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The Bear Market Diaries – Episode 3

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Mar 02 2016

This story features CSL LIMITED, and other companies. For more info SHARE ANALYSIS: CSL

In this week's Weekly Insights:

– The Bear Market Diaries – Episode 3
– Village Roadshow: Building A Memory
– All-Weather (Out)Performers
– Gold, The Come-Back Kid
– #NigelNoMates En Route
– Rudi On Tour
– Nothing Ever Changes, Or Does It?
– Rudi On TV

The Bear Market Diaries – Episode 3

By Rudi Filapek-Vandyck, Editor FNArena

"The fear that drives a bear market is far more intense than the hope that sustains a bullish trend"
[Robert Prechter]

You've probably never heard about Nautilus Investment Research (, whose targeted audience consists of funds managers and hedge funds -"professionals"- who can fork out a lot more than your average retail investor to access money making ideas and technical analysis.

Nautilus has been feeding its clientele the idea that what we are experiencing in share markets globally is the early transformation into an old fashioned bear market, 2008-style.

If Nautilus' roadmap proves accurate, US equities will be 30% lower by July this year, which is only five months away.

Even so, the roadmap that has been distributed suggests this downtrend won't reach its bottom until the closing month of calendar 2016. By then the S&P500 will be back at levels last seen in early 2012, effectively wiping out all gains from the past four years (ex-dividends).

If you think that's a pretty dire outlook, then prepare your stomach for the vision outlaid by Elliot wave specialist Robert Prechter, who's profiling himself as the priest of hard core negativism with predictions of a new Armageddon building for equities, commodities and commodities-leveraged currencies.

Prechter is convinced that in a world of too much debt, gripped by deflation and impotent central bankers, the present Risk-Off period is going to outlast the bear market of 2007-2009 both in duration and in capital losses.

Note both Nautilus and Prechter published their predictions in 2015 so both are feeling emboldened by how equities have entered the new calendar year thus far.

The Bullish View

There's another side too. One of local advisors last week tweeted me a link about a UBS investment professional who declared on financial television: I am so bullish right now, it hurts.

Over in Canada, investment experts at Raymond James have been copping quite some flack from their advisors and clientele recently about their undeterred bullish views. I can tell from the change in tone in the financial services provider's general communication with the outside world.

Several of prominent financial experts at Raymond James previously dismissed negative signals such as a Sell signal generated by Dow Theory last year, but they've decided this is not the time to stoically dismiss everything that is happening around them in financial markets across the globe.

Raymond James' experts have switched to a more pragmatic stance this month. There have been a few apologies about having remained too positive for too long. Still, the argument remains whether the best choice for investors is to capitulate and move 100% in cash. As Investment Strategist Andrew Adams explained last week, "we deal in probabilities in this inherently risky business, and there is always an opportunity to get it wrong".

So now it's up to personal goals, strategies and appetite for risk. Investors need to balance the risk for further capital losses against the risk they are going to miss out when this market turns and they're not in it. Advises Adams:

"Which side you choose to believe is really a personal decision and one that necessitates having to REALLY know how much risk you are willing to take".

"No one knows for sure what is going to happen, so it really comes down to analyzing that risk tolerance and if it’s decided that the potential upside is not worth the risk, there is certainly nothing wrong with limiting exposure and riding out the rough times safely in cash or other more conservative investments."

My personal opinion on Raymond James has shifted to positive from neutral in recent weeks. Not only has the team been willing to concede the market has proven its own views wrong, the measured approach that has followed since is really what investing in risk assets is all about: assessing risk versus reward and then deciding how comfortable am I as an investor with my portfolio potentially tumbling by 10-15%, or worse, in the short to medium term.

All-Weather 2016 Strategy

The dilemma Raymond James' advisors and clients are struggling with was very much on top of the agenda when I returned from a three week visit to Africa in January (My insights from this trip will feature in the weeks ahead).

At first I felt vindicated as we had decided in December the prudent action to take was to move some equities exposure into cash. However, it didn't take long to realise this global downtrend was much stronger than anticipated. No time for gloating and/or complacency.

