The Music Goes on and on

“Stocks have gone down via the lift, but will go back up via the stairs — so getting back in early doesn’t really help you if the ­markets have another down leg”.

However, Coppleson believes that once “macro issues” have played out, “we’ll see a sensational December rally that may begin in late November and will go through until the first week of January 2015”.

Fear fuelling our red October
STIRLING LARKIN THE AUSTRALIAN OCTOBER 25, 2014 12:00AM

Data at September 2014. Source: JP Morgan SecuritiesData at September 2014. Source: JP Morgan Securities Source: Supplied < PrevNext >
••
There appears to be a hunt for red in October.

Fuelled more by accusations than proof, headlines and not trendlines have propagated fear.

It is easy to say that the globally minded Ultra High Net Worth investor remains resolute but it is then incumbent to explain why and walk through the clear and present dangers in front of us all.

Richard Coppleson, Australia’s foremost markets commentator, recently shared with Larkin Group his thoughts regarding events in October.

“Volatility and fear are driving the markets right now and the US is still gyrating all over the shop — like a 1990s rocker — with QE3, Ebola headlines, Europe and ­broken technical levels, many are going to worry and fear is still out there. When people are fearful they sell first and see later if that was the right decision,” Coppleson says.

“Stocks have gone down via the lift, but will go back up via the stairs — so getting back in early doesn’t really help you if the ­markets have another down leg”.

However, Coppleson believes that once “macro issues” have played out, “we’ll see a sensational December rally that may begin in late November and will go through until the first week of January 2015”.

Chief among these “macro ­issues” is the widely expected end of unconventional monetary stimulus, known as QE3 in the US, on Wednesday.

UHNW advisers have reminded their clients that when QE1 ended, the US S&P 500 index fell approximately 20 per cent in a three-month period before QE2 was announced.

Again, when QE2 ended, the S&P 500 once more fell 20 per cent, in a three-month period before the next stimulus facility, QE3, was released.

However, globally minded UHNW investors remain resolute today because they recognise that the US — engine of the global economy — is finally showing resilient signs of sustainable growth.

They accept that the red seen in markets today is likely attrib-utable to fear and not funda­mentals. The correction to date brings the US and some emerging economy equity markets closer to fair value, while questions remain in Europe and Japan.

Another fear that has rattled markets has been the “inelasticity” of global oil prices to rebound from their current lows.

Several Australian family ­offices, in particular, have kept a close eye on this, primarily ­because their logistic interests, reaching far into Asia and abroad, deeply rely on energy price ­stability.

Contrary to the popular headlines suggesting cheap oil is solely a sign of a troubled global ­economy, UHNW investors have been advised there may be other key contributing factors at play.

One of these has been that Saudi Arabia is reluctant to cut production in a geopolitical and not necessarily economic attempt to hurt Iran, Russia and the ­Islamic State Caliphate, who are all seen as high-cost producing competitors, sitting on the periphery or outside of OPEC.

Also, accordingly to JPMorgan, “the oil price decline is a demand story, related to falling Chinese oil demand growth, from 800,000 to 200,000-250,000 barrels per day and a world which is still only growing at 3 per cent five years after the global recession”.

Australian shareholders in Woodside Petroleum, Oil Search and BHP Billiton have witnessed this first hand in October.

BHP’s US shale gas assets have also been hit particularly hard by the rapidly falling marginal costs of production for US shale oil seen recently.

According to Steve Miller, head of fixed income in Australia for the world’s largest asset manager, BlackRock, “our view is that the recent market volatility is corrective and reminiscent of the end of very low volatility periods”.

“It is easy to refute global growth fears, Ebola, falling commodity prices and falling inflation individually as game changers,’’ he said.

“But, collectively, they have disrupted the paradigm and it feels much more like a mid-cycle ­correction into a continued expansion than an end-of-cycle blow out as none of the end-of-cycle indicators are flashing any warning signs.”

The Australian investment experience in October suggests that with China’s supply-to-consumption-led transition directly cooling the Sino economy, paradoxically, China’s growth slowdown is having a bigger impact on Australian equity markets than on China itself, given how cheaply Chinese equities are currently priced. Framed rationally, Australian UHNW investors are broadly of the view that these sustainable ­elements bode well for their portfolios in the years ahead.

