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Peter Switzer
Expert
+ About Peter Switzer

About Peter Switzer

Peter Switzer is one of Australia’s leading business and financial commentators, launching his own business 20 years ago. The Switzer Group has since grown into three successful companies spanning media and publishing, financial services and business coaching.

Peter is an award-winning broadcaster, twice runner-up for the Best Current Affairs Commentator award for radio, behind broadcaster Alan Jones. A former lecturer in economics at the University of NSW, Peter is currently:

• weekly columnist for Yahoo!7 Finance
• a regular contributor to The Australian newspaper and ABC radio
• host of his own TV show, Switzer and Grow Your Business, on SKY News Business
• regular host of the Super Show on 2GB radio.

Testimonials

Dear Peter, What fun! You are really very good at what you do. I appreciated our time together and wish you continued success in all you do. Have fun (I know you will).

Jack Welch, former CEO, GE, and ‘Manager of the Century’ (Fortune magazine)


Peter, It was great to have worked with you – you really made the event come alive. I hope you enjoyed yourself. I know Steve Ballmer [CEO, Microsoft Corporation] did.

John Galligan, Director of Corporate Affairs & Citizenship, Microsoft Australia


Here’s a home truth, my only real education – or teacher who I actually ever listen to – is your interviews on Qantas. So thank you with sincere respect.

Sean Ashby, Co-Founder, AussieBum


Peter did a wonderful job on the night; keeping the program moving, working around changes to the run sheet, and ensuring each award recipient, and our sponsors, were made to feel welcome and important.
The feedback received from those attending has all been extremely positive.

Peter Mace, General Manager NSW, Australian Institute of Export


Peter, We would like to congratulate you for performing your master of ceremonies role in such a professional, entertaining and informative manner. We were impressed by your ability to tease out each winner’s story so that the audience gained maximum benefit from their collective business experiences.

Greg Evans and Nicolle Flint, Directors, Australian Chamber of Commerce and Industry


Hi Peter, I listened to you speak this morning and thought you were amazing. I am an accountant and in risk management and have never thought about doing a SWOT on myself – thanks for the tip!

Serife Ibrahim, Stockland Corporation Ltd


Dear Peter, Thank you for your valuable contribution to this year’s forum. Ninety-two per cent of delegates rated your presentation highly, commenting on its useful and topical content.

Catherine Batch, Head of Marketing and Communications, Indue


Peter has facilitated our CEO and CFO symposiums over the last three years. A true professional, he takes away the stresses of hosting and organising an event.

Justine Goss, Strategy Group

US doom 'expert' says major crash is coming. Has he put a dent in my optimism?

Tuesday, February 20, 2018

With apologies to comedian Rodney Rude but “I hate it, I hate it” (as RR would joke) when I have to interview someone like Harry Dent, the man telling us that economic and stock market Armageddon is around the corner.

Dent is over from the US with his new book, ominously called Zero Hour. Now I’m not wild about Harry’s predictions, but this is what the book’s blurb says: “Will you be prepared to take advantage when the revolution comes or will you go down with the rest? Revolutions are cyclical. They run on a very specific timetable. You could be so much happier, healthier, and wealthier if you grasped the powerful cycles that influence everything from currency valuations to election returns.”

Yep, you guessed it, this isn’t a read for the forever optimists. Even though I sometimes get called such positive names, the reality is I know bull markets don’t go on forever. While I’m enjoying this bull market that started in March 2009, that’s been more enjoyable for US investors, with their stock market in record territory, I’m always on the lookout for indicators that tell me it’s time to go negative.

That’s why I talk to someone like Harry, who has made a lot of money out of being negative on bull markets in the past. You see, there are negative nervous Nellies out there who’ve been worried about this bull market since 2011, when credit rating agencies actually took away the US Government’s triple-A status as a borrower.

And when the US economy’s response was so bad that official interest rates went to virtually zero, Armageddon spotters came out of the woodwork.

Then in 2015, when we all got used to a new political term “Grexit”, again the financial world held its breath for a Greek debt crisis that could ruin even German banks!

Around that time, Harry was last back here and I interviewed him then. He was then warning that Australia would be economically drowned by a China-created tsunami that would wipe us out.

Prior to that, in 2015, he was targeting our property market. He was headlining the Secure Your Future conferences in Sydney and Melbourne and his message wasn’t good for property lovers.

News.com.au captured his argument then to potential panic merchants. “Bubbles ultimately peak when the people buying can't afford to buy it,” Mr Dent said.

"Melbourne has been, actually, the biggest bubble in recent years and I would expect the biggest burst there. In Australia, obviously the bigger bubbles are in Sydney, Melbourne, Brisbane and Perth because they had the greatest growth and the greatest limitations in supply - but not quite as much in Adelaide and other cities."

When I mentioned that I was interviewing Harry for my radio program on the Talking Lifestyle station to Charles Tarbey, founder and chairman of real estate group Century 21, he couldn’t resist having a shot at him. “If someone took his advice in 2014 and sold their property or refused to buy a property because of his warnings, they have lost a lot of money,” Charles said.