The problem then becomes how do we limit downside risk while still retaining leverage to upside scenarios?

Two factors were front of mind: investors in general don't like their money sitting idle in cash (only after the fact, when Harry Hindsight has proved to be 100% correct towards the bottom of a bear market. Otherwise the general attitude is why am I paying fees to have my money sitting in cash?).

Second factor is financial markets have a habit of delivering unexpected surprises. A big counter-rally, or sooner-than-expected end to the downtrend will inevitably work against us if we are sitting 100% in cash by the time the rally takes off.

Hence why the decision was made to draw upon my analysis from the previous bear market and to combine this with some of the conclusions drawn in my book, Change: Investing in a Low Growth World (published in November last year. Available through all major online channels).

When risk appetite abandons the share market, not all shares are being treated equally. This is why the decision was made to concentrate the core of the FNArena/Vested Equities All-Weather Model Portfolio around All-Weather Performers that should hold up well when most other equities do not. Think CSL ((CSL)), Transurban ((TCL)) and InvoCare ((IVC)), et cetera. The core group we decided to stick with is either up year-to-date (read: in positive territory) or has suffered small, marginal losses only, on balance.

The second decision we made was to get rid of financials. When share price weakness becomes the theme of the day, financials will be de-rated and sold down. That's simply how it works. Most financials are leveraged to a buoyant environment for financial markets, not to mention the potential draw backs when global funding, liquidity and risk appetite take a serious step back in a world of too much debt and leverage.

Thirdly, with the focus firmly on the February reporting season, we concentrated on robust, strong growth stories whereby companies, even if the share price had sell off, were most likely in a position to prove investor angst and scepticism wrong when they report their results in February.

We had numerous of such "aha" experiences in our portfolio in February. Think Amcor ((AMC)), Orora ((ORA)), APN Outdoor ((APO)) and Japara Healthcare ((JHC)), et cetera.

Not everything went 100% according to plan. We went against our gut feel and subsequently witnessed how iSentia ((ISD)) got bashed following a disappointing market update. Weakness/volatility in Bellamy's ((BAL)) and Blackmores ((BKL)) has proved larger and more frequent than we anticipated, even though we always knew this was the risk we took on board given both companies' shareholders register are populated by large groups with large paper gains.

Always good to keep in mind: flawless execution is the territory of academic studies and the privilege of Harry Hindsight.

We remain confident though that we are backing solid growth stories, with the bias towards outperformance rather than negative surprises. Our approach has been the opposite of trying to locate cheap assets that are unlikely to fall much further, with the potential to release better-than-feared financial results. This strategy could have led us to companies such as Woolworths ((WOW)), APN  News & Media ((APN)) and BHP Billiton ((BHP)), among others.

If, however, the likes of Nautilus and Prechter prove to be more correct than not post the February reporting season, we feel more comfortable with the stocks we are holding right now.

All-Weather Portfolio

The picture above wouldn't be complete without mentioning the FNArena/Vested Equities All-Weather Model Porfolio is circa 60% invested in Australian equities. The core is made up of half a dozen stocks that have featured prominently in my research post-GFC and which feature regularly in my analyses and market commentary.

Year-to-date, and for the reasons explained above, the Model Portfolio's return is slightly negative, which is, this early in the year, a set-back we are comfortable with. It also marks clear outperformance vis-a-vis the broader market, which marks a continuation from 2015. As a matter of fact, my own research suggests any portfolio built around the same core of stocks would have outperformed consistently and markedly since the GFC.

The performance of our Model Portfolio is simply providing real life evidence of the same theoretical conclusion/observation.

Every strategy chosen is only as good as its execution. We do realise ours does not fit everyone. We care about the potential for capital losses and about total return, while reminding ourselves of the wise words once spoken by John Maynard Keynes: "In the long run we are all dead".

