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Excess noise

The doomsday merchants are having a field day defying positive economic predictions from credible sources, as the bears, those with margin loans and hedge funds customers who want out, along with those who simply have had enough, are all dumping shares.

With excessive negativity prevailing, it has to be time for someone positive to put his or her head up, but they will need to be more animated than the well-meaning Reserve Bank Governor Glenn Stevens.

Unfortunately, the bad vibes are making rational people want to sell their shares for cash, though it’s understandable.

Since Lehman Brothers was allowed to fail, the S&P 500 has given away around 33 per cent of its value. The same period has seen ineptitude on a grand scale from the likes of US Treasury Secretary Henry Paulson, as he has had second and third thoughts on his Troubled Assets Rescue Package.

He has been in-ably assisted by the European governments and their central bank as both the greatest communist regimes of all time — China and Russia — have run to the aid of capitalism by initiating big fiscal stimulus packages.

At the same time, even the most one-eyed Liberal supporter must be secretly happy that the Rudd Government has overreacted and pre-emptively given our economy a $10.4 billion fiscal shot in the arm.

The combined action of the 200 basis points of interest rates cuts, the fiscal pledges of spending, our lower dollar, which helps exports and China’s willingness to spend $US 586 billion to prosper are reasons to believe the Australian economy is well-placed compared to any Western economy to avoid recession.

And this is Mr Stevens case for thinking we could avoid a recession.
Regrettably, the negative viewpoint is prevailing over the positive. An apt case in point is the view on Macquarie Group.

The week before the bank reported, my stockbroker contacted me advising me to sell. Others I knew with other brokers had received similar advice.

I think the share is oversold and was prepared to gamble on its earnings report, which came in better than expected.

Who knows what happens in the short-run, but long-term investors need the courage to see value now and if they can’t push themselves to buy, they need to hold great but oversold companies.

Personally, Mac Bank is not a blue chip stock in the current environment, but it has speculative appeal. Roger Montgomery of Clime Asset Management agrees for buy and wait types.

“Fundamentally it’s cheap at current prices,” he says. “The business will take some time to gain traction in an environment where deal flow is slow, asset revaluations have stalled and staff motivation is low.”

“Those with a time frame of five, ten, fifteen years, it would appear to be in the bargain category.”
Tim Lincoln of Lincoln Indicators is not a ‘Mac Bankaphobe’.

“Macquarie Bank is a barometer for the world’s confidence in the financial sector and after falling 75 per cent from its highs back in May 2007, it is evident there is little confidence out there,” he suggests. “That said, the company produced a solid A$604 million profit, which includes a total of $1.1 billion in write-downs, in what has been a most challenging time.

“With strong liquid capital reserves to support the company, it appears to be in a solid position to survive these difficult market conditions.”

Now with these views come two hard heads who don’t read newspapers to form a view on a company. They actually value companies, which is a skill not easily acquired.

Lincoln says there is no hurry to buy Macquarie but when it is rebound time for world markets, that’s when you might want to be on.

“We retain our ‘buy’ recommendation with the lower target price of $45 on the stock,” says Simon Bond of ABN AMRO Morgans.

Recently, Macquarie Group’s boss, Nicholas Moore, said the bank’s share price follows the Morgan Stanley Capital International index. So, when Wall Street heads up, the odds will favour the millionaires’ factory.

The accumulation of negativity and fear is forcing many investors to think about dashing for cash, but only those who have cash flow problems now or who are in bad assets should be considering doing this without some objective advice.

Recently I had Steve Tucker, the boss of MLC’s financial planning business, on my Money Makers show on Sky Business and he had a sensible take on when the bottom of the market will happen.

“I don’t know when it will end, but I know it will bottom and I want to be well placed to benefit from the rebound,” he says.

“Cashing up is not an option,” says Tim Lincoln. “Beyond this recent volatility, the sharemarket will remain and events such as these are the market behaving normally.”

Roger Montgomery agrees.

“Get cash from somewhere else,” he advises. “The market’s fall has now exceeded the decline immediately prior to the Great Depression —  it’s the greatest decline in 100 years.  

“The stock market is having a ‘50-70% off’ sale and you want to run the other way?”
Simon Bond sums it up nicely.

“Investors need to try to eliminate the excess noise from their decision making and break away from the herd if they can,” he advises. “Why on earth would you sell your un-geared bank shares that are yielding almost double digit fully franked yields in order to put money ‘at call’ in a rapidly declining interest rate environment?”

That’s a good question.

Published on: Friday, November 28, 2008

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