The Benefits of Knowing a Stock Market Realist

And suddenly the hangover begins. Not ours, dear reader. It’s the middle of the week and although we had a nice glass of red from the Coonawarra last night, we took it easy so that we could be eagled eyed and alert for this morning’s reckoning. And what do we find as we look out at the world?

The Dow Jones Industrials have closed down five days in a row. The last three of those days, the point losses have been in double digits. Half of the first quarter’s gain has been wiped out on the Dow. A third has been wiped out on the S&P 500. Ouch.

Aussie stocks may not fare quite so poorly today. Trade data from China came out yesterday and showed a $5.35 billion surplus for March. That followed a $30 billion deficit in February. But the International Monetary Fund (IMF) is set to downgrade China’s expected GDP growth rate from 7% to 5%, according to today’s Australian. That clouds the earnings prospects for Aussie companies that depend on China’s perpetual expansion.

At times like this, we seek out the furrowed brow of Slipstream Trader Murray Dawes. And indeed, the brow was in full furrow when we said hello to him this morning. We know for a fact that he’s put on two short trades since the beginning of April. But for his “big picture” view, we turned to the stock market update he sends to readers on Friday. Here’s some of what he said last week before the long break:

The market is finally starting to show some signs of weakness. The technical picture is deteriorating at a rapid pace…When I look at my charts I see that we are entering a period where we may get some great opportunities. After an incredibly long wait the market is finally having the false breaks of the highs that we have been expecting.

The current state of the market is something that I have never seen before. We have a few powerful men literally pulling the strings of the market and driving it higher via money printing. Bad news becomes good news and normal analysis is turned on its head as I have said in the past.

But I have been looking closely at different indicators on the state of the market and they are pointing to trouble ahead.

My job is first and foremost to protect your capital. The last month has created a dent in the P+L and I am more than determined to get us back on top as soon as possible.

For the long only traders I am looking at a couple of great smaller-cap stocks that I think will fit into a long-term investment plan very nicely. I have met with the MD’s and have been researching the prospects for weeks now. When we do get a bit of selling in the market I will be jumping on those stocks at the first good opportunity so don’t feel disheartened if you feel there are too many short trades at the moment.

Have a look at the chart of the ASX 200 again and you will see there have been very few real opportunities for months, apart from the super-hot shale gas and oil sector. The heat will come out of those stocks soon enough and we will be given the chance to get into them at the right price.

Murray is neither an optimist nor a pessimist. He’s a market realist. And in a market where you’re basically forced to speculate, it doesn’t hurt having an experienced, sober-minded trader on your side. Even if you’re not a trader, take a few minutes to read Murray’s analysis of the ASX/200 from last week. He called it beautifully.

The short version is Murray looked for the ASX/200 to trade below 4266, the point of control for the current price distribution. He said that if prices closed below that point, the index was likely to trade to the bottom of the price distribution, or about 200 points lower. If he’s right, then his blue-chip short trades should come along nicely, even without leverage.

The fact that 10-year Spanish bond yields are again trading near 6% is another negative element in the overall picture. It’s a reminder that investors are not convinced Europe has solved its debt problems.

Investors are probably right.

But if you want to keep it simple, all you have to do is remind yourself that we’re in a multi-year period where households in the developed world are paying down their debts. It’s a psychological and cyclical change in the attitudes toward debt. The less consumers spend (also because their incomes have not grown, in real terms) the lower corporate profits have to be. And if corporate profits are headed cyclically lower, or won’t benefit from double-digit expansions in credit, it’s hard to see how stocks can trade at a big multiple of earnings (that are either growing less fast or declining).

Of course there will be exceptions to the rule. You can invest in companies that don’t require leverage to increase earnings. You can invest in companies that are traditionally very good users of shareholder capital and reward investors (with high returns on equity or dividends). And if financial firms are losing market share, in terms of their total percentage of corporate profits, then they’ll have to be replaced by some other sector, like energy.

In other words, you’re not powerless as investors. There are good choices you can make. But the key is to understand the shifts underway…hopefully before everyone else does. This, of course, is our whole business proposition at the Markets and Money…sensing the shifts by analysing the trends from a historical perspective…and allowing ourselves to think and say things that might embarrass people who are more worried about their reputation than their total returns.


Dan Denning
for Markets and Money

From the Archives…

Fake Savings, Detached Investments and the Mining Boom
2012-04-06 – Nick Hubble

Catch QE-22
2012-04-05 – Greg Canavan

How to Avoid Investing Idiocy by Ignoring the Fed
2012-04-04 – Dan Denning

Warren Buffett Scorns Gold. Bad Move!
2012-04-03 – Addison Wiggin

Heralding the Unsung Benefits of Frontier Markets
2012-04-02 – Joel Bowman

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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