Month: July 2013

By HY Markets Forex Blog

The Asian Market opened at a negative territory on Monday, as investors raise concerns over the credit crunch in China and further concerns regarding the Federal Reserve’s plans to cut back on its asset-purchasing program.

The US data releases showed that the number of employment has increased and the Fed may proceed with slowing down the asset-purchasing program earlier than expected.

The Hong Kong Hang Seng, were lowered to 2.14% to 20,463.80, while the Topic Index fell 1.4% at 1,172.58. The Nikkei 225 lowered 1.40% at 14,109.34, while the Chinese Shanghai composite closed at 1.61% lower to 1,974.71 at the time of writing.

The Australian S&P/ASX 200 fell 0.65% lower at 4,810.20. In South Korea, the Kospi index lowered 0.90% at 1,816.85.

The Chinese State council announced it would toughen up supervision of the wealth management products and build up stability in the financial market.

Analysts predict that the money-market in China is likely to lower its credit growth by the end of the year to 750 billion.

In Japan, the weaker yen grew the import costs, while Japan’s account surplus lowered 540.7 billion in May, according to reports from the Ministry of Finance.

Exports in the month of May increased by 9.1%, as Japan’s service sentiment index dropped 53 points in June, from previous record of 55.7 in May.

The post Asia Markets opens negative on China’s credit crunch appeared first on | HY Markets Official blog.

Article provided by HY Markets Forex Blog

By MoneyMorning.com.au

You may be tired of hearing it, but we’re not tired of saying it.

Our job is to give you our best investment ideas.

That means giving you advice you may not want to hear.

Sometimes it means giving you advice you ardently disagree with.

But we give you the advice anyway. It’s then up to you to decide if you want to follow it or not.

Well, today we’ll give you more advice…that you may not want to hear. But, for the sake of your investments, hopefully you’ll do exactly as we say…

For months we’ve told you to buy stocks.

For months we’ve told you the market was and would be volatile.

So when the market crashed through May and June we didn’t panic.

Hopefully you didn’t panic either.

We won’t claim we knew stocks would crash, but we knew all along a price drop was possible.

We told you that in advance. That’s why we suggested you should ‘average in’ or ‘scale in’ to the market.

That means buying – say – one-half or one-third of your normal position size and then adding to it over the following weeks.

Granted, in the short term it may not seem like great advice as stocks fell. But in the longer term, if we’re right about the direction the stock market will take over the next two years then you should be ahead of the game…well ahead of the game.

Besides, if you’d followed our advice before that, you would have bought stocks through the second half of 2012 and into 2013. So your blue-chip income portfolio should look super healthy…despite the recent price falls.

The one thing we didn’t want you to do was panic sell. As we say, we warned you about the potential volatility so it shouldn’t have surprised you.

But regardless of how you’ve managed your portfolio in recent weeks, what should you do next? That’s easy…

‘Contrarians, Start Your Engines’

Our view is that the market is on course for a strong rebound. Some of the big blue-chip stocks are already moving higher from the recent lows. Saying that, they’re still below the May peak.

For example – AGL Energy [ASX: AGK] is down 7.8% since the start of May; Westpac Banking Corporation [ASX: WBC] is down 14.3% since the start of May; and Commonwealth Bank of Australia [ASX: CBA] is down 3.5%.

Another blue-chip favourite among Australian investors – CSL Ltd [ASX: CSL] – has already rebounded. It had fallen 8.8% from May before recovering just two weeks ago.

And you thought it was the end of the world for stocks eh?

But it’s not just your editor calling for stocks to gain from here. According to MarketWatch:

‘Investors in international stock mutual funds and ETFs have been in a world of hurt. But now the managers of those funds are spinning the globe and finding bargains among the bramble.

