2005 and Beyond:The BEAR is BACK?

[ghotib]

Re: 2005 and Beyond:The BEAR is BACK ?

..."It was fun while it lasted: stockmarkets and property have boomed over two decades. But the world economy has changed and history will not repeat itself.......For the first time since he began investing, Warren Buffett holds more cash (US$43 billion) than shares. Buffett has cashed out. If he is right, the party has ended."

Not to rain on the journo's parade or anything, but I've been reading for at least 18 months that Buffet has cashed out. I don't know whether he has or not, but I seriously doubt that he waited till last month to make some massive move. Buffet's investment strategy is not, repeat NOT, driven by share price or market movements.

Page 27 of the same BRW has Access Economics showing three charts and a commentary on why the housing market is due for a severe correction. In Sydney, it is already underway. If the running of the herd builds momentum selling, either in property markets or equity markets or both, a crash could occur. Forced selling by lenders would accelerate the correction.

"Forced selling by lenders"? Lenders can't sell property until they foreclose; they don't own it. Which is not to say that overstretched owners aren't selling at panicky prices and accelerating the correction, but let's keep our panics straight.

Cheers,

Ghoti

 

[Investor]

Re: 2005 and Beyond:The BEAR is BACK ?

....
"Forced selling by lenders"? Lenders can't sell property until they foreclose; they don't own it. Which is not to say that overstretched owners aren't selling at panicky prices and accelerating the correction, but let's keep our panics straight.

Ghoti

During the economic recession in the 1980's, I had to do some force selling (foreclosures of residential and commercial properties) when I was working in a bank. It was terrible work because of the human emotions involved and I decided to find another job function soon after.

If borrowers missed repayments, the bank sent a reminder letter. If overdue repayments continue unpaid, phone calls were made. Some borrowers could not meet repayments due to reasons like loss of job, fall in business income or business failure. At that time, I would discuss the financial situation with the borrower and see if interest only payments for six months to a year might help. If the borrower cannot meet interest only payments, for three months, a Notice of Demand had to be issued. Then, the bank proceeded to foreclose on the property and appoint an agent to sell the property. The property is auctioned as a Mortgagee Sale.

During the recession in the early 1990's, I worked in Head Office and, luckily due to previous promotions, did not have to do the numerous forced mortgagee sales that ensued. Still, I saw the effects. Many houses were being sold at 20% to 30% less than the 1989 peak valuations held on file. Some borrowers, in their discussions with the bank, decide to do the selling themselves and avoid the mortgagee auction. This way, they might be able to get a better price. The price falls (for houses) during that recession were presented in a chart in the recent weekend Australian Fin. Review. Commercial and industrial properties fell even more, some by 50% of 1989 peak valuations held on file. Vacancy rate was high and vacant properties do not yield any income to offset loan repayments.

That was a severe recession. Unemployment rose to 12%. Many businesses (of various sizes) collapsed, leaving workers unemployed and creditors unpaid. The domino effect happened. Businesses that lost money from unpaid trade debtors found financial problems all of a sudden. Less income in the economy led to less spending. I saw a few friends, who lost their white collar jobs, leave to work overseas. They sold their houses at whatever price they could get, even if a capital loss was incurred. Retrenchments were by the thousands. I saw many work colleagues being retrenched. It was terrible. It encouraged me to save money and invest in the sharemarket (mainly ASX 100 companies) even more, to achieve financial freedom.

Forced selling by margin lenders for shares happened during the tech wreck a few years ago and could be happening yesterday and maybe today.

I am not suggesting panic. Good solid businesses either listed or unlisted, would survive any economic conditions. The stockmarket will continue on irregardless. Just that some businesses will close and other new businesses will take their place (as has happened before). During that process, some investors could lose money.

Just to say what I have seen before. This forum could be about sharing information. For readers who might not have operated through a recession before, is it not worthwhile to know in advance, what can happen in a recession? If it is not worthwhile, then just ignore my post. No problem.

