Yesterday March 9, 2010 marked the anniversary for one of the most spectacular stock market rally in history. In fact this article in BusinessDay said that Wall Street has posted the best gains since the Depression in the 1930s. Below is an excerpt from the article:

The Australian market has also notched up strong gains since last March, with the benchmark S&P/ASX200 – which contains the nation’s 200 biggest listed companies – closing yesterday at 4820.1 points. That is an increase over the 12-month period of 1635.6 points, or 51 per cent.

“There’s one word that describes the past 52 weeks and that’s recovery,” said Bell Direct equities analyst Julia Lee.”Still for our market to reach the previous high seen in November 2007, there needs to be a rise of 40 per cent and that still represents opportunity for investors.” she said.

When you read the above, it sounds like it should be a breeze for us to get back to the November 2007 high of 6750. If we can rally 51% last year, 40% this year should be no problem, right? Not quite. The 51% rally was from the March 2009 low of 3185, but the 40% rally needed is from the current level of 4820. In absolute terms, we will need to gain another 1930 points (which is more than the 1635.6 points in this 12 month rally) just to get back to 2007 highs. Technical analysts prefer to use retracement levels i.e. how much of the fall have we retraced or recovered. The ASX200 fell from 6750 to 3185, a total of 3565 points. In this rally, we have gained 1635 points which is only a 46% retracement of the total move down. From the chart below of the ASX200 for the last 10 years, we are roughly at the same level as where we were at the start of 2006, four years ago.

Think back to 2006. The economic climate then was quite different from what it is today. Those were boom times globally – there was no banking crisis, high unemployment or sovereign debt problems then. What do you think is the likelihood that we will have another stock market rally, similar to the one we had in 2006 today? Since the article compared the rally to the one in 1930, below is the chart of the Dow Jones Industrial average from 1929-1933.

The 1920s were boom times, similar to what we enjoyed from 2003 to 2007. The DOW peaked in August 1929 at 380 and there was a big crash which saw the DOW fall to 200. This was followed by a sharp 50% retracement rally in 1930. The rally that we have seen on the Dow Jones Industrial index and most major market indices in the past 12 months appears to be very similar to this rally. After the rally ended, the DOW continued to fall even further for the next two years and finally bottomed at 44 in 1932. Although the market started rising after that, the DOW did not manage to recover to the highs of Aug 1929 until 25 years later in November 1954. The book “This time is different” by Carmen Reinhart and Kenneth Rogoff gives a really comprehensive analysis of financial crises. The authors show us what happened in over 250 historical crises in 66 countries. An unsustainable rise in asset prices and credit precede banking crises. Banking crises tend to be followed by sovereign debt crises and it could take ten years or more to get back to pre-crisis level. At a forum in Tokyo in February 2010, Rogoff, a Havard professor and former chief economist at the International Monetary Fund said he expects history to repeat itself again. We have had our banking crisis in 2007-08 and he expects sovereign debt crises to follow a few years later.

I believe the financial crisis that started in Oct 2007 is still playing out and it will be quite a few years more before we see the end of it. So my dear reader, I will leave it up to you to decide if you agree with the analyst from Bell Direct equities that today’s market still represents opportunity for investors or do you think it is time to thank Mr Market for letting you recoup some of your losses from 2008 and allocate your funds to more defensive assets?

Many thanks to Dean Greacen from SMSF Investor for today’s post. Dean will be sharing with us a series of posts on Hybrid Securities, which could be a great investment for SMSFs seeking high yield with capital growth.

A preference share is a type of equity interest which has preferential rights over ordinary shares. The company’s profits are distributed (through the payment of dividends) to preference shareholders before ordinary shareholders. In addition, if the company goes into liquidation, the preference shareholders are paid out before ordinary shareholders, making them slightly less risky to invest in.

Preference shares are legally ‘equity’, and like equity, their dividends are paid out of after tax profits. Investors, however, generally regard preference shares as a form of debt security if:

• there is a contractual obligation of mandatory redemption by the company (a feature of debt rather than equity); and
• the dividend is fixed and cumulative (which is suggestive of fixed interest on a debt instrument).

Preference shares, however, are not pure debt instruments because the payment of the dividend may be dependent upon the profitability of the issuer.

There are a variety of different types of preference shares offered in today’s financial markets with a variety of different characteristics, however, we will only be concentrating on the types of preference shares that are deemed to be the most suitable for the portfolios of SMSF investors. These are:

• Convertible preference shares; and
• Redeemable preference shares.