‘“Contrarians, start your engines,” trumpeted the headline of a recent Bank of America Merrill Lynch report on global fund manager sentiment. Investors’ exodus from emerging-market stocks, which accelerated in the second quarter, has created a buying opportunity in those areas, BofA strategists asserted.‘

It won’t surprise you to know that much of the selling in recent weeks was panic selling. A lot of it came from funds selling down positions as investors withdraw their money.

But margin lending and other leveraged investments such as CFDs (contracts for difference), and not to mention institutional trading magnified the volatility too.

There’s No Excuse Not to Own Stocks

Of course, selling by the panic-merchants creates opportunities for calm investors like you. As far as we’re concerned, it should be business as usual.

If you’ve taken our advice and ‘averaged in’ to the market in recent weeks, we see no reason to stop and change course.

Keep averaging in for as long as central banks keep printing money, for as long as quality businesses can keep paying dividends, and for as long as entrepreneurial companies can disrupt markets with new ideas.

The Australian market is now trading right at the bottom of a range we predict it will stay within for the rest of this year.

Providing the market doesn’t experience any catastrophic events between now and December, we expect stocks to begin building up to a strong year-end stock rally. That should see the market take out this year’s high above 5,200 points and perhaps finish even higher.

And if that happens, it won’t just be dividend stocks. In fact, our bet is growth stocks will start to make up for the gains they missed out on in the first half of this year – so look out for resource stocks to contribute strongly to the gains.

If you already own stocks, think about adding to your positions…you’re probably already in that frame of mind. Good. If you don’t own any yet, what are you waiting for? Really, what are you waiting for?

Sorry to be blunt, but there’s no excuse not to have at least some of your savings in stocks. All cash? All gold? All term deposits? That’s no way to build wealth and save for a comfortable retirement.

If you want any chance of building your savings, you’ve got to take risks. And as we see it, with the market down from the recent peak, now is a great time to build more exposure to stocks.

Cheers,
Kris+

From the Port Phillip Publishing Library

Special Report: Panic of 2103

Daily Reckoning: Central Bankers in Driving Seat

Money Morning: Gloom Always Follows Boom…

Pursuit of Happiness: Reasons to Embrace the Future and Technology

Australian Small-Cap Investigator:
How to Make Big Money from Small-Cap Stocks

By MoneyMorning.com.au

Emerging markets have felt the effect of monetary tightening emanating from the world’s largest economy and manager of the global reserve currency.

Since peaking in January this year, the Brazilian market is down a whopping 22% and Mexico’s bourse is off 14%. Asia is not far behind. Chinese stocks are down 13.5% from the peak in February, while Thailand (-10.8%), the Philippines (-15.6%), Indonesia (-8.7%) and India (-6.1%) are all down from their highs in May.

Now this might just be a correction and nothing to worry about. After all, interest rates are still incredibly low from a historical point of view. You could just be seeing a pullback following a central bank induced liquidity melt-up earlier in the year.

But given the inherent instability in the system…and the fact that nothing has changed to correct the problems that brought about the first big credit crisis in 2007, we would be inclined to take the recent market action as a warning sign of trouble to come.

To Understand Why…

You need to understand how the financial system ‘works’. The US is the source of global liquidity. Due to massive US budget and trade deficits, US dollars (in the form of Treasury and mortgage securities) flow out into the world.

Countries that stand to benefit the most from the deficit spending soak up the flow of dollars with, in many cases, newly created domestic money and credit.

This has the effect of both financing over-consumption in the US and building up the foreign exchange reserves of the country in question…reserves which that domestic banking system can then use as a base to expand its own credit creation activities. It’s a liquidity-creating positive feedback loop.

While ever the US, buoyed by cheap money, continues to spew ever increasing amounts of greenbacks into the financial system, and emerging market export-dependent countries continue to mop up those greenbacks and increase their ‘foreign-exchange’ reserves, credit and equity markets will tend to inflate.

But this global dynamic relies on confidence in the ‘system’ to go on creating enough dollars and credit to keep the asset inflation going. And we think that confidence is beginning to wane.