A few businesses (ION - in administration, Collins Bookstore in administration, a construction company - was it Walker or Walter?) have already had difficulties recently (even looking around the suburbs, some businesses have closed, leaving vacant shops).

Profit downgrades (PBB, PMP, FPA, GUD, FMG, Repco, AMC) have been frequent during the past few weeks. PaperlinX announced a 20% profit downgrade after close of trading yesterday.

There are a few indications taking place.

 

[TjamesX]

Re: 2005 and Beyond:The BEAR is BACK ?

Investor

Do you believe these profit downgrades are demand or cost driven?. I know that AMC have seen a rise in their costs of doing business, leading to the profit downgrade - but I don't know much about the others.

This forms part of my reasoning as to why we haven't seen a top in XAO in this cycle... yet.

This is really just my own thoughts and speaking in very general terms, but when you have had growth run such as in Aus, I would think a tell tale sign of the end is that in the chase for profits, businesses invest $$$ even when their expenses and costs of doing business are rising fast. Aus employment market is at full capacity (you have to pay more $$$ for the right person), and I know from the co I work for - any suppliers we use are at full capacity, suppliers have pushed up prices. Essentially this all leads to the cost of doing business rising - hurting the PL statement. Now ofcourse every industry has its own dynamics, I'm speaking generally.

To me this is not the scary part, the cost part of the equation is hurting businesses at this stage of the cycle - but from my view of the world, we haven't seen the demand side hurt....... yet. I think this is inevitable and will lead to the next recession soon (1 - 2.5 years).

I was talking to my hairdresser last night, she spends $9 per strand of hair for hair extensions, she gets 100 strands done. I said 'how long does this last for', answer 3 months. She said she pays for 100 strands every 3 months!!! I said 'how many people get this done', answer - out at the cubs/pubs she said there's heaps of girls with them!!!

Maybe I didn't hear it all right but $900 every 3 months!! I haven't seen people start to zip up their wallets yet, but when they do......

I need to find some companies that have demand 'locked in' get revenue from non discretionary spending and do well in a downturn... any ideas?

TJ

 

[TjamesX]

Re: 2005 and Beyond:The BEAR is BACK ?

Not to rain on the journo's parade or anything, but I've been reading for at least 18 months that Buffet has cashed out. I don't know whether he has or not, but I seriously doubt that he waited till last month to make some massive move. Buffet's investment strategy is not, repeat NOT, driven by share price or market movements.

Isn't that the scary part though??? He's driven by fundamentals..... and longer term, everything reverts to the fundamentals

 

[ghotib]

Re: 2005 and Beyond:The BEAR is BACK ?

Hi Investor,

Thanks for the reminder that real people on all sides get hurt in downturns. I nearly dropped my mortgage in the 80s, and I don't mean to downplay the current risks of recession or the pain it will bring if it comes. But this particular article felt to me like beatup (beatdown?), and I guess that brought out my pedantic streak.

My real point is that emotions are an even worse guide to actions when the bears are running than they are when the bulls are out, precisely because fear is such a strong emotion. I completely agree with you that knowing what's happened before is useful, both in dealing with the emotion of fear and in figuring out what might be happening now.

All the best

Ghoti

 

[Investor]

Re: 2005 and Beyond:The BEAR is BACK ?

Investor

....I need to find some companies that have demand 'locked in' get revenue from non discretionary spending and do well in a downturn... any ideas?

TJ

Yes. I have already implemented such fundamentals in my portfolio. Some of the companies I selected (expected to be held forever) have hardly fallen at all in recent weeks, some have risen in price (amazing as it sounds). I will have to consider whether I want to demonstrate, lest I get accused of ramping.

Might get back to you.

 

[Aussiejeff]

Re: 2005 and Beyond:The BEAR is BACK ?

Yes. I have already implemented such fundamentals in my portfolio. Some of the companies I selected (expected to be held forever) have hardly fallen at all in recent weeks, some have risen in price (amazing as it sounds). I will have to consider whether I want to demonstrate, lest I get accused of ramping.

