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


kahuna1

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All,

 

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for Cash to be king it has to resist the forces marshalled against it

 

it can only be King if it is uncommon

 

what if everyone had lots of cash ? (only a few voters have too much(any) cash - they dont count for much)

 

Kevin will see interest rates to what ? like the UK 1.5% - a tax on holding cash - so spend it or suffer the tax

 

If you have a job and dont have a loan then Kevin could mandate that a suitable Loan be provided for you so you can have an immediate large amount of Cash to spend. As an individual you shouldnt have a lazy balance sheet - you need to be paying something off, get your income working for you.

 

If banks wont lend K can get the RBA to do(print) it for him directly

 

K could unleash the unions so we see a wages breakout so you can afford to pay off your K-Loan. Sharan Burrow has the right idea when she said the Alcoa workers at Wagerup need a 30% pay rise so they can spend more.

 

If you dont have a job the K will just give you some Cash (K has already allocated some that way about $21Bn)

 

 

(this post would be humorous if not so close to what K must be now thinking of )

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Interesting that Shilling thinks that the $U.S will remain strong. 2bs

 

 

 

PAUL B. FARRELL

Doomsayers warn: 'No recovery before 2010'

Wall Street's praying for new bull, but wishful thinking not enough for '09

By Paul B. Farrell, MarketWatch

Last update: 7:19 p.m. EST Jan. 12, 2009

 

Warning folks: Wall Street's happy-talking bulls are now hyping economic recovery and a new bull this year. That's a slower, but equally lethal 2009 version of that famous 1720 trick.

So first let's review Shilling's forecasts for 2009. He was amazingly accurate with his 2008 investment strategies. Expect the same in 2009 as he's part of a growing chorus of experts who believe "the worst global financial crisis and deepest worldwide recession since the 1930s will continue throughout 2009." His 12 strategies, with my notes:

 

1.

Sell home-builder stocks and bonds.

2.

If you plan to sell your house, second home or investment houses anytime soon, do so yesterday. (Yes, another 20% drop is coming.)

3.

Sell some housing-related stocks.

4.

Sell some consumer discretionary spending companies.

5.

Sell most commercial real estate.

6.

Sell some commodities. (But proceed "carefully:" Selling "some" securities, or buying, or actively trading in today's volatile markets demands a level of skill sets, savvy and sophistication most investors lack.)

7.

Sell emerging-market equities.

8.

Sell emerging-market debt.

9.

Sell stocks in general. (Shilling's forecast of a "severe recession suggests that corporate profits, as defined by the Commerce Department, will fall 48% from their peak in the third quarter 2007 to the fourth quarter 2009, and drop 32% from 2008 to 2009. This forecast implies much weaker S&P 500 earnings than projected by Wall Street analysts and strategies" whom he says "tend to be overly optimistic, especially in recessions when analysts don't want to offend managements of the companies they follow with low numbers.")

10.

Sell consumer lenders' equities.

11.

Buy the dollar.

12.

Buy, carefully, high-grade bonds.

 

No recovery in 2009? Not till 2010, or later? Shilling's not alone. But in the eyes of the Wall Street happy-talkers, he's just another dark-side bear vying for the title "Dr. Doom" in 2009.

Shilling offers 10 "sells" and two cautious "buys." The dollar's one: "The buck tends to have five-to-seven year moves, and the current one appears to have just started. With a global recession, the dollar is the safe haven, the best of the bad lot."

And as for bonds: While "the 27-year rally in Treasury bonds is over," the yields on "high-quality municipals, compared to super-safe Treasurys, make them interesting. The risk is that as the financial crisis continues, those spreads could get even bigger. And ratings may be cut as the recession strains state and local finances."

Another alternative: "Yields on investment-grade corporate bonds are very attractive relative to record low Treasury yields." So "buy high-grade corporate and municipal bonds, but carefully."

Will new bull be leading indicator of economic recovery?

Shilling is one of America's top economists. Sixteen months before the 2007 meltdown he warned Forbes readers: "The current housing weakness will develop into a full-scale rout ... a bubble ... the house-price collapse will induce a painful recession that will send U.S. stocks into a tailspin." But the bigger question now: When will it end?

"If policymakers succeed in containing the mortgage mess and bailing out financial crises related to consumer borrowing, commercial real estate and junk securities -- and other potential financial problems -- then the recession may well end in early 2010 as massive fiscal stimulus begins to take hold ... if not, the slump probably will extend well into 2010 and perhaps beyond, and might as well be given the label that such a long downturn deserves: a depression."

