Market outlook - Dow not going to break

I've been doing some reflection over the last few days. I had previously thought the Dow Jones was tentatively going to break 14,000 points, and that it would be a precursor to a rally. This view was underpin by some positive fundamentals inherent in the market. The problem is the negatives, which I see as these:
1. Market support - The Fed Reserve has been pumping a lot of liquidity into the market in the last few years to sustain the market - the market is fully valued, and I expect the Fed to ease that support, in an attempt to draw the market into more sideways movement.
2. Emerging markets - The strength in Asian markets rests upon expatriated earnings, passive foreigner investment funds, stronger construction and rapidly growing emerging service economies in their own right, but they are still dominated by 'food'. The Asian economies have their Gucci stores, but most still cannot afford these items. When they go shopping, its mostly to look, and mostly to eat, because that is all they can afford at this time. It will be different in a few years.
3. Dow Jones trend - The Dow Jones has historically been a trending market - see the log-linear chart below. This chart offers 115 years of history. So what can we garner from the current trend. There appears to be further evidence for consolidation for a number of years in the Dow before it is able to grow again. The question is why? Property markets in the US are already starting to recover, but everyone is still highly indebted, they are focused on rebuilding savings, and without really a substantive basis for upside, and perhaps some apprehensions about higher taxes, we are not going to see a rapid return of 'big spend' USA. So what if the US government increases taxes and gave the poor tax relief. The problem with that is that it would result in the sucking in of imports. The moral of this story is that this would be great 'stimulus' when the world is really to sustain it, because they are growing as well. Japan is talking stimulus, but perhaps they might wait before they do so. Perhaps its not going to be a sudden injection, but spread over a number of years. I don't expect Japanese stimulus however to result in a substantive rise in imports, and anyway, it would be offset by a competitive yen, so the net effect would be positive. Japan does not have a high reliance on imports because Japanese people consume products 'particularised' for Japan, i.e. Cute TVs and refrigerators.

4. Techically, the market action is telling me the Dow Jones is going to fall. See how the Dow has encountered strong resistance at 14,050 points. That was to be expected; its a major psychological hurdle to break 14,050 and previous 2007 high of 14,140 points as well. The issue for me was the break of the low of 15th Feb, followed by its failure last night to recover sufficiently to break above that low. It remains on a downtrend, and I am expecting a very convincing break of the 13,850 point level will occur tonight. In fact, I'm expecting a fall back to 13,650 points, with a nominal recovery. That will be a 230 point correction; before stabilisation. 

Source: Google Finance.

Lastly, I am not going to be a hero, so I was inclined to take golden profits - sold Gippsland for 1.4-1.5c, having bought for $0.08c. I believe this company is positioning for a capital raising around 1-1.2c. Its not the best climate to do this. The rest of my stocks are longer term - UCL and GBE. I also have a number of other stocks, and the rest is cash to buy on weakness. GBE has a buy-back provision in place, and has a lot of cash. UCL is just great exposure to great (2) projects.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Where to place your money during this recession

An article in the San Diego Tribune offers some investment advice in these hard times. I have some other advice for you, which you might like to consider after reading this article, which I find only modestly helpful.....mostly for its factual information.

Gold is far from over-valued based on historic measures. Based on the previous three cycles, the dow jones index vs gold price can go to 4, giving a gold price of over $US2,400/oz. Adjusted for inflation, gold is still cheap. In fact, it was only lasy year that it surpassed its old high of $780/oz – set 30 years earlier. But there has since been 30 years of inflation, compounding at 3% per annum.

Gold is not simply a hedge against inflation. It is a hedge against debasement of currencies. In a world where all major governments are debasing their currencies, we are looking at currency relativism. The only strong or 'hard' currencies are the commodity producers like Australia, Canada, NZ, Brazil and South Africa. Because of their cheap labour, resulting from structural liberalisation in the post-communist (liberalised collectivist) era, you can also consider China, India, Brazil as attractive emerging markets.

