial Services Licence (246510) and a Market Participant of the Australian Securities Exchange (“ASX”).

Information contained in this update is obtained from various sources. The changing character of markets requires constant analysis and may result in changes. Past performance is not a reliable indicator of future performance. All investments contain an element of risk. Actual performance will be different and returns are not guaranteed. While information in this update is given in good faith and is believed to be reliable and accurate, Freeman Fox gives no warranty as to the reliability of accuracy of the information, nor accepts responsibility for any errors or omissions of third parties. Opinions expressed are subject to change.

If you require assistance in relation to your personal investment situation please contact a representative of Freeman Fox Pty Ltd on 1800 000 369. For a copy of our Financial Services Guide, please go to http://www.freemanfox.com.au.