By Jason Fittler

Note to Readers:  You can listen to the audio of this report by clicking on the video at the bottom of thi spost.

The past 12 months have been a tough time on market we’d all have to agree, but the big question is; what is going on now?  We are now in a period in the market when complete confusion and fear has taken hold, and there is no rhyme or reason for the current market swings we’re seeing.

To understand, listen to the market reports on all channels or read the Financial Review each day to see what their reason is for the market falling. It’s always a vague response like:- “The market fell over night due to concerns over future economic recession and how deep it might go”. Translation:- “I have no idea what’s going on but my ego won’t allow me to tell you that, so I’ll make up something generic so I sound intelligent, and most likely you’ll have no idea either so you’ll just agree with me”.

This sort of media only serves to heighten the already anxious investor and does little to help.

So what is going to happen?  Short term I have no idea, last Thursday night the US market had a huge swing with a trading range of 12% during the inter day trading. The truth is no one knows why. As such I have stopped looking at the short term trend and started to focus on the longer term. Why?  Because you need to know where you’re going before you make a map.

So first, long term we can see a number of issues;

1.    Higher Unemployment.
2.    Lower interest rates, but harder credit terms.
3.    Higher inflation
4.    Slowing economy.
5.    Lower growth in the share market, higher income yields.
6.    Fall in the property sector.
7.    Australian Government will start stimulus packages.
8.    China will continue to grow and is working hard on their stimulus package.
9.    The recession will last until 2011.

When we take into consideration the above issue we have the ability to form a picture of the economic environment we will be working in over the coming 3 years. As such we can start to formulate a plan or map out what we need to do now to get us to where we want to be in the coming years.

The plan – achieve an average return of 8% pa.

How we do this!

1. Higher unemployment means we need to reduce our debt levels; gearing to invest needs to be done on reasonable bases. No more than 30%.

2. Lower interest rates – see above, use the lower rates to pay down loans, use surplus income. Look at it this way, if you are paying 8% in interest on your loan and you use the surplus cash to pay down your loan. Those funds are earning 8%.

3. Do not hold cash, short term ok, but longer than 6 months you will start losing money. The reserve banks expect inflation to be high until 2011 around the 5% mark. Cash is earning 6%. After you pay tax on the interest you return will be negative return on 1%.  Fear will direct you towards cash; common sense tells you invest in shares.

4. Slowing economy means that companies earnings will drop, in turn so will their dividends. As such it is important to buy now while prices are low to maintain your income. Even if NAB cuts their dividend in half you will be receiving 7% return so you only need 1% growth.

5. Chase higher income yields through Preference shares, in the big blue chip companies these are paying between 9-11% pa yields to maturity.

6. Stay out of property for now, high inflation, higher unemployment and the credit crisis has not hit property yet. There will be a time to enter this sector but not now.

7. The government will go into deficit; they need to if they are going to reduce unemployment. This is a good thing, look for stocks which will benefit, my favourite is Cardno. Buy and hold if they have a good yield.

8. China is also stimulating their economy, so this should increase demand for resources, believe the long term resources stocks, and accumulate these stocks as a small part of your portfolio for future 10 year growth.

9. 2011 is not a long way off, it won’t all be bad. Focus on income and the growth will come. Curb you’re spending over the coming years and you will be fine.

So now we have a plan for the longer term, time to put it into action.

Stop listening to all of the hype, stop listening to the media and get back to basics.

This down turn will pass with time whether or not you benefit will depend on how you act now.     

When you need advice, we are always ready to listen and help.
Give us a call (07) 4771 4577.

By Jason Fittler

November has started with a nice Bear market rally.

If you take a look at the below chart you will see that the market bottomed in October, from this point we have seen the market move back up strongly to 4300, at present it is starting to retest the lows. What we are now watching is for a higher low to be formed.

In my view if the market can bounce off the lows today and get back above the 4300 mark this will be a good sign… this will mean that for now we have seen the bottom of the market, and the Bear market rally is under way. Where will the Bear market rally pull up? I expect to see it get back to around 5000 in the coming months.

