The Bull shall Return

[YOUNG_TRADER]

Well I'm back from my little break, what a month it has been,

What a shift of perspective, 2 months ago everyone was screaming China, India, Japan re-awakening, Europe Steadying, US steadying etc etc, not enough commodities, Commodity Super Cycle

Today, its like everyone has an inside scoop to Federal Reserve Bank, inflation, interest rates, slowing economies blah blah blah,

The bears are out, and the bulls are well, there in the pubs drowning their sorrows away or are they?

After spending nearly all of yesterday on the phones to brokers, the consensus is clear, most if not all brokers were struggling to keep up with commodity price rises, as such in their valuation/profit guidance targets they were using conservative loing term forecasts,

The commodities whose spots were way ahead of brokers forecasts were Copper, Zinc and to a lesser or should I say shorter lived extent Gold.

Now reporting season is at most a month away, lets see how much upside suprise comes from the earnings of stocks like

BHP, OXR, ZFX, KZL, PEM, CBH, and a whole lot more,

I also think STO, WPL, TAP, ARQ, ROC will all benefit from higher all prices, but analysts were fairly close with estimates,

Still there will be many suprises to the upside, which will result in a raft of upgrades, with brokers scrambling over each other to upgrade not wanting to be left out and the bull market for commodities and in Australia Resource Socks will really take off,

On reflection I think that this period here, is what they call 'the wall of worry' and once over its when the real bubble starts!

 

[bullmarket]

Hi young_trader

I'm not convinced that the bulls will come back with the same vengeance. I think there are too many potential storm clouds on the horizon....ie....high oil prices, rising inflation in the US and here, possibly rising interest rates both here and in the US, the Chinese gov't being reported in The Age a few weeks ago saying they want to slow down their unsustainable economic growth rate etc for the market to be pushed past its recent all time highs within the next 6 months and possibly even 12 months.

I think our market (XJO) will basically trade sideways for a while with more downside than upside risk in at least the short term if there is any more bad news.

cheers

bullmarket

 

[wavepicker]

Hi young_trader

I'm not convinced that the bulls will come back with the same vengeance. I think there are too many potential storm clouds on the horizon....ie....high oil prices, rising inflation in the US and here, possibly rising interest rates both here and in the US, the Chinese gov't being reported in The Age a few weeks ago saying they want to slow down their unsustainable economic growth rate etc for the market to be pushed past its recent all time highs within the next 6 months and possibly even 12 months.

I think our market (XJO) will basically trade sideways for a while with more downside than upside risk in at least the short term if there is any more bad news.

cheers

bullmarket

Totally agree with you bullmarket,

I think it's going to be tough going for the bulls in the next 2-3 years
with more downside before any major rally on the horizon.

This has to be expected after a very strong run in the last 3 years.

cheers

 

[specman]

Quite a few economists in the U.S believes the market is oversold.Based on forecast earnings,stocks are undervalued in relation to previous history.Companies in the U.S continue to upgrade their earnings forecast.

What IS worrying the market is that the Fed will overshoot with their raising of rates and send the economy into recession.The hawkish tone on inflation by Bernanke has not helped in this regard.

There are already signs that the U.S economy is slowing down,thereby putting less pressure on inflation and most economists believe that the ceiling for rates will be 5.5% and that should be enough to control inflation.It is currently 5%,so 2 more hikes instore and I think the market has factored in one already.If the ceiling is going to be 5.5% and inflation in control then the economy should be fine.High oil prices are here to stay and Bernanke believes the U.S economy is very resilient and is not having as big an impact on inflation as was feared.

However,if inflation continues to rise even after 2 more rate hikes,then the dreaded stagflation scenario becomes possible and stock markets will suffer.I doubt this will happen but the next set of core CPI data should be interesting.

 

[wayneL]

Quite a few economists in the U.S believes the market is oversold.Based on forecast earnings,stocks are undervalued in relation to previous history.Companies in the U.S continue to upgrade their earnings forecast.

And therein lies the rub. Which history are those economist looking at... and what is their agenda?

Is the time frame 2 months, a year, 5 years, 10 years, a hundred years? I won't pretend to anything about valuations, but I remember a time when p/e 12 was considered expensive. Now thats a bargain. I believe a time is approaching where that will once again be considered expensive.

There is no risk premium available in stocks (as a long term investment) and any percieved value is all speculative. Something like Ducati pointed out in his BHP thread.