Of course, he was right for Perth but everyone knows that this property market rises and falls on mining booms and busts, so that wasn’t a difficult call to make.

His current warnings are that the stock market, the property market and the crypto-currency market are all going to crash and burn. He didn’t say exactly when — because he doesn’t know — but given the title of his book, Zero Hour, it’s safe to say that on Harry’s clock, you should start worrying now!

Harry isn’t an economist. He is a demographer and over his long history of scaring the pants of investors and even normal people, who like their life with a job and a nice home, some of his calls have been on the money.

It has meant some inexperienced journalists have started stories about him with lines like this: “A US economist who predicted the 2008 global financial crisis has tipped the Australian property market to tumble. Read why.”

A lot of people have become geniuses after the GFC but because Harry is often calling an end to bull markets, he’s going to get it right eventually.

As the old saying goes: “A broken clock is right two times a day.”

The greatness of a forecaster is determined by getting the call right really close to the market collapsing. When that happens, the forecaster’s followers have maximised their capital gain and have been saved from capital loss when the market collapses.

Those who don’t want capital loss from their investments should sell now and wait for the inevitable crash. I’ve said I’m OK with stocks until say mid-2019 and then I’ll reassess how cautious I have to be.

The Economist Intelligence Unit thinks the next global recession will be in 2020 but they’re only doing their best guess on that subject.

Right now, Citi and Blackrock have gone public saying they feel good about stocks but the former warns us to get used to notable downs in the market to go with the ups.

Harry is no dope. His book title should be Zero Hour is coming but I don’t know when, but that probably wouldn’t sell many books. And I’d finish this piece of writing with a Rodney Rude joke but they’re simply too rude!

(You can see my interview with Harry here on Switzer Daily. If you want to go to his conference, go to this website: www.harrydentlive.com for dates and locations.)

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Politics and the economy need adults to take charge!

Monday, February 19, 2018

When you look around our political landscape, with the need for a Barnaby bonking ban showing us loud and clear that our leaders are struggling to look like grown ups, the question is: when are the adults going to take charge? To be honest, I like Barnaby. I’ve interviewed him on TV show and, occasionally, his rye, down-to-earth takes on life and politics can be heroic as well as refreshing. He can sound a bit dopey at times but he’s no dope, though his performance with his lover does nothing for his political credibility CV.

Quite frankly, his lover hasn’t covered herself in glory either, particularly as a media adviser. In that role, she’s supposed to improve her boss’s media image, not trash it.

This issue aside, it has surprised me how ineffective, dysfunctional governments like the Turnbull one, which has been frustrated by a Senate dominated by unusual politicians, including the Greens, has not excessively hurt the economy.

The odd upper house has meant a lot of policies that would have been good for business and the economy haven’t been passed. It can’t be proved but it’s not hard to argue that the economy would be a little stronger, unemployment would be lower, wages would be growing a little faster and so on, if business-friendly policies had been passed.

A capitalist economy tends to respond positively to business-friendly policies, though it doesn’t always deliver the social dividends left-leaners like.

Let me go back to my desire to see grown ups take over the body politic of Australia. We’ve seen new businesses (such as Uber), which break laws that taxis had to, and still have to follow, be allowed to grow without recognising the unfair competitive edge they have. Politicians have even ignored the fact that there is a potential insurance issue.

London had a grown-up moment when bad Uber behaviour saw it banned. In Texas, there is a texting in the car ban and officials say one in five car accidents are linked to drivers being distracted.

In WA, a young driver severed the foot of one police officer and injured another, while texting last week, when he ploughed his car into them while distracted by his mobile phone. This has led the Australian Medical Association, a body predominantly made up of grown ups, call for stricter enforcement of laws covering the use of mobile phones and electronic devices in cars, with a "zero tolerance" approach towards L-plate and P-plate drivers.

And the need for adults in governments worldwide was underlined by the co-CEO of Village Roadshow, Graham Burke, who thinks Google is “facilitating crime” by doing precious little on its search engine to kill piracy of movies. Burke is happy for Google to sue him as he thinks the issue needs to have its day in court. Now that’s the attitude of a grown up!

He says illegal downloads of films such as Lion and Mad Max: Fury Road caused losses of millions of dollars to his company. He told Fairfax Media that “If piracy isn’t nailed ... the Australian film industry will be over.” 

In Korea, where Google is not the dominant search engine, local search platforms remove links to pirated content themselves. And while Google does say it takes the fight against online piracy seriously, it’s time politicians took the adult’s option and started making laws to improve society and the economy!

It’s staggering that the US isn’t more serious about the issue, considering how important Hollywood and its products are to its economy.

Five years ago, the US statistician investigated the importance of the arts to GDP and “creative industries led by Hollywood accounted for about $504 billion, or at least 3.2% of U.S. goods and services, the government said in its first official measure of how arts and culture affect the economy.” (hollywoodreporter.com)

Voters in places like the USA have shown they don’t think much of politicians who behave like grown ups and economies still seem to do OK but maybe we’re underestimating the importance of adults being in charge. 