Contrast that with Wall Street strategists who make their living selling securities that generate big commissions and fees. They don't like the conservative forecasters. So it's no surprise that another regular on the Forbes investment team, Bob Froehlich, author of "A Bull for All Seasons" and chief investment strategist with Deutsche Bank's retail funds, recently dismissed Shilling as a "perma-bear" whose forecasts are "dead wrong."

But a year ago Froehlich predicted the market would stay above 14,000 in 2008. And later Deutsche Bank's stock tanked from a high around $128 to a low about $22.

Yes, money managers are optimistic ... but 30% returns!?

The main reason Wall Streeters expect a new bull market in 2009 is the growing belief that the markets hit bottom back in November. Last week a Wall Street Journal article reported that "Suddenly, a Market Turnaround: Dow Is Up Nearly 20% From a Low, Other Markets More; Is It a Tease?"

That same day, in comes a "decidedly optimistic, opportunistic approach to the economic downturn and the effect it has had on the financial markets." The source: Brent Wilsey, president of Wilsey Asset Management. His "9 Reasons 2009 can Deliver a 30% Return for Investors" got my attention as I read Shilling's 42-page "Outlook for 2009." Wilsey's reasoning begins with the key assumption that we've hit bottom: The "market is forward thinking and can be ahead of the game by six months."

The contrast with Shilling offers an interesting counterpoint as you examine your own investment strategies for 2009. Assuming the market did bottom a few months ago, he predicts "the market could begin a strong rally in April. And even if the economy isn't going to improve until later in February 2010" he again extrapolates back six months predicting the "market could begin a strong rally in August" of 2009.

Then a huge leap of faith: "With companies trading at today's levels it's more important to be invested than to try and time the bottom." Bottom line: Start buying stocks now. Now? But first, examine the nine upbeat assumptions driving his 30% forecast, edited for comparison:

 

1.

$12 trillion cash on the sidelines: Just 10% would be a $1.2 trillion investment.

2.

Low interest rates: Cheap money usually has a positive effect on the economy.

3.

Low stock valuations: Forward earnings P/E ratios on many companies are under 10.

4.

Low consumer confidence: Low confidence often signals a rebound in a year.

5.

Banking fundamentals improving: The banks are working through this mess.

6.

Low gas prices: Add another $300 billion to $500 billion back into the economy.

7.

Increased labor productivity: Companies become cost effective, boost stocks.

8.

New president: Typically boosts confidence, optimism and spending.

9.

Federal money: And President-elect Barack Obama's ready to pump $1.2 trillion into the economy.

 

OK folks, the ball's in your court. Two opposing forecasts. But now you alone must decide on the direction of the market, economy and your investment strategy, facing so many "ifs," so many unpredictables.

Stop and ask yourself: Maybe you should ignore all predictions, especially any made by the Wall Street voices that got us in this mess in the first place. Maybe you should just wait, patiently, pray ... and do nothing

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In reply to: Twobees on Wednesday 14/01/09 12:34am

Is the "expert" Shilling,s advice worth a shilling? (a shilling worth 10cents now). I may be completely wrong but I just cannot get a hold of the US$ being the best "safe haven " of all.Just announced that deficit for the first three months of 2009 has blown out already to US$485.2billion compared to a total of US$455billion 2008. For my shillings worth I think Mr Shilling is wrong.

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In reply to: Twobees on Wednesday 14/01/09 12:34am

Having returned from holidays I have been catching up on the comments in this thread. Happy new year to everyone.

 

I guess everyone is scratching their head and asking what now especially in the face of the diverse opinions of the various experts in the market.

 

At times like these I find the best course is to use your own common sense rather than listening to the talking heads. I am often amused by the comment "XYZ who has been uncannily accurate over the last year". Plainly any perennial bear will have been uncannily accurate over the last year. In the hard cold light of statistics however, there are few commentators if any that show greater than a 60% correlation to what actually transpires on the market and most are around the 30% mark. The better ones of course show a greater mastery of obfuscation than the makets such that their comments can be interpreted to mean anything in the washup. At the end of the day only the numbers matter.

