Beware the Ides of March markets
by Peter Switzer
Right now there has been a run of US economic data that doesn’t look real flash. The same is happening here in Australia but let me do a Roman soothsayer and warn beware the Ides of March and short-term data watching.
For those who have never checked it out, the Ides of March is the 15th day of the month and this was a bad day for Julius Caesar but he had been warned and he ignored it.
Do the research
It’s an oldie but a goodie — stick to important readings and the long-term strategy of investing in good companies.
A great example is insurer QBE, which many of the experts who come on my SWITZER program often pinpoint as a great company.
Last year iit underperformed the S&P/ASX 200 by 30 per cent and has fallen 16 per cent this year. However, it has been slugged — no, mugged — by low interest rates and a high Aussie dollar.
It earns 76 per cent of its money from Europe, Asia and the USA and currency-wise the Oz dollar has been creaming these currencies.
And because the company earns a lot of money from safe fixed interest investments totalling around $23.5 billion, low interest rates are not a great help but this is expected to change in the years ahead. So a two per cent rise in interest rates translates to $225 million.
When it comes to investment, you have to understand the history of a company and how it makes money.
Over the weekend the AFR showed QBE’s premiums went from $4 billion to $14 billion in 10 years, while its assets grew from $14 billion to $40 billion!
And since 2000, the company’s market capitalisation went from $3 billion to $22 billion for an average annual compound growth rate of 18.5 per cent. Better still it has had one of the best CEOs in the country — Frank O’Halloran — as the boss for 12 years.
Buy and hold
This is a Buffett-kind of company that you buy and hold as a foundation for a long-term portfolio. It won’t be flash but it will come through. Of course, good companies can turn sour and the Oz dollar could stay high for a long time, given the expected resources boom. However, a good portfolio always has, say, 20 stocks to keep your exposure to one company down to five per cent in total.
Looking at the QBE story now reminded me of how the current run of economic data, especially in the US, can spook you at the wrong time.
Recent American economic figures could have been better and the impact of the big snowfalls has created some awful ‘snownomics’ which will hurt retail sales, job creation and investment. But this is short-term stuff.
On Saturday morning we learnt that the US economy grew at a 5.9 per cent annual rate in the fourth quarter, higher than the initial estimate of 5.7 per cent growth. Unfortunately, the growth was driven more by inventories than by big consumer spending but experts have been warning that the US recovery would not be consumer-led. I wrote about this last week.
At least the growth is solid and company earnings are telling us that the S&P 500 is likely to head up to around 1300 this year. This follows the National Association of Business Economists reinforcing their view that the economic recovery was real and likely to come in at 3.1 per cent.
“We see a healthy expansion under way, although it will take time to reduce economic slack and repair damaged balance sheets,” said NABE president Lynn Reaser, chief economist at Point Loma Nazarene University, in the Sacramento Business Journal.
Bonds in March
Okay, the company and economic view says investing in shares in 2010 makes sense, but where does the Ides of March fit into this story?
Well, bonds experts in the US say bonds perform badly in the States in March and April — it’s a history thing related to tax oddities that I must confess I don’t fully comprehend.
That said, if bonds suffer over these months it augurs well for shares in the USA and that should be good news for Aussie shares as well. Of course, this is guesswork but it makes a bit of sense.
On 15 February last year I read a story in which it said Buffett reckoned it was time to buy, and, if you had looked at the then-current readings, you might have hesitated, especially if the Lehman Brothers collapse had hurt your wealth, but he was right.
Sometimes, the best time to buy is when everyone else thinks it’s a bad idea.
As Buffett once observed, when everyone is brave and greedy he is fearful but when everyone is fearful that’s when he gets greedy.
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Published on: Monday, March 01, 2010blog comments powered by Disqus