It could be a case of not knowing what we’re missing out on and ignorance might be bliss, except when your business is going broke and you’ve lost a job because politicians didn’t have the guts to deal with illegal aspects of digital disruption. And that’s no pun on Barnaby’s disruptive behaviour!

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Stocks are up again but do normal people really care?

Thursday, February 15, 2018

Another great day in the paradise called the stock market! It looks like it was safe to go back into the water on Tuesday, with Wall Street looking like it’s on a five-day winning streak — post correction.

And the overnight rise in stock prices in the Big Apple should help our market here today but it’s time for three lessons from the fear and loathing of the past couple of weeks.

First, despite the trash talk from doomsday merchants, the stock market is not ready to crash and burn, yet.

Second, volatility is back. These five, great days for US stocks will eventually give way to some selling, which is normal for a market in the euphoric zone.

And third, the stock market is more important to normal people than many think.

Let’s take these three lessons in reverse order because it underlines how important my job is in explaining what’s going on with our stocks and, more importantly, our super.

This week we got to two important confidence readings. First we saw business confidence that rose from a downwardly-revised +9.6 points (previously: +11.1 points) to +11.8 points – the highest level in nine months. This came with the NAB’s business conditions reading, which was the fourth best monthly outcome on record, rising from +12.8 points to +18.9 points in January.

In contrast, the ANZ-Roy Morgan weekly survey of consumer confidence fell by 2.6% to a reading of 119.5, reversing its gains over the previous two weeks.

“Given the tumble that global and domestic equities took last week, it is unsurprising to see confidence falter,” said David Plank, ANZ’s head of Australian economics.

“In particular, views around current economic conditions fell sharply last week (down 6%), though they remain well above their long term average.” (Business Insider)

Meanwhile, the Westpac consumer sentiment reading, which was taken last week, fell 2.3% to 102.7 — down from January’s four-year high of 105.1.

This underlined how people, especially retirees, care about potential stock market crashes.

“Extensive media coverage of these developments would have unnerved respondents on two fronts – the impact on their own financial position and concerns for general global stability,” said Bill Evans, Westpac’s chief economist.

“These concerns appear to have been acutely felt by retirees whose confidence fell by 13.5%.”

Bill also pointed out that views towards family finances declined sharply from the previous month, while views towards the broader economy also fell. That’s a huge impact on normal people thrust upon them by the heady world of Wall Street and stock markets.

The second lesson is that the US stock market is in the euphoric zone. That’s when volatility — ups and especially downs — become more significant.

This five-year chart of the S&P 500 Index shows how US stocks have been ripping higher without any big slumps over most of 2016 and 2017. It’s time for smarties to test the US stock market as interest rates rise this year.

 

 

I often share this quote from Sir John Templeton but it’s worth remembering: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”

You might be thinking: “Switzer thinks the market, being in the euphoric zone, will die soon” but you’d be wrong. We don't know how long a euphoric period is but it is a time when someone like me is always on the lookout for really worrying signs.

They’re coming but I don’t think they’re here yet but I do expect to see some significant slides and rises this year — it will be volatile.

Finally, this comeback of stocks into five-day winning streak tells me that this market is not ready to crash, despite what publicity-seeking ‘experts’ want to tell you now, when you’re at your most spooked.

Right now, the economic and US corporate profitability story is so good that it won’t pay to get too negative just yet. These are certainly more risky times. If you don’t want to lose capital, then you might start dumping stocks but I think it’s too early.

I invest for income and my stocks will deliver that even if their capital value drops. I’d like to avoid a significant capital loss but if I cop it, the income from my stocks will keep me relaxed until the stock market rebounds.

That’s the way I’ve designed my portfolio of stocks and it helps me sleep in these volatile times.

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US inflation spikes, so why didn't Wall Street panic?

Thursday, February 15, 2018

Inflation in the US came in stronger than expected but Wall Street didn’t panic. How come?

Maybe the answer is that the Yanks have worried enough and taken down stocks sufficiently for the inflation that has shown up so far. But the whole experience since two Fridays ago, when both great employment and wage numbers screamed that inflation was on the rise and, therefore, US interest rates should rise quicker than was expected, justifies the maxim that where there’s smoke there’s fire.

Yes, I know it’s an oldie but it’s often a goodie, as the overnight inflation number in the States proved. However, using the smoke analogy to assess how much we should be worried about it, currently makes me OK with it.

So the inflation worries were legitimate and, therefore, the fear of faster rising interest rates in the US was a good call but the overnight stock market reaction, which was positive before the close, suggests Wall Street has done all the panicking it needs to do, for the moment.

I would’ve expected the revelation that a consumer price index rise of 0.5% in January, when economists in a Reuters survey expected a 0.3% lift, might have reignited some market panic of the kind we saw a week ago. Possibly the 10% plus drop in the Dow Jones index was enough for now and, interestingly, both tech and bank stocks were higher after the news, which is a sign that higher interest rates are not going to derail the US economy, at least in the short term.