Convertible Preference Shares

Convertible Preference Shares pay fixed dividends up until a compulsory conversion date, at which time they convert into ordinary shares at a variable price which is determined by the issuing company and is usually at a discount to the prevailing market price. As preference shares, they have priority over ordinary shares in relation to both the payment of dividends and the assets of the company in the case of winding-up.

Generally, a company considering the issue of convertible preference shares is in the position of needing additional equity immediately, but believes that its current share price does not accurately reflect the true value of the company. This might be because the company is currently out of favour with the equity markets. Issuing convertible preference shares offers such a company the opportunity to effectively sell its shares in the future when, they hope, the shares will be worth more in the market. Therefore, from the company’s perspective, the issue of a convertible preference share is a form of delayed equity. The conversion into equity (i.e. ordinary shares), is just held back until the specified date.

From the investor’s point of view, the receipt of fixed dividends up until the time of conversion, which is suggestive of fixed interest, gives the instrument a debt-like quality. Furthermore, the conversion of a preference share to ordinary shares can be thought of as payback of the principle at the end of the term in the form of ordinary shares, and in lieu of cash. The number of shares received is, however, generally determined by prevailing market prices, allowing the investor to participate in share price gains and thus giving the convertible preference share more of an equity flavour.

Redeemable Preference Shares

Redeemable Preference Shares have a fixed redemption date on which they will usually be redeemed at a stipulated price with holders usually entitled to receive payment of the face value of their redeemable preference shares, any premiums on the redeemable preference shares, and any dividends accrued (whether declared or not).

Redemption may be mandatory, at the option of the investor or the option of the issuer. Like convertible preference shares, redeemable preference shares have priority over ordinary shares in relation to the payment of dividends. Whilst their legal form is that of a share (therefore an equity-based instrument), most redeemable preference shares exhibit debt-like features, including:

• fixed dividend payments;
• an option for the holder and/or issuer to redeem the share (or compulsory redemption) for a pre-determined amount; and
• cumulative dividend payments, where any missed dividends must be made up before the company can pay dividends on its ordinary shares.

Redeemable preference shares may be useful in circumstances where ordinary shareholders in a company are seeking temporary use of outside capital for specific projects without risking dilution of their control of the company.

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SMSF Investor is a company that provides expert help to SMSFs. They offer SMSF clients a range of products and services tailored specifically to meet their needs as self managed super fund investors such as a SMSF Investor course and investment advice if needed.

Many thanks to Dean Greacen from SMSF Investor for today’s post. Dean will be sharing with us a series of posts on Hybrid Securities, which could be a great investment for SMSFs seeking high yield with capital growth.

Convertible Notes are debt instruments that may be converted to an equity holding at a future date. A convertible note is therefore issued with a right to convert the holding into an agreed number of ordinary shares at inception, or at a time closer to conversion. In effect, a convertible note is a fixed interest security with a call option to purchase shares at some later date.

Prior to conversion, the convertible note is debt-like with investors receiving interest payments. At this stage the instrument generally does not convey the same benefits as equity, however, like a debenture, investors would receive their normal fixed interest payments for the duration of their ownership of the note.

Commonly there is a conversion formula which provides for a ’floor‘, thus guaranteeing the holder will get equity of at least the value of their investment. However, should the share price fall to a level substantially lower than the issue and conversion price, the holder is still guaranteed cash on maturity of the note.

Convertible notes are particularly advantageous to the investor if the market value of the company’s shares increases over the period they hold the note.

If the attached right is exercised, the note is cancelled and the note holder is issued with the agreed number of shares. Interest payments will accordingly cease and the (now) shareholders become entitled to any dividends declared on the shares. They will also be able to vote at shareholders’ meetings in accordance with the voting rights attached to the shares.

An advantage for a company in issuing convertible notes is that they will be able to avoid having to raise further funds to redeem the notes if investors convert their holdings into shares. It should be remembered, however, that the issuing of shares will dilute the value of the existing share capital of the company.

A number of other advantages accrue to a company issuing convertible notes. Often these securities have terms of up to ten years which provides the issuing company with fixed-rate long-term debt finance. Convertible notes therefore represent the only way that some newer and smaller companies have of obtaining long term fixed interest finance. Being a long-term security, convertible notes are attractive to institutions with long-term liabilities, such as superannuation funds.

