# Are we in a bull market?



## Warren Buffet II (7 February 2005)

Hi Guys,

I have been thinking about this for the last month and what I have seen so far is more a recovery of the sharemarket than a real bull market. What I mean is that there are some shares still pretty cheap with P/E under 20. I only believe that the resource sector is overvalued and that there is a lot of potencial this year. 

Any thoughts?

Regards,


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## tech/a (8 February 2005)

W/B.

How is a bull or bear market defined.
Over what period.Is it the index making successive new highs or new lows.
Is it only during a period where the index is at all time new highs or lows?

Is it when advancers are constantly higher than decliners or vice versa.

Ive yet to see a definative description.

However currently ALL suggested criteria I have mentioned are being met so personally this is very bullish.


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## stefan (8 February 2005)

> What I mean is that there are some shares still pretty cheap with P/E under 20



A bull market wouldn't have much to do with P/E ratios. I would put P/E ratios into the "bubble" basket and not as an indicator of a bull market. As Tech has put it, there are several indicators to consider but for Australia the market is VERY bullish. We're hitting one record high after the other, high earning expectations by investors and lots of money is flowing into the market. Winners constantly outperform losers.

BULLISH IT IS. 

Happy trading

Stefan


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## wayneL (8 February 2005)

Yep,

The bulls have it for the moment...in Oz at least.

Yeah... the yanks are bullish too, just not as  much as here.

I'm still a bear, but no use fighting the current eh? Happy to run with the Bulls 

Cheers
*********************************************

Global: An Unprepared World.

Stephen Roach (New York)

Globalization is a wonderful subject to debate. Basically, that's
all I've been doing for most of the past two weeks ”” first at our
own MacroVision exercise and more recently at the World Economic
Forum in Davos. In many respects, these were two of the most
intellectually enriching weeks I have spent in a long time. Yet as
I now decompress and ponder the experience, I am left with a nagging
sense of concern. As I see it, investors are largely unprepared for
some big changes coming in the global landscape in 2005.

This potential disconnect is most evident in the debate over the US
and China ”” currently the twin engines of global growth. America's
imbalances are widely recognized as both worrisome and
unsustainable. There is a minority that believes in the new
paradigm of the fungible global saving pool ”” that the allocation of
capital, consumption and production now flows seamlessly to its
destinations of highest return or comparative advantage. In its
simplest sense that translates into a world where China produces,
America consumes, and the rest of the world gladly pays the bill and
goes along for the ride. But with global imbalances expanding at an
accelerating rate, even advocates of this point of view are starting
to have second thoughts. America's deficits are now being framed as
a problem that will come to a head sooner or later. The hope of the
global consensus is that it will be later.

As I have noted ad nauseum, macro is not particularly good on these
issues of timing ”” in making the distinction between the proverbial
sooner or later. But my suspicion is that 2005 will be a critical
year in being able to make that distinction. I rest my case mainly
on the likely behavior of the Federal Reserve. At present, the US
central bank is running an utterly absurd monetary policy of
maintaining a "zero" real short-term interest rate ”” a nominal
federal funds rate of 2.25% that is basically equal to the core CPI
inflation rate. That will undoubtedly change this week, but not by
much. When the dust settles after what is likely to be yet another
"measured" tightening of 25 basis points, the real short-term
interest rate will only be fractionally in positive territory. This
is well below what most believe to be a "neutral" position for the
Fed's key policy lever ”” somewhere in the 2% zone in real terms.
Which, of course, says there is a good deal more tightening to come
if the Fed is serious about containing the inflationary and
speculative risks it cited in the minutes of the December FOMC
meeting.

This could be a recipe for a flash point that has a lot to say about
the "sooner or later" aspect of global rebalancing. Last year's Fed
tightening was inconsequential ”” all it did was lift short-term real
interest rates from negative territory to zero. This year's Fed
tightening is likely to be a very different animal ”” taking the
policy rate from zero toward a large enough positive number that
deals with the very risks the Fed, itself, is now citing. For
financial markets, the zero real federal funds rate is the candy of
the carry trade ”” allowing investors and speculators to borrow short
and pocket the spread anywhere else on the yield curve. In 2005, the
Fed is going to take the candy away. This points to a likely
unwinding of a multitude of carry trades that have driven spreads on
risky assets to unbelievably low levels. Those include high-yield
and emerging market debt, investment-grade debt, and the "refi trade"
that has underpinned consumer equity extraction from increasingly
overvalued homes.