This is quite rational, given most thought there were going to be at least three interest rate rises there this year. The number has increased to four or five but as long as the real economy looks strong, the stock market is likely to cope with a bit more inflation.

That said it, and how quickly the Fed decides to raise interest rates is set to give us a lot of volatility in the stock market this year. So get used to big, bold headlines about stocks.

One important reason why the US stock market might be done with panicking, at least for the moment, is the news from company reporting season in the States. And it’s pretty damn good.

Right now, they’re 70% through reporting and earnings for US companies are up 14.8%, with revenues 8% higher. And this is the best in almost five years!

But that’s not all. 2018 trends are looking really good, with all four quarters ahead expected to deliver better results, which is quite unusual.

Source: Trading Economics

Given the above expectations, I guess I can pretty confidently re-use the old “where there’s smoke, there’s fire”, with the smoke of good company reporting saying the US economy is on fire and so is the related corporate sector. And the chart above of the S&P 500 index graphically shows that hot economy and corporate sector.

The big watch this year will be how fast inflation picks up and this will have a big impact on how fast interest rates go up. This, in turn, will affect the rise of stock prices and how much panicky volatility we’ll see.

Our stock market could easily outperform the US market this year but we need Wall Street to keep on heading higher to ensure panic doesn’t get in the way of my expected comeback for both the Oz economy and our stock market.

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After wild Wall Street windstorms, is it safe to go back into the water?

Wednesday, February 14, 2018

Good news is creeping back on Wall Street, while at home, our stock market is only cautiously positive, despite more good news on the economic front. So is it safe to go back into the water and start investing again?

This chart shows that history says we’re still in the safe zone for ‘swimming’ with the ‘sharks’ on stock markets.

This means that there’s no seasonal bias against the months leading into May, when professional market players quite famously run away and don’t come back until September on St. Leger’s Day. That said, they don’t really get to work on stocks until November, as the chart from CNBC shows.

This morning, the Dow Jones Index was again positive ahead of the close (up about 55 points with two hours to go) but as we learnt last week, anything can happen in the last hour before the close. And this closely-watched index was down 180 points earlier so there are sellers out there but they haven’t got enough supporters right now to turn the market.

Of course, you have to remember the Dow did correct losing more than 10% and that was in the context of good economic news and company profit reporting. If the opposite was the case, I think we’d be in a full blown attempt to crash the market ahead of a recession.

That could be a scenario a couple of years away, which I’ll be on the lookout for 24/7, but now is a different kettle of fish, to keep the watery metaphor going.

Last week’s wildness on Wall Street was because of overbuying of stocks in the USA — the Dow was up 30% in a year! — and January was crazy with nearly an 8% jump in the index. Did I talk about craziness? So a 10% correction only takes the Yanks back to December valuations for stocks, which might be too high as well, if interest rates rise too quickly in the States this year.

Until two Fridays ago, a lot of experts thought the Fed would raise rates three to four times in 2018 but the great employment as well as wage rise readings have pushed up these guesses to four to five hikes. If those people who believed there were only three rises coming now fear it might be five, that’s a big miscalculation for them.

In the weird and wonderful world of stocks, there is a battle between where investors put their money. I’ve always believed that in Australia a lot of people dump stocks when term deposits, for example, are around 5%, which is seen as a pretty good dividend percentage from a stock. As rates on assets like term deposits, offering safe returns, rise, the stock market loses friends. And as rising interest rates start to threaten overall spending by consumers and businesses, then recession fears spark a stock market sell off, which can become a crash.

Now keep this in your head while you consider the fact that the US gets its latest inflation number tomorrow. Also recall that inflation is a key driver of higher interest rates, which in turn eventually threatens interest rates. It’s important as Tom Essaye, founder of The Sevens Report, told CNBC overnight.

Tomorrow will bring the most important CPI report in over 10 years, as rising inflation (which will cause higher interest rates) has become one of the biggest risks to this multi-year rally.”

A higher-than-expected number could reignite stock market selling but, interestingly, a Fed survey for January found consumer expectations showed median inflation expectations fell by 0.1% to 2.7% on the one-year horizon. The three-year horizon also slipped 0.1% to 2.8% and MarketWatch.com quotes Chicago Fed President Charles Evans who thinks this is important. “Expectations of future inflation are a key determinant of actual inflation because they serve as an important benchmark for the wage demands of workers and the pricing decisions of businesses,” he said in a speech last week.

So all stock market eyes are on that inflation report tomorrow. I hope it doesn’t rock stocks, as our stock market needs an even break, with good economic data suggesting the nation’s businesses are doing well. And this should eventually show up in higher stock prices.

Yesterday we learnt that the NAB business conditions index rose from +12.8 points to +18.9 points in January – the fourth best monthly outcome on record! Meanwhile, the business confidence index rose from a downwardly-revised +9.6 points (previously: +11.1 points) to +11.8 points, which is the highest level in nine months.

