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The top of this cycle for ASX200, cash is king ?


kahuna1

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In reply to: kahuna1 on Friday 10/08/07 11:52am

Hi kahuna1,

 

Just want to say thanks for your regular contributions on this thread. I find them immeasureable helpful, educational and at appropriate times - even wise.

 

I really enjoy it.

 

Regards

 

Coop

 

(another old fart - 45 - but with much less market experience than you).

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QUOTE (AgentCooper @ Saturday 11/08/07 12:20pm)

Hi guys,

 

Thanks and yep an old fart ...

 

Started early back when you could and did Uni part time for 10 or more years whilst being a naughty full time trader. Was made a full dealer at a bank age 21 which was unusual and the RBA celebrated by having an auditor sit next to me for a few weeks :}

 

Besides the point this sadly ...

 

When I had 5 years trading experience I was totally convinced I knew everything about trading.

 

When I had 10 years .... i was just convinced.

 

When I hit 15 years .... well I was wondering about how little I knew 10 years ago.

 

Now ... 24 years later ... time ticks away .... still think I am 18. What I know and thought I knew ... things that I thought could never happen .... have occured and I have come to the realization the fact is how little I actually do know.

 

Trading is like that .... and I am blessed in many ways to have a hobby which also is how I earn money.

 

Right now the favourite saying I have is " Don't confuse a bull market with your brilliance"

 

Sadly thread after thread I read on SS and its the devoted talking about their stocks and at times their pet monsters in loving tones. I am being harsh .... but its tuff love. I too have loved many a stock and their story .... however not loved them to death. At some stage as i have said time and time again on this thread your love or perception of the stock changes along with its price.

 

The higher any stock goes the nearer it is to its eventual peak and the less one should love the stock. In other words one should be reducing when its going up an the converse when its going down ... not suggesting now is the time to double mind you .

 

Boils down to this ... being willing and able to admit you are not as smart as you think you are ... and have got it wrong and take it on the chin. If you cant do this ... you have no hope. times change ... you at time get something totally wrong ... totally. revenge trading and doubling a loosing position which is already seen 50% of your money dissapear because you are convinced of your own brilliance usually ends with some sad sack talking about a stocks that was 85 cents and is not 1.5 cents.

 

In being flexible in ones thinking and the total lack of it is why after working for institutions for 15 years the hit miss ratio of people who wanted to be traders and those who became very very good ones was less than 1% ... and thats after sorting out those who applied and interviewed ... about 1/10,000 is the odds. Sure a lot make middling dealers but eventually they wear out ... I am talking the freaks.

 

With the internet and the current bull market we have experienced one of the better bull runs over my time in the market. Is it over ? I really cannot answer that question. I suspect the fundamentals for a lot of stocks is very very good and they represent value at current levels longer term .... however in a bear market even good fundamentals will not save a decent stock. Most things go down.

 

I strongly suspect for a few reasons this bear cycle has much more to go. Despite the frenzied selling and then buying of the last few weeks the reversal is just two weeks old.

It's not mature enough ..... so i suspect longer spent trying to establish a base.

First reason. Its just started and they need to sit here for a few weeks if not try lower.

 

Second reason is being a value investor and having searched and searched for decent value of good companies with earnings profits and dividends almost without exception they have been at the expensive end of things. Sometimes the very expensive end of things and making assumptions about sales increases in 2008/2009 and pegged with P/E's accordingly. If a company comes out with a decent report its immediatly rewarded for its efforts .... and conversly spanked hard the other way. Instant gratification which i find perverse when one remembers for a company which has decent results and is pegged up 20-40% on a rosy outlook for 2009. I ask myself have I ever heard a MD call his company a dog ? Or in trouble ? Still a large section of the market is priced with forward looking assumptions into their share price.

 

After the last few weeks I would expect some of this almost guaranteed outlook built in to wear fairly thin.

 

Number three ... still some priced with a takeover premium into them. The credit crisis is not really about the sub prime market at all but more the easy credit for all comers regardless of risk profile. If I was to lend to my deadbeat next door neigbour I would demand a premium of 10% over the going rate if not 100%. If you are lending to a M+A hedge fund which is buying into something fairly expensivly priced ... I would demand several percentage points over say the 5 year bond rate ... not 20 basis points or 0.2%.