Convertible notes are also attractive to an issuing company in their own right, as they are an unsecured liability. A company that has pledged its existing assets as security for other loans can issue convertible notes. The unsecured nature of these debt like securities does, however, represent a risk to note holders.

Some markets will purchase a note that converts into a share in preference to purchasing an ordinary share. Large companies often feel more secure knowing that their capital is spread amongst a number of different markets rather than being dependent on one market only for their capital. Convertible notes offer the opportunity to access these other capital markets.

In certain circumstances convertible note issues are released undated, giving an extended period in which to convert them into equity, thus creating a form of perpetual debt. Alternatively, convertible instruments can be callable, meaning the issuing company has the right to repurchase the instrument at a certain price in the future, thereby forcing holders of the debt instrument to convert to equity sooner than they may otherwise have chosen.

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SMSF Investor is a company that provides expert help to SMSFs. They offer SMSF clients a range of products and services tailored specifically to meet their needs as self managed super fund investors such as a SMSF Investor course and investment advice if needed.

Many thanks to Dean Greacen from SMSF Investor for today’s post. Dean will be sharing with us a series of posts on Hybrid Securities, which could be a great investment for SMSFs seeking high yield with capital growth.

Hybrid securities have the characteristics of both debt and equity and the enormous growth of hybrid securities in today’s marketplace can be best explained by financial markets seeking financial instruments of varying risk and reward. What makes hybrid securities so attractive to investors are the numerous combinations of payments, rights and obligations available in the hybrid marketplace.

Hybrids provide investors with a predictable dividend or interest payment at a benchmark rate of return called the Bank Bill Swap Rate (BBSW) plus a margin that reflects the credit risk of the issuer. The yield on hybrid securities is nearly always greater than the standard yield offered by direct equity securities and makes hybrid securities more attractive than shares as an income producing asset. Hybrid securities are not, as a general rule, growth assets like shares, but can offer equity upside (capital growth) that may give rise to capital gains depending on the performance of the underlying ordinary shares of the issuer. The convertible nature of some hybrid securities also offers investors a form of indirect access to the ordinary share equity of the issuer.

Examples of hybrid instruments include Convertible Notes and certain Preference Shares. Convertible notes are a type of interest paying debt security that convert to ordinary shares (equity) in the issuing entity on maturity. Convertible preference shares and redeemable preference shares are an example of a hybrid security that may be considered by the ASX as equity when first issued, but offer investors dividends that resemble interest or coupon payments and therefore resemble debt securities. Each of these instruments will be covered in more detail in further posts.

How Do You Access Hybrid Securities?

Large companies, including financial institutions, life insurers and general insurers are the dominant issuers of hybrid securities. When hybrid securities are offered to investors for the first time, it is usually through a float or what is called an Initial Public Offering (IPO). This process occurs on the primary market with the entity issuing a prospectus to potential investors.

Organisations using hybrid securities to raise capital typically engage stockbroking firms to promote a float and distribute the prospectus to potential investors. If you wish to buy hybrid securities in a float you should first review their prospectus, then fill out the attached application form specifying the number of securities you wish to buy and send it with your payment to the issuing entity, or lodge it with a participating broker, before the application deadline.

The price of a hybrid security issued in a float is specified in the prospectus and is usually $100. The benefit to Investors who purchase hybrid securities in an IPO is that they do not incur brokerage costs, making IPO’s a great way to access hybrids at low cost.

Once issued in the primary market, hybrid securities then trade on the ASX (the secondary market) and depending on supply and demand factors and the credit quality of the issuer, trading can be either highly liquid or extremely illiquid.

What are the risks?

Most investors see hybrid securities as high yielding defensive assets for their portfolio’s and therefore a flight to safety during difficult times. However, the higher the yield on a security of this nature the higher the risks attached to it, which means the more likely they are to expose investors to price volatility during times of tight credit and liquidity markets.

The two main risks to investors in hybrid securities are credit or default risk, and term risk.

Default risk is the risk that the issuing entity defaults on payment of dividends or interest or repayment of your initial investment capital held with them and you don’t get your money back. Default risk represents a hidden danger, particularly in times of easy credit, strong risk appetites and plentiful liquidity because it won’t necessarily show up in price volatility. The key, therefore, to managing default risk appropriately is to only invest in the highest credit quality hybrid securities available in the marketplace. Although hybrids represent a less risky investment than direct shares, the price of a hybrid security can also be affected by the performance of the issuing entity and may expose an investor to downside price risk. However, if an investor is dissatisfied with the performance of the issuer, they always have the option of selling their hybrid securities on the ASX any time prior to redemption or conversion.

