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 (www.nautilus-cap.com), 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 info@fnarena.com

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: http://www.amazon.com/Change-Investing-Low-Growth-World-ebook/dp/B0196NL3KW/ref=sr_1_1?s=digital-text&ie=UTF8&qid=1454908593&sr=1-1&keywords=change.investing+in+a+low+growth+world

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: info@fnarena.com or via Editor Direct on the website).

****

BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

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): https://www.fnarena.com/index2.cfm?type=dsp_signup

In this week's Weekly Insights:

- The Bear Market Diaries - Episode 1
- NigelNoMates - The Live TV Debut
- Dividend Cutters Facing ETF Back Lash
- Corporate Profits Remain The Beez Neez
- Positive Surprise From RCG Corp?
- Rudi On Tour
- Nothing Ever Changes, Or Does It?
- Rudi On TV

The Bear Market Diaries - Episode 1

By Rudi Filapek-Vandyck, Editor FNArena

There are still those who do not believe that this is a bear market; they are fools of course
[Dennis Gartman]

If you point your personal feelers in the right direction, you can feel how much angst and discomfort the opening weeks of 2016 have caused.

I am not talking about many an investor whose portfolio is looking at double digit losses year-to-date, not to mention the losses endured since April 27 last year, and who no doubt is watching financial markets every day with more than the usual trepidation.

I am talking about the large army of stockbrokers, financial planners, accountants and other financial services providers who have until now ignored what is happening in financial markets, taken no action whatsoever to prepare their clients' portfolios and nest egg savings for tougher times ahead, or who've largely stuck to the mantra that timing the market is impossible and long-term everything shall be alright, as it has always been.

Good luck with that.

Hotel California & The Big Short

In recent weeks I had visions of late 2007/early 2008 when talking heads appeared on TV to tell investors not to panic. Subprime, after all, was but a small problem in a very large financial sector inside the world's largest economy. Why would Australian banks ever be affected? Of course, we all know what happened next.

I am not reminiscing to make a few extra enemies inside the local finance sector and neither am I predicting the world is guaranteed in the process of repeating the 2008 experience, but what investors should have learned from that painful and frustrating experience throughout 2008 is the financial sector essentially operates like a live version of Hotel California: very eager to get your money in the market, but never there to advise you to get out when the proverbial hits the fan.

The same can be said of most newsletters and mainstream media. If the media had as good a memory for financial experts as they have for politicians, and publish flash backs today from back in 2007/2008, you'd find many looking for cover with blood red cheeks and a hint of mea culpa/shame in their eyes.

I went to the movies and saw The Big Short. As per always, the book was multiple times better even though the movie is a commendable effort in making the incomprehensible accessible to a broad, non-finance audience. Even so, the movie is still too high brow for Joe Average and his wife. Better not to expect blockbuster audience revenues.

The key take-away from The Big Short, in my view, is that although fraud and misrepresentation of mortgage loans and related derivatives was widespread, and went on for quite a while, literally nobody in mainstream media, economics or financial markets commentary had been paying attention. Nobody but a few (hence the book and the movie). Note this was happening inside the world's largest and most accessible economy & financial sector. What are the chances something similar is happening right now, say in opaque China, and somehow things will be different?

Good luck with that.

Samuel Beckett Is Smiling

In my younger years I was a fan of Samuel Beckett and contemporary artistic soul mate Eugene Ionesco. You know, Waiting For Godot and similar absurd theatre plays.

Here is, in my own absurd manner, an ode to Samuel Beckett, based upon the experiences of 2000-2003, 2008-2009 and 2016.

Imagine a stage with 25 actors, all in suit and with brief case, representing the shiny end of the financial services industry. Suddenly, out of nowhere, a dead body drops on stage. Blood spatters everywhere. The audience shrieks. Yet, all 25 actors raise their heads to the ceiling, pretending nothing just happened.