Today we get the latest Westpac consumer sentiment reading, which might have been hurt by last week’s Wall Street wobble. If that can become less wobbly over the next few weeks, we might see our stock market go higher.

Interestingly, Michael Knox, Morgan’s chief economist in Brisbane, has done his complicated calculations on where our stock market should be and his findings will make bulls smile. “If I value the Australian stock market in terms of our earnings per share and bond yield right now, I get a value of around about 5700 points,” he writes. “But if I include the additional supply of US corporate debt in US wholesale market to a model, I get a fair value of 6300 points. I think that the model estimate of 6300 points is what's appropriate right now. I think that our market is hundreds of points too cheap.”

So is it safe to go back into the water for stock players? In the short-term, it could be tricky but, for the longer period, it looks pretty safe. But as a former North Bondi lifesaver, who once captained a patrol with the PM on my team, I’ll be closely looking for sharks that could ruin our swim with stocks!

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Is the stock market fear and loathing over?

Monday, February 12, 2018

A week of wealth worrying is over and, in case you missed it, Wall Street ended positively on Saturday morning our time, or Friday arvo in the US. Once again, the Yank’s stock markets were up and down like a long-string yoyo and one hour before the closing bell was rung at the New York Stock Exchange, I thought we could see another big drop ahead of 4pm in the Big Apple.

In fact, there was a 300-plus rebound and there was buying not selling into the close, which is a good sign. Meanwhile, the VIX or “fear index”, which investors can buy gambling on whether the market and fear goes up or down, ended at 29, which is still a high reading but it was 40 earlier in the US trading day! 

I’d love to say that we’re out of the woods but that would be me ignoring my experience with these correction phases. The local stock market’s future indicator — the SPI — says we should start down 28 points, and while the number can often be wrong, the direction tells you that the consensus view is that we still have some volatility issues ahead of us this week.

Whether we like it or not, we play follow the leader with Wall Street. I’m betting this year that we could have a better stock market year than the Yanks because they have rallied so much higher in percentage terms since the GFC than us. We’re up about 80% while they’re up over 200%. Even still, right now, we’re in the hands of what the smarties do on Wall Street.

I find it hard to believe that our market could do what we did on Friday, but I was proud of us, in a way that only a corny money man can be proud of stock market behaviour. The Dow closed down a big 4% on Thursday, which we see on Friday morning because of our time differences but we only fell 0.89%.

Now given the Yanks actually ended up 1.38% on the Dow Jones index on Friday and we also were positive on Friday, why is the SPI saying we start down?

Well, part of it is that we are vey wimpish on Mondays and don’t have a real lot of confidence if we think Wall Street could start its week in a negative frame of mind. Also, hedge fund managers who make money when fear prevails will be exploiting this nervy situation this week. It’s classic bears versus bulls stuff and the bears are on top but I don’t think it will last.

Day-by-day, the economic and company news stories will bring the bulls back to stocks but, for the short term, we will have to cope with volatility. Hopefully it will be less intense this week.

The level to watch on the Dow will be 23,405, which was around the low last week.

For anyone worried about their super or their portfolio of stocks, I’ll repeat the research from Citi. Their team have 18 indicators that tell them to buy or sell stocks.

Before the Dotcom Crash, 17.5 out of 18 said “sell!” Ahead of the GFC Crash, it was 13/18. Now the score is 3.5 out 18!

As Citi researchers argue: “So our bear market checklist says it is too early to call the end of this bull market.”

My main concern is not when the stock market rebounds but whether some crazy hi-tech trading products linked to the VIX is creating threats for stock markets that regulators haven’t understood fully.

I hope the extreme volatility last week leads to closing down of these types of products by the likes of Fidelity and Credit Suisse late last week.

The rollercoaster ride will continue but I suspect there’s no really big, steep drop sections left to scare the pants off us ahead.

I hope I’m right but you never know with stock markets, as they’re a collective representation of our fear versus confidence battle that goes on every day on markets.

Go confidence!

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Another good day for Wall Street but can it last?

Sunday, February 11, 2018

It’s another positive day on Wall Street but can positivity last? When I started tapping away on my laptop, the Dow was up over 400 points (or 1.7%) but can this rally last to the closing bell, only two hours away?

These are both hard questions, considering the volatility and the market’s huge negative reactions last week.

Remember last Tuesday the Dow was down around 600 points with less than a hour to go, and as I watched US business TV, the most quoted stock market index in the world slumped 1600 point in a few minutes!

To come close to answering these two tough questions, we have to recap what’s happened and then use these revelations to work out what might happen.

The trigger was great: employment and wage data that led to the bond market raising its inflation expectations and therefore its rate rise expectations.

When this happens, those numerical types who try to work out the future success of the companies that we invest in (they’re called analysts, fund managers, traders, etc.) rework their numbers and might say “we should downgrade the stock price potential of that company or companies”.

It’s called running for the exit doors when it happens in a big correction, when the market drops 10% plus and definitely in a crash when the market slumps 20% or more.

