Why Investors May Have Made A Huge Mistake
Lance Spicer, Editor - Trident Confidential, 28 Apr 2011, 8:18 AM
There’s a change coming to the markets in coming months and it will catch many investors out, if they aren’t careful. Unfortunately, for many investors it’s one of the most common mistakes made and can cost you a small fortune.
You see, the whole rally from the March 2009 lows has been on very low volume (historically). This, and other statistics I have reviewed, are telling me one thing – stocks are not as popular, or do hold the dominant position in investor’s portfolios as they once did. The GFC has scared a large number, particularly private investors, out of the market, as we have heard stated many times over from the larger fund managers who have noticed large outflows from their funds over the last few years.
As time goes on, however, this attitude and trend will change and investors will be drawn back to the stock market, as economic conditions further stabilise and memories of the GFC fade. In fact, it’s only in recent months that inflows into equity funds have reversed and a trickle of investors are returning to investing in shares. This change, if it were to continue, should see the bull market rally continue for a couple of years, at the very least, particularly as several well respected fund managers are expecting another technology boom in the next few years.
The boom is coming in the form of Cloud Computing, 4G and other communication innovations such as we have seen with the iPad phenomenon. To prove the point I’m making, have you noticed the incredible earnings results in the last week from technology companies? What’s even more encouraging is the fact that many of them have raised their forward guidance on earnings and sales and only now are investors jumping on board. These stocks are still at bargain basement levels. You can buy IBM, Apple and Intel a lot cheaper than you can buy BHP, RIO and Woodside. The tech companies will increase earnings greatly in the next 12 months – but you’d be a brave soul to predict that with the latter 3. So, it’s obvious where money will be made in 2012. The 3 mining companies have problems with not only the Australian dollar (which I’ll get to in a minute), but also other impediments such as the Carbon Tax, Minerals Rent Tax etc.
An example of the opportunities available - last week I wrote to you and mentioned that I had 10 stocks in my current buy list that I was recommending subscribers buy. If subscribers had bought those shares last week, they’d be sitting on an average 8% increase exactly one week later when the next issue of Trident Confidential came out!
The Trident Confidential Portfolio has risen over 24% this year so far, which is outpacing the market by almost 5 times.
Which brings us to the mistake investors make, and it appears many fall into this category -the mistake of procrastination and fear. They procrastinate and lose valuable opportunities, as we pointed out with the 8% rise missed in the last week. They are also fearful of losing money, as so many did during the market fall in 2008 and early 2009. However, what they seem to be ignoring is the most important underlying fundamental that drives a stock market – company earnings. As we have seen since late 2009 - they are in great shape, particularly those in the US, and 2012 is looking even better, as long as you are investing in the right sectors at the right time.
Sitting on the sidelines waiting for things to be “back to normal” will not only be a long wait, but it will cost you a lot of money, as opportunities continue to pass you buy. Sure, you take on some degree of risk investing in difficult times, but if you employ the correct strategies (which we show you) your risk is minimised and limited and your upside is unlimited.
The Rise and Rise of the Australian Dollar and the Problems for the Australian Stock Market (but the opportunity for you)
Now, to what ails so many Australian companies at the moment, the strength of the Australian dollar. The carry-trade continues to push the AUD$ higher and is now reaching a level where it seems there are few Australian CEO’s not complaining that it will hurt profits substantially and this will eventually be reflected in the Australian share market performance. As you well know the Australian market is where it was in February 2006 – over 5 years ago. However, I expect the government to act on the strength of the dollar soon, as it will not only hurt the stock market due to earnings being lower, but those earnings will bring about lower tax collections and their commitment to return the budget to surplus will begin to look impossible.
At this stage, I know of no economist or analyst who thinks the AUD$ is fairly priced. They all agree that the dollar is way too high and is now approaching economic damage levels.
So, how much higher can the AUD$ go? That’s anybody’s guess but I would think $1.10 would be the absolute upper limit unless the US Government launched QE3 (Quantitative Easing), which would drive the US$ lower, which seems to be more remote as the US economy strengthens. I still maintain the US$ will strengthen in the latter part of this year and that in turn will have the AUD$ come down. While, some commentators are saying the AUD$ may go as far as $1.20 to the US$, I think the economic ramifications would be so horrendous in the form of poor earnings and government budget deficits, it would never reach these heights.
I also expect Australia to turn in a negative GDP result, which in part will be due to the AUD$ strength, as well as the flooding in Queensland. Two quarters of negative growth are defined as a recession. Earlier in the year I predicted Australia may find itself in this situation, so it won’t be a shock if we do actually have a mini-recession. I know a lot of people in business, who feel they have been in “recession” since the end of the GFC anyway. Of course, a negative GDP number from Australia during a commodities boom will place pressure on the AUD$ to drop as well.
The opportunity here is to take advantage of the AUD$ strength and buy assets, such as US and international stocks at current prices, because when the AUD$ does come back down to “fair price” levels you’ll be sitting on a very nice foreign exchange gain, in addition to the capital gain you’ll have made on your stocks. This is the strategy so many well-regarded hedge fund managers are employing right now.
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