Village Roadshow: Building A Memory

Some companies build up a legacy of outperforming market expectations, even if these expectations rise into the stratosphere or simply add a little bit on already upwardly revised management guidance. We all know the names. Domino's Pizza ((DMP)). Ramsay Health Care ((RHC)). Cochlear ((COH)). Hence, every reporting season investors and analysts get set for an interruption in the long list of market surprises, only to be proven wrong yet again. February 2016 delivered yet more of the same.

No doubt, a time will come when yet another upward surprise will prove a bridge too far, but by golly hasn't the winning streak been impressive to date? Note Macquarie Group ((MQG)) also has an enviable track record of surprising to the upside, but general expectation has it that streak is poised to end come August (subdued financial markets are not a buoyant framework for the Millionaires Factory, otherwise known as the Golden Doughnut).

Then there are others, those who find it increasingly difficult to stay away from issuing disappointing market updates. Woolworths ((WOW)) has become one prime example, even though the latest disappointment has been welcomed with upward momentum for the shares. Another retailer in the same boat is Super Retail ((SUL)) for which weaknesses -again- outweighed its core strengths this reporting season.

Contrary to Woolworths, investors have continued selling down their exposure to the management team once crowned the best retailers in the country post interim results release.

Then there is Village Roadshow ((VRL)). On my personal observation, both analysts and investors tend to get really excited on the basis of macro-tailwinds such as resurgent tourism to the Gold Coast in between reporting seasons. But every time the company updates on its financial numbers, the share price takes a dive.

It happened again this month with the Village Roadshow share price essentially wiping out all gains from the past twelve months. As a matter of fact, we can go back to February 2013, when the share price fell, to discover Village Roadshow shares were equally priced at present level. Not wanting to go too hard on the company and its management, but the relationship between financial reports and a (sharply) falling share price looks but obvious since February 2014. That's five reporting seasons in a row.

Is this enough to now assume an established pattern? (Long term buy&hold-shareholders will consider themselves lucky the company pays a relatively high dividend. Current yield is circa 5% plus 100% franking according to FNArena's Stock Analysis).

All-Weather (Out)Performers

It truly fills my heart with joy (sorry, one of my poetic moments. It's gone now) when FNArena subscribers, and others, start communicating with me about how they incorporated some of my stock choices and analysis into All-Weather Performers in their own portfolios.

Whether it be through InvoCare ((IVC)), Ramsay Health Care ((RHC)) or Orora ((ORA)), in a world that remains obsessed with BHP Billiton ((BHP)), Telstra ((TLS)) and the local banks, you are, and have been, on a good wicket. And don't you know it too.

Then there is the "other" side. FNArena subscribers who have been on board for seven, eight, ten years and longer, and only now have found it in their interest to pay attention to my research post GFC. Of course I am happy you finally ask for a copy of my book, and about prior publications on All-Weather Performers, but it breaks my heart every time I realise it has taken this long and the reason behind the question today is probably because the portfolio hasn't done well.

One subscriber, James, last week went through the effort of calculating the average return of my selection of All-Weather Performers in 2015. The magical number he came up with is 22%. On average. In a year when only high dividends kept the index in positive territory. Needless to say, James has now been converted.

I can add the outperformance of All-Weather Performers has continued in 2016 with the FNArena/Vested Equities All-Weather Model Portfolio on its way to outperform the broader market again for February. The portfolio never followed the market into double-digit negative return in January in the first place.

Investors who like to find out more about this option, which runs through SMAs on the Praemium platform, can send an email to

Gold, The Come-Back Kid

It has been a cold winter for gold bugs the world around ever since spot gold surpassed the US$1900/oz mark in mid-2011, but in particular since mid-2012 when gold fell out of bed and started a relentless downward path that seems to have ended in January 2016 when the world returned from Christmas celebrations and started selling global equities.

Admittedly, Australian investors have enjoyed about twelve months of booming dynamics for the local gold producing community, but this was 100% driven by the weakening Aussie dollar. Now gold in USD is showing all kinds of strength variations on price charts and both traders and investors are taking notice.

From a fundamental perspective, it is my observation most analysts at stockbrokerages and investment banks still find it difficult to get their head around the changing dynamics that are pushing bullion back into the limelight, but change is happening, albeit slowly.