Lets not ever forget "most" economists/analysts have an agenda/vested interest. It's a bit like Real Estate Institutes commenting on the stae of the real estate market... always a positive spin, no matter what.

Cheers

 

[scsl]

This is part of an article from MoneyWeek (watch out for David Fuller's comments):

Will China's slowdown really sink the commodities market?
19 June 2006

It was all going so well.

After taking a dive at the start of the week, world stock markets recovered some of their poise mid-week. By Thursday's close, the FTSE 100 looked as if it had a good chance of ending the week higher than where it began.

And then another Federal Reserve banker decided to open his mouth and state the obvious yet again…

William Poole, the president of the Federal Reserve Bank of St Louis, ensured stocks ended last week on a low note when he pointed out that “core inflation is modestly above what many of us have expressed as our comfort zone.”

Speaking to reporters in South Korea, he continued: “It’s certainly my view that if the inflation rate continues to be persistent like that, the Federal Reserve will simply have to pursue [anti-inflationary policies]."

Let’s leave aside the fact that the idea of an anti-inflationary central banker is something of an oxymoron. After all, they're the ones who've been printing all this money and driving prices higher in the first place.

Mr Poole’s comments reawakened all the insecurity that had briefly been set aside mid-week. Traders had become resigned to a fresh US interest rate hike at the end of this month, but now they are getting worried that another will follow sharply on its heels.

But the renewed nerviness wasn’t just down to Mr Poole. China did its bit to rattle investors at the end of a long week as well, by announcing its very own bit of financial tightening.

The People’s Bank of China raised its “required reserve ratio” for commercial lenders by 0.5% percentage points, to 8%.

Basically, this means that commercial lenders will be able to advance fewer loans, because they will need to keep more money in their reserves. The hope is that this move will help to slow investment in unnecessary factories and infrastructure projects.

This is far from the only measure designed to slow investment growth, says Julian Jessop at Capital Economics. In April, the Chinese central bank hiked the key interest rate to 5.85% form 5.58%, reacting to strong economic growth in the first quarter.

“Further…controls [on lending] may well be coming. Individually, none of these measures is likely to make much difference, but as a package they should have more bite,” says Mr Jessop.

This news hit mining stocks in particular – investors are concerned that if China’s economy starts to slow down, then the country’s demand for raw materials will also fall, driving down commodity prices.

So is the market right to be punishing the mining sector?

We don’t think so. As highly respected financial commentator David Fuller points out on Fullermoney.com, the commodities story isn’t just about China – “it now emanates from most of Asia, South America, much of the Middle East, Eastern Europe and even Africa.”

Unsurprisingly, the populations of these developing economies want the higher standard of living that they see in the West. And that demand will require a lot of raw materials to sustain it.

As Mr Fuller puts it: “You don’t need to be a mining analyst, let alone an economics wonk, to appreciate that when 5.5bn mostly impoverished but naturally intelligent and often highly educated people are encouraged to lift themselves out of shanty towns or rural squalor, and into the gleaming cities and higher paid careers that 1.5bn people in the developed world have mostly taken for granted, the newcomers embrace this opportunity with considerable zeal.”

He believes “we are only a few years into what will surely be the biggest and longest bull market for industrial resources that the world has ever seen.”

But if you want to worry about bubbles, there are certainly plenty of them around just now. In the commercial property sector for example, Jenny Davey in The Times reports that property developers are planning to build the equivalent of 33 shopping centres the size of Bluewater (Europe’s largest shopping centre) in the UK over the next four years.

More than 18 million square feet is already under construction. That’s the most since the period from 1989 to 1991, when 19 million square feet of new shopping space was built - just before the property crash of the early nineties.

All this new building is going on at a time when consumers have never been more indebted, and the high street is looking increasingly vulnerable. Perhaps more importantly, it’s also occurring just as retail outlets are losing significant levels of market share to the internet.

We don’t think the UK needs more shops. But we do think the world needs lots more raw materials. So although the mining sector correction may well continue while markets remain confused and scared about a US-led slowdown in China, remember that’s all it is - a correction, not a crash.


"we are only a few years into what will surely be the biggest and longest bull market for industrial resources that the world has ever seen" .....ahhhh, just what we all needed to hear amid all the chaos of inflation worries!

 

[specman]

And therein lies the rub. Which history are those economist looking at... and what is their agenda?