So even though interest rates may still be historically low, it’s the change in rates you should be looking at. And compared to a few months ago, financial conditions are now tighter. And tighter conditions in the US mean tighter conditions around the world. Monetary tightening doesn’t usually inspire confidence amongst financial speculators.

Don’t forget, the US fiscal consolidation plays a large part in this too. For the past five years, the US government has churned out $1 trillion plus budget deficits. But government spending is set to contract sharply following the repeal of the Bush-era tax cuts and some changes to spending.

The Congressional Budget Office (CBO) now projects that the federal budget deficit will total $642 billion in 2013 and $560 billion in 2014. Last year, the CBO estimated that the deficit would remain over $1 trillion in 2013 and reach $924 billion in 2014.

That’s quite a tightening. The supply of new treasuries is still high, but it’s the change that’s important and if the government can hit the CBO forecasts (unlikely) it will represent a significant fiscal contraction over this year and the next.

So you’ve got monetary and fiscal tightening going on behind the scenes, combined with hugely inflated, derivative driven asset market casinos where the players want to keep on rolling the dice.

But maybe not all the players. Perhaps what we’ve seen over the past month or so is the ‘smart money’ taking their chips off the table and exiting the building. When this occurred in past tightening phases, it was a prelude to a crash.

Greg Canavan
Editor, The Daily Reckoning Australia

[Ed note: To read more of Greg’s in depth macro-economic analysis, click here to subscribe to the free daily e-letter The Daily Reckoning.]

From the Archives…

The Power of Low Interest Rates Coming to the Aussie Market
5-07-2013 – Kris Sayce

S+P 500 Downtrend Looms? Counting Down The Days…
4-07-2013 – Murray Dawes

Here’s Your Six-Point Stock Buying Checklist
3-07-2013 – Kris Sayce

Are the Credit Rating Agencies at it Again?
2-07-2013 – Kris Sayce

Why This Could be Another Great Year for Australian Stocks…
1-07-2013 – Kris Sayce

USDCHF’s upward movement from 0.9130 extends to as high as 0.9664. Support is at the upward trend line on 4-hour chart, as long as the trend line support holds, the uptrend could be expected to continue, and further rise towards 0.9800 area could be seen over the next several days. On the downside, a clear break below the trend line support will suggest that consolidation of the uptrend is underway, then the pair will find support around 0.9450.

Written by ForexCycle.com

Article by Investazor.com

A really important week has passed for the EURUSD currency pair. As we know, in the first week of the month the ECB has the monetary statement and the press conference and the Non-Farm Payrolls is published for the United States.

At this press conference Mario Draghi pointed some things regarding the positioning of the ECB in what concerns the economy of the Euro Zone:

• Euro Area growth risks remain on the downside
• Inflation risks are broadly balanced, inflation rates may be volatile throughout the year
• Economy should recover at subdued pace
• 0.50% interest rate was maintained, but it is not the lower bound
• The rates to stay low for extended period of time
• ECB keeps an open mind on negative deposit rates

If this wasn’t enough, S&P lowered Portugal’s outlook to negative from stable. The country’s current grade is BB and rating company sees one in three chance of ratings cut within the next 12 months, and the also see a deficit about 5.8% of the GDP for 2013.

For the United States the story is a bit different. Several weeks ago Ben Bernanke said that the Federal Reserve is preparing for tapering the Quantitative Easing Program by the end of 2013, and stop it in 2014. The conditions for these measures were that the economy to head towards their forecast and the unemployment rate to drop to or under 7%.

One day after the ECB’s press conference, the Non-Farm Payrolls was published. It surprised the market with a value of 195K vs. 165K expected, and the previous value revised to 195K. Even though the Unemployment Rate did not come as expected and stagnated at 7.6%, the biggest impact came from the NFP.