Might get back to you.

I presume you are indicating a preference towards essential service stocks such as utilities (gas, electricity etc)? No need to name specific companies..

I have biased my portfolio for now into such stocks.

Cheers,

AJ

 

[TjamesX]

Re: 2005 and Beyond:The BEAR is BACK ?

Yes. I have already implemented such fundamentals in my portfolio. Some of the companies I selected (expected to be held forever) have hardly fallen at all in recent weeks, some have risen in price (amazing as it sounds). I will have to consider whether I want to demonstrate, lest I get accused of ramping.

Might get back to you.

I think this is the sort of analysis we need, investors and even traders need to be prepared for a demand slow down in our economy (whenever this occurs). I for one know the 'types' of businesses that I want to invest, but I don't have years of experience in the market in knowing exactly what these companies are and which have the best track record and management to carry it through.

I would greatly appreciate if you could 'demonstrate' and explain why these particular companies have businesses that will continue to profit - in another thread perhaps, probably in the stock chat forum. I'll get the ball rolling

TJ

 

[clowboy]

Re: 2005 and Beyond:The BEAR is BACK ?

I would have to say ALN fits well.

Strong managment etc etc

My only hesitation with ALN is how well the share price has done since listing (400+% in 5 years).

 

[clowboy]

Re: 2005 and Beyond:The BEAR is BACK ?

I also like Australian Renewable Fuels as a speccie (not listed yet).

At least at this stage people still need fuel.....

 

[Investor]

Re: 2005 and Beyond:The BEAR is BACK ?

Hi Investor,

... But this particular article felt to me like beatup (beatdown?),...

Ghoti

G'day Ghoti,

I should have stated that the author of that cover story is Gerry van Wyngen, an investment banker and Chairman of CPI Group.

I have been reading his articles in the BRW and Financial Review since the 80's and have a lot of respect for what he says. In 1989, he warned that a severe economic recession was on its way. At the time, I had already known that. Getting 15% p.a. risk free on bank term deposits worked for me then. Commercial lending rates of 20% p.a. in 1989 would bring any economy down.

Regards.

 

[wayneL]

Re: 2005 and Beyond:The BEAR is BACK ?

Hey peeps,

More bad signs for the share market

QQQQ has been placed on the 'Threshold Securities Lists' It is therefore a regulatory requirement that it cannot be shorted.

In other words the maximum permissable number of short sold shares has been reached.

For those who don't know QQQQ is an exchange traded mutual fund that tracks the NASDAQ, and one the most heavily traded stocks on the Nasdaq.

Cheers

 

[DTM]

Re: 2005 and Beyond:The BEAR is BACK ?

Looking at last Friday on the ASX, it seems like the smart money got out. So much volume with the banking sector in Oz and the price didn't move that much.

 

[Investor]

Re: 2005 and Beyond:The BEAR is BACK ?

.... So much volume with the banking sector in Oz and the price didn't move that much.

Scary version would be if the smart money moved out while the not so smart money moved in.

Be a bit careful with this sector. Many brokers are recommending retail investors move into this so called defensive sector, but the institutional players could be moving out simultaneously (but I am merely guessing). Could be a poker game.

The banking sector, to me, is not a defensive sector. It is the highest geared sector in the ASX. Australian banks have the highest foreign borrowings as a % of their liabilities, in the whole world and has one of the lowest Tier 1 capital adequacy ratios in the whole world. It is a high risk sector, to me (IMO).

 

[RichKid]

Re: 2005 and Beyond:The BEAR is BACK ?

Scary version would be if the smart money moved out while the not so smart money moved in.

Be a bit careful with this sector. Many brokers are recommending retail investors move into this so called defensive sector, but the institutional players could be moving out simultaneously (but I am merely guessing). Could be a poker game.

