Future Planning
Prosper or Panic?
According to Bloomberg around US $75 Billion worth of mutual funds were sold in the past 4 months a similar amount to that sold in the period of Lehman Brothers collapse.
So where is the market and what are investors doing?
Bruce McCain, manages US $22 billion told Bloomberg recently “When we’re getting close to a market bottom, the phone starts ringing off the hook and our clients want us to sell everything. Market bottoms are less about an improvement in the fundamental situation, whether the economy or outlook for earnings, and a lot more about getting rid of all the anxious investors.”
“The five months after Lehman were an epic buying opportunity, yet investors liquidated en masse,” Barish an investment professional who mnaages US $8 Billion told said. “Retail unfortunately tends to time things poorly. I don’t expect the current situation to be all that different.”
Where are the underlying fundamentals of the businesses?
Data compiled by Bloomberg show US corporations have been hoarding cash and paying down borrowings. The S&P 500’s net debt to earnings before interest, tax, depreciation and amortization ratio is down to 2.5 from 5 in the second quarter of 2008. Furthermore this year’s earnings will increase 18 percent to a record US$99.57 a share and break $100 next year. This means we have companies at their most profitable and with a strong financial structure (less debt) meaning we are getting an absolute bargain if you are a long term investor.
What is The World's Greatest Investor Doing?
Warren Buffet is not concerned about European debt as he believes it will have fallout but nothing like the GFC. He doesn't believe the US is going into a double dip recession and that a recovery is underway.
His company Berkshire Hathaway is buying back its own shares because "they’re undervalued", Buffett said. He was quick to point out this won't preclude them purchasing shares of other firms or entire companies, who told shareholders in his annual letter that his “elephant gun” is loaded. “If the stock is cheap we will buy it in. If it isn’t cheap we won’t buy it.” said the Oracle.
A Revolution Occurring?
According to Bloomberg, Goldman’s set a Wall Street pay record in 2007, and was subsequently “pilloried by politicians and labor unions for its compensation practices after getting taxpayer aid during the financial crisis”.
It is hard to imagine how employees of banks who have lost billions in capital for their owners and sent the world to the brink of disaster forcing governments to bail out these banks for their misdeeds have been eligible for “bonus” payments. I can’t see how they keep their job yet alone the former.
However, is this a sign that maybe people are starting to have enough?
I have long believed that fund managers or mutual funds in the US have taken a way to passive role in the governance of senior management. They effectively let them get away with whatever they want surely part of the fund managers duty is to scrutinise the reasonableness of staff remuneration the same way they would if THEY owned the business. Clients in fund managers are paying fees and the fund managers should be earning those fees on the governance side by holding senior management to account if actions are not in share holders interests.
The Inside Job - Film Review
It really focuses on the fact that the whole finance food chain is broken and is in desperate need of reform. It also makes the statement that Obama will not be able to deliver the needed reform as he has engaged “current players” to be important members of his staff.
The ineffectiveness of regulators and politicians is a focus of the film. You could even draw a longer bow and say they knew what they were doing and profited themselves. The same can also be said about the academic’s who offer “unbiased” advice and the absolute ineffectiveness of the credit ratings agency’s who got it so wrong. By the time you finish listening to their disclosure and what they are assessing you can see that it is an absolute waste of time paying any attention to anything they say.
The world continues on.
Do you realise that the people that caused the heartache of the GFC have all got away with the money they have stolen? Not one has been jailed or told to give back the money. It has been such a huge transfer of wealth to the rich that effectively figured a way to steal from the poor.
Valuations Determind Long Term Value Not Sentiment
The old saying you make your money when you buy not when you sell is absolutely true. Guess what we are right now in a very exciting time for long term investors.
Last week I read a Bloomberg article discussing the fact that US equity valuations “were stuck at near credit crisis levels”. The article also went onto say that companies were going to increase their profit by 19% in 2011. The article goes onto say that the earnings growth is back in line with long term averages however the index is trading at 13.5 times earnings which is roughly 8% discount to the long term average.
What does this mean...quite simply? The operational performance of the companies is back to “average” however from a valuation perspective investors can acquire these businesses for less than they could on average in the past.
I believe that nothing short of “new” economic dangers surfacing that ceteris paribus this valuation effect could lead to a rise in markets.
US Economy – World’s Greatest Investor Speaks his Mind
There has been financial markets action that suggests that people are indeed concerned with the direction of the US economy. These concerns were reinforced last week with economic data showing the unemployment rate had grown to 9.2% as the US economy only added 18,000 jobs last month. Any continued weakness in the job market will adversely impact upon the levels of consumer spending.
Billionaire Warren Buffett said he is wagering on continued US economic expansion and he doesn’t expect a second recession. Buffet told Bloomberg Television’s Betty Liu on the “In the Loop” program, “How fast the recovery will come, I don’t know. I see nothing that indicates any kind of a double dip.”