This will make it far less attractive and possible to do any of these deals and at this stage there is serious doubts they can raise funds at any price in some cases.

 

The rest are hunches. But very worrying ones for the short term.

 

China and its demand longer term will not go away.

 

However back 2 years ago in a matter of weeks we saw the commodity price for a lot of things double in a 6 week period.

 

Is there anything written that says it can't do the opposite ?

 

I was during the week the first time they beat the hell out of stocks buying resource stocks but then noticed a thumping was going on ... several of the commodites were showing extreme signs of weakness.

 

I changed my mind ... yes changed my view and acted accordingly.

 

This is the most important thing and tool a trader can have. Most just don't have it. Sometimes I lack it ... get it wrong ... do stupid things ... just like everyone else. However last time I was sitting on a stock praying for a recovers with a large amount of my funds tied up. If I sell at the low ... so be it ... unlikely since I tend to buy into extreme events like last week early on ... but Fridays selloff not this time sunshine.

 

It comes down to commodites and their prices. Until the FED came in for a second time last night and injected liquidity ... they were not looking flash. They did recover along with stocks in a lacklustre last 20 min trading rally ..... call me sceptical but I have a pricing scenario for all the metals and other sin mind.

 

It goes like this .... take the most expensive to produce type of the product ... say offshore oil at around US$25- per barrel. Oil is in fairly short supply and unlikely to change over time and if anything creep slowly tighter ... my price is there will be a base at 2 times the cost of the most expensive oil .... US$50- and a top at 3 times US$75- ish. Due to the very short nature of it ... the base will slowly creep up over the years to being 3 times and the top 4 times. Over the next 10 years. But right now we are nearer the top end of things.

 

Making 100% even at US$50- is historically a massive retunr for companies.

 

Oil is something with long term supply issues ... platinum and maybe silver and lead the same. So their ratio ..... say 2.5 times is the base 3.5 times is the top.

 

The rest are short term supply issues despite in some cases being convinced of something different. So Copper at US$3.50 is right at the top end of this band.

Nickel which was manipulated up to an insane 6 times cost at US$25 ish ..... even here its 3 times .....

Uranium ... lots of variations of pricing here but there are lots of US$25- per lb deposits to develop .... so at US$120 per lb good luck.

 

Short term they can take these things anywhere and have and will continue to do so.

Longer term if there are known deposits which in the case of most of them there are an assured price 3 times the cost of production will see the capex to developed paid back in 24 months.

 

My point is ... whilst I don't expect the demand to go away long term ... the reality for me is a lot of the prices which have driven the rally in our market still remain in the upper ends of the long term price outlook.

 

Markets have an awful habit of doing just what you don't want to happen at the wrong time. They take the easiest route and stick to it ... the path of lease resistance and with stocks the route is down at this stage. With commodities and several still up in the top end bands of long term rationale I suspect the irresistable urge will be to try the lower end of the bans as they have in most cases just tried and failed at the highs.

 

Maybe this happens ... maybe it doesn't.

 

Been a long time since I was this undecided at the bottom and I think with very good reason this time. Confidence is a funny thing and the exuberance of 2 months ago replaced by the realization of todays realities.

 

Not so brilliant buying the stock at 20 times earnings because it would be 15 times in 2009 if all went well. Decent companies I loved or liked in the past CAB JBH and a host of others selling out at prices I was wishing for ... and then seeing them go another 10 or 20% .... and sometimes even further ... the retreat from the highs for these two last two weeks has been nothing short of scary .....

 

I still don't think they are cheap and was stunned the heights they went to ..... along with a whole swag of others in this hyped up market on steriods. Earning 4% or a p/e of 25 is never cheap in my eyes and 38 mio profit verses 1.1 billion market cap = 28.94 or 3.45%.

 

Still we have an assumption of future earnings growth built into a whole swag of mid tier companies even after the correction. To justify for my own eyes value in some of these they need an assured earnings of around 15 times .... so to get from 28 p/e to 15 needs EPS growth of 18% for 4 years !!