Term risk involves the risk of investing in hybrid securities over long periods of time. Historically, longer maturity instruments have higher risks attached to them without the commensurate increase in expected returns. As such, the return from longer term hybrid securities is generally not worth the added risk. To avoid the price volatility attached to longer term hybrid securities the key is to stay relatively short term (i.e. no longer than 4-5 years). The best risk adjusted returns can be delivered by investing in short dated hybrid securities of 2-3 years.

A further but less important risk to investors of hybrid securities is liquidity risk. This is the risk that some investors may not be able to buy in or sell out of a particular hybrid security in a hurry at the price they want. Liquidity risk is, however, not a huge issue for the majority long term investors in hybrid securities because most investors purchase hybrids to access a constant and predictable income stream usually for the duration of their term (i.e. until conversion or redemption).

Why should SMSF trustees consider investing in hybrid securities?

Hybrid securities are suitable for SMSF trustees to include inside their investment portfolios both during the pre-retirement accumulation or savings phase, as well as the post-retirement pension phase when self funded retirees will be drawing on their superannuation life savings.

The decision to include hybrids in a SMSF portfolio and to what extent is therefore dependant on a person’s stage in life, time frame for investment and risk profile. Obviously there will be greater need for high yielding income producing securities during the pension phase in order to pay for a retirement income stream than during the accumulation phase of saving for retirement when growth assets are more important. The asset allocation process both pre and post retirement therefore becomes paramount as SMSF investors rebalance their portfolios to suit market conditions and their own personal situation.

For SMSF trustees who are not yet fully invested, hybrid securities are attractive financial instruments to invest in because of the appealing combinations they come in. For SMSF trustees who are fully invested, but want to include hybrids in their portfolio, the only way to do this would be to sell down some growth assets (i.e. shares) or use excess cash reserves.

Moving from pre-retirement to post-retirement will also necessitate the rebalancing process but it is important that SMSF investors get professional advice to ensure that the timing is right to avoid any unforeseen taxation implications as a result of this rebalancing.

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SMSF Investor is a company that provides expert help to SMSFs. They offer SMSF clients a range of products and services tailored specifically to meet their needs as self managed super fund investors such as a SMSF Investor course and investment advice if needed.

So what are the types of investments that we should be holding in these times? Watch this video to find out…

Last year there was also a lot of debate as to whether there would be inflation or deflation in the next few years. Getting this right is quite critical because asset classes that do well in inflationary times WILL NOT do well in deflationary times. After doing my own research on this topic, I am more convinced on the case for deflation. Robert Prechter gives a strong case for deflation in the following video …

I am a subscriber and marketing affiliate of Elliott Wave International (EWI) publications. If you have found the above videos interesting, check out the ElliottWave page on this site to get the latest free updates from the EWI website.

I am also in the process of collating old blog posts related to building a SMSF investment strategy into an e-book so I will not be personally writing as many blog posts in the next month or so. Instead I have arranged for some guest posts on investment products that are suitable for SMSFs that I am not as familiar with such as hybrids and debt securities. Stay tuned…

What Chinese Malls Tell Us about the Economic Reality

February 22, 2010

By Editorial Staff

Investor expectations are decidely bullish right now, and many people expect an economic turnaround this year. What do the underlying economic conditions suggest? The Chinese mall “The Place” demonstrates the contrast between investor hope and economic reality.

The following is an excerpt from the February issue of Global Market Perspective. For a limited time, you can visit Elliott Wave International to download the rest of the 100+ page issue free.

Bullish expectations (shown by the top three panels) may not be quite as extreme as they were in 2007, but adjusted for underlying economic conditions (bottom panels), the current psychology probably ranks right up there with the most complacent outlook in history. The charts of housing, consumer credit and unemployment show the systemically sluggish state of the economy. We know that fundamentals always lag psychological trends, but the lag is generally only a matter of months. It’s been nearly 11 months since the outset of the Primary wave 2 rally; by these critical economic measures the rebound is barely registering.The wide disparity between the hope of investor expectations and the reality of economic strength shows that the great bear market — already ten years old — remains in its early stages. As the next legdown matures, hope will turn to despair, and it will become impossible to ignore the persistence of the economic contraction.

