Some perspective around the “fiscal cliff”

Dad and I often laugh about some of the “extreme” terms that are coined by the media. One of our favourites is “fiscal cliff”, I mean blimey, how scary does that sound?! For me that term conjures up an image of Barrack Obama hanging one-handed from the edge of a cliff with Republican Treasurer, Tony Parker, prying at his fingers.

Don’t get me wrong, the situation in the US is serious, but as always, we need to keep perspective.

With all the doom and gloom, there’s also been a lot of good news coming out of the States and so I feel a little bit of balance is called for… Below are some good news stories that you could have been excused for missing amongst all the negative noise.

• Whilst there’s been a lot of media coverage on the fact that that the US economy contracted slightly in the December quarter, it would seem this is mostly related to disruptions caused by Hurricane Sandy and a drop in defence spending. So far nothing concrete to indicate they’re heading back into recession. 
• The pace of growth in private final demand actually picked up from 2% in the September quarter to 3% in the December quarter, and basically what this means is that underlying growth is fine, which is a positive sign.
• US corporates are in a financially very strong position with approximately $1.7 trillion dollars in cash sitting offshore. More than 70% of listed US companies reported greater than forecasted earnings expectations last quarter and 65% reported greater than forecasted revenue expectations.
• Business investment is looking stronger, construction spending is on the rise, consumer sentiment is up and jobs growth has been fair.
• The Republican Party (who control the House of Representatives) have agreed to cooperate with Obama’s recent debt ceiling proposal, albeit with conditions, which is a positive step. As I mentioned on my radio program last year, I couldn’t ever imagine the Republican Party would want to be seen as the reason the US went back into recession and for this reason would ultimately always agree to raising the debt ceiling. However, last year that they left their cooperation until the 11th hour and the argey bargey caused some real confidence damage. And if I can just hark back to last week’s blog post, you’ll recall the impact investor confidence has on sharemarket performance in the current climate.
• Obama has proposed a “sequester” on automatic budget cuts and tax increases which would have otherwise come into play this year, and this should hopefully have a positive effect on confidence and economic recovery.
• The International Monetarty Fund (IMF) have conceded that some of their fiscal austerity measures have been harsher than necessary, and will take a more moderate approach going forward.
• The US banking system may not be completely “fixed” but is greatly improved, and definitely well ahead of Europe.
• The US has access now to abundant cheap energy in the form of gas, and by 2017 is set to overtake Saudi Arabia and Russia to become the largest single producer of oil in the world.
• The US housing crisis appeared to bottom late last year, and US households are reducing debt at around US $500bn per annum.

Without question, the US still have a massive task ahead to fully recover from the financial mess they got themselves into - a task made even more difficult by the political instability of a Government with no clear majority.

It’s easy to get caught up in the negativity because frankly that’s what’s thrust upon us every day, but at the end of the day, the question we really want answered is – how does this effect us? And you can only get this answer and perspective with a balanced view of what’s going on. Hopefully I’ve helped provide a little bit of that today.

What should investors be doing in 2013?

Today’s my first day back in the office since Christmas, and I’m pondering two important issues:

1. Why did I come back on a Thursday instead of just giving myself an extra two days break?

2. What was I thinking coming back on my birthday???!!!!

Interestingly, the financial world didn’t stand still while I was away. In fact it was quite busy!

Have you taken a look at our sharemarket lately? It’s trotting along quite nicely and putting a smile on the faces of lots of Aussie investors.

You may recall me griping last year about the US market’s record breaking returns compared to Australia’s lacklustre efforts, well it seems I was heard. I didn’t realise I had that much influence. I suspected, but wasn’t sure…

At its all-time peak in November 2007, the ASX All Ordinaries index reached 6,854 points. During the Global Financial Crisis (GFC) it fell as low as 3,091 points (a fall of 55%) on 10 March 2009. Yesterday it closed at 4,940, almost at that elusive 5,000, and a 59% recovery since the bottom…

This news also bodes well for the economy in general, because sharemarket recovery is usually one of the first signs of pending economic improvement.