Chart: EURUSD, Daily

This week Euro dropped almost 1.5%. The biggest fall took place on Thursday and Friday. The speech of Mario Draghi did not encourage the investors to buy euros and the dollar continued its trend. Next day, the economic data showed an improvement in the US labor market, the dollar continued to appreciate.

From the technical point of view EURUSD got to a good support area, formed by 1.28 level and a trend line. The probability for the down trend to continue it is quite high. If this area will fall the next good support it is at 1.2650. Before a breakout we could see a bounce back to 1.29 or somewhere near 1.30.

The post Weekly Wrap Up for EURUSD, Euro Dropped 1.48% appeared first on investazor.com.

By www.CentralBankNews.info
    This week the European Central Bank (ECB) and the Bank of England (BOE) expanded their arsenal of monetary policy tools to counter the spillover from the Federal Reserve’s decision to wind down quantitative easing and prevent the subsequent rise in interest rates from snuffing out Europe’ economic recovery.
    The ECB and BOE wanted to convey a similar message to financial markets: We are a long way away from tightening our policy and the rise in global bond yields will have a negative impact on our economies.
    The move by the ECB and BOE follows recent attempts by central banks in emerging markets to tackle the spillover from the change in U.S. monetary policy, illustrating the power of globalized financial markets to challenge central banks that base their policies on domestic economic conditions.
    While markets and analysts were focused on the launch of forward guidance and a continuation of easy policy by the BOE, along with a possible rate cut by the ECB, the central banks of Sweden and Poland took the opposite tack, signaling that their policy won’t be eased any further.
    Even the Reserve Bank of Australia (RBA), which expects to see the benefits of a 10 percent fall in its dollar, appeared to pull back on its readiness to cut rates. In this week’s statement, the RBA said it saw “some scope for further easing,” compared with June’s statement of “scope for further easing,” signaling that the room to cut rates had narrowed ever so slightly.
    This week featured seven central bank policy decisions, with two cutting rates: The National Bank of Poland’s (NBP) third rate cut in a row along with the National Bank of Romania’s (NBR) first rate cut this year.
   The other five central banks that took policy decisions this week maintained their policy rates: the RBA, the BOE, the ECB, Sweden’s Riksbank and the Bank of Uganda (BOU).
      Through the first 27 weeks of this year, central bank policy rates have been cut 66 times, or 25.4 percent of the 260 policy decisions taken by the 90 central banks followed by Central Bank News, slightly up from 24.9 percent last week, indicating that the global trend toward lower policy rates remains firmly in place.
   
    LAST WEEK’S (WEEK 27) MONETARY POLICY DECISIONS:

    NEXT WEEK  (week 28) features 11 scheduled central bank policy meetings, including Malawi, Thailand, Croatia, Brazil, Japan, South Korea, Serbia, Indonesia, Malaysia, Peru and Mexico.

     www,CentralBankNews.info

By Profit Confidential

I can’t say this often enough: the eurozone debt crisis is here to stay for a long time. The key stock indices might have given investors false hope, but we are still standing at square one of any economic recovery.

Greece, which was at the epicenter of the eurozone debt crisis, may be required to issue Treasury bills to stay solvent. The country has to convince the International Monetary Fund (IMF) and its eurozone peers that it has made the changes required by the bailout conditions it agreed to. If it fails to do so, Greece will not receive any aid from its eurozone partners for the next three months. (Source: MNI Deutche Borse Group, July 3, 2013.)

But Greece has actually failed to follow through on two conditions set by its creditors: cutting 12,500 jobs from the government sector and reducing a small but significant fiscal gap.

And Greece is hardly the only troublesome nation when it comes to the eurozone debt crisis. Look at Portugal—problems are emerging in that eurozone nation as both its finance minister and its foreign minister recently resigned. There are fears that the Portuguese government might collapse and put the 78-billion-euro bailout it received in 2011 in jeopardy. (Source: Reuters, July 3, 2013.) Those fears have caused the key stock index in Portugal to plummet and bond yields to soar.