[While looking at the ceiling] Body? What body? There's no body? I certainly cannot see any?

Applause for a predictable, but impeccable performance, with conviction.

Technicals Versus Fundamentals

One local market commentator opined back in 2009, when things turn really sour, as they did in 2008, investors are better off ignoring fundamentals (and fundamentally based opinions) and take guidance from price action and technical analysis instead. Think about this for a while. All most commentators do is refer back to economic data. But economic data in early 2008 were nowhere nearly as bad as they were six months later. The situation was similar in 2000. The same is happening today.

Again, I am not predicting a repeat of those two dreadful bear markets, but what I am saying is that economic data (mostly backward looking and available at a delay) are not necessarily the place to look for answers at market turning points.

When financial markets, one after the other, are sagging through all kinds of longer term and nearer term technical support levels, one has to pay attention and start managing risk in a more rigid and stringent manner. BHP Billiton ((BHP)) shares have fallen more than 50% over the past twelve months alone. I know it's a bit late now, but have you ever thought about how long it's going to take to just get back to square again if you've held on all that time?

Good luck with that.

The good news is: many a technical analyst is anticipating a relief rally of some sorts.

Similar to projections and opinions based upon economic and corporate fundamentals, there's equally a plethora in different views from technical analysts and chartists. However, it appears there's some kind of consensus in that the ASX200 is widely projected to eventually fall inside the 4600-4200 region, with a potential overshoot to 4000. These projections don't have to be correct, but it probably signals that without a circuit breaker, and amidst a general downwards trend, the bias remains to the downside.

A few hundred points extra to the downside doesn't seem like much, but consider the following: as at Friday, the ASX200 was down -10% year-to-date. Over that same short period, BHP Billiton shares are down -15%. Lend Lease ((LLC)) shares are down -19%. Challenger Financial ((CGF)) shares are down -24%. Henderson Group ((HGG)) shares are down -27%.

How confident are you that a few more percentages to the downside, or worse, is not going to inflict some serious damage to your portfolio and its future returns?

Hope Is Not A Strategy

If you haven't taken any action yet, it's probably a fair statement to make you have been slow in responding to financial markets turmoil. It's never too late to make amendments to protect your wealth. Talk to your financial advisor or seek advice about your options to limit the chances you might end up as a sour victim in case technical analysts are correct and all those freewheeling talking heads are not.

My favourite slogan in the present context is: manage risk.

During bear market phases, Price-Earnings (PE) ratios contract and investors' focus turns to the downside, meaning overall risks are firmly to the downside. Try to minimise your exposure to potential disappointments. Programmed Maintenance ((PRG)) issued a profit warning. The shares are down -58% year-to-date. OzForex ((OZL)) had a suitor disappearing without a formal offer to shareholders. The shares are down -43% since Dec 31. Slater & Gordon ((SGH)) had a terrible year in 2015, but its board still cannot appease investor angst about its financial accounts and cash flows. Slater & Gordon shares have fallen a further -26% in 2016.

The FNArena/Vested All-Weather Model Portfolio has reduced exposure to stocks we believed contained more downside risks than what we are comfortable with. For example, Macquarie Group ((MQG)) was one of the best performers in the portfolio last year. We sold all shares in January. To date, Macquarie shares are down -29.50%. We are glad we escaped the bulk of those losses. Instead we concentrated on conviction positions including CSL ((CSL)), Transurban ((TCL)) and Orora ((ORA)). Sure, some of our choices have not performed as anticipated. InvoCare ((IVC)) springs to mind, as well as REA Group ((REA)).

This is par for the course during risk-off periods. In general terms, the portfolio has significantly outperformed the broader market. Further, to actively manage risks, we have significantly reduced exposure to the share market (in other words: we raised cash).

It goes without saying, protection/insurance is not universal and dependent on specific portfolios, strategies, compositions and targets. However, anything is better than simply keeping fingers crossed and hoping for the best.