Now, I’m often accused of being a bit of a Pollyanna by my family and friends, but when it comes to the sharemarket I’m realistic. There are fundamentals that even someone as optimistic as I am can’t ignore.

A few of the most important include:

• NO ONE can 100% accurately predict future sharemarket performance;

• The sharemarket IS NOT rational;

• Risk is an inherent part of sharemarket investment, and if it wasn’t, there’d be no point investing because that’s where the reward stems from;

• From inception, the sharemarket has ALWAYS returned to a higher point than its original peak, but no one can predict how long it will take;

• Sharemarket investment is a long-term commitment, and when you experience something as unexpected and unprecedented as the Global Financial Crisis, it may be longer than you originally anticipated.

There’s also no doubt that we’re living in an era where investor psychology is impacting the performance of the sharemarket more greatly than we’ve ever experienced. This is largely due to the almost instantaneous access investors have to information via the internet and media.

Unfortunately this information is not always understood or interpreted correctly and therefore the market is prone to over-react to what is, or is perceived to be, bad news. This isn’t going to change anytime soon, so we need to be prepared for market volatility even when it’s illogical.

I read an entertaining article in the Age last week by Marcus Padley who claimed that his new year's resolution was to stop occasionally and ask, "Is what I am reading, watching, listening to or doing, necessary, worthwhile or a waste of my time?" It made me laugh out loud, but I digress…

My point is that while our favourite economist, Felix Stephen, is forecasting a 7 year bull run from the end of this year (he’s also forecasting a correction and high volatility by this April), markets are quite literally unpredictable.

I would love to tell you that this recent market rally will continue, but I can’t. No one can. What I can tell you is that the investment philosophy of “set and forget” which worked in the early noughties has become somewhat redundant in this current environment.

So what do I think investors should be doing in 2013? I’m glad you asked.

1. Getting financial and market information from your Financial Adviser not the media. I’m not suggesting you shouldn’t take an interest in current affairs, but also make sure you get perspective that’s relevant to your personal circumstances, and without the scaremongering;

2. If you’re not reviewing your investment portfolio you should be; and if it hasn’t been formally reviewed in the past few years then it’s definitely time because changes almost certainly need to be made to reflect the current environment.

3. Don’t rely on “set and forget”, this just isn’t a sensible strategy in this post-GFC climate. One of The Hendrie Group’s primary focuses since the GFC has been sourcing strategies that include tactical decisions, and this should be a priority for investors.

4. If you’re thinking about retirement in the next few years then you should be getting advice NOW. Don’t wait until it’s too late to implement really effective strategies that might add thousands or tens of thousands to your retirement nest egg.

Hope you’ve enjoyed my birthday musings.

Talk soon,
Caren

GREECE is the word!

………or is it Spain?........Portugal?........USA?...
…..Italy?........France?...



In the olden days it used to be said that sharemarkets were efficient (because all investors had the same information on which to base decisions), and that today’s news didn’t effect sharemarkets because the markets worked on expectations of the future.

In these modern times, you could be forgiven for thinking that these long-held truths no longer apply, as markets gyrate to the latest news reports issuing particularly from the European scene.

John reckons he can lay the blame for all the ups and downs at the door of the communications industry. In the 70s, 80s, and even the early 90s, news travelled relatively slowly, and economics was not a regular feature of our daily news broadcasts.

The spread of computers, the advent of the internet, and the development of broadband have led to a situation where news of what’s happening in the world of finance anywhere around the globe reaches us almost instantaneously.

Couple this ready access to information with a dramatic increase in the number of small investors who can trade with ease over the internet, and we have a situation where daily market movements can be determined by these small traders, while the larger, longer term institutional investors sit back, and watch and wait.

We’re lucky, aren’t we????

Anyway…..to Greece.

For now, at, least the election result has averted a messy Greek default and exit from the Eurozone, which would likely have had a contagious effect on other European economies. European leaders met on 28/29 June, to hopefully can devise an acceptable plan for a sustainable solution to their systemic problems.