Is the time frame 2 months, a year, 5 years, 10 years, a hundred years? I won't pretend to anything about valuations, but I remember a time when p/e 12 was considered expensive. Now thats a bargain. I believe a time is approaching where that will once again be considered expensive.

There is no risk premium available in stocks (as a long term investment) and any percieved value is all speculative. Something like Ducati pointed out in his BHP thread.

Lets not ever forget "most" economists/analysts have an agenda/vested interest. It's a bit like Real Estate Institutes commenting on the stae of the real estate market... always a positive spin, no matter what.

Cheers

How do you determine what is good value?One investor may find a company with a p.e of 12 good value,another may not consider it good value unless it is less than 7.Ultimately,the market overall will determine the value and the fact that the stocks on the S&P500 is undervalued historically should be a positive,not negative.It is certainly not in a tech boom type bubble.

Once the wall of worry about recession and stagflation is lifted,there is certainly plenty of upside potential.Of course,a recession is possible and some economists are even predicting a depression due to the massive U.S current account deficit.Nobody can accurately predict the future,just make an educated guess.

 

[TheAnalyst]

How do you determine what is good value?One investor may find a company with a p.e of 12 good value,another may not consider it good value unless it is less than 7.Ultimately,the market overall will determine the value and the fact that the stocks on the S&P500 is undervalued historically should be a positive,not negative.It is certainly not in a tech boom type bubble.

Once the wall of worry about recession and stagflation is lifted,there is certainly plenty of upside potential.Of course,a recession is possible and some economists are even predicting a depression due to the massive U.S current account deficit.Nobody can accurately predict the future,just make an educated guess.

Someones selling and it aint mums and dads thats for sure....so it seems at this stage especially after this duration and no end in sight that large funds of every type are factoring in some very bad news..........interest rates is the most obvious at this stage....

 

[specman]

Someones selling and it aint mums and dads thats for sure....so it seems at this stage especially after this duration and no end in sight that large funds of every type are factoring in some very bad news..........interest rates is the most obvious at this stage....

Inflation is the biggest worry.The U.S Fed will fight inflation at the expense of the economy.You can kickstart a sluggish economy quickly by lowering rates but inflation takes years to root out.

If inflation data continues to be above expectation,it is a given that interest rates will be hiked and if they hike it more than needed(it takes 12 months before the effects are felt) then they could send the U.S economy into recession,with repercussions felt globally.This is probably what is worrying the funds,not that stocks are overvalued.

 

[RickG]

Don't mean to hijack this thread, but one reason why I think the bull run is far from over (in the medium to long term anyway) is a simple thing called superannuation. This is the first generation which has been forced to put 9% of their income into a super, and many contribute more.

Maybe I am being too simplistic, but the money has got to go somewhere, and most policies I would assume have a large portion going into shares. If you keep fueling the fire its got to get bigger.

I think it will be many years yet until retirement starts impacting on super funds.

Anyway would like to hear some ideas on the impact of Super funds on the share market over the last 10 years, and their impact for the future.

I could be way off base, but the injection of funds must have made some impact.

 

[carmo]

Totally agree with RickG, that 9% every week is being forced into a jar that is already full, it has to spill out somewhere!

 

[specman]

Don't mean to hijack this thread, but one reason why I think the bull run is far from over (in the medium to long term anyway) is a simple thing called superannuation. This is the first generation which has been forced to put 9% of their income into a super, and many contribute more.

Maybe I am being too simplistic, but the money has got to go somewhere, and most policies I would assume have a large portion going into shares. If you keep fueling the fire its got to get bigger.

I think it will be many years yet until retirement starts impacting on super funds.

Anyway would like to hear some ideas on the impact of Super funds on the share market over the last 10 years, and their impact for the future.

I could be way off base, but the injection of funds must have made some impact.

Yes,recently released figures showed the Australian managed fund market,everything from super to life insurance,has reached one trillion in funds under management.That is 1000 billion.

All that liquidity has to be parked somewhere and fixed term bank deposits won't please policy holders.

 

[Smurf1976]

To my understanding, history backs the notion of the Fed going too far with the rate rises. They'll stop when something breaks IMO. Question is whether it's the stock market, houses, general economy etc.

 

[Sean K]

Chindiapanaiwanporeland is REAL. Even a little US recession won't stop it.

 

[TheAnalyst]

It is a historical fact that when interest rates are increased to counter inflation share prices move downwards to ensure the return on shares is greater than the return on fixed interest to reward the investor for the risk and volitility in the share market......then the only way companies can increase there price is for their profits to increase.....