The same chasm between fundamental performance and stock market expectations is visible in other parts of the world. In China, for instance, ground reports reveal how out-of-whack financial expectations are with street-level demand. A blog called The Peking Duck described Beijing’s “stunningly dysfunctional, catastrophic mall, The Place. Fifty percent of the eateries in the basement were boarded up. The cheap food court, too, was gone, covered up with ugly blue boarding, making the basement especially grim and dreary. There is simply too much stuff, too many stores and no buyers.” The world’s largest mall in southern China is completely empty. Most investors do not see past the performance of the Shenzhen or Shanghai stock indexes, just as most of the buying and selling of U.S. stock indexes remains detached from the real economy. We see lots of hope but no change in the reality.

“Drama, intensity, change and travel will be the keywords for 2010. Unfortunately, world conflicts and disasters tend to feature during Tiger years also, so it won’t be a dull 12 months for anyone. The Year of the Tiger will bring far reaching changes for everyone. New inventions and incredible technological advances have a good chance of occurring.”

Other sites also concurred that the year will be full of drama and unexpected events. The last year of the tiger was in 1998 and at that time I was still living in Malaysia, one of the countries that was severely affected by the Asian Financial Crisis which began in 1997.  Stock markets and other asset values plummeted and values of currencies slumped. After 30 years in power, President Suharto of Indonesia was forced to step down on 21 May 1998 in the wake of widespread rioting that followed sharp price increases caused by a drastic devaluation of the rupiah. In the Philippines growth dropped to virtually zero in 1998. The last year of the tiger sure wasn’t a dull year for me personally either. My youngest daughter was born in May 1998 and my marriage broke down three months later. I sure hope this year of the tiger will be less traumatic for me!

I can’t help but wonder how this year of the tiger will work out for China. Their stock market is closed this whole week because of Chinese New Year. The last time I looked at the chart of the Shanghai Composite index in December 2009, it was on the brink of breaking a 13 month uptrend line which started in November 2008. Since then it has broken below that trendline and other key moving averages as shown in the chart below. I have also drawn the Fibonacci retracement lines and you can see how it struggled but failed to push above the 38.2% retracement level. From a technical perspective, the chart does not look very bullish at all. From a fundamental perspective, China is also winding down on the stimulus spending that started in November 2008. The Chinese government has also recently asked their banks to tighten lending and increase their reserves. Unless a new stimulus package is announced in 2010, I don’t see much reason for the market to go up further.

The world is depending on China to lead the recovery. From the chart above, it looks like the Chinese investors themselves don’t seem to be that convinced about their recovery. Most global stock market indices have managed to reach at least a 50% retracement in 2009 but China barely managed to reach a 40% retracement in August 2009. Despite this gloomy outlook, I don’t believe this year has to be bad for those who are prepared. The Chinese term for “Crisis” is made up of two words “Danger” and “Opportunity”. Michael Yip’s blog also said

“For all of the Chinese horoscope signs, this year is one to be active – seizing opportunities and making the most of our personal and very individual talents. Everything happens quickly and dramatically in a Tiger year – blink and you could miss an important chance of a lifetime!”

So, expect the unexpected and seize opportunities that make the most of your personal and very individual talents. I wish you a successful Year of the Tiger ahead!

While all eyes are focused on Greece, Dubai is quietly trying to work out a deal to restructure USD 22 billion of debt that is coming due soon. Dubai World rocked global markets on Nov 25, 2009 with a request to delay repaying $26 billion in debt linked to its main property units Nakheel and Limitless World. Then big brother Abu Dhabi stepped in with a USD 10 billion bailout (later reduced to 5 billion) which was enough to stave off a default on a $4.1 billion Islamic bond linked to Nakheel. Abu Dhabi’s bailout calmed investors down for a little while but it looks like round two of the problem is starting now.

In the news recently, you would have no doubt heard the term “Credit Default Swap” or CDS. I knew it was some form of debt default insurance but I did not really understand some of the related terminology like “basis points” or “CDS spreads”. I decided to educate myself a little bit more about them and came across this article by forex specialist Kathy Lien which I thought explained it very well in layman terms.

What are Credit Default Swaps? A credit swap is like an insurance contract. The buyer of a credit default swap receives a payment if the underlying (company or country) defaults which basically means that he or she is buying insurance for a default. In return, the seller will require regular payments from the buyer. The best way to describe a 5 -year credit default swap is to compare it to a 5 year term life insurance contract. You make a payment at regular periods of time so that if the “credit event” or “death” occurs within 5 years, a lump sum is paid. If it does not happen, then the seller simply retains the payment and your “insurance” expires.

