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Friday, March 23, 2012

Hard not to be bitter…

It’s pretty easy to blame the US for the Global Financial Crisis (GFC). Even if they weren’t completely to blame, their housing slump and sub-prime debacle were a mighty big contribution.
You remember right? All those sub-prime mortgages where banks would loan money to just about anyone, and not only that but some were non-recourse (ie. if the bank forecloses and doesn’t get the full value of the property, there’s no further requirement for the homeowner to pay the balance of their loan). I’m no Julia Childs, but I see a really good recipe there – for disaster! Maybe something like this:

Mix way too many sub-prime mortgages with an over-supply of housing in some areas, and make a well in the middle. Gently fold in rising unemployment and a generous splash of foreclosures due to interest rate hikes. Pour into a tin lined with a collapse in residential housing. Bake at 180 degrees Celsius and test with a skewer and if gross domestic product (GDP) is falling it’s ready. Cool for (let’s face it, about 4 years) and what you have is a perfect GFC yeah?

So it’s a little hard not to be bitter watching their sharemarket screaming towards its highest point in history. In October 2007 the Dow Jones index reached it’s all time high of 14,164 and as I write, it’s at 13,125.

Of course that’s good, I’m not really whinging about their success BUT, in the words of Moving Pictures (or Shannon Noll if you didn’t get to experience the 80s), “What about me?”

In good old Oz, our ASX All Ordinaries index reached 6,854 points in November 2007, and where are we now? 4,348 as of yesterday. Still a long way off our all time high! Seems a tad unfair?

So what should we expect from sharemarkets going forward?

Prior to 2007, business cycles were reasonably long in duration, but it would seem now that they have shortened (eg. 3-5 years) in response to world monetary difficulties (probably euphemistic for some of the European countries). And of course there’s political and religious unrest, not to mention government instability in various geographic regions. So this relatively shorter business cycle began in mid-2009, and economists are forecasting that it possibly has another 12-18 months to run.

Anyone who listens to my radio program will have heard me say that “volatility is the new black”. It’s here to stay for at least this cycle. I did some research a couple of months ago and at that particular time our sharemarket had experienced movement of more than 1% in a single day 97 times in the 12 month period. WOW!! (By the way that’s an expression of amazement, not the Woolworths ASX code). Fortunately most of those times were “upward.”

Sooooooo, market volatility will continue for some time and we’re concerned that government stimulation packages haven’t been enough to sufficiently boost flailing economies. Depending upon a number of factors (eg. presidential and congress elections in the US next year, a programmed change to the political leadership in China, a continued thrust to hold the European Union together) there’s the possibility of a world recession in late 2012 – 2013. So my recommendation is to make sure you protect on the downside by taking a more tactical approach to portfolio management. For example, the current circumstances would seem to call for some strategic defensive positioning. In particular, holding enough equity exposure to take advantage of any market rallies over the next 6-12 months, but also putting measures in place to help protect against “downside” risk.

Alright, well that’s as technical as I’m prepared to get, it must be time for some cheese and bikkies (yes that’s my excuse for a glass of wine).

Talk soon.