Moving back down the ASX 5000 levels

Agree Michael.. our economy is still strong, infact needs slowing down via interest rate rises! So a couple banks going bust in US is hardly going to affect our country in a large way.

I'm ****** off as I have seen 3 years worth of profits wiped out.. and been forced to sell to bring down my LVR.. makes me wonder if gearing is worth while! sure it gives you higher returns, but at the end of the run your loss is multiplied.

 

Michael,

No doubt we are seeing a fair bit of panic selling, but stocks have had an outrageous run over the last 3 years. Maybe the problem lies not in the P of the equation, but the E. Ie: earnings have been extrapolated out of recent unsustainable figures rather than long term averages, showing P/E ratios as much lower than they actually are.

 

Hi SG,

Except, that for the stocks I hold the forward earnings projections appear conservative. BHP for example has its forward earnings projections calculated on current contract ore prices. However, these ore prices are more likely to rise than fall as new contracts are locked in with China soon. The current contract prices justify a share price of $40 odd. A 50% lift in prices for example should see that share price jump into the $50's. Today its trading at $35. Go figure! The same can be said for some of the banks I now hold like NAB. The Aussie economy and consumer is still in great shape and their balance sheets look solid. On current PEs these things are absolute bargains.

If you apply a rigorous ruler to future earnings allowing for US recessions and the like, they still look robust. I just don't get it. Maybe some of the consumer discretionaries are over-priced but consumer durables should still be solid. But I'm holding solid blue chips with solid earnings projections. These do not deserve to have been beaten up as much as they have lately. Hence my confidence that they'll come good in 6 months time when the dust settles. Its just a shame I don't have the free cash to pump into them at current levels.

Ah well, if they take too long to recover I will have finished developing Mona Vale and can then take an LOC against that equity, margin it at 50% and plough another $1M odd into BHP and co. If only they'd hold at $35 until then and I'd be a very happy man!!

Cheers,
Michael.

 

RIO at $110. Any lower and it'll be less than double what I paid for it.
(Mind you, having picked up AMP at $9.30 a few days ago, I'm a tad disappointed that I could've got it for $8.30!)

I've got to smile since I still have my health.

 

“It just makes absolutely no sense for the ASX to track backwards when another US financial institution has a profit downgrade”


ASX tracks US most of the time.
It does not matter if this makes sense or not. Take it or die hard !


“Does nobody care that the Australian economy is actually in great shape and that the PEs for ASX stocks are ludicrously cheap right now.”


People who are losing money right now do not give a pink elephant about OZ strong economy at all.
Players perception moves the market NOT low P/E ratio.

Actually, current situation is an another example of how ‘well’ fundamentals work.

 

I'm with Michael here. It seems like a wonderful opportunity to finally transfer my holdings into a ML and gear it to 50%. I could buy (more!) BHP below $35, WES under $36, NAB at $35, and CBA at $51 (5.5% FF 2008 yield!!)

 

I second the thoughts so far. I’m surprised how much everything has been sold, particularly the banks which are really on the nose at the moment. Pretty much all the banks have EPS growth of 7%-10% for the next 2 years at least, bringing their current and forward PE pretty low. (Especially ANZ, NAB and MQG).

I’m not sure if their profits will be affected by sub prime due to higher costs of funding but they have also passed this onto the customer with their latest rises? Maybe they are playing down their exposure? I don’t know. But this year if they announce another year of record profits…….

It was also interesting that our market has actually fallen MORE than the DOW – What’s the go there? I haven’t seen any billion dollar write downs here J very odd indeed….

I’m in a similar situation to you Michael, albeit on a much smaller scale. I would like to buy more but money is tied up with the duplex I’m building. Otherwise I would probably top up on existing holdings..

And I have also received a margin call, but have the $$ to cover it anyway. I have a fair bit of MQG and ARG (MQG is ARG’s biggest holding) so I have taken a bit of a hit :/

 

Ditto......

There's always opportunity. For example, the market may have been down nearly 180s points today but it's also risen around 60 points so far from those lows. As an example, a Navra type fund will certainly end the day with a lower unit price but I'd be surprised if it didn't also tuck away some trading profits, which means ............CASHFLOW........and in this environment, cashflow will keep your head above water until you can take advantage of the eventual market rise.

I don't know about you guys, but I think times like this are a golden opportunity to test your structure and pickup some wonderful experience at the same time.

 

Tropo,

This is where we agree to disagree. Low PE ratios are part of that perception. At the moment the bears have the day, but it will only take some really solid news on the domestic front coupled with Bush injecting $100Bn stimulus program and Bernanke dropping rates by .75% and that perception will change real quickly. Bad news is ruling at the moment, but a return to fundamentals is inevitable. People are just running scared under the weight of bad news. Provided BHP doesn't start downgrading its profit outlook then we're still in good shape.

I still see the ASX closing above 7000 for the calendar year. Mark my words and check back with me in Jan '09.

Cheers,
Michael.

 

Michael,

Don’t you think that all those news/possibilities you are talking above are already built in the market reaction?
As I said before sentiment, greed and fear move the market. Last time (during a bear market) our market moved sideways for 5 years in the tight range. This may happen again.
Do not forget that for quite some time only few ‘big stocks’ moved our market up.
At some stage when market sentiment changes from bearish to bullish, fundamentals will follow.

A bit of history:
Main reason for the crisis of 1997 was a growing level of exchange rate tension in Asian market over the collapse of their currencies.
At that time very similar pattern can be seen on BHP, SPI and All Ord charts before correction.
Currently BHP and XJO chart patterns look very similar again. Is it possible that history repeats itself ?
Hmmmm. Time will tell.

