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The Bear Market Diaries – Episode 8

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 | Apr 20 2016


In This Week's Weekly Insights:

– The Bear Market Diaries – Episode 8
– Three Week Hiatus
– The Other ASIC Investigation
– Coppo Is Back
– NigelNoMates Not Enjoying A Holiday
– Catching Up On The Past
– Rudi On Tour
– Nothing Ever Changes, Or Does It?
– Rudi On TV

The Bear Market Diaries – Episode 8

By Rudi Filapek-Vandyck, Editor FNArena

"Eat, drink and be merry, for tomorrow we die"
[Kurt Vonnegut, American novelist]

The Big Elephant in the room of global equity markets is, of course, the usual seasonal pattern that has firmly characterised five out of six calendar years post 2009.

With the exception of 2014, in all other years global indices enjoyed one last hurrah leading into late April/early May only to subsequently take a dive to lower levels.

Not exactly a promising outlook at a time when most equity markets year-to-date have managed but the smallest of gains, or are still underwater, like the ASX200 in Australia.

Of course, these seasonal patterns are not written in stone. There's never a God-given guarantee that equity markets will behave in similar fashion every single year. It wasn't the case in 2014, for example, and neither did the seasonal pattern show up in the bear market years of 2008 and 2009.

A 2014 Replay?

There might be an important message in these notable exceptions: the lead-in to the usual buoyant opening months for the calendar year in each case had been negatively impacted and subdued, which then translated into continued positive performance when the seasonal pattern implied share market weakness should follow.

In simple terms: share prices didn't sell off post April because they hadn't rallied in the lead-up. This should be encouraging news for investors because the situation in 2016 looks eerily similar. A lot of damage has been done to trends, trend lines and investor confidence in the opening six weeks of the year. Even after an unexpectedly robust recovery since then, share market price charts merely show sideways movement instead of the usual Mount Optimism (remember last year?).

If we can draw confidence from the experiences in 2014 and both bear market years, then investors should not fear another abyss, but prepare for ongoing improvement instead. This outlook is currently supported by technical analysts reporting the technical set-up for many markets around the world has been improving in April, fueling further optimism.

Short Term Trend Fuels Optimism

The public debate about whether this really still is a bear market, or a new bull market, or simply continuation of the old bull has notably disappeared from the public arena. When share prices recover and technical signals improve, one does not ask prickly questions. Such seems to be the attitude of market participants and commentators worldwide.

Now enter the Biggest Elephant in the room: globally, fund managers are positioned as if this were a repeat exercise of the bear market periods 2000-2003 and 2008-2009, carrying more bonds and cash than usual, with more exposure to safer havens among equities.

This could turn into a career-defining dilemma and potentially the reason as to why the usual seasonal sell-off has little chance of developing this time. Read, for example, this analysis of the latest fund managers survey by BoAML:

Plenty Of Worries To Ignore

It shouldn't surprise, the caution shown by the world's fund managers coincides with a notable increase in macro-concerns among forecasters and economists worldwide.

Not a day goes by or the FNArena mailbox receives reports titled "The Year of Living Dangerously" (Macquarie) or "Risks to China Outlook Intensify" (AllianceBernstein).

These concerns are real, tangible and believable. But they also fall in the same category as the repeated warnings by the IMF managing director, Christine Lagarde.

These warnings talk a lot about what might go wrong tomorrow. But unless there's any concrete sign of impact today, financial markets are mostly happy to shrug and continue their ignorance of longer dated issues.

We've all read (or watched) Michael Lewis' The Big Short to know how difficult it is to establish that what cannot go on indefinitely, won't – but timing is the most difficult element to add to any form of analysis.

In the absence of any indisputable signs of financial distress showing up in the short term, every investor will be faced with the same dilemma: succumb to the momentum short term, or stay focused on the threats and dangers that linger? Many have by now adopted a shorter-term, trading-oriented style of share market participation.

They might heed the old adage: stay on the dance floor for as long as the music continues playing, but don't venture off too far from the exit.

Market Conniptions Show Future Risks

Global equities have in the past twelve months twice lost their nerve. Once because of a sudden, unexplained devaluation in the Chinese renminbi/yuan and once when lower oil and a stronger US dollar created a self-reinforcing, downward trending maelstrom that proved too powerful for weak constituents and vulnerable sentiment.

Both are, in my view, the two most important warning signals for investors from here onwards. Unfortunately, it is impossible to prepare for the first threat; a significant devaluation in the Chinese currency.