There is not going to be a collapse in China anytime soon because this is a 'super cycle'. China has plenty of cheap labour, and that will mean Western factories will continue to invest in their country. The softening of the global economy offers reason for China to stimulate domestic demand, as Western countries previously did. So these economies are attractive.

Why is Japan’s currency too strong? The US is simply debasing their currency at a faster rate than Japan. You can rest assured that Japan is going to change that very soon, as it contends with a public debt of over 200% of GDP and diminished export competitiveness. So this is more economic or simply currency relativism.

Bonds offer a poor yield in the USA, so you need to look at short term emerging market or hard (commodity) currency markets like Australia, NZ, South Africa and Canada, however even these markets are pretty volatile, so you have to trade opportunities.

Real Estate in the USA or Japan is ok, but gold stocks is by far the best opportunity.

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Andrew Sheldon www.sheldonthinks.com

Where is US property going?

The US property market is worse than many people think. Consider the following chart by Credit Suisse.

Basically it shows that we are half way through the financial foreclosure process. We have experienced the worst of the sub-prime crisis, but now we are about to be hit by ARM resets. These low-interest teaser loans will gradually reset at the variable interest rate. Over the next 2 years they will cause the same type of carnage as the sub-prime loans.
I say this not to give you any false hope, but so you might be better prepared for the future. The fact that the banking system will have worked its way through these loans is not meant to imply that we can see the light at the end of the tunnel. The market has to absorb these loans before we will see any restoration of economic activity that is not sponsored by government stimulus measures. But consider why the economy is where it is:
1. House prices are collapsing - this places a lot of people in a position of having negative equity. More than anything else this will cause consumer confidence to shrink. The most indebted will be walking away from their homes. Some people were really sucked in by the rhetoric and easy credit terms.
2. Home repayments are increasingly moving to a variable rate (i.e. ARM resets). This is hardly a problem as long as interest rates remain low (which is the case as long as the Fed keeps lowering the Fed rate) and inflation doesn't break out.
3. The unemployment rate does not plummet too much

You might wonder (given the downward spiral caused by a deterioration in unemployment) what it would take to restore confidence in the market. Clearly there is not going to be private sector lending as long as asset prices are collapsing. The government is going to some lengths to make up the difference, but government spending is no substitute for private spending and investment. How long before the US and other governments will be forced to print money to fund all sorts of stimulus measures. Does anyone believe this debt is going to be repaid? Well no doubt there will be some dilution in the value of the USD, as well as the prospect of higher interest rates when confidence is restored and asset prices stabilised. The first priority for the government is to stability or 'refloat' asset prices. When that occurs they can raise the Fed rate again to lift US savings. This might be tough medicine as its going to be accompanied by higher inflation. The message being....the pain of resets is just part of the story. In effect governments will be absorbing private sector debt with public debt. Wasteful expenditure with more wasteful expenditure. Their intent of course is to defer the problem rather than deal with it. Their solution is absorbing debt with more debt. Sounds kind of meaningless doesn't it.
So what do the ARM resets tell us about the US property market? Well we must remember that they are only a portion of the total credit outstanding. There are more secure loans with lenders who will also be struggling with unemployment and negative equity considerations. At some point however investors are going to re-enter the market. So we ought to be looking at yields on US property. If you are looking at capital growth properties, then you will need to wait longer, but for other areas there are buying opportunities now. We must remember that the US is not a single market; that property did not universally rise across the country. Some areas did not rise at all. The problem for many people is that they choose or cannot live where the reasonably priced properties are located. But I would suggest in the US there will be better buying opportunities ahead - even in rural areas. Just wait for the currency to collapse.
I am confident that equity markets have reached their bottom. I would expect them to tread sideways for the next 5 years in a series of rallies, so be prepared to trade your positions. For property, I would expect similar sideways movement with inflation undermining real property values in the city; so I don't necessarily see significant falls to come. The trends suggest capital growth properties are still falling but that rural property values have stabilised. For this reason, in countries like Australia and NZ where the currecy has already collapsed, you can start buying rural properties where value remains.
As long as they are not city lifestyle or tourist havens....since these forms of property are overvalued and going to remain a pariah for the next few years. Your best guide is yields and nominal prices. In any case. avoid the cities where there is going to be an overhang.