And it doesn’t end here. The third-biggest economic hub in the eurozone, Italy, is facing troubles of its own. Antonio Guglielmi, an analyst at the second-biggest bank in the country, Mediobanca, in a confidential report to clients wrote, “The Italian macro situation has not improved over the last quarter, rather the contrary. Some 160 large corporates in Italy are now in special crisis administration.” (Source: “Italy could need EU rescue within six months, warns Mediobanca,” Telegraph, June 24, 2013.)

The report also indicated that the eurozone country will “inevitably end up in an EU bailout request” in the next six months unless it is able to lower its borrowing costs and recover from economic chaos. (Source: Ibid.)

Keep in mind that Italy is the country with the most debt in the region and third worldwide, after the U.S. and Japan. The debt crisis that the mainstream media claimed was over or under control could easily shake the global economy again.

All of this shouldn’t come as a surprise to my readers. I have been warning about the debt crisis in the eurozone for some time now. The common currency region still has some major problems that need to be fixed before it can be said that it’s in good economic shape.

What worries me even more is that the nations with stronger economies, such as France, have also fallen prey to the troubles in the eurozone. France is currently in a recession and the country’s unemployment rate remains high. The longer the debt crisis continues in the eurozone, the deeper its impact will be on the stronger economies like that of France.

I can’t stress this enough: the eurozone is critical to our own economy, because a significant number of American-based companies operate and gain revenues from the eurozone. Troubles in that region could hurt the profitability of North American companies, which could eventually cause the key stock indices here at home to slide lower.

Article by profitconfidential.com

By Profit Confidential

On the surface, today’s jobs market report looks good…

195,000 jobs were created in the U.S. economy during the month of June, with the “official” unemployment rate for the month sitting at 7.6%, unchanged from May. (Source: Bureau of Labor Statistics, July 5, 2013.)

But look a little closer and this jobs market report is a catastrophe…

Look at the underemployment rate, which includes people who have given up looking for work in the jobs market and those who are working part-time because they can’t get full-time work—based on this number, the picture looks drastically different. In June, the underemployment rate rose from 13.8% to 14.3%—the highest level since February! That means that one out of every seven Americans who want to work can’t get a job. (And the politicians keep telling me the economy is improving?)

And if that wasn’t bad enough…

Most of the jobs created in June were part-time jobs; the number of people working part-time in the U.S. jobs market rose by 322,000 to 8.2 million. These people aren’t working part-time because they want to—it’s because they can’t find full-time work.

And there’s still more…

Of the jobs created in June, 60% were in low-paying positions: 75,000 jobs were created in the leisure and hospitality sector, and 37,000 jobs were created in the retail sector! Low-paying jobs do not create economic growth.

The numbers don’t lie. The jobs market report today loudly screams, “Not a lot has changed in the U.S. economy.” Let’s get real, politicians; the way the government creates the unemployment rate is misleading. Millions of Americans are resorting to food stamps for one reason—they can’t find a job and have run out of savings.

I remain very skeptical about the so-called “economic recovery.” There is no growth in the U.S. economy. Today’s jobs market report affirms my belief.

A healthy jobs market can give the U.S. economy the economic growth we so desperately need. When Americans have jobs, they buy more goods, they spend on durable goods, first-time home buyers enter the housing market, and consumers generally spend more—but none of this is happening. A worsening jobs market puts the brakes on consumer spending and ultimately causes the U.S. economy to suffer, even contract. (Remember: consumer spending makes up almost 70% of U.S. gross domestic product.)

Dear reader, the question has become: “How can we not avoid a recession in late 2013 or in 2014?” Get ready for it.

Michael’s Personal Notes:

I can’t say this often enough: the eurozone debt crisis is here to stay for a long time. The key stock indices might have given investors false hope, but we are still standing at square one of any economic recovery.