 

I have some difficulty with the advice given by Shilling. He suggests selling property, shares and investing (carefully, whatever that means) in bonds but these instruments are yielding around 2% for 10 years and 1% for 5 years. This may well yield a positive position in the next 6 months but when exactly should this investing position be reversed. Further he suggests investing in the $US when the Fed is printing money. Surely a highly risky position.

 

It should almost be compulsary before any discussion takes place on this matter that an investment horizon is first stated. If we take a long term horizon of 3-5 years then we should be able to use the lessons of history as a guide which tells us that the markets will recover, the degree of recovery being a matter of conjecture. There will be the perennial bears who believe that Japanese style stagflation will be visited on the Western world and we will be in for a decade of no growth. If this is your belief then cash is truly king and bonds, TDs are your go, even though in real terms your net asset position will be weakened over time. If you believe markets will recover then it is a question of degree. Remembering that we talk of a long term position here, it is unlikely that interest rates in he US will increase any time soon. Certainly in Oz they will continue to drop. Yesterday I was quoted 5.25% for a 3 month TD. Within 3 months I would expect this to be 3.5%. The rates for cash are even lower in the US. On this we pay tax giving a net yield of around 2.5%. This return has to be looked at in the light of longer term inflation of 3-5% per annum because whilst global economies are deflating now the cost side is certainly inflating and the fiscal stimulus packages are certain to be inflationary. My view is that 3-5% is on the low side but I use that now as this is what the Fed/Reserve/IMF uses.

 

So what are the investing alternatives.

 

Well there is property. Prime commercial yields are now starting to align globally at around 8% and residential yields at 6%. The problem is slipping cap rates and thus capital protection. This is of course quantifiable in terms of long term returns and if you assume a 20% deterioration in valuations long term yields will drop by 2% of so. Of course the great unknown is how much they will drop and how quickly they will recover. It should be remembered however, that as an asset class property will be inflationary protective for many reasons which I wont go into here. Of course property will not resume its upward march for some time yet, but 2 years is a good bet. Thus to cut a long story short, a simple calculation shows that investment in property is highly likely to beat cash over 5 years. Of course when I say property I mean direct investment rather than via the markets. In my view REITs should be simply lumped with market investments.

 

Then there is the stockmarket. We have P/Es below 10 in both the US and Oz based on current returns, which all will agree will deteriorate over 2009. The question is by how much. We have historic levels of debt throughout the Western world and there is a substantial amound of deleveraging to take place over the next 5 years. Undoubtedly this will affect the performance of businesses underlying all stockmarkets. Plainly the indices have factored in a halving of the business outputs. There is a strong case to argue this selling is overdone, but for the sake of argument let us assume this will happen. I will make the case for the ASX here. Currently average dividend return on market is 8%. Some are less, others are more. I would argue that those that are less are unlikely to be greatly affected whilst those that are more will be more likely to be affected. Let us assume that this dividend return drops to 4% on average. Further let us assume that taxation effect is minimal (an exhaustive analysis on its own) and this return translates to 3.5%. But of course this is not the end of the story. By assuming a halving in returns we have already taken into account the deflationary effects (in much the same way as we say property will drop by 20%) and so business outputs on average must as they have done for 300 years track GDP growth. Put in another way based on a 3.5% dividend return the markets will return 3.5% AFTER INFLATION. Compare this to a return on cash of negative 2-3%

 

Accordingly, unless you believe in financial armegeddon then Cash is no longer king and over the next 3-5 years in real terms you will lose money in cash.

 

None of this is of course new. It is economics 101. Buffet repeats it incessently every time he is given the microphone. It is however worth repeating from time to time because at times like this people forget about the basics and fear drives their investment decisions. Go no further than the looming bond bubble in the US where investors are rushing to embrace returns that will lose them money in real terms.

 

Assuming all this is given then the discussion returns to qualifying shorter time horizons. Maybe 2 years. Maybe 1 year. Maybe 6 months. Immediate Trading. All of these will yield different strategies.

 

For those long term traders that await further lows, then history can provide further guidance. Historic drops in the market are painful and long rembered, but increases are euphoric and forgotten the day after. Increases come unexpectedly and in large magnitude and if you are not in the market it is opportunity lost. There are many studies which show that those investors timing the markets will do worse than those who dont. I understand on this forum many if not most will not agree with this as all believe they have strong market prescience due to their stong market knowledge. However, as a general guideline most here I think understand that true bottom picking is difficult if not impossible and with the market at half what is was the market is a more investable proposition than 18 months ago.