What are Credit Default Swap Spreads? Credit default swap spreads are the cost of the protection expressed as an annualized percent of the notional amount. So for example if the 5-year swap spread on Greek debt is 400 basis points it means that it costs 4 percent of the notional to protect against a default of Greek government debt within 5 years. On a $10 million bond, investors would require an annualized payment of $400,000 in this case to be willing to bear the risk of Greece defaulting on their bonds.

The cost of credit default swaps (also known as CDS spreads) is measured in basis points (bp). If the risk of default is higher, the cost of insurance naturally goes up, so the CDS spreads are a good measure for risk of default. Despite all the seeming panic over Greek debt, Greece’s 5 year CDS spread is only 400 bp compared with Dubai’s CDS spread of 627 bp as of last Friday. Based on the CDS spreads, it looks like Dubai has a higher risk of default than Greece.  Dubai stock markets fell 4.1% on Sunday but European and most other markets gained on the hope of a bailout for Greece. Maybe investors do not realise it yet as Reuters seem to the only news agency still covering Dubai after the initial panic passed in late 2009.

Looking at the Dubai debt crisis as an example, I think the same thing will happen with the Greek debt crisis. The total debt for Greece is now €254 billion, and they need to finance another €64 billion this year, €30 billion of it in the next few months. I think Germany and France will reluctantly fork out €30 billion for the first bailout but funds for subsequent bailouts will be much harder to come by. I don’t hear Abu Dhabi coming forth with more bailout money this time around. I think Dubai World’s creditors will have to be prepared to take a 40% haircut and wait a long time to get the rest of their money back. When this happens, lenders’ mindset will change from “maximizing profits” to “minimizing risk” and credit will be much more expensive and difficult to obtain (in other words, its credit crunch time again!).

In the meantime, lets enjoy this optimism over the pending bailout for Greece while it lasts. Australian markets are up 2% as I write this.

1. SMSF trustees are long term investors, not short-term traders and
2. they currently do not cover stocks listed on the Australian Stock Exchange.

But I am always open to new ideas so I decided I would try out their products for a month. I also realised that I do have a number of visitors who do invest in the markets they cover such as the US and Canadian markets, who may find this review useful.

Ino.com’s flagship product is Marketclub which provides a simple but useful tool they call “trade triangles”.  A trade triangle indicates a change in trend and that can help you decide when to get in or out of the market. They have two types of trade triangles – monthly and weekly.  The monthly trade triangles picks up changes in long term trends and are more useful to the longer term investor. After using marketclub for a while, I actually found it more useful than I first thought I would. My first impression was good – I liked the site a lot because they use a lot of multimedia like videos, audios and even talking charts which makes the site very interesting. I really like the video analysis that ino.com founder Adam Hewitson does twice a week. He uses a lot of the same technical analysis methods that I use like trendlines, fibonacci retracement levels and Japanese candlesticks. It is much easier to learn when you are able watch him mark on the charts and talk about it as with this video analysis of the DOW.

I set up my portfolio of stocks, ETFs and indices that I watch in my Marketclub account and I get a daily portfolio analysis by email which also alerts me to any change in trend in any of the markets that I follow. The daily emails are useful as I don’t have time to check the charts of each market everyday. In the past one month that I have been using Marketclub, I have received monthly trade triangle alerts on three of the markets I follow, which have helped to confirm my views on these markets. The first was a bearish triangle on the Reuters/Jefferies Commodities Index, which is a good index to watch if you have mining stocks. The second was a bullish triangle on the USD/AUD chart as shown below.

Even if you don’t own US listed shares, it is a good idea to keep an eye on this chart as the strength or weakness in the US dollar affects a lot of Australian listed stocks. Mining companies such as BHP and Rio Tinto sell products that are priced in USD. Companies like CSL and QBE sell a lot of their products in the US, so most of their revenue is in USD. The exchange rate can affect their share price and dividends. In a way, we are all exposed to currency risk, even with a portfolio of only Australian blue chip stocks. The third was a bearish triangle on Silver. I used to own shares in SLV which is an ETF for silver. I sold them a couple of months ago based on my own analysis, and this bearish signal helped to confirm that I made the right decision. Check out Marketclub’s recent video analysis on Gold if you own or plan to buy Gold.

