Bullish Shares versus Bearish Bonds – which one is correct?

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Welcome to Finance and Fury

The ASX is sitting around a high mark.

But there is a lot of talk about recessions, analysis talking about share corrections, not a lot of optimism – Has there ever been?

Don’t really see many articles with positive outlook on the economy

  1. Important to remember – Don’t trust journalists to make investment calls
    1. Bad track record- European debt crisis, Brexit, Trump getting elected, trade wars, actual wars – GFC?
    2. Paying attention to the media yields some of the worst investment returns – emotions and fall into crowd
  2. Today ep – want to look at share market corrections, what signs are pointing towards, then how to not get stung
    1. If you have been listening – eps at the moment might come across as doom and gloom as well
      1. Apologise if it comes off that way – only intention is to inform but also provide ways out
    2. Not prophesising - Point of those episode is to let you know what can happen – not when or the magnitude

Are we going to crash?

  1. Might surprise you after what I just said – but we will 100% have another share market crash – but Who knows when it will occur!
    1. Investing in shares – you are 100% guaranteed to see a downturn in the portfolio value
      1. But from high point – not original capital invested – what goes up, comes down –
    2. Important point is to try and avoid losing the value of what you originally invest

major stock market correction is possible

  1. Levels – looking back – 10-25% range potential - for whatever reason – that would be a significant decline
    1. Can be scary
  2. Riding out the decline –
    1. Buying companies – shares = ownership in a business – either domestically or OS
    2. Make sure the companies you buy are good – doesn’t matter what short term valuations say then
      1. own quality investments and ride out the correction – confidence – will the company go out of business
      2. Not – will my share price go to zero – that is hard to comprehend – but will the company go out of business – that is the important part

Where is our share market in relations to economy -

  1. Australian shares are near record highs while interest rates are near record lows
  2. RBA - Lowe admitted - did not understand why bond market priced in for a recession while the sharemarket was screaming boom times ahead
    1. disconnect between the two usually means that one market will be "spectacularly wrong"
  3. Bond market – due to rates dropping, yields are also dropping – especially future yield spreads
    1. What does this mean – Bonds have a maturity date – buying debt – has a date when you get the money back
      1. If something has a 2 year timeframe with a 1% yield versus 10 years with 1.5% = .5% spread
      2. Shows that the interest rates will be increasing over the next 10 years
    2. What has happened – Compare now, 1 month ago, 6 months ago
      1. Short term – 2y and 4y – same now and 1m – 1% - but 6m 1.8%
      2. Medium term – 10y – 1.4%, 1.3% and 2.3%
  • Long term – 30y – 2%, 2%, 2.8%
  1. Share market
    1. Australian share market not heavily overvalued – PE Ratios
    2. Our share market is doing well in growth
    3. But share markets normally improve with the economy, but it is rising as the RBA is lowering interest rates to help the economy along (opposite signal)

12 month forward PE

Either Bonds, shares, or nobody is correct

  1. no-one can predict with certainty what will happen to the sharemarket next.
  2. If business growth continues to slow, share markets will be the incorrect ones – and the market will take a downturn
  3. market analysts look at charts of the ups and downs of share price movements to gauge trends
    1. Relative Strength Index (RSI) rises above a critical line - trading above the RSI looks like it has some room to run – but after a peak there is a decline – sometimes 3%, sometimes 10-20% - recently went through 10%
    2. PEs aren’t outside of range of normal – little above
  4. May be the case People are buying based around future expected growth – get in before it is gone

Few scenarios – hypothetical -

  1. We see no growth in a few months to years – event RBA has no room to drop rates – share market panics as the predictions weren’t true and tries to be the first to sell
    1. Fed – holding off raising rates now – but need a 4% buffer
  2. We see an uptick in growth – RBA does except this in the next 6 to 12 months – Share market doesn’t charge ahead, but keeps growing steadily
  3. Collapse of derivative debt bubble – would be worst case – no signs – counter party obligations are huge though

So if I’m saying we can’t predict market crashes, what can you do? Buy quality shares or funds – what is quality

  1. What do they do?
    1. Something people will still use, or something that is almost impossible to shake people’s confidence on
    2. Diverse models for income – products, services – Amazon vs corner store
    3. Have low expenses – or if high, most is capex
  2. Are they consistently able to provide growth and dividend returns?
    1. Dividends are important part of a share – makes up a large chunk of return – Growth plus Income = Return
    2. Why? Companies with good divs has to come from profits and not too much of those as a percentage
    3. This is where comparing the earnings yield as well is important – the companies may be above average yield on Div, making market look cheap – but if the earnings are lower than what is paid out – only time until the divs drop back and the yields correct back in line with average, or lower.
    4. Also – as a market average, good sign of if market is overvalued – especially when compared to earnings
      1. ASX Dividend Yields – 4.2% average since 1980 – we are about there – 4-4.2%
      2. Signs of an overpriced market? Low Div yeidls – From start of 1984 to Aug 1987 – 4% to 2.5%
  • From October to end of 1990 – rose to almost 7% - same peak reached at bottom of GFC
  1. Healthy dividends are a great measures of a company that survives collapses
    1. By healthy – mean they have growing profits – from diverse sources – the can afford to pay tax + FC – DPR isn’t too high – Telstra
    2. Pre GFC – grew quickly – hits 40c in 2006 – special cash payments back – but GFC hits and they cut to Div of 28c p.a. - .14 a pop – back to similar levels of early 2000s to 2005 – but set a message to the market – set dividend rate – poor decision as what if the EPS is less that 28c
  • Become 85%, 90, 108% - banking off the NBN – then chose to increase Divs – 90% DPR – how can a company grow with only 10% earnings are retained – limited capital investments
  1. Debt levels are important- interest coverage –
    1. Issues with some companies – total capital is made up of equity (what shareholders have) and Debt
    2. Debtors get money first – and the debt doesn’t decline – unlike equity if price drops
      1. i.e. too much debt and price drops – nothing left for shareholders
    3. Other things – watch out for companies spending all their retained profits in share buybacks
      1. Share buybacks are a sign of either companies thinking their price is cheap, or they have nothing better to spend money on, so reduce supply and price goes up – but at cost of future growth if miss opportunities
      2. When companies favour this – especially using leverage due to low rates – sign the company may be in for a tumble if the market goes down a bit

Looking at most companies – they look healthy enough

  1. Remember one thing – shares are volatile – but are the highest returning investments over the ultra-long-term – 20 to 30 years or so.
    1. even better than property, cash, gold, timber, silver and tulips
    2. has the unlimited potential of decades you’re
    3. But as long as there are more businesses while also providing more and better services/goods to people.
  2. Break up the risk through investing consistently - cash set aside for financial emergencies is important
    1. dollar-cost averaging – breaking up cash if holding a lot – or natural form from surplus cash
    2. Do it from cashflow - Spend less than you earn – invest the rest – regardless of what your fears or greed

If you would like to get in contact you can do so here.

Returns if dividends are reinvested

235 episodes available. A new episode about every 2 days averaging 19 mins duration .