On the down side if the market does not pull up and push back above 4300 we can expect to see the market move back below 3750 and possibly form new lows.

So what should we do?

At present it is difficult to determine what the market will do in the short-term.

I would not base any short-term investment strategy around growth.

In the longer term I am focusing on the following;

1.    Income – looking for stock which can continue to pay you a nice income return.
2.    Security – looking for companies which have low debts levels.
3.    Blue Chip – again I am mainly looking to buy in the top 20 shares and their preference shares.
4.    Options – looking to enhance returns through conservative options strategies.

If you can set up your portfolio to obtain a return of around 8% pa you will do well during this Bear market. Long-term growth will come back, so it is important to hold that portfolio. 

Until next week.

By Jason Fittler

The market opened the month at 4800 only to fall to a low of 3800 being a drop of 20% during the month. We finished the month on a strong note with the market rallying back to 4000 closing down 17% for the month.

In Japan the market fell to 26 year lows while in the US the market fell back to 2003 levels.

There was also a large increase in margin calls during the month (not amongst our clients). The big story on this front was a local firm which converted all of their clients into cash. To do this at the bottom of the market is simply a measure to prevent margin calls which once again highlights the danger of high gearing levels. Now that these highly geared investors are out of the market this is a strong indicator that we should see a rally in the short term.

Have we seen the bottom? In the short term I expect so, however in the longer term we could see further market weakness.

What should we expect to see from here, in terms of the market? I expect to see a Bear Market rally which may get us back to around 5000 points. The time frame for this will be the next couple of months. However, when we take a look at the longer term being the next 2 years I would expect to see further weakness in our market.

The facts are that we are moving into a recession or at minimum, a slow down. The Reserve Bank will cut interest rates to soften this fall but it will happen all the same.

Why will there be a slow down?

1. The major players world wide are slowing down, this can be seen clearly in America.

2. Unemployment is historically low running at 4%; we can expect to see this rise. One of the leading indicators of this is the 50% drop in job ads.

3. Credit is tight, the policies the governments have put in place around the world to stimulate credit will work, but it will take a number of years.

4. Retail sales dropped 1.1% in September, in Queensland this figure was 5.3%. This is larger then the drop seen after GST was introduced in 2000. The concern is what the October figures will show.

5. Housing prices are also falling down 1.8% in the third quarter; this is the biggest fall since the mid 1980s.

6. The resources boom is slowing, base metals prices are coming off and steel production is down. Expansion projects have ceased, construction companies who feed off the resources sector are reporting a major slow down in their pipeline.

7. The average Australian is poorer today then they were this time last year as such we can expect a further slow down in consumption as they put of those larger purchases.

The Positives

1. Bear markets run for around 2 years and what we do know is that when the markets recover you will see fantastic gains.

2. Stocks are yielding high incomes at present; there is plenty of opportunity to receive an 8% return just on the income.

3. Using derivatives, you’ll be able to boost your returns in a very safe manner. For clients whose investing style suits, we will look at covered call strategies to boost returns in the coming two years.

The next two years will be a tough time but there will be plenty of opportunity to produce a great return. Remember a return above 8% per annum on average is considered a great return.

Until next week.

By Jason Fittler

What Happened?
There is a lot of information out there about why the market has fallen and who is responsiable. Below I have tried to simplify what happened with the help of a chart from Doug Mc Taggart chief economist for QIC. Let’s start with that.

The below chart comes from a presentation by Doug Mc Taggart. Take look and read below.

 
Mistakes made:

1. Cheap loans were given to people who could not afford or had poor credit history. Why? Greed. Banks could write the loans and then on sell them. This way they were off balance sheet and no longer their problem. Obviously this was profitable as such bank wrote worse and worse loans.

2. Investment bankers bought these junk bonds, took them along to the rating agencies to have the rated. The issue here is that investment banks should have avoided these junk bonds all together, but there was money to be made and they too would pass the risk on.

3. The next step is having then debts rated. Here is where this sub prime issue should have stopped. The rating agencies should have rated the junk bonds as such the intuitions would never have taken on the debt. So why were they A rated? In short, money. The rating agencies business model is based on repeat business. So if they did not give a good rating, the Investment Banks would take their business elsewhere. So the ones who should protect the end consumer are no better then the Investment Banks.