This is because a robust ­American economy with a clear economic plan and toolkit to ­improve productivity growth, a Chinese neighbour successfully transitioning to a more stable economic architecture, cheap ­energy and a modest return of volatility are seen as real ­opportunities and not imminent liabilities. This sentiment is seconded by Australian businesses facing the region.

According to Radek Sali, CEO of Swisse Wellness, who recently signed a landmark agreement with Procter and Gamble to ­distribute their Australian-made products across Europe, Asia and Latin America, “any leading ­Australian business needs to ensure their alignment to what is on our doorstep in Asia. It’s where our future lies”.

Acknowledging that problems never come alone, to remain above the fray, it is imperative for Australian investment comm­unities to recognise that the ­rolling thunder is merely market winds blowing hot and cold and is not a perfect storm in formation.

Predicting markets is like trying to pick the weather, and the reason why those who have based their investment decisions around fundamentals have underperformed this year, in particular, has been because market equilibriums are now clearly distorted with ­historically significant levels of central bank stimuli.

The classical presumptions within market microstructure theory no longer apply.

This helps explain why more than 85 per cent of US mutual and global macro hedge funds have lagged their benchmarks, returning 1 per cent this year while the benchmark itself; the S&P 500 has returned 5 per cent.

With volatility returning, allow fear to tell us where the edge is and help us define our terms of ­success.

Larkin Group is a wholesale wealth adviser focusing on ­
high-yielding global investments.

www.larkingroup.com.au

Fine line between prosperity and pain

Market monitor Philip Baker
887 words
25 Oct 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Philip Baker

One of the concerns about the sharemarket selloff this month was that there didn't seem to be one specific new problem on the scene for investors to worry about. Instead it was a range of the usual concerns that somehow caught many by surprise.

But October as a month has a bad reputation, so investors were quick to take the "glass half empty" approach.

While it showed just how fragile financial markets can be, Miles Collins, investment director for the Myer Family Company, says it also signalled buy time.

He wrote to clients during the week, saying: "For what it's worth, we think it likely that this current downswing in markets presents a buying opportunity over the short term, meaning six [to] 24 months, mainly because we think it will become apparent that interest rates are not going to rise quite as quickly in the United States as the market suddenly decided they were."

That's not to say interest rates in the US won't eventually rise, but Collins thinks it will happen in slow motion, as the world's largest economy isn't quite strong enough for higher rates just yet. He's also quick to say that he has "no real idea whether this downdraft turns into anything bigger" and is trying hard "not to be swayed by dogmatic commentary one way or another".'Sweet spot' forecast

As the investment director for the private Myer Family Company and its 100-strong ultra-rich family base, Collins does have a say in how $5 billion is managed, but he is not constrained by a short-term benchmark index.

He isn't forced into buying certain assets at any particular time but rather looks across the financial landscape to see where the value is. For that reason, some of the funds can be tied up in very long-term assets.

Right now, he says the market is favouring US dollar assets due to the new-found confidence in the greenback, and he thinks there is a sweet spot where investors will feel comfortable investing in the world's largest economy.

Collins has also had a look at some numbers crunched by KKR, the private equity firm, earlier in the year that imply Wall Street won't peak until some time after interest rates begin to rise. He says if history is any guide, that time frame could range from months to years.

For instance, in the period after World War II, it was anywhere between 10 and 73 months, but the average is 29 months.

"We should not seek to over-extrapolate this historical data, as there is no particular reason why US markets should not peak earlier than this suggests, but if earnings growth comes through sufficient to justify some of the run-up in price-earnings ratios, then the market may continue to run for a time yet," he says.Panic button ever-present

Many fund managers were expecting a correction – defined as a 10 per cent drop in share prices – some time within the next 12 months for the simple reason that it's been so long since there has been one.

Smart or lucky, they're suddenly looking wise now.

Still, the gains are linked to decent growth in corporate earnings and moderate equity valuations helped by record-low bond yields, which put a floor under the market.

There are still enough bulls out there who think the large rally that began in 2009 will resume after an unpleasant but probably healthy time-out. The bulls on Wall Street see the Dow Jones industrials index reaching as high as 18,360 by the middle of 2015, and the S&P 500 Index reaching 2173.

One of the important lessons to learn from the wild ride this month is that it still doesn't take much to cause some sort of panic in markets.

It also highlights a risk that when the good times roll, it doesn't get much airplay. It's called liquidity risk, and it's the risk that investors won't be able to trade in securities as easily as they could when all was looking well with the world.

