XAO Bull

[qldfrog]

There was an excellent podcast presentation on Andrew Swanscott's "Better System Trader" that mentioned the risk of NOT being in the market (some time ago - I'd have to dig back for the episode). Basically that over the long term the trend is up, albeit with some very inconvenient drawdowns along the way, such that a long term investor can't afford to risk not always having at least some size position in the market.


View attachment 70990 View attachment 70991

I see your point but your graph is based on a relatively short (aka a generation) timeline, where we had in the west the effect of a great age pyramid/demographic
Now these inflated baby boomers number are going into spending more than saving, western world has reached a max in term of consumption capacity etc.I very doubt that these trends have any real meaning in the west; in the indonesian market or maybe indian market, yes but not here.people draw money when in pension more than they contribute, be it in their super or own investment, this new phase starts now!!!To the despair of our government pushing debt blindly to avoid the economical truth

 

[CanOz]

Who says the baby boomers have anything left to spend?

....in the US they're working longer.

 

[Newt]

I see your point but your graph is based on a relatively short (aka a generation) timeline, where we had in the west the effect of a great age pyramid/demographic
Now these inflated baby boomers number are going into spending more than saving, western world has reached a max in term of consumption capacity etc.I very doubt that these trends have any real meaning in the west; in the indonesian market or maybe indian market, yes but not here.people draw money when in pension more than they contribute, be it in their super or own investment, this new phase starts now!!!To the despair of our government pushing debt blindly to avoid the economical truth

Very fair question from an enquiring mind. I had a dig around for a longer timeframe as my Norgate XAO data only goes back to 80s. Interesting the graph below back into the 19th Century shows a long term regression line of 5.1%.

I think most of us working hard to invest or trade Aussie stocks would expect more than 5.1% compound for our efforts, on the expectation we'll do better picking stocks than the long term average of everything in the All Ords that's going up, sideways or down.

(I do however repeat my remark that "short term" discomfort away from these convenient trend lines can last >10 years, just in case the market hits me with lightning tomorrow!)

 

[Value Hunter]

Newt 5.1% is on the price index not the accumulation index. If you add dividends the return would be higher. But the point still stands most on this thread would be hoping to do better than the index.

 

[Value Hunter]

Craft I am not saying the market cannot go higher but its hard to see the market being going sharply higher. Modestly higher yes, but sharply higher I just cannot see the fundamentals supporting it. If you look at p.e. ratios, Cyclically adjusted p.e. ratios, price to book ratios, etc for the Aussie market there is nothing to suggest its greatly undervalued (other than the earnings yield to bond yield comparison).

Interest rates in Australia are close to the bottom pf the cycle so there is not going to be much if any free kick from falling interest rates, the opposite is more likely in fact.

As for corporate earnings the resources companies will be faced with an oversupply of the major commodities for years to come. Sure there might be some cyclical upswings and downswings in resource earnings but I cannot see a major continued uptrend occurring there. Banks can increase their earnings modestly over time but given the high level of indebtedness in the Australian economy its hard to see how strong credit growth (and hence strong earnings growth) can be sustained. Modest credit growth is more likely. Also in the meantime Bank's are facing increased regulations and capital requirements that are impacting margins and earnings. As for Telco stocks Australia is a mature market and new technologies and companies will simply compete away the earnings of the outdated technologies/companies. Overall I don't see huge growth in aggregate Telco earnings. As for retail earnings most of the Australian retailers listed on the share-market are outdated dinosaurs that will slowly be crushed by companies like Amazon, Aldi, Expedia, etc.

Sure some of the other sectors like tourism, healthcare and education, etc might do well over time but given the heavy weighting of banks, miners and energy stocks in the index they will act as a drag limiting the upward momentum of the market.

For the record I am modestly bullish on the overall market as opposed to strongly bullish.

 

[skyQuake]

View attachment 71022

Whenever I see a long term chart like this I always wonder if the comparison is fair:
For the entire decade of 1875-1885, All the market moving events, trades and (inflation adjusted) dollar value of trades could probably be squeezed into a month of frantic trading in 2017.

The velocity of money was so much slower, market adjustments and participants were also much slower...

 

[craft]

Whenever I see a long term chart like this I always wonder if the comparison is fair:
For the entire decade of 1875-1885, All the market moving events, trades and (inflation adjusted) dollar value of trades could probably be squeezed into a month of frantic trading in 2017.

The velocity of money was so much slower, market adjustments and participants were also much slower...

That’s a good point. The counterpoint is that the index represents the value of the underlying productive capacity. If a similar % of the economy is represented by listed equity in 1875 as today (???) then the picture remains reasonably valid. Doesn’t matter the contrast in the transaction volume – that should just be faster price discovery or possible larger financial economy driven bubble deviations depending on your take on things.

 

[craft]

Craft I am not saying the market cannot go higher but its hard to see the market being going sharply higher. Modestly higher yes, but sharply higher I just cannot see the fundamentals supporting it. If you look at p.e. ratios, Cyclically adjusted p.e. ratios, price to book ratios, etc for the Aussie market there is nothing to suggest its greatly undervalued (other than the earnings yield to bond yield comparison).

Interest rates in Australia are close to the bottom pf the cycle so there is not going to be much if any free kick from falling interest rates, the opposite is more likely in fact.