However, what we’ve lived through, while looking dramatic, should prove to be the correction that the Yanks had to have.

The Dow was up 30% in a year. There hadn’t been a 5% pullback in over 400 sessions and that was a record. A lot of us (people like me) kept reminding investors that a “healthy correction” was overdue and now we’ve had it.

And while I’m glad the US stock market has now added a positive Monday for stocks to a positive Friday last week, history says it could be premature to jump in and start buying on the belief that the worst of this is over.

Mind you, I think it is, but Wednesday in the US brings the latest Consumer Price Index reading and, given inflation is the new spook factor for stocks, this number could send stocks up or down.

If it’s bigger than expected, stocks could fall. If it’s lower than expected, we could be off to the races with stocks! The US shouldn’t get a big positive rebound — it will have to get great economic and company news stories before it can retrace its previous record levels but I do think over the next year or two, its stock markets will make new highs.

The charts showed the Dow was starting to fall after 26 January but it got serious after those great economic readings, with the January job report on 2 February.

The high on the day before was 26,280 but seven days later it was at 23,465. And that was a 10.6% drop and there’s your correction.

On 2 February, we were at 6119.4. Seven days on, we hit a low of 5793, so we gave up 5.3%, which means we haven’t had a correction like Wall Street.

Last night on my new Sky News Business program, Money Talks, I assembled three of Australia’s best fund and portfolio managers together to work out how scared we should be about all this and how worried they were.

I had John Murray from Perennial Value, Mary Manning from Ellerston Capital and Anton Tagliaferro from Investors Mutual share their thoughts on what just happened.

They agreed it was a healthy and overdue correction in the US. They didn’t confidently say the worst is over but they do see it as a buying opportunity.

Fear on stock markets means good companies get belted as investors, traders and others dash for the exits. This creates buying opportunities, provided you don’t think economic and market Armageddon is around the corner.

All three don’t see this and all three think the next recession in the US, which could create a crash of the stock market, won’t happen over the next two years.

Given the above, the second question on what will happen to positivity beyond today, the consensus is that stocks can go higher, at least for 2018 and my experts didn’t seem worried about 2019 as well but it will depend on how fast the US grows, helped by the Trump tax cuts and how quickly the Fed raises interest rates.

So betting positivity can last for at least a year or two looks like a sound bet.

But what about between now (6.30 am) and the closing bell at 8 am our time? Can the Dow remain positive?

Recall how last week the Dow dropped from 600 to 1600 in a matter of minutes, so can I be confident that this positivity will last 90 minutes?

I guess yes but there are some experts who are worried about hi-tech investment products that are linked to the VIX or “fear index”, as well as others connected to algorithmic trading that could be the basis of the next “Big Short”, as some negative types refer to the potential threat.

Some of these like to blame ETFs (exchange traded funds) for adding to the threat to market stability but that’s an unfair call. I’ve always railed against normal investors taking risks on exotic ETFs that are linked to derivatives and where the fund manager doesn’t actually buy the stocks that underlie the investment product.

They are risky and could threaten the market in the future but it’s wrong to brand all ETFs as market rockers in the future. Ray Dalio, one of the greatest fund managers of all time at Bridgewater & Associates, is long a number of ETFs.

And arguably, the greatest investor of all time, Warren Buffett, has regularly extolled the virtues of passive index funds, which the most famous ETFs are.

I repeat there are risky ETFs for investors and ultimately they could hit markets but when I asked my three fund managers about the threat of the VIX-linked products, they argued that the risks weren’t a major concern.

They’re all smart people and are famous for doing their homework, so I hope they’re on the money!

P.S. With 77 minutes to go, the Dow was up 539 points (or 2.2%). Go positivity and long may it last!

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Why does Wall Street seem to be panicking again?

Friday, February 09, 2018

Wall Street is at it again! And when it sells off big time, it instantly gets the attention of the media that generally ignores the machinations of money, until it starts to scare the pants off the world. On my radio program on the Talking Lifestyle channel, I’ve been saying that we’re not out of this sell off time for stocks, so let me explain why.

A pretty smart guy called Albert Einstein once counseled us to understand that, “the only source of knowledge is experience”. Of course, there are two experiences that can make you smarter — the first is the one where you are the star in the experience story and the second is when you learn from others’ experiences, either through conversation, via book or video, etc.

When it comes to stock markets, experience has taught me that you seldom get a big sell off and then it becomes a case of ‘well, that’s over, now let’s start buying again!’

At the time of writing (5.45am), the Dow Jones Industrial Average was down 404 points. When I woke up 20 minutes before, it was off over 500 points! The Yanks (and therefore us) are in volatile times, which I reckon will be with us until the weight-challenged opera singer belts out the finale song on this Wall Street opera.

Yep, it ends in tragedy, as all bull markets do, and my job (and it isn’t an easy one) is to work out when I need to tell those who follow me that danger for investors is nigh.