This underscores a potentially critical moment of reckoning for the
US economy and for a US-centric global economy. Extraordinary
monetary accommodation has been the glue that has held a post-bubble
US economy together these past five years. But the easy money has
given rise to an asset-driven saving and spending mindset. That
development, in conjunction with an unprecedented shift in the
federal government's saving position ”” a budget that went from
surplus to deficit ”” has pushed America's income-based saving
position to record lows: The net national saving rate has averaged
just 1.5% since early 2002. Lacking in domestic saving, the rest is
history ”” a US that has to import surplus saving from abroad to grow
its economy, and run massive current-account and trade deficits to
attract the foreign capital. And, of course, Japan and China have
led the charge in financing this asset-dependent spending binge
because they couldn't stomach the alternative.

Like in 1994, 2005 is likely to be the year when the Fed finally gets
"real" on real short-term interest rates and the carry trades they
have spawned. But unlike the case in 1994, more than a decade later,
the US has been transformed into an asset-dependent economy that has
given rise to massive global imbalances. To me, all this smacks of
sooner rather than later on the rebalancing watch. Based on all my
discussion and debates in the past few weeks, I would say that the
world is largely unprepared for this possibility. The Fed is widely
thought to be the world's central bank and wouldn't dare risk such an
outcome, goes the logic. By inference, that means the world is
perfectly content with the alternative ”” the folly of financing
itself on an increasingly shaky foundation of ever-risky carry 
trades.

A truly independent central bank has no choice other than to take the
candy away. And a US-centric world will have to figure out how to
cope with the aftershocks. The key question, in my view, is whether
the Fed has the courage to act.

Similarly, an increasingly integrated global economy has to find a
much better way to cope with China. The China debate has now reached
a feverish pitch ”” especially on the RMB currency issue. The Chinese
were well represented in Davos and every utterance by a Chinese
official or banker was scrutinized by the press and the markets for
hints of any imminent action on this front. In one of the final
sessions at the World Economic Forum, Li Ruogu, Deputy Governor of
the People's Bank of China, stated unequivocally that the decision
has already been made to shift gradually to a more flexible currency
regime. But he went on to underscore that there is no timetable for
such an action. But, as I saw it, the message from China was sooner
rather than later on this count as well. The operative word on this
issue came from the senior member of the Chinese delegation at Davos
”” Vice Premier Huang Ju. China, he stated, was well advanced in its
preparation for a more flexible currency regime.

If that wasn't a wake-up call, the next session at the World Economic
Forum was. Literally, a few minutes later on the same stage, John
Taylor, US Under Secretary of Treasury, used precisely the same
language in stating that China is now taking steps to prepare for the
shift a more flexible currency system. The emphasis on the word
"prepare" stands in sharp contrast to earlier language, which always
contained references to terms such as "stability" or "fixed." Those
words were not used in Davos. I don't want to read too much into the
nuances of language, but I think there is an important message here.
I don't think it was an accident that both Chinese and US officials
selected the same new word to characterize an issue that has taken on
increasing significance in world financial markets.

Personally, I think the Chinese currency issue is totally
misunderstood. For starters, I can't conceive of a likely move in
the RMB that would have any impact on Chinese competitiveness or on
the US current-account deficit. Sure, if the peg goes, other Asian
currencies could follow suit ”” allowing the dollar to continue the
requisite decline that America's current-account deficit requires.
That would undoubtedly also trigger some diversification out of
dollar-denominated assets by foreign investors and central banks ””
only underscoring the likely of a back-up in longer term US interest
rates that would have happened in any case. The only RMB outcome
that would shock the markets would be an Asian-crisis-style
adjustment. With over $600 billion of official foreign exchange
reserves at its disposal, the odds of that are close to zero, in my
view. China has ample resources to manage any currency adjustment it
wants.

I do think this is a big deal for China. Over the past 26 years,
China has made phenomenal progress largely by successfully executing
an open, trade-oriented development model. It has relied on its
enormous reservoir of national saving to improve the infrastructure
that supports its manufacturing platform. And it has used this
infrastructure, along with aggressive tax incentives and a vast low-
cost labor force, to attract huge inflows of foreign direct
investment. Currency stability is key for any outward-looking growth
model. But now China is coming of age and must shift to a more
balanced, market-oriented framework. To do that, it needs to focus
more on stimulating domestic demand ”” its consumption share of GDP is
only about 55%. At the same time, China also needs a more flexible
policy apparatus to smooth out the inevitable cyclicality of market-
driven adjustments. That points to flexibility in terms of fiscal,
monetary, and yes, even currency policy. The Chinese know and
understand this, and are definitely moving in that direction. Timing
is their business ”” not ours. But when they shift currency regimes,
I think it will be a very positive sign of the maturation of the
Chinese growth miracle. I don't think the rest of the world gets
this point at all.



All this speaks of world financial markets that are not well 
positioned
to cope with two of the biggest issues on this year's macro agenda ”” 
a
significant move in real short term interest rates in the US and the
deeper implications of an eventual shift in China's currency regime.
Timing is always tricky in this business, but I think the Chinese 
have
put it best: The time to prepare is now.


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