Still A Few Bears Out There…
By Damien Hatfield on May 2, 2013 in Investment Markets
Iʼm naturally bearish which is weird because Iʼm a naturally positive individual. Instead of glass half empty, I like to be glass full to the brim! However, being around financial markets for a reasonable period tends to make you a natural bear. A lot of that stems back to me being, for many years, a floor trader on the SFE, and a futures broker. You get hit with the adage “up by the stairs and down by the elevator” on more than one occasion. As a result you tend to look for the reasons to sell rather than buy. Having said that, over the last six months, aside from Apple, Iʼve been looking for the reasons to buy rather than sell.
Midway through last year, the European crisis was in full swing. It was a risk-off environment. As it seems to happen, time and time again, authorities seem to pull a rabbit out of the hat, and the crisis passes. This will change at some stage (get that bear outta here!). As you get older you tend to rack up more crises and you see the corrective process take place every time. Some crises last longer than others, but history tends to repeat itself.
Towards the end of last year, we saw a risk-on environment. Equity markets started trending up and everyone started talking about the closing stages of the thirty-year bond bull-market. US QE pump priming influenced the Europeans and the Japanese. They jumped in with great gusto prompting wide discussion of “currency wars”. In the last couple of weeks, the markets got the wobbles. This was due to the Cyprus crisis and lower growth numbers out of China. However, every time the markets take a hit, they are bought straight back up again. YTD, including the recent wobbles, US Equities are up 12%, after 8% last year. The FTSE is up 6%, the Nikkei is up a whopping 23%, and the ASX is up 8%. The only negatives are the DAX and CAC reflecting the Eurozone woes. Even so, they are only slightly down.
I recently attended a lunch, which was addressed by the London-based Crispin Odey, who runs Odey Asset Management. Crispin is one of those pragmatic stock-pickers who really looks at whether a stock is cheap in his (or his teamʼs) eyes. Yes, they look at macro- and external- factors but, at the end of the day, if a stock is under-valued, relative to the market, then buy it. Crispin articulated a number of issues that supports positive equity markets. He suggested that we are six months into a possible two to three year bull-market. He presented a number of themes including the US Airline Industry and its return to profitability. He cited the need to upgrade an old airline fleet, and the efficiencies gained with new planes – similar with cars. Prior to the crisis, the average age of an individualʼs automobile was six years. It is currently twelve years. Cars are generally built to last twelve years so there is significant capacity to shift from the old clunker to a new car, which will be significantly cheaper to run.
Crispin also talks about the US Housing recovery. Housing starts are running at one million per year, still well under the 2006 peak of over two million, but well off the lows of 480K. Odey thinks the recovery could see 1.75m starts per year. Even here in Australia, at a grass roots level, there is a lot more positive activity. I am always a property bear but I have recently changed my mind. I was looking at my house and with grown-up children I thought of downsizing to a unit. During the agent appraisal I was surprised to find out that I could rent the house out at a gross return of 5%. I started looking at units and doing the numbers there, and the 100% finance (if you can get it) is at 5.5% and the gross rental yield is 5%. Thatʼs a pretty good yield. As I was looking, the units were selling pretty quickly. Last week we saw a Sydney waterfront property in Point Piper go for $33 million. So the upper end of the market is moving as well.
When you think about Australia, everyone talks about China. Chinaʼs GDP numbers dipped last week but the numbers are still very strong. Itʼs hard to see a significant decline in the terms of trade with China. Some time ago I discussed resources-related selling with an ex Rio Tinto marketer. He said that during the Asian Crisis during the late 1990ʼs, when Asia went off the boil, they shifted their selling effort to other countries. With the US looking more positive, other markets will open up.
I just find it hard to be bearish these days; except Apple – more on that in my Gadget Corner.
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