Experience has taught me that when a big sell off happens, there will be reasons why there isn’t a comforting rebound of the stock market and here’s why:

  • The trigger for the sell off (in the current case, rising interest rates in bond markets that expect rising US inflation) hasn’t gone away.
  • In fact, overnight, US interest rates in bond markets went up.
  • Hedge fund managers and short sellers thrive on these unstable, volatile times and it’s when they make their money. So they buy and sell stocks, bonds, currencies for all their worth to take advantage of market instability. And remember, they have had some rough years lately, with stocks in most markets trending higher most of the time.
  • Right now, investors in all asset markets have become uncertain. This means the overall confidence that inflation isn’t a threat, that there will be three interest rate rises in the USA, that the US economy will grow as strongly as was thought two weeks ago and where the stock market is heading have turned from known ‘facts’ to unknown facts.

But how do you know that this sell off isn’t the prelude to something big and scary? Well, you don’t and the only challenge for stocks that I can’t fully be comfortable about is computer-related trading in exotic, derivative-based products that were responsible for turning a one-time 600-point loss on the Dow on our Wednesday morning into a 1,600-point slump, in a matter of minutes!

This then triggered buy messages in the world of algorithmic trading and the final Dow loss ended up being off a big 1,175 points — the biggest one-day loss ever! And that madness in a number of minutes was why regulators have to look at how vulnerable investors are to this computer-created craziness.

Be clear on this: the sell off was healthy but the magnitude of the drop on the Dow was sick enough to make smart people ask questions about how automatic, hi-tech trading is making the stock market scarier than it has to be.

I’ve been saying for months that a sell off was overdue on Wall Street. The S&P 500 Index in January hit its 10th consecutive monthly gain, the longest streak in 59 years!

It’s now 6.15am and the Dow is now down 466 points and I’m hoping the crazy computer programs don’t take control before 8am our time, which is closing bell time of 4pm in New York.

I can take this volatility when you know it’s simply buyers and sellers working out their best guesses on the future of the US economy, inflation, interest rates, jobs and profits, which then sees them place their ‘bets’. I don’t like handing over this to damn computers and the nerds who design programs to make money the easy, automatic way.

Anyone who looks at the economic and corporate profit setting would want to remain long stocks. And that’s my position. I don’t care about the short-term losses because the long-term outlook is positive for a year or two.

This week, Citi’s research team looked at 18 indicators that can flash buy or sell stocks. I ran this yesterday but it bears repeating: “Good news is our checklist shows that only 3.5/18 factors are flashing SELL compared to 17.5/18 in 2000 [the dotcom crash] and 13/18 in 2007 [the GFC crash].” Citi strategists said. “So our bear market checklist says it is too early to call the end of this bull market.”

I think these guys are right but we will have to deal with some scary volatile times in the age of computer-trading and exotic investment products that need to be looked at by regulators before it’s too late.

"The market is focused on higher interest rates right now," said Kate Warne, investment strategist at Edward Jones on CNBC. "The underlying fundamentals are going to drive stocks higher, but I think the path higher will be more volatile than it's been in the past few years."

In case you missed it, while this Wall Street worry has dominated headlines, Thomson Reuters tells us that US corporate earnings season has been strong, with 78% of S&P companies announcing better-than-expected earnings.

And that’s why this current panic about stocks in the US has not got me spooked. I hope my experience has led me to the right conclusion that the weight-challenged opera singer is not on stage yet.

Update: The Dow ended down 1032 points, so the fear and anxiety of this week is set to continue next week but we’re looking at a looming great, buying opportunity.

 

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What are the intelligent lessons from this stock market craziness?

Thursday, February 08, 2018

It’s been a dramatic week for material comfort, with many wondering if we were looking at the kind of stock market crash that generally brings a recession, job losses, terrible super returns and a hell of a lot of dream crushing for individuals and businesses.

So, what have been the lessons from the biggest point drop in history, losing 1175 points on Monday, wiping out all the 2018 gains? Before the close of trading on Wall Street, all the market indexes were back in positive territory but the experience can’t be ignored.

But at it’s worst, the Dow was down an incredible 1600 points, which didn’t underline the economic and company profits threats but warned that crazy, computerized trading has become a huge concern for volatility.

Some experts are warning regulators that exotic exchange traded products linked to the VIX or “the fear index” is behind these excessive moves on stock market indexes.

The GFC came about because regulators ignored the potential threat of the sub-prime lending in housing to people who, in the old days, would never have got a loan. And then there were collateralized debt obligations (CDOs), which were pooled assets – such as mortgages, bonds and loans. These are essentially debt obligations that serve as collateral for the CDO product that financial institutions bought and sold. As investopedia reminds us, “the tranches in a CDO vary substantially in their risk profile” and the once highly respected debt-ratings agencies completely rated these CDOs incorrectly. This spooked the financial system, creating what we called the GFC or global financial crisis.

This brought a 50% crash in our stock market and while most economies went into a “Great Recession”, as the Yanks called it, with surging unemployment, we dodged that bullet. We can’t expect that we’ll do that again.

