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Still A Few Bears Out There…

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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