4. Now the problem compounds, with the intuition investors, they take these now A rated junk bonds and borrow against them in order to squeeze out some more money. Again another moral hazard, the intuitions should have never touched these but there was money to be made and besides everyone else was doing it.

5. The final step was then to sell these A rated junk to the poor retail investors. So why did your adviser not pick up the above mistakes. Simple, they did not have the information. By the time the end-product came to the market, such advisors simply relied on the rating of the rating agencies.

Next, times turned a little tough and the loans fell over.  The whole house of cards fell down and brought with it a number of investment banks, banks, and mortgage lenders. The result created two new words in the public vocabulary… sub prime and credit crises.

Should this have ever happened? No.
Has it happened before?  Yes.
Will it happen again? Yes.

What we'd like to happen.
I think I speak for everyone… we would all like to see the government reach into its magic bag and pull out an economic policy that will fix all of these problems. We would all like to see the market recover, so we can revisit the prosperous times between 2003 and 2007.  

The fact is… there will not be a quick fix.

So now is the time for you to... seek the right advice and re-visit your investment strategy.

However, the inexperienced and highly geared investors will…
•    Wake up every day and wish the nightmare over.
•    Find it difficult to cope with the losses incurred.
•    Feel sick every time they hear they market has hit new lows.
•    Most likely, exit the market, buy property, and kid themselves that property values will not fall.

What's going to happen.
The market will shake out and remove the highly geared, the inexperienced and the wrongly advised. With these investors gone, the market will start to recover.

We can expect to see further down side in the market as the last of the rubbish is purged. Daniel Goulding is expecting this to happen in the next couple of weeks, during which we could see the market fall as low as 3400. This should be followed buy a quick rally. This will spell the start of the recovery. I expect the market to recover somewhere between 4500 and 5000 and establish a long-term trading range at this level. But it could take 12 months to reach these levels.

But wait there is more! There are some major economic issues starting to surface which indicate that it will be a slow recovery.

The below is not a negative view. It is a factual view.

Once you have this information... you can make informed decisions.

1. Consumer confidence is at an all time low, as such you can expect spending to slow.

2.  Unemployment has been at historic lows, it is now starting to rise. I see higher unemployment in the future.

3. Interest rates are coming down but credit is tighter. This means only those who can afford it will get finance. Given issue 1 and 2 there will be less people able to borrow.

4. China’s GDP is down and the world as a whole is starting to slow.  This affects our major export, resources. As such the likes of BHP and RIO will cut back employees. Those of you in North Queensland will understand how fly-in fly-out miners have been a major factor in the growth of our area.

5. Inflation is on the way up, cost of living will increase, carbon trading will add to this. Belts will tighten. Like it or not, this will affect the discretionary spending companies such as Harvey Norman.

6. Investments are frozen, funds are flowing out of the market and into cash, term deposits etc. This is great for the banks but not for the recovery of the markets. I think the government put more thought to News Paper Headlines then Economic effect when they passed this one. One major side effect is a number of conservative fixed interest managed funds are now frozen to redemptions. This will have a major impact to self-funded retirees.

7. Property sector is now starting to be effected with the property trusts falling on Friday with further falls to come. Residential property will follow, guaranteed. In Townsville I would not like to be in the off the plan units market.

So what to do?

My choice is to structure my investments so I can continue to make money in a prolonged sideway market. I expect to continue to make 10% per annum over the coming years in a sideways market.

How?

Find out next week.

By Jason Fittler

The last couple of weeks have seen history in the making. Today I want to recap on a couple of issues. Below are the losses or gains you have made over the past 5 years. This is based on the ASX200 accumulation index.

1.    Market has fallen 27% from it high.
2.    Year on year the market is down 28%.
3.    Over the past 2 years you are down 6%.
4.    Over the past 5 years you have made a return of 72% or 14% per annum.

As you can see from the above figures if you are indeed a long term investor you have in fact, over the past 5 years produced a good overall result.