Over the past weekend, Deutsche Bank, until recently on the same bandwagon as Goldman Sachs and the likes predicting gold was on its way to sub US$1000/oz price levels, released a report titled "It's expensive, but you need some insurance". The subject at hand is gold and the report marks a 180 degrees turnaround from that prior dire forecast.

The conclusion that pretty much sums up the report is "The world has changed in favour of gold". The opening paragraph of the report explains it all:

"The conditions that led us to forecast gold falling below USD1,000/oz have changed. Slowing global growth momentum, the rising risk of a US credit default cycle, and the increasing likelihood of a large one-off RMB devaluation means that the Fed may have to relent from its path of tightening. US rates are now expected to end the year at current levels, and the upward trajectory of the S&P500 is no longer a given in our view. Given the rising core inflation and strong job creation data, the Fed may be compelled to hike in the near term. This combined with seasonal weakness in Q2, may provide investors with a good entry point"

My personal view is, and has been, the time has arrived to start re-considering adding gold exposure to one's portfolio. How much exposure is dependent on how comfortable/uncomfortable investors are with present risks. Gold as insurance, which is essentially what Deutsche Bank is suggesting, has long been my central view about the precious metal. When in a relentless bear market, however, there's little use for any such guaranteed loss-making insurance option, but, clearly, times are changing and this makes gold a viable insurance option again.

#NigelNoMates En Route

Last week, Nigel visited the dentist, believe it or not.

I am keeping the world up to date about #NigelNoMates' endeavours and adventures through my Twitter account @filapek. Clearly the theme is catching on with Nigel even receiving direct emails through FNArena.

Rudi On Tour – Who's Afraid Of The Big Bad Bear?

They seem to come along every eight years or so, the dreadful bear market so many investors detest, causing risk appetite to evaporate and share prices to reset at lower levels. Every time the cause and follow-through are different. So what lies at its origin this time and what's going to be the likely outcome? As a self-nominated bear market expert, I will be sharing causes, explanations, insights and strategies for investors who want more than keeping their fingers crossed while hoping for the best.

I will be presenting:

– To Perth chapters of both Australian Shareholders' Association (ASA) and Australian Investors' Association (AIA) for presentations on Monday 9th May, both afternoon and in the evening.

– At the Australian Investors' Association's (AIA) National Conference in August on Queensland's Gold Coast.

Nothing Ever Changes, Or Does It?

Yes, of course, investing in the share market is never really different and best working strategies today are the same that worked pre-GFC. Seriously. I tell you, seriously.

Now that we had a good laugh about it, let's get straight to business. This is a low growth environment. Has been since 2010 (it was masked at the time because of the V-shaped recovery from the global recession) and it is not likely to change fundamentally in the near term. I wrote a book about this (see below). This means investment strategies must adapt. You'll be turning your portfolio into a wish list for dinosaurs otherwise (and your returns will be a reflection of it).

Those not afraid to contemplate "this time is different" can subscribe to FNArena and read all about it in our bonus eBooklets 'Make Risk Your Friend' (free with a paid 6 or 12 months subscription) plus the freshly published eBook 'Change. Investing in a low growth world' (equally free with subscription, or available through Amazon and other online distributors).

Here's the link to Amazon:

See also further below.

Rudi On TV

– On Tuesday, around 11.15am, on Sky Business, I shall make a brief appearance through Skype-link to discuss broker ratings for less than ten minutes
– I will be appearing as guest on Sky Business's Lunch Money, 12.30-2.30pm on Thursday
– On Friday, around 11.15am, on Sky Business, I shall make another appearance through Skype-link to discuss broker ratings for less than ten minutes

(This story was written on Monday 29 February 2016. It was published on the day in the form of an email to paying subscribers at FNArena).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: or via Editor Direct on the website).



Paid subscribers to FNArena receive several bonus publications, at no extra cost, including:

– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow. This book should transform your views and your investment strategies. Can you afford not to read it?

Subscriptions cost $380 for twelve months or $210 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible):

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