Many are convinced it is but a matter of time. The Asian research team at CLSA is so convinced about its thesis, it released nearly 200 pages of research on this subject last Friday, together with a media presentation in Hong Kong.

I'll keep it brief as this is likely to remain a longer dated Sword of Damocles, exact timing unknown, but when it occurs it will cause carnage all around. I am thinking 1987 Black Monday-style. It is very difficult, if not plain impossible to immunise one's investment portfolio from such a devastating potential threat.

Last year's instant panic after what was still a rather small adjustment in the RMB/CNY should give everyone the heebies jeebies, however, for it revealed the potential consequences on the day Chinese authorities might leave price discovery to the markets.

CLSA, and others, are convinced this is but a matter of time. We'll explore this matter with more depth on another occasion.

The second market signal has turned significantly more supportive since Janet Yellen & Co backtracked from their intentions to hike the US cash rate four times in 2016; it's the global reserve currency, the US dollar.

What we've learned from the first quarter is the world and financial markets cannot cope with a strengthening US dollar. So far so good as the greenback is now weaker and risk assets significantly stronger in response.

But surely I am not the only one who sees the Catch-22 situation central banks have created through extreme stimulus? If the Federal Reserve doesn't hike, central banks in Europe, in Japan and in China will be forced to implement more stimulus. In a world of low growth, low inflation, low investment and extreme low interest rates, relative values of regional currencies have become the key determining factor whether economies can recover from downward trending, sub-par growth.

But, and locally the RBA already confirmed this, we cannot all have weaker currencies to help our economies out of the quagmire.

The End Might Be Grand And Bold

It is possible that by some miraculous, Divine Intervention, financial markets will be able to find the perfect equilibrium between the major currencies of the world, without disturbing the economic healing process and resurrection in the four largest economic regions, but what are the odds, really?

It is far more likely the world's central bankers will become increasingly frustrated with each other, and with financial markets. Macquarie's The Year of Living Dangerously suggests investors only have but one certainty and that is volatility is to rise and fall, over and again, with the year to date seen as exemplary of what the future likely holds.

Ultimately, the analysts predict, the public sector (read: governments) will have to join in the action and this is likely to occur through aggressive, bold and far-reaching policies and initiatives. Macquarie is effectively anticipating active nationalisation of capital markets and of gross capital formation. It will be yet another act of common desperation, but it will be welcomed by financial markets, at least at first.

What Macquarie is suggesting is that governments will overtake the role of private enterprise and central bankers, through yet more extreme stimulus, will provide the financing.

But first the current trend of ever diminishing returns, for economies and for financial markets, shall persist and as that trend continues, the seeds are planted for extreme government intervention. Japan will go first and it will likely do so later this year (2016). By 2017/18, predicts Macquarie, what started off as a "fringe idea" will become widely accepted policy, just as happened with Quantitative Easing and negative interest rates in years past.

Time to re-read the opening quote from Kurt Vonnegut on top of today's story. These are genuinely extraordinary times.The future truly is going to surprise many.

Three Week Hiatus

It's your Editor's 50th birthday this week. I am grabbing the opportunity to reminisce and celebrate with friends and acquaintances on Friday and to subsequently fly to Bali for yet more reminiscing with friends from Europe, many of whom are also celebrating their half-a-century milestone being reached this calendar year.

After my return in early May, a flight to Perth awaits where I shall present my latest thoughts and insights to members of Australian Shareholders' Association (ASA) and Australian Investors' Association (AIA). As a result, Weekly Insights will take a three week break and resume in the week starting May 16th.

The Other ASIC Investigation

It appears Labor's push for a Royal Commission into the banks' misbehaving in recent years might push the Turnbull government into putting the Australian Securities and Investments Commission (ASIC) on the case of publicly naming and shaming the bad apples in the banking sector and pulling the sector overall back in line with standard decent moral guidelines.

Banks can always count on their fair share of the whip when Australian elections loom (not that they don't deserve it, given recent revelations).

Against the background of it all, amidst hardly any attention from anyone, ASIC already is reviewing Finance & Insurance (F&I) practices in Australia's automotive sector. Depending on what will/can be uncovered, and ASIC's response and findings, this review can potentially re-shape the industry.

No surprise thus, share prices for car dealership owners AP Eagers ((APE)) and Automotive Holdings ((AHG)) are well off their highs this year and reluctant in fully participating in the newfound strength that has bumped up the Australian share market since mid-February.