The problem with most investors is they focus on the short term; investors who have been in the market for the past 5 or 10 year would most likely think that they have lost money. I would expect that only a few would still be happy with their overall return.

The volatility in the market has caused even the most experienced players to throw their hands up in the air and declare that they have no idea what will happen next. As a professional investor I get paid to advise you where the market is going as such below is my view on the current market.

The issues:-
More bad news is to come, over the coming 12 months I would expect the following:
•    unemployment to increase,
•    interest rates to fall,
•    company earnings to fall,
•    the US dollar to pull back slightly however I do not expect to see the Aussie dollar move much above 0.90 US cents,
•    House prices to fall or stay at these levels,
•    Inflation to rise,
•    Base metal prices to fall.

The result:-
Our market will stay relatively flat, there will be day to day volatility, but when you take a look at the longer term charts the market will have moved sideways. This is a time for consolidation; each investor needs to decide how to position themselves in this market.

•    Traders; look for options, write covered calls, sell puts and look for the extra income.
•    Super fund looking for growth; invest as a contrarian, go against the trend and buy sectors which look cheap. Right now - banks and resources; in the next 12 months - the property sector.
•    Super funds in pension mode; chase the income through the preference shares issued by the top 20 stocks.
•    Geared investors; shuffle your portfolio to make sure that it is paying you maximum income while still maintaining your loan ratio. Now use surplus income to pay down debt.
•    New investors; no gearing, use surplus income to invest. Make sure you have a regular investment being made each month. To do this I would look at index funds. Best exposure for a small amount of risk.

Message:-
The market will come back but it will take time, in 5 years you will look back and wished you had bet the farm. Investing is a long term game, focusing on your losses will only increase them.

Focus on what to do from here keep working your investments and seek out advice but be careful where you get it from. A lot of commission based advisers are hurting right now as their income has dropped substantially over the past 6 months… As such they will tell you anything to get a sale.

Get the right advice, the right strategy and put it into action.     

Until next week.

When you need advice, we are always ready to listen and help.
Give us a call (07) 4771 4577.

The 10/10/2008 will be a date which goes down in share market history.

The market fell 8.2% on Friday and as I write this we are still waiting to see what the US will do over the weekend. By the time you read this we will know!

The market is back to the levels of March 2005, it has gone past our bottom of 4200 and at this stage we are not sure if it’s going to stop. What we do know is that the US will go into a Recession and most likely so too will Australia.  We are also confident that we will not see the market recover in the short term. This recovery will be between 6-8 months away.

So what to do.
1. If you have good quality shares in the market which are paying a good dividend hold on and ride out this weakness. However, expect a long wait.
2. If you have cash, buy good quality stocks for the income. My main picks are in the resources sector. I am comfortable to top up your banking and insurance stocks but not to buy large new holdings.

We are now looking for the market to have some strong positive days which will give us an indication that we have indeed seen the bottom. These indicators again will give us the confidence to be buying into this market.

Concerns.
There could be issues out there we’re unaware of… As such we could see the market fall further. If this is true I would expect to see them come to light over the next couple of weeks.

Please keep in mind that there is no rush to do anything. If you are concerned it is OK to sit for now… I don’t expect to see the market recover quickly which means there will be plenty of opportunity to get into the market.

The below chart of the market is a little more complicated than what I normally send out. Why? Because this week we are really stuck to work out where the market is going. In a nut shell here is what we know:-

1.    Fair Value is 6300 for the ASX 200
2.    The market is trading well below the 200 day average.
3.    The market seems to have weakened over the past week.

Other issues to throw into the mix are:-

1.    The US is injecting $700 Billion into the banking sector to improve liquidity.  This has been done before and worked so it should work again. But we will need to wait and see.
2.    Ban on Short Selling, this has had the effect of reducing trading volumes and in turn volatility in the market. But this is only for 30 days… What then?

At present we have more questions than answers and we will need to wait and see the how these measures will effect the market, and if this is the bottom of our market, and indeed if the US will be kept out of recession.