As for corporate earnings the resources companies will be faced with an oversupply of the major commodities for years to come. Sure there might be some cyclical upswings and downswings in resource earnings but I cannot see a major continued uptrend occurring there. Banks can increase their earnings modestly over time but given the high level of indebtedness in the Australian economy its hard to see how strong credit growth (and hence strong earnings growth) can be sustained. Modest credit growth is more likely. Also in the meantime Bank's are facing increased regulations and capital requirements that are impacting margins and earnings. As for Telco stocks Australia is a mature market and new technologies and companies will simply compete away the earnings of the outdated technologies/companies. Overall I don't see huge growth in aggregate Telco earnings. As for retail earnings most of the Australian retailers listed on the share-market are outdated dinosaurs that will slowly be crushed by companies like Amazon, Aldi, Expedia, etc.

Sure some of the other sectors like tourism, healthcare and education, etc might do well over time but given the heavy weighting of banks, miners and energy stocks in the index they will act as a drag limiting the upward momentum of the market.

For the record I am modestly bullish on the overall market as opposed to strongly bullish.

Wall of worry is the term that comes to mind.

 

[craft]

American business – and consequently a basket of stocks – is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that. Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle.

Substitue 'American' for 'Australian' and this quote from Buffett's 2016 shareholder letter seems pretty apt for this thread.

 

[craft]

The All ords Accumulation Index for the last financial year.


Over this last FY
How many have been Bullish?
How many have been Bearish?

 

[craft]

Here is the all ords accumulation index since the first post in this thread


and here is the above chart in context of the historical accumulation index chart

 

[kid hustlr]

I enjoy your posts Craft.

As an aside,
How do share offers / raising's get included in these type of indexes? I view these as a bit of a hidden win?

 

[craft]

I enjoy your posts Craft.

As an aside,
How do share offers / raising's get included in these type of indexes? I view these as a bit of a hidden win?

thanks for the feed back Kid.

No free hit from capital raisings etc. The index divisor calculation adjusts for corporate actions in the same way it does for index management related changes.

This will give you idea of the how & why of the calcs
http://www.spindices.com/documents/methodologies/methodology-index-math.pdf

 

[kid hustlr]

I think this chart puts things in perspective from a pain perspective - the GFC and the following bump really was an extraordinary event in the grand scheme of things

 

[craft]

Updating my data for end of month and noticed my touchstone for fair value has just about reached the level of all time high's of the index. Sensing the level of bearish sentiment still widely prevelant it wouldn't suprise me if the current move still has some good legs.

 

[Newt]

Thinking of you today craft, as the XAO finally reaches a new high.
"So long, and thanks for all the fish....."

Just in case - your insights are always welcome at ASF, should you decide to come home.

 

[craft]

Updating my data for end of month and noticed my touchstone for fair value has just about reached the level of all time high's of the index. Sensing the level of bearish sentiment still widely prevelant it wouldn't suprise me if the current move still has some good legs.
View attachment 71711

Everything I’m looking at still suggest we are still very close to fair value.

That’s not to say that we couldn’t in the relatively short-term re-visit 5,000 on for example a hard landing from bad debts relating to housing or up to 9,000+ as things reprice on the expectation that inflation will be lower for longer. Both would be extended valuations but within historical norms of valuation.

Given valuation is only around fair level’s currently, I just don’t see this market yet getting anything near the love needed to suggest its long-term demise is imminent. I suspect the un-loved bull continues – the bear market everybody fears will start one day, but it could be from a much higher price level/valuation. Who really knows what the future holds? Maybe we just keep chugging along around fair value of underlying economic fundamentals which slowly and boringly head north east under relentless human endeavour. Perhaps we are in for another decade of no valuation extremes - Keeping the noise down (+ or – std dev of fair value) is much more the norm for index pricing than the extended valuation points like GFC, 70’s inflation, Great Depression etc that give rise to the extremes in price that people fear.

Calling since 2007 a consolidation that requires a second part that takes us back to or below 2007 lows would create extreme “normalised” valuation never seen before.

ps Thank you for the comment Newt.

 

[IFocus]

Everything I’m looking at still suggest we are still very close to fair value.

That’s not to say that we couldn’t in the relatively short-term re-visit 5,000 on for example a hard landing from bad debts relating to housing or up to 9,000+ as things reprice on the expectation that inflation will be lower for longer. Both would be extended valuations but within historical norms of valuation.

Given valuation is only around fair level’s currently, I just don’t see this market yet getting anything near the love needed to suggest its long-term demise is imminent. I suspect the un-loved bull continues – the bear market everybody fears will start one day, but it could be from a much higher price level/valuation. Who really knows what the future holds? Maybe we just keep chugging along around fair value of underlying economic fundamentals which slowly and boringly head north east under relentless human endeavour. Perhaps we are in for another decade of no valuation extremes - Keeping the noise down (+ or – std dev of fair value) is much more the norm for index pricing than the extended valuation points like GFC, 70’s inflation, Great Depression etc that give rise to the extremes in price that people fear.

Calling since 2007 a consolidation that requires a second part that takes us back to or below 2007 lows would create extreme “normalised” valuation never seen before.

ps Thank you for the comment Newt.

Thank you Craft, your invaluable view point sorely missed

 

[Newt]

Have been away a few days, but very happy to see your insights shared again craft

 

[brty]

I'm another very happy to see you contributing again craft.

One part on valuations that can be seen from the long term (140 years!!) chart that Net put up in 2017.

Have a good look at that chart before making any long term predictions. Only once in the 140 year period, from ~1888- 1904 did the index take more than 11 years to regain it' prior high. Also with one exception (1987-1994), the index after passing prior highs continued on in a bull market. Even the pull back in 1994 was only a relatively minor one.

Either history is bunk or the market is likely to go much higher in the current bull market despite all the calls for the market to be going down in a huge bear market 'soon'.
Also for history buffs, the leaders of every bull market are different to those of the past (but there are always one or 2 exceptions)