As part of this meeting they agreed to allow aid to be delivered directly to struggling banks, rather than through national governments. The upside being that banks can be re-capitalised without adding to the debts of individual countries.

The leaders also agreed to set up a joint supervisory body for banks across the Eurozone and approved a $160 billion stimulus package.

Meanwhile, across the water, the US economy has been showing signs of slowing, and may take a further hit in the new financial year as planned budget cutbacks settle in. The saving grace here is that, compared to Europe, the US is not fragmented in the same way (even though the political parties can sometimes make it seem that way), and no one fears a credit default by the US government.

With all that said, expect market gyrations to continue for some time, while the financial world settles down and anticipated stimulus packages kick in. Invest in the downturn, and wait for better times.

Where is Bruce Willis when you need him?

My brother and I meet in the lunchroom each day to do the Herald Sun quiz. Sometimes when the clues for the “Who Am I?” are too easy, we make up our own. A few weeks ago Dean gave me the clue “we owe him everything.” Of course, too easy, that’s Bruce Willis.

You know what I’m talking about right? That feeling you get when you sit down to watch a movie and you see Bruce’s name in the credits. It’s relief. It’s conviction. Coz, you just know that it’s all going to be ok.

So where is he right now? The USA are up to their oozit in debt (oozit is a highly technical term, so don’t feel badly if you’re not familiar with it), Standard & Poor’s reduced their credit rating from AAA to AA+, and a minority government is not helping matters (MS Palin, you need to come back and answer me some questions ma’am….).
So exactly how did the US get themselves into this mess?

Well, the Treasury of the United States of America reached the legal limit of its debt in May of this year. In the past, this has never been a real problem because Congress (House of Representatives and the Senate) just kept increasing the “debt ceiling” as required, so that Treasury could continue to borrow in order to run the country and service the nation’s debts.

This time is different. In November last year, the Democrats lost control of the House of Representatives, and this has caused some major headaches, including a standoff regarding raising the debt ceiling. This came to a head when Treasury announced that as of 2 August 2011 it would not be able to meet all of its obligations, including social security cheques (due the following day), interest on its $14.3 trillion of bonds (due 15 August) and a host of other payments.

Of course, an agreement was reached at the last minute, reminding me of a famous Winston Churchill quote “You can always count on Americans to do the right thing—after they’ve tried everything else.” However, I’m still trying to work out if any party actually came out of the agreement as a winner.

I should mention that other than suburban Melbourne, America is my absolute favourite place in the world, and I love Americans. BUT (yes this is one of those some of my best friends are buts….) they’ve possibly been getting a tad too big for their star spangled britches.

I’ve no doubt that the government will act swiftly and sensibly to get their house in order (yep, a very deliberate pun), but it won’t be a smooth ride so fasten your seatbelts.

The big question on everyone’s quivering lips at the moment is – are we heading for GFC 2? Will all this uncertainty and tea party politics send us back into recession? Of course, no one knows the answer to that, but I think it’s highly unlikely.

The sharemarket is over-reacting at the moment (and how!!), but hopefully it will settle down soon and we can all breathe out.

In the meantime, Bruce if you’re reading this blog, it sure would be great if you could yippee-ki-yay yourself on over to save the day. Oh, I just realised, America can’t afford him right now….

So after a real rollercoaster of a week, let’s end on a fun note. Here’s one of my fave Bruce Willis quotes from Die Hard 2 - the lesser of the Die Hards let’s be honest, but still very watchable:

“Hey, well, as far as I'm concerned, progress peaked with frozen pizza.”

Ahhhh it makes me giggle. And after the past few days, I’m hearing ya Bruce, I’m hearing ya.

Add your favourite Bruce Willis movie quote in the comments section below, and I will award a nice bottle of red wine for the one I like best*.

* Please note that judging is completely arbitrary and subjective.

Talk soon,
C

FEEL THE NOISE?