So here are the big lessons of this week:

• The US stock market is in the euphoric zone and this is where bull markets die. And while our market is pre-euphoric, we will rise and fall with Wall Street.

Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management, gave a wise observation of the week to CNBC: “I think this bull market is basically in the process of forming a top,” he said.  “This is the first crack of it.” Once we hit the top of a bull market, the next phase is a bear market.

• We will see huge volatility over the next couple of years and many smarties think 2020 will bring the next recession. So the stock market could get very worried in 2019 some time.

• Regulators need to look at what created the crazy computer-linked trading on Monday morning, US time.

So that’s the bad news but there is good news and it comes from research from Citi and reduces our fears about a bear market lurking around the corner. “Good news is our checklist shows that only 3.5/18 factors are flashing SELL compared to 17.5/15 in 2000 [the dotcom crash] and 13/18 in 2007 [the GFC crash].” Citi strategists said. “So our bear market checklist says it is too early to call the end of this bull market.”

The Citi team warnings imply we will see volatility and drama on stock markets over the next couple of years. So what will determine the life of this bull market?

It’s going to be a battle between how fast the Fed raises interest rates, which will be determined by the economic story versus the strength of company profits.

For me, I’m comfortable being long stocks until some time in 2019. Then I could get super cautious but I hope regulators look at the computer-linked trading that added to the market madness this week.

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What you need to know about the Wall Street wobble

Wednesday, February 07, 2018

Drama that’s played out on Wall Street always becomes a big short-term news story but it doesn’t have real ‘sit up and take notice’ effect on the average Aussie until it becomes a crash, which ultimately and usually breeds a recession.

So, let’s understand what this worst month for the Dow Jones index in eight years actually means.

People like me and the people I talk to on TV and radio have been saying for a long time that we were overdue for a pullback or correction but only a few oddballs, who always say it, were tipping a crash.

More on the oddballs later.

In trying to explain why this pullback (less than a 10% drop in the index) or even correction (if the drop ends up being 10% to under 20%) happens, we say that on Wall Street valuations of companies were stretched or unrealistic.

If it becomes a crash (and I don’t expect this at all), the drop has to be 20% plus and we’d say that the bull market, which we’ve seen since March 2009, had turned into a bear market. As I’ve said, I don’t expect this at all.

If you need additional assurance, I interviewed Martin Lakos from Macquarie yesterday on my radio show and his team of very smart people sees it exactly like yours truly. As many wise market observers have seen this episode, this is a healthy pullback.

Why did it happen? I use this analogy. Imagine a builder mistakenly put a 13th level on an apartment block because he misread the plans or was a nincompoop. Those who paid too much for US companies are like this guy, who ultimately had to pay the cost of demolishing the 13th floor.

Back to the real world and those who have paid too much for stocks in the USA didn’t expect the economy to be so good that it would not only create more jobs than was expected (200,000 rather than 180,000, which had been forecast for January) but wages rose much more than the expected 2.9% for the year after a nice jump in January. This was an eight-year high!

This was a big deal as Reuters summed up the surprise numbers: “Average pay rose by more than 3 percent in at least half of U.S. states last year, up sharply from previous years.

“The data also shows a jump in 2017 in the number of states where the jobless rate zeroed in on record lows, 10 years after the financial crisis knocked the economy into a historic recession.”

And even more, the thinking was: “Gee, inflation is bound to rise next and maybe we could see four or five interest rate rises this year rather than the three that many thought was probable!”

That pushed up interest rates on bond markets. And when that happens, short-term stock players sell out quickly to avoid the kind of stuff we’ve seen over the past two days. And then computer and algorithmic trading takes over to add fear to insult and injury. And that’s why in the Dow is now down about 10% since a recent record high.

But let’s keep this in perspective. Since Donald Trump became the US President, the Dow is still up 33%, while the S&P 500 is up about 23%. (CNBC)

And even on a one-year basis, the Dow was up 21% with about two hours to trade this morning.

However, on a year-to-date basis, earlier today the Dow was down 1.2% but this is what happens when you mistakenly add a floor to a building or you overestimate a value of a company by underestimating how strong the economy is.

So, why did we cop it?

It’s simple. We follow Wall Street’s sell offs more slavishly than we follow their rises. Our stock market ‘apartment block’ is still only at the 8th or 9th floor so we won’t make the same mistakes as the Yanks, but I still think we have a few more floors to build. However we won’t have 12 floors like the Yanks, with our stock market apartment.

I reckon we’ve got a few more days of fear and loathing before the drama of the past few days is behind us, as bargain hunters (who believe the US economy and companies still have a couple of good years left) come back to stock-buying.

Sure, there are oddballs out there who again are making their Armageddon calls, which they’ve been making for the past three or four years. One day they will be right, just as a broken clock actually tells the right time twice a day.

The balance of intelligent market views says this was the pullback/correction we had to have but, thankfully, the economic and corporate fundamentals say that Wall Street’s wobbling apartment with one floor too many is not about to crash.

 

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