Concerns for not only US economic growth but also world growth have resulted in share markets all over the world falling.
As long term investors what should we be doing?
The Google Index
I have been saying that the direction of the Australian economy is very dependent on the events that unwind in Asia predominantly China. These countries are fuelling our resources sector as they demand more and more.
Well guess what we are in the age of new technology so maybe we need to start looking at new economic indicators. The most famous economic indicator drawn from everyday life is the “Big Mac Index” which compares the price of the very famous burger in different currencies. This measures, however crudely, the difference in purchasing power of different currencies.
However, maybe we need to be considering the “Google Index”.
According to a recent article by The Economist, It appears that many Chinese are now concerned with the implications of their economic position if the frequency of the Chinese equivalent to “Hard landing” and the amount of times it has been searched in Google is any indication.
Has Australia utilised these good times in regards to establishing ourselves for post resources boom? Or will we look back and think what a wasted opportunity?
Need to Remain Patient
From an investment returns perspective it seems the GFC is still here. People are asking when asset values will recover.
As with everything the longer things go the more people question will it ever change? The answer to that is only if it is different this time and never is.
The graphs Missing the Best Trading Days and Rolling Returns Since 1980 demonstrate that we need to stay the course and commit to our longer term strategy. The fact that so much has gone against us in the last few years is reason for the attitude that it change sooner or later. In a drought every dry day is said to be a day closer to rain.
In short we cannot afford to be out of the market for the days that it does go up. For example last week the S&P 500 increased 5.6% its largest weekly gain in 2 years.
Also, importantly when we look at rolling returns over longer periods of time the returns become more palatable. Obviously 3-5 years during the period such as the GFC will not look spectacular but the question is what does the next 5 years have install?
Will the Bubble Burst?
An article from David James in the BRW discusses the bursting of the Australian residential property bubble. I have been discussing the “expensive” valuations of our property for sometime however the market is holding up, so far.
In the article Tim Lawless, research Director of RP Data, says that in the year to the end of April, the top one-fifth most expensive capital city suburbs recorded a decline of 5.4%.
Naturally, the parallel is then drawing to the US residential property market which is roughly 1/3 below the peak in 2006.
It should be noted that the mortgage debt to GDP ratio in Australia is around 87% according to The Reserve Bank of Australia. James cites the US peaked at about 75% saying that our bubble is bigger than the US.
I guess we still have strong employment in our economy and the question is what would happen should the “lucky” country become subject to a global slowdown lead by China thus decreasing the global demand for our resources?
Markets Unsteady – Again
More than US$2 Trillion has been wiped out of global stock markets values from the high reached in May. The US stock market has declined for the last 5 weeks as a result of economic news that manufacturing weakened and that unemployment rose.
What does all this mean?
Well according to Bloomberg the S&P 500 is trading at 12.2 times earnings. So what does this mean?
This means that for every dollar of profit you need to pay 12.2 times that amount to buy the business on the stock exchange based on current prices. The long term average is anywhere between 16 and 17 times for this index which means that we are acquiring the assets on historically cheap terms. That means that there is already consideration for some “bad” events in regards to the current prices. Naturally shares can always get cheaper but if you are a long term investor there is an opportunity to take a longer term position and reap the rewards.
Whether the strong Aussie dollar is good or bad depends on what side of the fence you sit on.
If you are planning to go overseas no doubt you are overjoyed with the exchange of your Aussie for the Greenback or Euro.
The same cannot be said for our overseas visitors. Visa recently reported that total spending in Australia by UK visitors was down 3% and down 8% for our US visitors. Interestingly, the total money spent by Chinese visitor had increased by 2%.
As far as investments go those companies that need to buy things from overseas are better off whilst those that have things bought from overseas customers are worse off. Markets react to such movements and these are exactly the sorts of things that are built into the share price of companies. This provides an opportunity for those that are willing to take a longer term outlook on these businesses rather than just react to short term foreign exchange movements.
Wealth and financial security don't just happen. Centre Capital takes a big picture approach to your short term and long term needs. As Thomas Edison said "Good fortune happens when opportunity meets preparation".
A financial strategy is never static, so your strategy will be adapted as needed to suit your lifestyle and accommodate whatever unexpected developments life throws your way.
Centre Capital considers the ultimate measure of successful financial planning to be the achievement of your financial and lifestyle objectives. So we take a holistic view of your overall financial situation and goals. From the very beginning we'll help you to identify your objectives and lifestyle goals by asking you to consider questions like:
- What are your important financial and lifestyle priorities?
- Are you taking advantage of all the current taxation strategies available to you?
- Do you need more income with less tax?
- How confident are you that you are adequately providing for your retirement?
- What are the investment options that you can utilise to help you create wealth?
- Are your loans structured to allow for flexibility and subsequent financial growth?
- Is there any other area of your financial affairs that you wish to review?
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