ALL ORDS went nowhere for 7 YEARS!

[pixel]

It is a non-equally weighted modified index of important US based economic indicators that include: capacity utilisation, business inventories, PMI manufacturing index, new orders, M2 money supply, treasury rate, corporate bond yields and financial stress index.

I created it to provide an alternative to using consensus EPS forecasts, which are constantly changing and therefore useful over the shorter term. They are likely more of a lagging indicator. Whereas the economic indicator does not change and is not subject to human qualification or expectation. Instead of using past EPS and forecast EPS, it uses economic indicators to determine fair value.

I like your approach, Macros;

You take as much "eggspurt opinion" and "consensus forecast" out of the equation as possible. In fact, it seems you've found a way to eliminate all of that.

Just for clarification: Do you use the US data to gauge Australian conditions? Or have you found the equivalent Australian stats, to which you apply the calculations that work for US data?
While the USA have exerted the dominant influence on global macro-economic conditions, one might argue that other regions are rapidly gaining ground - for example Europe, albeit as a rather "bad influence."

I note with interest your observation that Australian companies have on average the same eps as their American counterparts. How likely is that to change? And if it is, can you detect it and adjust? What about the big difference between policy options available to Fed as opposed to RBA ?

 

[Macros]

Thank you Pixel,

Just for clarification: Do you use the US data to gauge Australian conditions? Or have you found the equivalent Australian stats, to which you apply the calculations that work for US data?
While the USA have exerted the dominant influence on global macro-economic conditions, one might argue that other regions are rapidly gaining ground - for example Europe, albeit as a rather "bad influence."

I use the US data for Australian earnings. They are highly correlated, but have different rate of change - so it makes perfect sense for me and it works. US and Aus EPS side to side is a very interesting graph.

 

[professor_frink]

The average person who started investing in the 1960s (in US) did not beat inflation today. And that's over 50 years...

Am I missing something here

The only negative real returns on that chart on the right hand column are from people buying at the end of the tech boom.

 

[Starcraftmazter]

I now have two indicators for the overall market. Firstly, one which determines fair value based on forward earnings estimates - but has the flaw of those estimates changing on a frequent basis. Secondly, one which determines fair value based on economic indicators and completely excludes past or future company earnings.

My issue with such things is that we are living in extremely unusual times where historic indicators may not (probably will not) hold up due to heavy manipulation of data, monetary supply - all sorts of things by governments and central banks.

Add to this the fact that the way many indicators (unemployment, inflation, gdp growth, etc) are calculated is changed overtime....

I would not trust any indicator.

Why when our economy has been so strong albeit on the back of the miners only?

ASX has been underperforming DOW & SP500 since the start of December.

Our economy is not strong - it consists of houses and homes.

Houses are not being bought much, and prices are falling.
Holes are not exporting for as much money because China is going downhill.

There is plenty of future downside to both of them.

 

[pixel]

Thank you Pixel,

I use the US data for Australian earnings. They are highly correlated, but have different rate of change - so it makes perfect sense for me and it works. US and Aus EPS side to side is a very interesting graph.

Hi Macros;

I visited your website and found it interesting how, from a different base, you arrived in the same ballpark: 4300, that my Option Spread Analysis suggests.
I follow the distribution of ASX Index Options and try an educated guess at the likely target at the respective expiry date. The January series has been fairly clear for a while: unlikely less than 4100, with luck (if you're Long) possibly a little above 4250.



"Protection" at 4300 has recently intensified; therefore I believe we won't see 43xx within the next week or two.
A similar analysis for the end of FY 2011/12 tells me that a considerable number of traders fear a drop as low as 3200, but strong protection lies as high as 3900-4000; at this stage, it seems that nobody really believes 4550-4600 to be exceeded.



Being so far out, the June picture can still change significantly; but even as early as now, I find it interesting that the general sentiment - those 3200 fears notwithstanding - seems to expect relatively little change: call it 4300 +/- 150.