What it also means is it's a fair bet they won't like the price offered to them when they choose to exit a trade because it will be so different to the one they have looked at over the past few years whenever they valued their portfolio.

This has become a much greater challenge for bond investors, in particular, as many investment banks don't hold large inventories of bonds due to the high cost since new rules were brought in after the global financial crisis.

It's also a problem given that so many investors are positioned the same way, all looking for that additional yield.

Finally, it still pays to listen to the US Federal Reserve. A few words from the Fed were enough to calm investors by revealing it could slow its retreat from the highly accommodating monetary policy of the past few years. This was music to the ears of investors who rely on Fed support – but one day it might all fall on deaf ears.


Fairfax Media Management Pty Limited

Document AFNR000020141024eaap0004k

http://www.ampcapital.com.au/article-det...audience=1

A combination of the blanket news coverage of economic worries, the associated information avalanche we are now exposed to and our innate fascination with crises is likely making us worse investors: more fearful, more jittery and more focussed on the short term.

Investors should recognise that shares climb a wall of worry, try and turn down the “news” volume, focus on investing for the long term, and remember the best time to invest is when everyone is gloomy.

Introduction

About two months ago I had all my wisdom teeth out - well rather the top teeth were pulled and the bottom teeth chopped off. The day this was to happen a speed test I was running on my iPad was interrupted by an ad screaming “The Australian Recession of 2014: why it’s inevitable, click here to find out how to protect your wealth” (for a fee) and the headline on the front page of the AFR was "Economy enters the danger zone”. Needless to say all this gloom did nothing to cheer me ahead of the trip to the dentist!

This year has seen an endless list of worries. Ukraine, a property collapse in China, the end of quantitative easing and talk of rate hikes in the US, global deflation, renewed weakness in Europe, the Insurgent Savagery (IS) in Iraq, protests in Hong Kong, Ebola, Australian Budget cutbacks, the collapse of the iron ore price, etc.

But last year was the same with the US fiscal cliff, worries about Italy and Spain, Cyprus (remember how the bailout of Cypriot banks was going to destroy the European banking system!), the sequester, Fed taper talk, Syria, the US Government shutdown and debt ceiling, Fed tapering, etc.

2012 was just as packed with worries – remember the one about the end of the world according to the Mayan calendar that was going to happen on December 21. I actually went to sleep that night with fingers crossed fearing the end was nigh, woke up the next morning with relief only to realise that if the world was to end it would surely happen in the US time zone so as to make the movie. And even then it didn’t end!

Going by much financial commentary and the questions I get from investors it seems there are lots of things about to drag us into the next financial crisis: budget deficits, debt, money printing, the Euro, hyperinflation, deflation, taxes, welfare spending, banks, retiring baby boomers, the government, Obamacare, peak oil, pollution, global warming, war in the Middle East, terrorism, Russia, China, a pandemic. The expected result is always horrible with a massive loss of wealth, rising unemployment and maybe even the collapse of civilisation.

The perpetual worry list and the ongoing doom and gloom has me wondering. Is there anything new in this? Why the fascination with doom and gloom? And is the avalanche of economic and financial information we are now seeing with the IT revolution making things seem worse?

...

New abnormal means relying on central banks for growth
PUBLISHED: 25 NOV 2014 05:22:00 | UPDATED: 25 NOV 2014 09:20:00

“Dictionaries define ‘normal’ as regular, usual, healthy, natural, orderly, ordinary, rational,” ING Bank’s Mark Cliffe said. “It is hard to use those words to describe the current performance of the world economy and financial markets.” Photo: Bloomberg
SIMON KENNEDY

The “new normal” may be new. It’s hardly normal.

The “new abnormal” would be more apt, according to reports published this month by Ed Yardeni of Yardeni Research in New York and ING Bank’s Mark Cliffe in London.

“Dictionaries define ‘normal’ as regular, usual, healthy, natural, orderly, ordinary, rational,” Mr Cliffe said November 7. “It is hard to use those words to describe the current performance of the world economy and financial markets.”

Among signs of irregularity since Pacific Investment Management Co. popularized the expression “new normal” in 2009 to describe an environment of below-average economic growth: Central banks are still deploying near-zero interest rates or quantitative easing six years after the financial crisis, yet output, inflation, business investment and wages remain mostly subpar.

In financial markets, equities are hitting new highs as bond yields probe new lows. Even as the US shows signs of strength, commodities are slumping.