Analysts at Morgan Stanley tend to agree with the market's caution, arguing it is difficult to gauge any potential impact from the ASIC review, but short term earnings impact can be "material", depending on what exactly might change for the industry. Morgan Stanley is willing to speculate proposed changes might include capping the interest rate charged to customers while also a rebasing of dealer commissions generated.

The silver lining from the review is that any such changes might make life a lot tougher for smaller players in the sector and this might ultimately play in the hands of both AP Eagers and Automotive Holdings through further sector consolidation. But first there are potential negatives to deal with and investors are not willing to take any positive bets just yet judging by the lacklustre share price performances of late.

It is as yet not known when ASIC might conclude its review.

Coppo Is Back

Before they elevated him into the Stockbroker's Hall of Fame, Richard "Coppo" Coppleson produced Australia's most popular end-of-day stockmarket report while on the paylist for Goldman Sachs, but then he retired, leaving a gap that has not been filled.

He's back now thanks to the entrepreneurial spirit of Bell Potter who has trusted "Coppo" with doing exactly what he was doing at Goldman Sachs, only this time there will be a subscription fee attached to accessing the aptly rebranded The Coppo Report.

Since a week or so the Report has been available at no charge, but we understand this is about to change. Which probably means the stream of emails at the end of each trading day sharing the Report with colleagues, friends and contacts across the financial industry in Australia should soon come to an abrupt halt. In a previous life, Charlie Aitken once over-estimated his appeal behind a paid subscription. It's going to be interesting to see whether Coppo can elicit more subscription revenues and whether it's still going to be worth doing it for Bell Potter if it doesn't (The Coppo Report remains free of charge for institutional clients).

We wish him all the luck. Having witnessed local online publishing for share market enthusiasts morph from boom into bust and then in a mere moribund state, leaving many behind with shattered dreams and hollow aspirations, starting yet another initiative with a famous author like Coppo should significantly lift the chances for survival/success, but there are no guarantees in this cut throat business. See Charlie Aitken and so many others in years past (not to mention News Ltd's experience with Eureka Report, now sold).

The first two weeks or so of Coppo's comeback have seen him dig into Australian banks and dividends, the local housing market, Chinese growth and investor worries, the RBA's track record, US companies and lack of profits and uncertainty around infant formula and vitamin exports into China. All in the same old familiar data-driven with strong opinion attached style as if nothing has changed between his retirement from Goldman Sachs and the current resurrection at Bell Potter.

Maybe the most remarkable change has been that, from memory, Coppo's opinions were mostly steadfast bullish when at Goldman Sachs, including calling the bottom way too early in 2008, while his reports since the come back have been far more sceptical, cautious, even a bit bearish at times due to scepsis around US corporate profits.

Surely, that must be a sign o' the times too?

#NigelNoMates Not Enjoying A Holiday

Nigel remains sceptical whether central bank actions in March have now fundamentally re-shaped the outlook for the global economy and for financial assets.

Catching Up On The Past

In case you missed some of the preceding stories, here's your chance to catch up (in reverse order):

Rudi's View: 2016 is The Year Of Conviction

Rudi's View: Who's Afraid Of The Big Bad Bear?

The Bear Market Diaries – Episode 1

The Bear Market Diaries – Episode 2

The Bear Market Diaries – Episode 3

The Bear Market Diaries – Episode 4

The Bear Market Diaries – Episode 5

The Bear Market Diaries – Episode 6

The Bear Market Diaries – Episode 7

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.

– To a Selected Group of FNArena Subscribers, "An Evening With Rudi", in Sydney, 26 May (sold out)

– To Melbourne chapter of the Australian Shareholders' Association (ASA) on 6 July

– To a Selected Group of FNArena Subscribers, "An Evening With Rudi", in Melbourne, 6 July (sold out)

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

– To Chatswood chapter of Australian Investors' Association (AIA) on September 7, 7pm, Chatswood RSL

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 hosting Your Money, Your Call Equities on Sky Business on Wednesday, 8-9.30pm
– I will be appearing as guest on Sky Business, 12.30-2.30pm, on Thursday
– Later on Thursday, I will re-appear as guest on Switzer TV, between 7-8pm
– On Friday, around 11.05am, on Sky Business, I shall make a brief appearance through Skype-link to discuss broker ratings for less than ten minutes

(This story was written on Monday 18 April 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):

FNArena has reformatted its monthly price tracker file for All-Weather Performers. Paying subscribers can request a copy at 

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