Superannuation can also be put in to cash or fixed interest and various domestic and global bonds and does not all have to be placed into shares.....with the new super rules and contributions it seems that our retirement plans by governments is resembling the U.S. and that may mean that per's can become higher and the market will except this......

I am starting to think that when purchasing shares now factor in a central bank interest rate here in Australia at 7-8% and if the share returns 2-3% above this gross then it is a buy and less riskier.....would like to hear more from others

 

[wayneL]

Chindiapanaiwanporeland is REAL. Even a little US recession won't stop it.

The next recession won't be little

 

[specman]

To my understanding, history backs the notion of the Fed going too far with the rate rises. They'll stop when something breaks IMO. Question is whether it's the stock market, houses, general economy etc.

That all depends on your definition of "break".I am assuming that you mean a strong growing economy going into recession or a stock market crash.I don't think the Fed would do that on purpose.It's just easy to get wrong as altering rates does not have an immediate effect on the economy and very easy to overshoot.By the time they stop hikes,it's too late and a recession results 12 months later.They are aiming for a soft landing but of course that is not guaranteed.

 

[Sean K]

Time for a crash eh Wayne? When is it, Sep 07?

What is going to bring it on? Just going on the Waves/Cycles? Or is that when the real WWIII starts? Or, mutation of birdflu/SARS into something serious? Perhaps the Labor Party get into power then. That'd bring on a crash! Especially if Julia is running the show...

You been speaking to Yogi about this?

 

[wayneL]

Perhaps the Labor Party get into power then.

That'd probbably do it

 

[YOUNG_TRADER]

Totally agree with RickG, that 9% every week is being forced into a jar that is already full, it has to spill out somewhere!

Also what Kennas said, "Chindiapanaiwanporeland is REAL. Even a little US recession won't stop it."

Lets look at these 2 points,

The first is money needs to go somewhere, isn't it interesting to note that during the last phases of our phenonmenal property boom (2003) money started to pour into the stock market, could this be a coincidence? Alot of property developers I know where cashing up 2003 and we're putting their huge profits into other areas such as ASX stocks, listed managed funds, both locally and overseas etc etc,
Without a doubt property in most parts of Aus are not cheap, with affordaility at all time lows they are said to be overvalued, I think I read an OECD report that said we have some of the most overvalued property in the World, whether you agree or disagree is irrelevant one thing for sure is that for the last few years the sentiment towards property has died off,
So property is not as an attractive option to park your money in, so the question comes where do you park your moeny, Bonds, Term Deposits and other fixed interest securities? Or the roaring stock market? ? ?

The second point is quite simple and I think really underestimated, Chindiapanaiwanporeland is REAL, a quick question to ask some people out there who have these strong views on interest rates slowing global growth etc, have you in the last 2 yrs been to China or India?
For those who have please think about what you saw, those two nations construction development is nothing short of freaky/crazy/scary!!!!!!!

I was in China last year on business for 12 days, on my way from the airport to hotel I past a row of buildings under construction, at least 50, on either side of the road, at the end of my trip on my trip back to the airport to depart the buildings that were say 50% completed were nearly 80% completed I couldn't believe it I was so shocked and amazed I asked the Cab driver how it was possible, he said the work in 3 crews doing 8hr shifts, thats 24hrs a day, 7 days a week construction, with no red tape council crap to restrict and no work cover or unions to slow things down, my point is China and India's construction is like the German build up to WW2 they are going nuts and what are their deadlines? For China the 2008 Olympic Games, for India the 2010, why? Because its the first time the whole world gets to see the nations properly, they are on display and these are two very very proud nations who want to show to the world that they are now a force to be reckoned with, they wish to shake off the shackels of the past that they are 3rd world nations and launch themselves into the new millenium as the future of the world!


To conclude in a clear concise manner, 2 things are certain, we have money and we don't like putting it under our mattreses, we either spend it (we're notorious for this) = More Consumption = Higher GDP
Or we Invest it = Improved sentiment towards investments = Bullish Outlook
The second is any slack left by the US or Western Worlds in terms of Commodity Demnad will be snapped up by China and India and even Japan,
These 3 nations in particular have been in the making for 10 yrs + (Japans Deflation situation) so its taken 10yrs to get the locomotive going, while the track is by no means smooth and there will be a few sharp bends and curves it will take a hell of alot to de-rail these economies.

Thoughts?????