The lesson for Mr Yardeni is that by running to the rescue every time asset prices swooned in the past two decades, central bankers’ prescriptions distorted economies.

“If a central bank moderates recessions, then speculative excesses are likely to build up much more during the booms and never get fully cleaned out,” Mr Yardeni, a former chief economist at Deutsche Bank, said in a November 19 report. “So each financial crisis gets progressively worse than the previous one, forcing the central bank to provide even more easy money to avert a financial meltdown.”

Mr Cliffe at ING is less willing than Mr Yardeni to lambaste central banks, noting it’s hard to say how bad a recession may have occurred without their aid. Still, he agrees that policy makers now find themselves having to keep an eye on markets as much as the economies when setting policy.

Witness how quick officials such as St. Louis Federal Reserve President Jim Bullard and Bank of Japan Governor Haruhiko Kuroda were last month to soothe anxious investors. The risk is that an era of monetary interventions leaves markets primed for volatility when policy makers do step toward the exit.

Officials “are clearly concerned that a sharp fall in asset prices might derail their efforts to foster economic growth,” said Mr Cliffe. “That leaves ample scope for policy errors and sudden investor panics.”

The Australian Financial Review

http://www.ft.com/cms/s/0/574e879a-7708-...abdc0.html

Lower oil price could stoke US stock bubble
John Authers

Opec’s position on output could have profound consequences
Organization of the Petroleum Exporting Countries (OPEC) Secretary General, Libya's Abdalla Salem El-Badri © answers to journalists during a press conference as part of the 163rd meeting of the OPEC conference (Organization of the Petroleum Exporting Countries) in Vienna, on May 31, 2013. OPEC has agreed to hold its output ceiling at 30 million barrels of oil per day, Venezuelan Energy Minister Rafael Ramirez said on Friday after a key meeting in Vienna. AFP PHOTO / ALEXANDER KLEIN (Photo credit should read ALEXANDER KLEIN/AFP/Getty Images)©AFP
O
il anchors world financial markets, and Opec has just decided to raise its anchor. The consequences could be profound, and go far beyond the power game between the traditional oil producers in the Middle East and the new generation of shale producers in North America.
Oil, it is true, is less important than it was. Steady improvement in technology has rendered the developed economies less “oil-intense”, and less vulnerable to a repeat of the 1970s, when oil price spikes twice led to savage recessions.
More
ON THIS TOPIC
Leniency expected from oil lenders
Supply glut fears push oil lower
John Redwood Recalibrating for a world of cheaper oil
On Wall Street Tense year end for distressed energy debt
THE LONG VIEW
Breaking the white male grip on markets
But ever since the postwar version of the gold standard ended in 1971, with President Richard Nixon’s decision to end the dollar’s fixed price in gold, oil has been its closest replacement as a store of value in the world economy. In the 1970s, the savage oil price spikes in terms of dollars, engineered by a far more active Opec, merely restored oil’s value in terms of gold. US economic pump-priming had weakened the dollar.
A loose “oil standard”, with Opec adjusting supply to limit oil’s volatility, has cohered ever since.
Oil anchors capital markets most clearly through its tight inverse relationship with the dollar. When oil rises, so the dollar tends to depreciate against other currencies. Typically oil exporters receive payment in dollars and then sell them, meaning that higher oil prices lead to a lower dollar.
The dollar depreciated significantly in the years leading up to the 2008 financial crisis, and its nadir overlapped closely with a speculative bubble in oil. Now, it is strengthening significantly.
That correlation with the dollar leads to a second clear correlation, with emerging market equities. They tend to outperform when the dollar is weakening (as in the years leading up to 2008), and to underperform when the dollar grows stronger.
The last period to see falling oil prices (albeit at a much lower level), and a strengthening dollar was the late 1990s. That saw a US equity bull market melt up into a full-blown bubble, while emerging markets suffered a succession of crises. A stronger dollar made it harder to pay off their dollar-denominated debt.
From December 1994, when Mexico’s devaluation started a series of crises, until that cycle of crises ended in Argentina in 2001, the dollar gained 35 per cent on a trade-weighted basis – and developed world stocks outperformed emerging markets by more than 200 per cent, according to MSCI.
Assuming – as now seems reasonable – that oil does not rise significantly from here, and that any significant moves will be downwards, what are the chances of a 1990s repeat?