 

[Macros]

My issue with such things is that we are living in extremely unusual times where historic indicators may not (probably will not) hold up due to heavy manipulation of data, monetary supply - all sorts of things by governments and central banks.

Add to this the fact that the way many indicators (unemployment, inflation, gdp growth, etc) are calculated is changed overtime....

I would not trust any indicator.

Whilst I understand where you are coming from, I disagree with your conclusion.

Manipulation of data is not new, to 2011/12, however this indicator has worked exceptionally well during the whole time period.

Increases to money supply flows through to an impact on stocks. You may mean, for example, that the FED's balance sheet could increase without showing up on money supply data, however this is probably okay for my purposes as it could be the case that the increases in assets have offset debt destruction in other areas. Also, if it flows through to the banking system and they use assets for leverage, then it will inevitably flow through to the data.

Unless the data is removed, or becomes outright fraudulent, then I'm happy to use it. It has been working and is currently working, so I don't see any reason not to use it until it actually breaks down. I do not believe that this has occurred.

I haven't used unemployment, inflation or GDP figures in my indicator. Had I done so, I would agree with you.

I'm happy to trust an indicator if it has worked and continues to work. I accept that things can change at any point, however until they do then I can only work with what I have available. Should things change, then I will adapt and find another solution.

 

[Macros]

Hi Macros;

I visited your website and found it interesting how, from a different base, you arrived in the same ballpark: 4300, that my Option Spread Analysis suggests.

Pixel,

I see no reason why two completely different approaches cannot reach the same conclusion. It is very interesting. I had someone say the same thing with pure TA.

I like your ideas about option analysis - thanks for sharing. Sounds like something I will turn my attention to when I find some time, as options are my preferred mechanism for trend trading, which I plan to use in conjunction with my indicators. Thus far I have invested solely based on individual stock value, but I'm looking to diversify my approach.

 

[Starcraftmazter]

I'm happy to trust an indicator if it has worked and continues to work. I accept that things can change at any point, however until they do then I can only work with what I have available. Should things change, then I will adapt and find another solution.

A respectable position, best of luck with it.

 

[skc]

Am I missing something here

The only negative real returns on that chart on the right hand column are from people buying at the end of the tech boom.

You are quite right. I read the wrong shade of red. Those who bought in the 60s produced below median return over 50yrs but still beat inflation between 0 to 3%.

 

[odds-on]

I don't believe in buy and hold, as it is usually a symptom of either a lack of investment strategy or just pure lack of understanding. My philosophy is to buy under-priced companies with growing value in favourable macro conditions. I look to achieve very high rates of return and detest losses.

As such, it is important to know where the overall market is headed as that will usually have a substantial influence on individual stock selections and the types of companies that will do well in a particular environment.

I now have two indicators for the overall market. Firstly, one which determines fair value based on forward earnings estimates - but has the flaw of those estimates changing on a frequent basis. Secondly, one which determines fair value based on economic indicators and completely excludes past or future company earnings.

Given the fact that the market has gone nowhere for seven years, you may find this indicator interesting (as least I did when I charted it for the first time the other day):



At least based on this indicator, fair value dropped far below market price in early 2007 and has only now exceeded it - which is interesting. I find it interesting that it suggested that the market got ahead of itself in the rebound of 2009 and also that we have the potential to enter in to a bull market (yeah I know about the global problems) - at least on nominal terms. I haven't been able to track this prior to 2003, however it has been very effective during the time period. It is an indicator that I will be watching closely to help inform my investment timing and allocation decisions.

Macros,

Great work. Do you have any thoughts on the Buffett ratio for stock market valuation? The Buffett ratio being Market Capitalisation expressed as a percentage of GNP. See link below:

http://www.fool.com.au/2011/08/investing/buffett-ratio-says-stocks-look-interesting/

I personally see great value in adopting an investment strategy using this type of ratio to invest in large monopoly/duopoly/oligopoly type companies which have significant recurring revenues - companies that are the "economy" so to speak. When the Buffett ratio is 80% or less load up and when it equals fair value then sell. Repeat until retirement.

