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Playing the rally

Playing the rally

The question I am fielding all the time right now is — how do I play this rally? A related one is about whether the worst is behind us and is it time to buy shares?

Regular readers know I have pointed out that the US stock market has a history of bouncing around 26 per cent after the world’s biggest economy hits rock bottom on its consumer sentiment reading.

In hindsight

The tricky thing is you don’t know when the low has been hit until you have seen a month or two after it has happened. And even then it can be wrong. The Lehman Brothers collapse in September last year created a false dawn on consumer sentiment.

The Reuters/University of Michigan consumer sentiment index gave up 5 points in mid-February to 56.2 after January recorded 61.2. The US record low for consumers is 51.7 from May 1980.

March was a tad better but April made the point more emphatic with the reading going to 61.9 — the highest since the 70.3 level in September.

Brave call

In March I reported that Sydney economist from Kinetic Securities Clifford Bennett had called an end to the bear market, which was the call of the brave.

This coincided with some better economy-fixing policies from the Obama Administration, some ‘green shoots’ showing the US economy was getting better and then better than expected company results.

By April the March lows on the stock market were being left behind but technical experts said we had to break through important levels on the S&P 500 and they have been broken with this very broad measure of the health of US shares now over the 900-hump at 942.

Barring another Lehman Brothers shock, it looks like the worst on the US stock market, and therefore ours, is behind us.

Global recovery follows US recovery

There is a growing belief that 2009 will be the year of the US recovery, which lots of cynics said was a naïve claim when some made it last year (OK, sometimes I like to rub it into my critics). And 2010 will be the year for the global economic recovery.

In Australia, our market plays follow the leader with Wall Street — historically and generally — but there can be exceptions. I suspect this isn’t an exception.

As the belief in economic recovery grows, so will the demand for commodity stocks and that helps the likes of BHP-Billiton, Rio and other miners.

Long-term strategy

But now as I have started naming names, let me warn that my views are for long-term investors. The short-term play is gambling, and it can be sensible gambling, but you have to be good on your timing.

I have confidence that I want to hold our best banks, best retailers, best miners and best property businesses in my portfolio. They go into my self-managed super fund, as it gives the best tax treatment, and that’s where I collect the best of Australian industry. That’s a line from Warren Buffett, who recommends to his compatriots that buying US industry for the long-term is a strategy that has underpinned his wonderful run as a stock picker.

John Bogle, the founder and former CEO of The Vanguard Group recently told CNBC that people should not buy stocks.

“You’re betting on prices — you’re betting on buying them from those who don’t know how much they’re worth and selling them to somebody who thinks they’re worth more,” he said.

“That’s speculation and it’s short term. It’s influenced and driven by supply and demand, and not by the worth of those companies whose value lies underneath that stock price.”

Two things

He’s saying two things. First, the wise investors learn how to measure a company’s value and then compare it to its price. As most people can’t do that or won’t do it, then you should buy an index fund that buys the entire market.

That’s what Vanguard sells but for many investors I think Bogle has a point and index funds are used by many cautious investors and financial planners. Also, they are not expensive compared to other funds.

Answer the question

To answer the initial questions, I think it’s safe to say that the worst is behind us on the stock market barring a massive shock, which looks less compared to six months ago. That’s why the rally has topped 30 per cent.

The US economy is on the mend and Australia is surprising the doomsday merchants with one-time disaster spruikers now falling into the mild recession camp. We could get a technical recession over June and September, as business investment has been very weak, but I doubt it.

The latest NAB business survey added more positives to my rosy picture.

This is how CommSec’s Craig James greeted the news: “Business confidence rose by a substantial 11.6 points in May to a reading of minus 2.2,” he said. “Apart from the rebound after the September 11 2001 terrorist attack, it was the biggest monthly improvement in confidence on record.”

An opportunity

This market could go sideways for a few months until we get the next US company results and then could rise again or fall a bit — that’s the short-term investor’s gamble.

For the long-term investor, with the March market lows behind us, this is a buying opportunity of a lifetime, even if you missed the latest rally. 

Published on: Thursday, June 11, 2009

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