More video
On the US end, the chance of a melt-up is directly aided by untethered oil. At the margin, cheaper oil provides a boost to the economy. The greatest boost goes to the consumer, precisely the sector that had been lagging: not for nothing was Walmart, the biggest US retailer, the strongest gainer on the US stock market on Friday.
As a significant component of price indices, cheaper oil automatically brings down inflation. This reduces the pressure on central banks to raise rates, and signals that monetary policy can stay lower for longer. As far as the bond market is concerned, forecast inflation for the next 10 years briefly dropped below 1.8 per cent on Friday, for the first time in three years – a level that has previously prompted the Federal Reserve to resort to QE bond purchases, and that certainly reduces the risk of imminent rate rises.
A stronger dollar is itself a tightening measure, making it less necessary for the Federal Reserve to act. A strong currency will tend to attract funds towards the US. And US stocks already look expensive. So if Opec will not act to keep a floor under the oil price, this certainly stokes the risk that the current rally in the US stock markets carries on until it boils over into a bubble.
Similar arguments apply to Japan, dependent on oil imports. As cheaper oil reduces inflation, which the Bank of Japan wants to force upwards, the chance of cheaper money in Japan only increases.
What of the rest of the world? Emerging markets are less vulnerable to currency crises now, as they have built reserves and (mostly) allowed their currencies to float.
That said, all countries that benefit significantly from exporting oil stand to lose. Above all, that means Russia, whose rouble has now dropped 53 per cent against the dollar since its 2008 peak. But India, dependent on imports for its oil, is surging – the rouble has dropped 36 per cent against the rupee in barely a year.
A full-blown repeat of the bubbles and crises of the late 1990s remains unlikely. The world should have learnt enough lessons to avert that. But the comparison still looks good – the risk is strong that as oil stays cheap, US stocks will boil over while emerging markets weaken.

Oil is an important commodity no doubt but it never anchors financial markets. Nothing is priced against oil except maybe in Iran or ISIS

It is non core CPI because it is a cost and it is supply driven

I've never heard of a bubble forming because cost went down and profit improving. This is one of those 哗众取宠强出位 type of article

(08-12-2014, 07:08 AM)specuvestor Wrote: Oil is an important commodity no doubt but it never anchors financial markets. Nothing is priced against oil except maybe in Iran or ISIS

It is non core CPI because it is a cost and it is supply driven

I've never heard of a bubble forming because cost went down and profit improving. This is one of those 哗众取宠强出位 type of article

Oil price topic has became a mantra heading, which attracted all kinds of article. We should filter the signal out of the noise, in order not to waste our valuable time.

(08-12-2014, 11:12 AM)CityFarmer Wrote:

(08-12-2014, 07:08 AM)specuvestor Wrote: Oil is an important commodity no doubt but it never anchors financial markets. Nothing is priced against oil except maybe in Iran or ISIS

It is non core CPI because it is a cost and it is supply driven

I've never heard of a bubble forming because cost went down and profit improving. This is one of those 哗众取宠强出位 type of article

Oil price topic has became a mantra heading, which attracted all kinds of article. We should filter the signal out of the noise, in order not to waste our valuable time.

Agreed. It goes against basic commonsense. I understand people can voice all sort of views in blog. But when this appears in major web news ... we need to learn to filter. Unfortunately many can't.

Pessimistic views?

The Next Crisis for the Global Economy? Beware the End of the Dual Stimuli

China and the United States’ dual stimuli are coming to an end, and there is nothing to replace them.
Samuel Rines

December 8, 2014

http://nationalinterest.org/feature/here...emma-11816

How will the world react when there is nothing propping it up? Part II of a two-part series.

Samuel Rines

December 9, 2014

http://nationalinterest.org/feature/here...emma-11816

Base on the headlines, the author didn't take the "QEs" of Japan and ECB seriously? I have to admit that I didn't read in detail on both articles...

(09-12-2014, 12:09 PM)Boon Wrote: Pessimistic views?

The Next Crisis for the Global Economy? Beware the End of the Dual Stimuli

China and the United States’ dual stimuli are coming to an end, and there is nothing to replace them.
Samuel Rines

December 8, 2014

http://nationalinterest.org/feature/here...emma-11816

How will the world react when there is nothing propping it up? Part II of a two-part series.

Samuel Rines

December 9, 2014

http://nationalinterest.org/feature/here...emma-11816