Long range plans engender the dangerous belief that the future is under control. Try to stay flexible, open minded and sceptical. Good trading is a peculiar balance between the conviction to follow your ideas and the flexibility to recognise when you have made a mistake. In a bull market focus on price & momentum, in a bear market focus on valuation.
Ecinya Investment Rules 8 & 10, formulated July 1997.
Quincy Magoo is a cartoon character created at the UPA animation studio in 1949. Mr Magoo is a wealthy, short-sighted retiree, who frequently gets into sticky situations as a result of his near-sightedness, compounded by his stubborn refusal to admit the problem. People impacted by his various calamities tend to think he is a lunatic. After each triumph (calamity to others) Magoo exclaims "Ah Magoo, you’ve done it again!"
Edited extract from Wikipedia
Games played amongst even professional investors of Old Maid, Snap and Musical Chairs can be played with zest and enjoyment, though all of the players know that it is the Old Maid which is circulating, or that when the music stops some of the players will find themselves unseated.
Thus professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not the case of choosing those which, to the best of one’s judgement, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipate what the average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.
John Maynard Keynes circa 1936
OVERVIEW
Ms Magoo has joined the ranks of the Ecinya confidants, people we talk to on a regular basis who are market participants, aware of our views as we are aware of theirs. Since about 4 March Magoo and our editor have diverged on their market view. Magoo is fixated on levels of 5200 for the All Ordinaries and 1200 for the SP500 prior to a significant turning point occurring. Frustratingly for editor, Magoo has been correct in her assessment since the beginning of March. Under intense questioning, editor has asked Magoo "Why?" and Magoo throws a document at editor presented to her by editor some years ago, and says "Six prettiest girls!".
Editor is of the opinion that a tradeable turning point will occur before 5200 and 1200 and hopes to be over-weight cash at that time.
On 4 March we said; "In relation to the All Ordinaries index, the last downwave low was 4544 and as we go to press we are sitting at 4702, a mere 3.5% above the downwave low. The reporting season has been satisfactory, but not outstanding. In looking at 100 of the majors that have reported, about 28% have increased their interim dividend and a few companies have declined to give guidance. This suggests that though the worst may be over for most companies, caution is still a dominant theme. Also the interim report of Toll Holdings was a disappointment as Australia’s largest transport operator is suggestive of a sluggish economy. Though Australia avoided a technical recession in 2009 this had more to do with Australia’s robust financial position going into the ‘global financial crisis’ than management of the crisis once it came to pass. Summary: Our tactical position is ‘Going with the flow, without conviction’ and we are ‘comfortable’ and NOT ‘confident’, ‘bullish’, ‘very bullish’, and certainly not ‘euphoric’."
Editor has moved from ‘comfortable’ to ‘concerned’ as markets drift higher with the SP500 (our global proxy) and the All Ordinaries because the context does not feel at all conducive to further upside momentum at the moment and our position is fluctuating on an intra-week basis from ‘uncertain’, ‘relatively clueless’ to ‘comfortable’, to ‘concerned’.
WHAT ARE THE CONCERNS?
The markets have developed a speculative tone which is manifesting itself in two ways. Firstly, that a strong global economic recovery is surely happening. Fiscal 2011 forecasts are bullish; in our view, prematurely bullish. Secondly, local resource stocks, many in the ‘penny dreadful’ category, are rising indicating that people are looking for ‘easy’ profits. "Investment is not speculation" and to further emphasise the point we stress "speculation is not investment".
1) Strong global recovery: The economic stats are coming off such a low base that they are frequently said to be ‘exceeding expectations’. America is forecast to be providing 24% of total world growth for calendar 2010. But consider the following summary provided by James Quinn of quinnadvisors.com:
| "Economic Factor | Peak to Trough So Far (as at 4 March 2010) |
| Real GDP Decrease | 3.7% real decline from December 2007 until June 2009 totalling $500 billion |
| Personal Income | Personal income declined by $339 billion from mid-2008 to the 1st Qtr of 2009 |
| Investment | Fixed investment has declined by $543 billion, or 24%, since December 2007 |
| Unemployment | There are 8.1 million less people employed today than in 2007 |
| Industrial Production | Has fallen 12% since 2007 |
| Bankruptcies | National bankruptcies have risen from 800,000 in 2007 to 1.4 million in 2009, a 75% increase |
| Trade | Exports and imports declined by 22% and 31%, respectively, between July 2008 and June 2009 |
| Currency | The USD has fallen 17% in the last year versus a basket of world currencies |
| Bank Failures | 140 banks failed in 2009, with 700 banks in danger of failing, according to the FDIC" |
In relation to bank failures some 26 banks have failed in Calendar 2010. Mr Quinn does not mention the fiscal difficulties being experienced by about 10 major US states, including California which on a stand-alone basis would be the world’s 6th largest economy. The Wall Street Journal Economics survey for March 2010 has 28% of their 57 economists with a GDP growth forecast for 2010 below 2.5%, and 9% below 2.0%. Consenus has moved since the February survey from 3.0% to 2.9%.
China is said to be in a speculative bubble involving mainly property speculation on the part of both investors and developers. There are many blog editorials on this subject. Doug Noland of Credit Bubble Bulletin encapsulates these views in the following transcripts –
China Bubble Watch:
March 17 – Bloomberg (Sophie Leung): "The World Bank indicated that China… should raise interest rates to help contain the risk of a property bubble and allow a stronger yuan to help damp inflation expectations. The nation’s ‘massive monetary stimulus’ risks triggering large asset-price increases, a housing bubble, and bad debts from the financing of local-government projects, the… World Bank said… The group raised its economic growth forecast for this year to 9.5% from 9% in January."
March 17 – Bloomberg (Bei Hu): "China is in the midst of ‘the greatest bubble in history,’ said James Rickards, former general counsel of hedge fund Long-Term Capital Management LP. The Chinese central bank’s balance sheet resembles that of a hedge fund buying dollars and short-selling the yuan, said Rickards, now the senior managing director for… Omnis Inc. ‘As I see it, it is the greatest bubble in history with the most massive misallocation of wealth,’ Rickards said…"
March 17 – Bloomberg (Jeremy van Loon): "China replaced the U.S. as the biggest investor in renewable energy for the first time in five years as the Asian nation raced to meet rising demand for power and reduce carbon emissions. China invested $34.5 billion in wind turbines, solar panels and other low-carbon energy technologies in 2009… The U.S. spent about half as much last year…"
CONCLUSION
Despite Ms Magoo’s pleasure in being ‘ahead of the curve’ and ahead of us, we are remaining sceptical in this market, adding to value positions, and taking short-term profits as they appear. However, based on the quant and technical aspects of the market, Magoo could be right for the month of March.