Greece, which was at the epicenter of the eurozone debt crisis, may be required to issue Treasury bills to stay solvent. The country has to convince the International Monetary Fund (IMF) and its eurozone peers that it has made the changes required by the bailout conditions it agreed to. If it fails to do so, Greece will not receive any aid from its eurozone partners for the next three months. (Source: MNI Deutche Borse Group, July 3, 2013.)

But Greece has actually failed to follow through on two conditions set by its creditors: cutting 12,500 jobs from the government sector and reducing a small but significant fiscal gap.

And Greece is hardly the only troublesome nation when it comes to the eurozone debt crisis. Look at Portugal—problems are emerging in that eurozone nation as both its finance minister and its foreign minister recently resigned. There are fears that the Portuguese government might collapse and put the 78-billion-euro bailout it received in 2011 in jeopardy. (Source: Reuters, July 3, 2013.) Those fears have caused the key stock index in Portugal to plummet and bond yields to soar.

And it doesn’t end here. The third-biggest economic hub in the eurozone, Italy, is facing troubles of its own. Antonio Guglielmi, an analyst at the second-biggest bank in the country, Mediobanca, in a confidential report to clients wrote, “The Italian macro situation has not improved over the last quarter, rather the contrary. Some 160 large corporates in Italy are now in special crisis administration.” (Source: “Italy could need EU rescue within six months, warns Mediobanca,” Telegraph, June 24, 2013.)

The report also indicated that the eurozone country will “inevitably end up in an EU bailout request” in the next six months unless it is able to lower its borrowing costs and recover from economic chaos. (Source: Ibid.)

Keep in mind that Italy is the country with the most debt in the region and third worldwide, after the U.S. and Japan. The debt crisis that the mainstream media claimed was over or under control could easily shake the global economy again.

All of this shouldn’t come as a surprise to my readers. I have been warning about the debt crisis in the eurozone for some time now. The common currency region still has some major problems that need to be fixed before it can be said that it’s in good economic shape.

What worries me even more is that the nations with stronger economies, such as France, have also fallen prey to the troubles in the eurozone. France is currently in a recession and the country’s unemployment rate remains high. The longer the debt crisis continues in the eurozone, the deeper its impact will be on the stronger economies like that of France.

I can’t stress this enough: the eurozone is critical to our own economy, because a significant number of American-based companies operate and gain revenues from the eurozone. Troubles in that region could hurt the profitability of North American companies, which could eventually cause the key stock indices here at home to slide lower.

Article by profitconfidential.com

By Profit Confidential

When a stock market sector is hot, it always pays to look for spin-off trades. These are investments related to the underlying strength in a particular industry and stock market sector.

Housing, construction, and new home builder stocks have been soaring for quite some time now. And many businesses related to this sector strength have been powerhouse wealth creators.

In commercial and industrial building, large contractors haven’t been nearly as robust on the stock market as new homebuilders, but there are plenty of spin-off companies doing well.

Jacobs Engineering Group Inc. (JEC) is a $7.0-billion technical services company out of Pasadena, California that sells design, engineering, architectural, environment, and consulting services to clients in the oil and gas, aerospace, defense, infrastructure, and manufacturing industries.

The company has experienced a strong recovery rally on the stock market as momentum is returning to operations.

As we all know, new initial public offerings (IPOs) are plentiful when the stock market is hot. One interesting small company is Textura Corporation (TXTR) out of Deerfield, Illinois.

This company sells collaboration software that’s used specifically in the commercial construction industry. Products include efficiency software to help with invoicing and payments and bid preparation and testing software; the company also provides online environments in which participants in a construction project can collaborate and manage the massive scheduling efforts required among professionals and contractors.

The company recently sold 5.75 million common shares, including a full overallotment of 750,000 shares for $15.00 each. Total shares outstanding on the day of listing were 21.9 million. The position closed at $20.91 on its first day and is currently trading around $29.00.