The banking sector, to me, is not a defensive sector. It is the highest geared sector in the ASX. Australian banks have the highest foreign borrowings as a % of their liabilities, in the whole world and has one of the lowest Tier 1 capital adequacy ratios in the whole world. It is a high risk sector, to me (IMO).

The sector is a good example of the fact that there are more falls to come imo, the banks themselves admit that the best is behind us, any panic by the little people will see some carnage as when the crowd panics it spreads to other areas of the market, wouldn't trust the fundies, they may just be doing what you suggest Investor.

 

[Investor]

Re: 2005 and Beyond:The BEAR is BACK ?

Yes RichKid,

Here is an indication. In today's Financial Review, JP Morgan's banking analyst, Brian Johnson, stated:

"Everyone thinks banks are defensive, but when your debt to equity gearing is 20 to one and you lend to the rest of the economy, I'd say you are more cyclical than anything else.......Having spoken to a lot of overseas investors in the past 24 hours, they are saying, "Why are banks going up when housing starts are falling and Mirvac Group has delivered a profit warning on development risk? Why would you be buying this?"

Remember Barings Bank. It was also the bank to the Royal Family in England. It collapsed due to a rogue trader called Neeson (single handedly).

 

[Investor]

Re: 2005 and Beyond:The BEAR is BACK ?

...It collapsed due to a rogue trader called Neeson ...

Ooops. A typo. That should have been typed as Nick Leeson.

 

[Investor]

Re: 2005 and Beyond:The BEAR is BACK ?

In the news today:

"Treasurer Peter Costello forecast a bleak outlook for house prices last night.
He tipped a further dampening of the property market, compounded by a "substantial slowdown" in household wealth.

Mr Costello revealed property owners' bricks and mortar -- whether it be people's homes or investments -- could be worth even less next financial year, as less people entered the market and prices continued to slide.

Leaving no doubt that the property market is now in a downturn, Mr Costello said the number of people investing in property would fall by 2 per cent in 2005-2006.

He attributed the decrease to the plateauing of soaring property prices during the boom and the recent interest rate rise.

"Dwelling investment fell in the second half of 2004 and forward indicators of activity in the housing sector, such as dwelling approvals, suggest that this modest downward trend will continue," Mr Costello said.

Another indicator pointing to lower activity was the number of monthly finance commitments for the construction or purchase of new dwellings by owner-occupiers, which is down 15 per cent on its last peak in October 2003.

With a glut of apartments languishing on the market, it will come as no surprise that the investor sector is expected to be hardest hit.

Mr Costello said much of the speculative activity in the investor market had passed.

He said rental yields on investment properties were still very low, "suggesting that house prices may fall further in real terms".

Mr Costello warned: "There remains a risk that a prolonged period of falling or flat house prices may lead to rein in consumption expenditure more than expected."

However he said the dampening of the market was merely "the current housing market unwinding in an orderly manner" -- a soft landing with the risk of a sharp fall in house prices abating.

He said solid underlying demand for new dwellings and a strong workforce would keep investment simmering.

Although the economy was expected to record solid growth, he said the recent interest rate rise and high petrol prices would restrain consumption.

With the tax cuts expected to lead to a rise in inflation there could be further pressure on the Reserve Bank to increase interest rates before the end of the year."

 

[DTM]

Re: 2005 and Beyond:The BEAR is BACK ?

An interesting read showing a looming bear market.

http://www.kitcocasey.com/displayArticle.php?id=162

 

[RichKid]

Re: 2005 and Beyond:The BEAR is BACK ?

An interesting read showing a looming bear market.

http://www.kitcocasey.com/displayArticle.php?id=162

That's a great site DTM, it's one of the few I really pay attention to. In terms of cycles I recently read in a Larry Williams's book that Gold, contrary to public opininon, does not rally when markets crash (ie not a safe haven in that sense), it actually goes sideways or down- shown in the charts. Just thought I'd mention it. Lovely graphs in that article too, I like the fact that he hasn't tried to make predictions but is just observing trends and cycles. Thanks again for posting the link.