The DOW is back at 10,000 which is where it was 10 years ago, the Nikkei is at 10,000 where it was 25 years ago and the All Ords is at 4600 where it was 5 years ago. However, if you bought stocks in March 09 and sold in Jan 2010, you could have made a 50% return. Perhaps it is time we challenge the conventional wisdom of “Buy and Hold” or “Time in the market” is better than “Timing the Market”.  Timing the market is tricky and this is where trader tools like Marketclub, which are based on technical analysis principles, can help you get started. The cost for joining Marketclub is quite reasonable at USD449 per year. You get analysis of 230,000 markets which include stocks, futures, ETFs, Forex and more, and other benefits like up-to-date global market news, investor education  and historical data. As a comparison, I currently pay AUD1400 per year for a service that only provides fundamental analysis for 200 Australian stocks. Start your free 30 day trial today!

Respected UK economist and financial historian Niall Ferguson tell us it would be a grave mistake to assume that the sovereign debt crisis that is unfolding will remain confined to the weaker eurozone economies. He says “It is a fiscal crisis of the western world. Its ramifications are far more profound than most investors currently appreciate“. Most investors are assuming that the European Union will bail Greece out like Abu Dhabi did for Dubai and the problem will just go away but doing a bailout for Greece will be a lot more complicated. Due to the way the European Monetary Union was designed, there is in fact no mechanism for a bail-out of the Greek government by the European Union or other member states or the European Central Bank (articles 123 and 125 of the Lisbon treaty). Nor is there a way for Greece to devalue its currency, as it would have done in the pre-EMU days of the drachma. There is not even a mechanism for Greece to leave the eurozone. Ferguson sees only three possibilities: one of the most excruciating fiscal squeezes in modern European history – reducing the deficit from 13 per cent to 3 per cent of gross domestic product within just three years; outright default on all or part of the Greek government’s debt; or (most likely, as signalled by German officials on Wednesday) some kind of bail-out led by Berlin. As none of these options are very appealing, and because any decision about Greece will have implications for Portugal, Spain and possibly others, it may take much horse-trading before one can be reached. Wealthy Greek investors are also not as confident of a bailout and have been pulling billions of Euros out of Greek banks. According to Erik Nielsen, chief European economist at Goldman Sachs, many long-term investors have sold Greek bonds.

If you think Niall Ferguson is pessimistic, wait till you read what former Chief Economist of the International Monetary Fund (IMF) Simon Johnson has to say. In a recent blog post entitled “Europe risks another global depression” (yes you read it right – Depression, not Recession). He is not so confident that the European countries with deep pockets are willing do anything except insist that all countries under pressure cut their budgets quickly and in ways that are probably politically infeasible. This kind of precipitate fiscal austerity contributed directly to the onset of the Great Depression in the 1930s. Another option for Greece may be to go to the IMF but doing this brings with it a great deal of stigma and strings attached. He says “Another Lehman Brothers/AIG-type situation lurks somewhere on the European continent, and again our purported G7 (or even G20) leaders are slow to see the risk.  And this time, given that they already used almost all their fiscal bullets, it will be considerably more difficult for governments to respond effectively when they do wake up.”

I don’t profess to be an expert on financial crises and I don’t know exactly how the Greek crisis will affect the Australia. Even today, I would still struggle to explain why the US subprime crisis and the collapse of  one US  investment  bank managed to cause all the global equity markets (including Australia’s) to nose dive in October 2008, but I know it did.  I am going to heed the advice given by economists like Niall Ferguson and Simon Johnson that the European sovereign debt crisis may not end well and this will have serious implications globally, and we could be in for another wild ride (credit crunch,  exploding credit default swaps, and stock market crashes) like what happened when Lehman Brothers collapsed. I prefer to stay in safe investments and will think twice about buying or holding the types of stocks that were badly affected in the last market crash (e.g. banking and resource stocks), no matter how good their earnings were last year . For those who hold a lot of resource stocks, consider also the chart of the Reuters/Jefferies Commodities Index courtesy of Marketclub. Prices have broken below a 12 month uptrend line and Marketclub has flashed a red monthly trade triangle (click on the chart to zoom in if needed) which indicates the start of a long-term downtrend. Marketclub traders use this signal to get out of long positions.Trade triangles are signals created using Marketclub’s proprietary technical analysis algorithms. As you can see on the chart below, the last monthly trade triangle was a green one in May 2009 which correctly indicated the start of a strong uptrend.