Certainly the enthusiasm in the stock market is apparent in new IPOs. This was a strong start for a developing micro-cap like Textura. Wall Street expects the company to generate around $35.0 million in revenues this year. The 2014 revenue estimate is approximately $56.0 million with continued operating losses.

Founded by three former partners from PricewaterhouseCoopers, the company’s offering prospectus is a worthy read, and while it is a business plan with something to sell you, reading a prospectus is always useful.

According to the company, clients have used one or more of its on-demand collaboration products to help manage over 13,000 commercial construction projects worth over $125 billion.

Clients include 41 of the 100 largest general contractors in North America.

In the fiscal years ended September 30, 2010, 2011, and 2012, the company’s revenues were $6.0 million, $10.5 million, and $21.7 million, respectively. Net losses for the same fiscal periods were $15.9 million, $18.9 million, and $18.8 million, respectively.

While there is quite a bit of supposition in financial documents like prospectuses, they do offer details on the general business conditions in specific industries with which you may not be familiar. Like other U.S. Securities and Exchange Commission (SEC) documents, a prospectus can help shape your overall stock market view, even if you aren’t interested in the company.

While IPOs are typically overpriced, a strong debut on the stock market is helpful in legitimizing the story.

Textura’s strong stock market performance so far helps it stand out, and because of this, more investors are getting to know the company’s story. (See “New IPOs Hitting the Tech Sector; Microsoft and Intel Struggling.”)

Most micro-cap companies have a strong entrepreneurial founder leading the enterprise. But businesses founded by people who identify a niche that isn’t being fully served in the marketplace can be very successful. Textura is the perfect example of that.

Article by profitconfidential.com

By MoneyMorning.com.au

The single most effective marketing message the investment industry has peddled over the past three decades is, ‘In the long term the share market always goes up.’

My retort to this widely accepted statement is, ‘But will it go up in my investment timeframe?’

In 2006, global share markets ran hot. Three straight years of 20%+ gains.  In the same year, my weekly newspaper column, ‘The Big Picture’, began warning readers the good times wouldn’t last and a prudent investor should consider taking profits.

Such talk in the midst of a boom was met with a fair degree of derision.

With hindsight my warning of an impending market correction was too early and the longer the market performed, the easier it was to dismiss my viewpoint. In 2007, share markets posted another 20%+ gain. The lesson learned from this experience is it can be very lonely waiting for a trend to fully express itself. Self-doubt is a constant companion.

My belief in the secular market model remained steadfast and in 2008/09 global share markets behaved as expected.

So what is the secular market model? In simple terms it’s the old ‘two steps forward, one step back’ principle.

The following chart of the Dow Jones index from 1900 to present highlights the staircase pattern of the market’s advancement.

Click to enlarge

Secular Bear Markets are the periods when the lines are flat. Conversely, Secular Bull Markets are the ascending lines.

The century old market pattern is a cycle of undervalued to overvalued and back to undervalued. This is a well-established market pattern.

The following two charts courtesy of Crestmont Research show how this valuation cycle occurs.

But before we take an in-depth look at the charts, I need to give you some mathematical background.

One of the main valuation tools in the share market is the Price to Earnings (P/E) Ratio. The long-term P/E average for the market is around 16.

If you’re not familiar with P/E’s, here’s a simple example…

If a company earns $1 Billion, its fair price based on the long-term P/E average is $16 Billion ($1 Billion earnings x 16).

While the long-term average is 16, there are times in the market’s history when the P/E is higher than average (periods of boom and exuberance) and times when it’s lower than average (periods of bust and gloominess).

This high, medium and low range are what constitutes the average.

The first chart is the P/E ranges for the various Secular Bull Market periods. NOTE – all Secular Bull Markets have started with a below average P/E (the green shaded area between 5 and 10). The blue line (representing the latest Secular Bull Market from 1982 to 1999) started with a P/E around 8 and finished at a stratospheric 48.