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Andrew Sheldon www.sheldonthinks.com

The best markets to trade & invest

In this period of rising inflation, you might be wondering where to place your money. Well I'm happy to offer you several alternatives, each with their own appeal. This might be a period of asset price contraction, but its worth reflecting on several points:
1. There is still alot of money out there, and its because there is still alot of credit out there
2. The cost savings fundamentals of China, Vietnam, India, Indonesia and the Philippines still make alot of sense.

The first task is to understand what is happening. The Fed and other central banks around the world have been in a competition to debase their currency. Because the USA is the base currency, that is the currency in which most goods and debt are priced, it has a more favourable position, thus it has a lower risk exposure. Currency debasement has 2 impacts:
1. Encourages a wealth effect
2. It favours holding assets to avoid inflation
In the last 15 years we have seen a number of bubbles in internet stocks, energy stocks, etc. These were examples of money chasing assets. With low interest rates, speculation was cheap. It was fears of inflation and poor yields that actually contributed to weaker asset markets. At the same time with money supply running so strong, and with asset prices falling, the imbalance between money supply & the productive capacity of the global economy had to be corrected. Hence as asset prices have fallen, and property and equities are among the biggest, we have seen consumable prices increase. I suggest there will be more of this pressure, as well as wage pressures. That does not change the fundamentals for China. A demand contraction is just as likely to fuel manufacturing capacity additions in China, but it will be at the expense of plants in the USA or Japan. New call centres will be created in the Philippines, but it will be at the expense of call centres in the USA.
It goes without saying that those markets which have lagged will now become the strongest. I particularly like Vietnam because it has lower costs than neighbouring China, the Philippines because of its strong position in call centres. Mind you I think there are other economies that could benefit from taking this path, just the Philippines has the best brand. Very affable people, but at the same time, they don't have a very good work ethic. So alot of training is required to keep this market lead.
Japan has been sleeping whilst everyone has been striving. This is true of money supply and asset prices, so I particularly like Japan and the Philippines. The Philippines is more of a capital growth scenario, whilst Japan is more of a yield story because of its slow pace on reform and lack of population growth. The Philippines is positive by these measures, though needs to keep the momentum.
Looking at the commodity markets, the fundamentals for many economies remains in place for manufacturing centres like Asia, and with tight commodity markets, you could be forgiven for thinking commodity prices will remain high. There are infrastructure bottlenecks all around the world, with over 100 ships off Newcastle port (Australia), strikes in Chile by workers seeking higher pay, and even a shortage of consumables, geological experts, etc. I wonder if there are enough ships? As the USA debases its currency these commodity currencies should remain fairly strong, particularly major food producers like NZ and Australia, as food prices have until 2007 really been trailing for the reasons mentioned above. So the markets that strike me as the best to trade are:
1. Precious metals - offer growth - see Commodities blog
2. Agricultural commodities - offer growth - see Commodities blog
3. Industrial commodities - offer trading opportunities - see Commodities blog
4. Property in Japan - offers yield- see Foreclosures and Property Market blogs
5. Property in Philippines & Indonesia - offers best capital growth - see Foreclosures and Property Market blogs
6. Currencies - Australia and NZ -trade long for interest swap and appreciation - see Forex Trading blog.
7. Equities - Stocks with a strong focus on commodities, whether mining or farming. I have a preference for those countries which are not big exporters, eg. Indonesia, Philippines, because they will not be penalised as much from forex exposure, but there are other factors to consider. Other good sectors are mining & rural service providers. In the broader equities market, infrastructure, utilities and healthcare will be ok, but not yet, and not nearly as lucrative. I dont know why I mentioned them. Really just so you dont buy them!

In the coming months I will be writing up notes into a number of eBooks for how to trade these markets. The first eBook is on Japanese Foreclosed Property.
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Andrew Sheldon www.sheldonthinks.com