 

I took off the rose coloured glasses some time ago ... and was enthusaiastic about JBH when it was bumping around $5- and looked stupid taking profits when I did ... and still below the current levels just .... however the sanity for some of the mid tiers to me remains and abounds.

 

Does the market take a reality check for the 40 or so of the top ASX 200 stocks which have this sort of absurd pricing factored into them ?

 

It should frankly ...the market ... wake up !!.... IRE simialr sorts of things they have bought into a growth story but in its case it needs EPS of 25% for 4 years to justify the price right now.

 

The valuations are all over the place. Have been for some time.

 

Someone asked why go to banks ? ... well lets say the wheels fall off ... the banks are approaching 12 p/e's at todays prices and banks are not just lenders but have funds management and in most cases insurance arms. A great diversification of earnings and only someone insane is swapping something with implied earnings of 8% for something for earnings of 3% ish.

 

Thats what the market has just done ... and we all have made lots of money from it ..... but ask yourself is it sane ? Your buying into something which is a maybe and in some cases for these second tier things I see they proudly announce double digit growths on EPS but 11% .... at 11% to catch the banks or diversified miners like BHP with great outlooks they need a string of 10 years similar growth to catch up.

 

Worlds gone mad ... just like me .... sanity is all relative I suppose.

 

Suspect there is some serious work to do with a lot of sectors out there and a realization that 3% as opposed to 8% irrespective of growth outlooks is something that should be respected.

 

As for the very bottom end of the specs ... the companies with valuations of 300 mio and zero sales and sales to start in 2009 or 2010 on some wonder product .... if I look at a reasonable miner who has a virtually assured market the implied P/e out there than makes them cheap given the risk given the problems associated with metals prices and development and its something like a P/E of 2-3 I would assume as being value. so when i see a big maybe priced as though its already producing and their product is accepted into the market ..... and then see they are hoping for 100 mio in sales in 2011 after starting in 2009 ... even at a margin of 20% on sales they have these things pegged at a p/e of 15.

 

Insane ....

 

What do I know ? ..... maybe the world goes on ... but to me the valautions on a whole slab of the market have some serious serious waking up to do.

 

Until then I hide under a rock ... buy things they spank just as hard but have the sub 10 p/e's and spread it around.

 

Outside miners there were very few in this category lately. However one thing the correction has done so far is bring the ones which have the exceptional earnings back to almost decent value ... however the pain for the non starters I suspect is only in the early stages and in some cases I can justify prices at half the absurd highs reached for at least 10 of the industials in recent weeks. Still another 25% to go :{

 

Should be fun either way.

 

Maybe that was the low. Don't really care at 6.5% interest .... the vast portion of them do nothing to inspire me to part with my cash.

 

I demand better and good if not great stories ... not something which may evetually earn 6.5% and pay a dividend of half that if everything goes right the next 5 years.

 

Worst case ... 12 months we are back at the old highs ... hmmm .... 5,925 times 6.5% = 6,310 ... cash verses invested.

 

Nope more pain please !!

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Hi Kahuna

 

always enjoy your posts, there's nothing like some wild swings at the top of a market to bring out the experience. You only have to go through a few of these to always have that doubt about what can happen at the top.

 

not sure if others have posted on this point, but I'd say on Monday the margin loan calls will be melting down the phone lines. there has been a massive hit on the LVR of most of the ASX200 which the margin loans favour. I know in my case I have had the biggest % drop ever on Friday - barely in credit after sitting on 10-15% buffer for some time. Also in my case, I have several non LVR stocks sitting there which I can cash (PNA, CSE, AYR, STX, ARU) and there is always the option of putting in some more cash.

 

The point is that my margin loan these days is very conservative when it comes to gearing, unlike previous corrections where it was rather ugly. I suspect there is a lot of people looking at ugly scenarios at the moment - and panic selling.

 

It is intersting how emotion can turn. I sold half my BHP at $36.10 on the way up post July 1, to bank a big capital gain for the start of the year. I felt real regret as it went to near $40 and looked like going higher. Now it is a real chance at sub $30. I'm waiting for the annual results to hopefully have some bad news (excessively higher costs, $A effect, something left field) to buy them back plus some.