Cheers

Oddson

 

[Macros]

Macros,

Great work. Do you have any thoughts on the Buffett ratio for stock market valuation? The Buffett ratio being Market Capitalisation expressed as a percentage of GNP. See link below:

http://www.fool.com.au/2011/08/investing/buffett-ratio-says-stocks-look-interesting/

I personally see great value in adopting an investment strategy using this type of ratio to invest in large monopoly/duopoly/oligopoly type companies which have significant recurring revenues - companies that are the "economy" so to speak. When the Buffett ratio is 80% or less load up and when it equals fair value then sell. Repeat until retirement.

Cheers

Oddson

Thanks Oddson,

I've looked at many indicators and have never found any that felt right for me - hence the drive to create my own and to attempt some sort of innovation.

With regards to the one you mention, I remember having a look at that years ago. Two problems that I can see:

First, is the reliability of GNP as a measure.

Second, is the use of this as a timing mechanism. From memory, I think Buffett was negative on stocks in the early 70s, when this index was at 80? and didn't bottom out for a few years.

Overall, I think if one had a 10 year minimum time-frame for each investment decision, then the market as % of GNP could be a good long term indicator to find better times to enter and times for caution. I would suspect that this would best be used in conjunction with some other tools.

 

[pixel]

It probably boils down to life expectancy, I guess.
When WB started out, he would've been in his 30's, maybe early 40's. And it's probably also fair to assume he didn't have to worry about putting food on the table while he was learning the ropes.

Speaking as a "Boomer" though, I'd imagine many of my generation would've started "learning the ropes" well in their 50's, if not later. If we studied and applied strategies that resulted in profits after a decade, chances are that Al Z. would get us and we'd forgotten what to do with those profits

No criticism implied of long-term strategies; I merely wish to explain the reason why I want, even need, to target at least average monthly earnings.

 

[Macros]

It probably boils down to life expectancy, I guess.
When WB started out, he would've been in his 30's, maybe early 40's. And it's probably also fair to assume he didn't have to worry about putting food on the table while he was learning the ropes.

Speaking as a "Boomer" though, I'd imagine many of my generation would've started "learning the ropes" well in their 50's, if not later. If we studied and applied strategies that resulted in profits after a decade, chances are that Al Z. would get us and we'd forgotten what to do with those profits

No criticism implied of long-term strategies; I merely wish to explain the reason why I want, even need, to target at least average monthly earnings.

The other factor with buffet is that he was able to successfully invest during the biggest credit bubble the world has seen. Given the tail-winds, his long term approach was definitely appropriate for the environment.

 

[young-gun]

The other factor with buffet is that he was able to successfully invest during the biggest credit bubble the world has seen. Given the tail-winds, his long term approach was definitely appropriate for the environment.

Unfortunately alot of boomers have themselves convinced it was their brilliant trading approach and ability that lead them to such success in this period of time. when all you had to do was buy shares to be a winner(within reason, of course, there was no doubt a few bad eggs).

Thats not at all to discredit Mr Buffett and is not in reference to him, or anyone particular.

 

[pixel]

Unfortunately alot of boomers have themselves convinced it was their brilliant trading approach and ability that lead them to such success in this period of time. when all you had to do was buy shares to be a winner(within reason, of course, there was no doubt a few bad eggs).

Thats not at all to discredit Mr Buffett and is not in reference to him, or anyone particular.

Have you read the title of this thread?
If it were as simple as you claim, how come we're discussing the market going "nowhere for 7 years"?

Mind you, I don't lay claim to any brilliance, be it in trading or other achievements in life. It's nothing but good luck that my results from 2007/08 onwards show increasing profit margins.

(I like the cereal ad, where Dad says to Daughter "I'm not young enough to know everything.")

 

[Macros]

I think the title of this thread may become redundant soon. Likely will be 'ALL ORDS went nowhere for 6 YEARS!' (or even 5 years if we are VERY lucky).