The answers to these questions will become clearer in the coming weeks as the effects of these measures can be seen, until then the best bet is to sit tight only buying into short term trading opportunities as they present themselves.

My view is that we have seen or are very close to the bottom of this correction, but it will take some months to confirm this view. As such the safe option is a controlled measured approach.  

By the way do not listen to the media on these issues; most of the material I have seen circulating is wrong and miss-informed. Remember media sell advertising not information.

Last week was a week we would all like to forget but I expect that we will see history repeat itself again in the coming weeks.

First let’s recap. The week started on a bad note dropping 2.5% followed by two more down days before we were hit with intra day lows of 4% on last Thursday. The sell off was brought about by a number of major companies in the US falling over. One was saved by the Bank of America the other by the US Feds and poor Lehman Brothers was left to file for Bankruptcy.

This saw the US market fall 4% on Wednesday night which sparked a sell off in all major countries around the world. Our market fell heavily before recovering towards the end of trade to close down 2.5% for the day. On Friday we saw a massive bounce in the market as many feared that they missed the bottom with a 4.5% rally in the market.

On Thursday we saw fear grip the market with both Suncorp and Macquarie Bank being sold down as if they were going broke only to bounce back the next day. This sort of price action is a clear indication that there is a lot of panic out there in the market place.

So what should you do?

Traders – this sort of volatility is a great opportunity, however you must have the right risk profile, as this is a high risk, high reward game.

Investors – continue to hold your core stocks maybe look to sell any bad stocks on a rally. Take the long-term view and only review your portfolio on a weekly basis.

Conservative Investors – it really is too late to look to move to cash. Talk to your adviser and look to off load any high-risk shares. Hold your core stocks.  
 
What will the future bring?

Expect more volatility in the coming weeks. We expect to see 4200 before the pain stops. It is not time to get too excited.

Until next week.

There much commentary around at present, but be careful who you listen to. Many economists change their mind more than I change my shirt. I heard on the news last week that the Aussie dollar will go to 0.75c, wow what a great insight. What I didn't hear is why. Statements with out any supporting theory should be left where they belong, in the pub.

This is where our chief economist Michael Knox is different. Why? Because everything he tells us, he puts in writing. He publishes his view on a regular bases. You can go back and check if what he is telling you today, is in line with previous comments, or if he has done a back flip.

His view is that the market is cheap right now. Based on key issues in his market model, the market is discounted 20% and so is the Aussie dollar.  The US dollar is over bought and will pull back, it must. That is the only way they can keep their economy under control.

Based on his latest report there is only a 1 to 2 percent chance that the Aussie dollar and the market will stay this low. He is also very confident that there will be a further resources boom over the coming 2 years.

Even if his is only 50% right on his model, you will still make a lot of money.
Go on; take a look at what he has to say. (When you click the link it will open a new page)

Until next week...

After a sell down last weak in the United States, it would appear that we are now heading into the long awaited down leg. Coupled with the traditional weakness this time of year, a betting man would expect to see the market come off over the coming weeks.

Do not panic; let me say that again, DO NOT PANIC. This will be a good opportunity to pick up some quality stocks a little cheaper. It will be a bumpy ride over the coming months but I expect that this down leg should shake the tree one last time and clear the way for a recovery starting next year.

As you can see in the below weekly chart, the market has been moving sideways for the past couple of weeks. It has been doing this on small volume, which indicates to us that the market is set for a further drop.

So what to do? There is a lot of commentary at present about being out of the financial stocks. If you are a short-term trader then I agree.  If you are a long-term investor I would continue to hold these stocks for the income.

In this period of the market, I would be looking at the material stocks as a source of opportunity. Let me say that I am not trying to pick the bottom. However this down leg will be lead by the resources sector, as such you will have the opportunity to buy in at lower prices. Take advantage of this opportunity.

The resources boom still has some life in it yet and buying into this sector should provide you with a good gain over the coming 12 months.

For those of you who would like to insure your portfolio, then start to think options. Options are a great way to make money in this market, but make sure you use a sensible approach. If you would like more information on options, give us a call.

Ph: (07) 07 4771 4577