Oh man, it has been a noisy few weeks in sharemarket land. And most of that noise has been coming from the media – bless their often misguided, sometimes completely irresponsible, cotton socks.

This will be a fairly lengthy blog, but I think (hope) well worthwhile for anyone that’s wondering what on earth is going on. More importantly, it will provide some perspective.

But most importantly, there’s a prize offer at the end!!!!!

At my business, The Hendrie Group, our approach to managing finances has always been to identify long term goals and then to develop strategic plans to help meet those objectives.

As with all plans, nothing is set in stone, and there may well be variations along the way, to respond to changes both in your goals and to investment markets.

But we try to keep those changes to a minimum, by having a long term strategy, and filtering out the market “noise” which fills the media on an almost daily basis.

Those of you who regularly read my blog or listen to my radio program (98.1FM Radio Eastern Thursdays after the 9am news), will be accustomed to my periodic harangues about the need to be wary of sensationalism in media headlines and reporting. Not to mention, inaccurate reporting, media focus on “short termism” particularly in relation to investment returns, over-emphasis on the issue of fees, etc, etc ….. and to remain focused on the long term.

So, given the market gyrations of recent weeks, and the associated reports, I was pleased to read two articles which – in differing ways - reflected my philosophy.

In a topical article titled Why the fear industry has moved on from the Greek ‘crisis’ well-known and respected Australian finance journalist Michael Pascoe wrote:

“Is anyone feeling a little sheepish after all the hype about the potential Greek Armageddon last week? Probably not. The fear and worry industry immediately moved on to beating up the importance of China’s manufacturing industry numbers on Friday.

For all the theatre of protesters and police, the whiff of tear-gas in reporters’ constant pieces to camera, the repeated lines about the danger of Greece causing another global financial crisis….nothing much really happened.

…….Meanwhile, back at the headline factory, China’s indicator of manufacturing activity, the purchasing managers index (PMI) came in lower than expected for June. The Australian stock market allegedly saw that as a bad thing, indicating that China is slowing, albeit to a growth of about 9%. The Shanghai market saw it as a good thing, indicating that China is slowing and therefore Beijing won’t have to increase interest rates again. So it goes.”

(Market Perspective, The Sunday Age, July 3 2011, p22)

Jim Stackpool, a leading management consultant to financial planning businesses, says:

“Good financial professionals deliver certainty in a constantly uncertain world. Mining booms will come and go, international markets will fluctuate, countries - and companies the size of continents - will not perform predictably, natural and unnatural disasters will occur, and unforeseen threats will raise their ugly heads. The ramifications of each of these events will affect the assurance people seek, and good financial professionals anticipate this.

… (they) also understand our ‘natural financial wiring’… adversely affects most peoples’ decision making (that is most of us mere mortals tend to buy high and sell low), and they know how this thinking will most significantly affect the attainment of greater financial certainty in our lives.

Even more importantly, they understand their clients well enough to deliver the wealth management services required to reinforce and lead their clients on the financial journey most appropriate to deliver the assurance each and every client seeks.”

(Asset Financial Review, July 2011, p40-41)

(Note: All the bolding is mine for emphasis).
And finally, eminent Australian economist Shane Oliver (so not the media) wrote in his latest issue of Oliver’s Insights:

“A massive increase in economic and financial information flow is adding to investor jitters and driving a shift further away from long term-investing. This is likely to work against investors over time.

Investors should consider turning down the ‘news volume’ and refocus on investing for the long term, remembering the best time to invest is when everyone is gloomy. Averaging into weakness is a good way to go.”

(Oliver’s Insights, Edition 18, 29 June 2011)

So my message remains the same - stick with your long term strategy. Unless you really can’t stand the strain, in which case talk through your issues with your adviser.

Ok, now to the prize offer. If you have a Facebook account all you need to do to enter our draw is “like” our new Hendrie Group page before 31 July. The prize is a 26" Full HD LED Kogan TV with built-in DVD player and PVR. How good is that?

Talk soon,

C