I updated my economic indicator with the latest data and it is becoming very bullish. Note that the target is not a hard target, but more an indication of the direction and potential strength.

So for now bullish (IMO), but potential detractors later may come through from either further sovereign debt focus or from too high oil prices.

 

[young-gun]

Have you read the title of this thread?
If it were as simple as you claim, how come we're discussing the market going "nowhere for 7 years"?

Mind you, I don't lay claim to any brilliance, be it in trading or other achievements in life. It's nothing but good luck that my results from 2007/08 onwards show increasing profit margins.

(I like the cereal ad, where Dad says to Daughter "I'm not young enough to know everything.")

i like the way boomers get so defensive about their generation when mentioned on this forum.

i'm well aware of the title, but if you read my post (apologies if it isnt clear) you will notice the period of time i was referencing was the boomers credit boom(that warren buffet took advantage of), which as opposed to inflating and pushing the market up, has in recent years been trying to deflate and push the market down.

in 2005 the credit boom was still in full swing, in fact it was only about half way done. all ords were at around 4000 in jan 05. and im sure i dont need to tell you then pushed to a whopping 6900 at peak in 2008 sometime. the gfc was the beginning of the end of the credit boom.

my point still stands, any moron could have bought shares in this period and done well(once again, within reason) and once again this is not in reference to anyone on this forum. anyone who actively discusses economics would no doubt have some idea as to what they are doing, these are not the people i am referring to.

please feel free to pull the quote where i claimed to know everything. that fact that i am currently not invested in anything would be an indicator that i have no idea. and dont sell yourself short, pixel, anyone who has made boast-able profits from 08 onwards is doing well imo.

 

[Bill M]

Hello everybody I thought I'd return to this thread I started exactly 12 Months ago to the day. There were a lot of opinions and wild predictions out there but the figures are in.

XAO went up 13.5% this year. What a ripper of a year it's been for me anyways.

The title of the thread does not need to be changed. The All Ords has still gone nowhere for 7 years. We touched this point the first time back on 19/12/2005 when the all ords closed at 4671 (near enough).

Anyhow here are some comments from 12 Months ago, cheers.

5700 (don't ask) (emphasis on punt)

Way out, never mind.

OK I'm going to take a punt too, 4919:

I was out too, only 255 points though.

My punt
All Ords will be up by 8% at 4440

Pretty close old mate.

I can't see 2012 ASX being that flash - but hey, you never can tell.

Happy New Year

Happy New Year to you too, sorry but a 13.5% increase was pretty good.

On a side note, at the end of 2012, a year when depressed Eurozone countries have to find refinancing for around 1 TRILLION EUROS worth of sovereign debt - yep, you read that correctly - I predict this thread will be changed to "ALL ORDS went no where for 8 YEARS!!"

Crappy New Year?

Not that crappy, however it's still at only going nowhere for 7 years, you were pretty close too.

More to come.

 

[Bill M]

all ords to 3000, chinas collapse is imminent, there wont be many positives after june/july next year. european leaders are already calling for a very tough year ahead, and if theyre calling it tough, it actually means its going to be horrific.

Man, you got it so wrong on all accounts, all ords is 55% higher than what you thought it would be.

+1
China slow down will have an effect on us here in Oz.

l'm going for 3400.

See above.

Bear market bearing down on us all. It will continue into the next year and the next 2 decades.

Wrong.

Ya, cash feels good atm.

Sleeping much better.

What are you going to do now? You made 5% on your cash, the all ords gained 13.5%. What will you do with your money for 2013?

I've been near fully invested since mid 2007...my PA return (gross dividends and distributions) on (original) capital is close to 10% ~ PA return (gross dividends and distributions) on recycled capital close to 7%

Well done.

 

[CanOz]

Amazing how easy it is to get it wrong, completely.

That's why I'd rather trade equities with an algorithm. I dont need to think about the sentiment.

So many bears got it so wrong in 2012, the most hated bull market in history must be.

Happy New Year all!

CanOz