 

SPROCKET................

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QUOTE (kahuna1 @ Saturday 11/08/07 05:48pm)

QUOTE
The higher any stock goes the nearer it is to its eventual peak and the less one should love the stock. In other words one should be reducing when its going up an the converse when its going down ... not suggesting now is the time to double mind you .

 

Well my tactic is actually to pyramid into my winners (on pullbacks)/

(It should be said that im much younger and much less successful than Kahuna! http://www.sharescene.com/html/emoticons/lmaosmiley.gif ).

 

Peter Lynch actually said in his famed book: "When a favourable card turns up, add to your bet", so there must be merit in this strategy.

 

C'mon Kahuna, we know how much you love Peter? http://www.sharescene.com/html/emoticons/wub.gif

 

Also, have a look at this link.

Some of these traders make Alan Moss look like a peasant! http://www.sharescene.com/html/emoticons/lmaosmiley.gif

 

http://www.dailyii.com/article.asp?Positio...6&pagPageID=218

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In reply to: nizar on Saturday 11/08/07 06:20pm

gday nizzy,

 

I employ both strategies.

 

It is good to pyramid early into an upwards move (confirmation that the market is catching on).

 

But as the SP approaches fair value (may stillbe trading at a significant theoretical disscount) start lightening up. Then if you get an unjustified spike dump most (if not all) into the market.

 

Not saying buy/sell if the price goes up . . . its not that simple.

 

Like K and many others l am essentially a value-investor looking at fundamentals of stocks that are not well understood by the market (yet), but keep an eye on the broader markets and the SP-ceiling as others wake to the story.

 

NWE is a recent example of where l was buying sub 10c . . . as many did not understand the NWE story . . . when the masses were buying l was selling above 30c.

 

Another one both K and l have ridden is SLX.

 

No one (other than a select bunch of cluey people on this thread) understood it sub 50c when l was buying. As the market waked to the progress l was buying at $1, some more at $2 . . . (pyramiding). When everyone caught on and were boosting it up to $10 . . . l was selling at $7, $8, $9, $10 . . .

 

So one needs to assess the value proposition. As the upside (in % terms) is reduced as the stock goes up, this should be reflected in the strategy! Early on pyramiding is wise, but later in the upleg selling is the way to go.

 

Just my thoughts.

 

Like you K, the current developments are music to my ears.

 

I have locked in very respectable gains for this year, yet am still 90% cash . . . and have made a decent swag from a few rogue shorts that were taken out as hedging shorts when l was holding less cash.

 

___________

 

Got out at the top, lucky me . . . but l am still very concerned about the DOW.

 

I don't think the MBL buyers get it (yet).

 

The amount of funds being injected into major markets by the reserves suggests that the bottom is yet to come.

 

Enjoy the ride all, but l am glad to be largely out.

 

Capital preservation . . . and like K says - 6.5% risk free ontop of massive gains for a few years in a row is just fine until things settle.

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QUOTE (King Baz @ Saturday 11/08/07 06:58pm)

QUOTE
Like you K, the current developments are music to my ears.

 

Gdya Bazzy,

 

Well i was out when the XAO broke through 6200 support like it wasnt even there.

So not as early as you -- but still, i cant say seeing punters getting hurt is music to my ears.

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In reply to: nizar on Saturday 11/08/07 10:56pm

Nice work nizar.

 

QUOTE
but still, i cant say seeing punters getting hurt is music to my ears. 

 

I too am not massively pleased about super-saving of the masses losing value . . . but l try to take the emotion out of it. Isn't the idea to sell high and then buy again lower?

 

Still waiting for 5700 before l really get excited about buying more aggressively.

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In reply to: kahuna1 on Saturday 11/08/07 05:48pm

Hi Kahuna

 

Yep, I am an older guy too.

 

Have been reading through sharescene and picked you as the best with your years of experience even before you revealed it.

 

Always enjoyed and still enjoying your articles, full of commonsense, experiences, down to earth

opinions of the global market.

 

Keep up the good work mate. I totally agree with you.

 

Cheers

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