 

So inevitably the question is one of timing. Not enough space to discuss here but we are not in the depression revisited. Anyone who believes this has not studied the depression in any detail. It is hard to make comparisons to past recessions as they are all different. The big issue we have to contend with now is debt, but this has to be looked at in terms of the changing of the financial guard in the emerging economies of China and India. Surely there is great change, just as their was in past downturns, but the system will churn and the cycle will turn.

 

If we again look at statistics we see a 15 month cycle to lows and and average 6 years to reach previous peak. Interestingly if we have seen the lows then this recovery was quicker than most, but that is yet to be seen. I suspect that for the next 6 months we gravitate between 3300-3800 ASX and 8000-9000 Dow, but my view is that this period will present buying opportunities too good to pass up.

 

Interestingly, if you accept a 10 year cycle to reach peak then you are looking at 8% increase per annum plus an average 4% dividend return (for what its worth I believe this is too conservative), this yielding 12%, this being the average return over the last 100 years in Australia.

 

What does this translate to in reality. For me, a simple strategy for 2009.

 

(1) I am currently 35% in cash with no debt. In 6-12 months I wish to be geared to the tune of 20-30%. Timing will be dependent on the reading of the markets over time.

 

(2) I will not be selling any direct property. Within 6 months I will buy direct property at the low end (<$500K).

 

(3) In the next 6 months I will be a buyer of blue chip, high dividend yeilding stocks on weakness. Margin lending facilties are in place to enable a gearing strategy. I am of the view that many stocks provide strong enough and secure enough returns that dividend streams will cover margin lending interest charges.

 

(4) For various reasons outlined here and in other threads I believe Gold will strengthen and thus I have a reasonable and increasing position in Gold stocks.

 

(5) Trading is perilous ATM as I see no prevailing logic to market positions. However, clearly the markets have and will continue to overreact from time to time with regard to single stocks or indices. In the case of these extreme overreactions I believe there is money to be made, provided careful money management practices are adhered to.

 

As a closing comment I have now been through 5 downturns and lost (on paper at least) significant amounts only to emerge with a stronger position. Maybe this time is different, but I have a view that common sense should prevail over fear at all times and I guess this is one of those times when this view will be sorely tested.

 

Good luck to all over the next year.

 

Cheers

 

 

 

 

 

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In reply to: cwjohn on Wednesday 14/01/09 10:16am

Allow me to make the assumption that you are bullish. In an ocean teeming with the scourge and scornful sentiment of "perennial bears", does this make you a contrarian? If so, you are hardly alone. Many here are eagerly awaiting that decisive yet elusive turning point from trough to peak. What would you say about the use of carry trading as an indicator of trend? The flight to USD and JPY as of late is a reversal of this trait as investors head to haven. The latter half of 2008 is all but a complete unwinding of carry trade positions with sellers dumping risk, and returns, for guarantees. The rise in the Yen is a credible testament of this behaviour. The Greenback's appreciation however, I believe, is much of a ruse as many others have stated. M3 is running at near 20% annualized, public deficits expected to reach 2.7 trillion USD when BO takes office and next to no savings. Real unemployment is perhaps already threatening to cross into double digits and we'll see more of this when the bureau most certainly revises their numbers further downward in the coming months. So once carry trades resume in earnest and commodity currencies pick up their pace, would anyone see that as a commonly sensical indication of trend re-definition? Quite frankly, I'd like to see the Yen devalued to hell.

 

QUOTE
I have now been through 5 downturns

 

So I guessing that would make you around 25 right? http://www.sharescene.com/html/emoticons/tongue.gif

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In reply to: jfgao on Wednesday 14/01/09 11:28am

May I suggest you write clear understandable English. That way, to use the vernacular, I might have a chance to know WTF youÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢re on about.

 

I would prefer to hold US dollars than Australian dollars.

The Australian current account deficit is funded by the banks. How long do you think that can continue before we have a financial crisis?

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In reply to: spot on Wednesday 14/01/09 12:55pm

I would prefer to hold US dollars than Australian dollars.

The Australian current account deficit is funded by the banks. How long do you think that can continue before we have a financial crisis? QUOTE

 

All very true, spot.

But the US current account deficit is funded by various Asian and Middle Eastern treasuries. Doesn't look like a very attractive alternative to me.

 

http://www.sharescene.com/html/emoticons/unsure.gif

 

 

 

 

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