To put this into context, a company earning $1 Billion in 1982 was valued at $8 Billion (8 times). Even if the company didn’t increase earnings over the next 17 years it was valued at $48 Billion in 1999. This was an eye-popping 600% increase in value simply due to investor exuberance.

By comparison all previous Secular Bull Markets overshot the average and went into the 20 to 25 range. The 1982 to 1999 boom (fuelled by the greatest credit bubble in history) took valuations into nosebleed territory.

Click to enlarge

The other side of the boom coin is the bust. The following chart traces the retreat of P/E’s from their boom time highs. These periods are Secular Bear Markets.

Again let’s focus on the blue line – the market P/E from 2000 to 2012. After the P/E peak of 48 in 1999/2000 it has gradually reduced down to around 20.

A stagnant period of share values is a result of falling P/E’s being offset by rising company earnings.

For example a company earning $1 billion in 2000 was valued at $48 Billion. The company could increase earnings to $2.4 billion (140% increase in earnings) but with a P/E of 20, the company is still valued at $48 billion ($2.4b x 20).

The combination of shrinking P/E’s (from extreme highs to lower lows) and rising earnings is why markets trend sideways for an extended period of time – usually 10 to 20 years. Waiting for this trend to play out requires patience.

(NOTE:  The blue line – current Secular Bear Market – has only retreated into the 20 to 25 range. This is where all previous Secular Bull Markets have ended and started to fall. The unwinding the 1982-1999 period of excess has been prolonged due to a manic desire by central banks to pervert the natural course of markets.)

If history repeats itself, the current Secular Bear Market is a long way from finished.

Click to enlarge

We know markets never ascend or descend in a linear fashion. They zig and zag.

In looking at previous secular markets, there are several phases (zigs and zags) that contribute to the overall performance of the market.

The following chart of the 1966-1982 Secular Bear Market shows there were 9 phases – 5 negative and 4 positive – over the 14 year period. Collectively the fall and rise of these phases resulted in a zero sum game.

Click to enlarge

Whereas the 1982-1999 Secular Bull Market consisted of 7 phases – 4 positive and 3 negative. The positive phases were so strong they make the 1987 ‘crash’ look like a mere speed bump. The credit bubble took hold in the 1990′s and its influence is clearly evident from 1990 to 1998.

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The following chart of the S&P 500 index shows the current (2000-present) Secular Bear Market has had 4 distinctive phases so far – 2 negative and 2 positive.
 

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Based on history it is hard to conclude global share markets are set for a continued run upwards – here are a few reasons why:

1. P/E ratios remain high compared to previous Secular Bear Markets
2. There does not appear to be enough negative phases to create investor fatigue – market sentiment is still too bullish. Previous Secular Bear Markets have completely sapped investor confidence.
3. The current recovery (from Mar 2009 to present) is now four years old and has recorded a 100% gain. This is well above average.
4. The current recovery (2009 to present) has been strongly aided by unprecedented Central Bank intervention.  This intervention is producing far less bang for the printed buck.
5. The 1982 to 1999 Secular Bull Market was the greatest period of extended performance in share market history due to the greatest credit bubble in history. The US Federal Reserve has aggressively fought the bursting of this bubble – firstly, in 2001 when Chairman Greenspan provided cheap credit to fuel the US housing bubble and secondly, in 2009 Chairman Bernanke provided cheap credit to investment banks to repair their balance sheets and support asset (shares, bonds and commodities) prices. Defying gravity can only last for so long.

The centrifugal force created by wholesale money printing has kept markets spinning to date. The recent market wobbles suggest the energy force is waning. The Secular Bear Market’s gravitational pull is set to take the market through its next down phase.

Vern Gowdie
Contributing Writer, Money Weekend

From the Port Phillip Publishing Library

Special Report: Panic of 2013

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Money Morning: We’re Buying This Crashing Stock Market

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