PS- I would be careful reading predictions of all those ‘gurus’ about market at the moment.
If DOW hits again 14 000 and stays above this level there is a chance that XJO may hit 7000.
So, if this happen in 2008 I’ll buy you a bottle of whisky.
Do we have a deal ????

 

Deal!

That's where I think the weight of probability is still heading, but of course I could be wrong. I truly believe the market is massively over-sold and set to correct through H2 2008 back to 7000 levels. And that's not blind optimism driving that viewpoint, but an appreciation of fundamentals driving company performance. I believe it is future revenues that set share prices, and that at some point the market must reflect more accurately future revenues.

Cheers,
Michael.

 

Until than ....Stay

 

Always my friend, always...



Michael.

 

I see numerous statements that market fundamentals are strong, without an explanation of what people have considered.

Any strong business can fail, even in a great market, if its financing is mis-managed.

Financing is so much more important when awash with debt, as it adds risk via fixed costs which rise at the end of a boom period.

Debt renders a PE ratio meaningless.

e.g. without changing anything in the business, you could borrow money secured against assets and buy back, say, half your shares.

In times of low interest rates that will nearly double your EPS without changing your business. Consequently, with the market focussed on PE then the price near doubles to bring it back into line. Bonuses all round for the Directors !!

But you have increased business risk via your fixed interest costs. In times of rising interest rates you may wish to sooth creditors by revaluing your assets upwards - perhaps too optimistically ?? Your lenders may acquiesce to these "friendly valuations" in a hope you can trade out as they do not want to be perceived themselves as foolishly over-exposed.

Lets face it, banks are lending other people's money. If they are perceived as risky, they have nothing like enough reserves to cope with a run on deposits. So they might vainly hold off calling in their loans to the business.

Investors might get a sniff of the increased business risk and the share price drops, this helping to keep up the PE (NOT MARKET FUNDAMENTALS !!).

The scary thing is that two major methods of valuing an investment is the net assets (for controlling interests) and capitalised future cash flows (for minority interests).

Net assets is meaningless if the assets are "over-valued". Also, in a liquidation frenzy you tend to get much less after the creditors' fire sale than you expect.

Future cash flows require a discount, and this depends on risk and also cost of capital. When loaded up with debt that cost is pretty unpredictable at the end of a boom.

Add dodgy financial reporting practices, like showing short term debt as long term or contingent liabilities being discounted too much then I cannot see how I can possibly work out the value of an investment at the moment.

I know that these methods are approximate, but in stable times you can add "fudge factors" to make the models fit reality better. But this cannot be done in volatile markets with significant uncertainty.

And all along the underlying business may not be changing, in fact it might be regarded as a "Blue Chip". Many blue chips have failed in the last 30 years. The problem is the ASX100 only counts the current stars at any one time. If you held on to dogs that were blue chips once, the historical performance is not so good.

Just what are the market fundamentals that are so damn good in Australia, and how do you measure them ?

Cheers,

Rob

 

I am sorry but do you really believe this will make things better?? I think actions like this are responsible for getting the international market into such a mess are just delaying the inevitable!

Many people much smarter then me are calling this the 'perfect storm'... I don't know what will happen but when in doubt, stay out!.

Happy trading/investing/dreaming/wishing/hoping.... Praying

 

But what do you do to stay out? Cash is losing its purchasing power at an ever increasing rate, meaning that it becomes a less than desirable store of value....

If the worst happens in this collapse there wont be much in the way of financial implements which are worth anything, including our fiat paper.

smeggett

 

Maybe Cash is not the most efficient investment vehicle... But i would rather be in cash now then long the stock market at the moment! You don't have to be in market all the time... If Warren Buffet, Soros and others are happy to be mostly in cash then it can't be all bad. I am waiting to see if this is just a shortish correction or a more medium term trend-change...

At the moment i am leaning towards the latter (at least until mid-year)
Most charts are back at LONG-term support lines, some have broken them... I don't see many technical reasons to be long with all the volatility and uncertainty. One day the US is heading for recession (market down 300pts), then the next its all rosey with a big company beating estimates (market up 300pts)... Then Gold Rallys, oil Spikes, Investment firms declaring 10's billions in write-downs, blah blah blah... Does that sound like a stable market to you?

Recent reports:

You can't get a margin-Call in Cash!

Time will tell...

 

can someone explain.. US falls 0.5% and we fall almost 3% today!

Did I miss some announcements?

US goes up, we remain flat.. US goes down, we plummet, US plummets, US plummet even more..

some people mentioned cash is a good investment at present, and I'm thinking he might be right!

 

"can someone explain.. US falls 0.5% and we fall almost 3% today!
Did I miss some announcements?
US goes up, we remain flat.. US goes down, we plummet, US plummets, US plummet even more.."


To know an answer to those questions would not be of any help I guess.
At the moment OZ market (for whatever reason) is more bearish than US. Bad sign.
From time to time Market is moving in the very ‘mysterious’ way (and is driven by fear and gread most of the time).


"some people mentioned cash is a good investment at present, and I'm thinking he might be right"


Are you considering cash right now?
You said before that you are buying when blood is on the street.
So, according to your investment strategy you should be buying now as it is cheap, cheap, cheap....

Hey, crc-error - buy more !!
Don’t be a chicken. Be a hero!

 

I'm not moving into cash, I just reduced my position to close out margin positions. This is where I'm caught out, when there is blood in the street, I should be buying, but instead I'm selling due to margin calls..

I'm changing my stratergie now to employ regular monthly contributions, so I benefit from these falls, rather than get ass wipped in them.

I'm seeing margin lending as a less effective tool now, as interest rates are two high, with limited return on the horizon.. so to double my risk, only to get potentially 1 or 2% more sounds like a waste of time.

However I will use margin lending, but keep it alot more conservative now.