Get rid of your duds. Bear markets are unforgiving (you might want to wait until the next rally to do so).

What's The Real Deal?

Ever since January started off on a weak note, market commentators have been mostly scrambling to find a fitting explanation as to why risk appetite has deserted global equities. Last week, I explained how the fall-out from extremely cheap oil prices has been one major contributor (again one factor largely missed and misrepresented by most commentators). Read my story here:

https://www.fnarena.com/index4.cfm?type=dsp_news_weekly&wid=1981  (Oilmageddon, The Spiral That Hurts)

Macquarie analysts pointed out loss of confidence in central bank policies is another major contributor. I agree, but leave this subject for another time.

In a broad, uber-macro spectrum, I believe everything harks back to one of the main themes in the book I wrote and published last year (see further below): global growth continues to progress at a steadily declining pace. This remains a major problem for central banks looking to spur on inflation and economic activity. Add over-supply post the biggest investment bubble in commodities the world has ever witnessed, plus a world drowning in debt, and it's not difficult to see why investor angst has peaked in 2016. In line with the findings in my book, I continue to believe all roads lead to All-Weather performers and to structural growth stories, no matter how cheap resources stocks get.

How are we going to get out of this mess?

Danske Bank analysts are suggesting what is needed is globally coordinated action by governments and central banks. I think they might be correct, but it also might require a lot more investor patience before we might see such market saving coordination. There's a G20 meeting later this month. One can but hope...

Dennis Gartman

Ok, you've seen the quote at the beginning of this story. You've read my thoughts and observations up until this point. What more can I possibly add that isn't but noise and humbug?

How about the latest commentary from one of the longest active and most experienced traders in the market today?

Here's what Dennis Gartman (The Gartman Letter) had to say on Friday:

"There are still those who do not believe that this is a bear market; they are fools of course.

Why are stocks so weak? They are weak because the global investor class is losing confidence in the political and monetary leadership it sees everywhere and anywhere. They are weak because money growth in the US as measured by the adjusted monetary base is actually falling, not rising, despite arguments that the monetary authorities here have been too monetarily easy.

They are falling because the likes of Mr. Draghi have made the statement that he would do what is necessary to sponsor an inflation of at least 2% and instead deflation seems everywhere to reign. They are falling because earnings are weakening and the investor class knows that in the past much of the earnings growth has been due to cuts in staff and deferred capital expenditures. And now they are falling of their own weight as the margin clerks of the world are united in their urge to raise liquidity at every turn.

Are share prices over-sold? Of course they are. In bear markets, prices get oversold many, many times and more often than not become even more oversold. Too, in bear markets, the rallies are violent and swift, taking the markets from over-sold to over-bought in a blink of an investment eye."

Stop The Silly Rule

I cannot believe the number of times seemingly intelligent people keep on parroting each other about a "technical bear market" being in place once prices have declined by 20%. I intend to amass some concrete examples in the weeks ahead, just to prove my point this is an utterly useless rule/definition, no matter how many times it is being repeated.

Similarly, think about iron ore prices now having surged 20% from their lows. Iron ore now in a bull market? Really? Seriously?

Good luck with that.

Share Market Observations

Looking at the price action from the past seven weeks, there are some easy but oh so important observations to be made:

- investors have fallen in love with gold stocks in the Australian share market
- yield remains popular through infrastructure stocks including Sydney Airport ((SYD)) and Transurban ((TCL)), with A-REITs increasingly in focus as well (see Westfield ((WFD)), for example)
- traditional defensives are firmly back in favour, see Wesfarmers ((WES)), AGL Energy ((AGL)), yes even Metcash ((MTS))
- Fair is fair, a select group of energy stocks and miners has proved remarkably resilient year-to-date, including South32 ((S32), Iluka Resources ((ILU)) and Oil Search ((OSH))
- Some of last year's success stories have been de-rated, such as infant formula & vitamins producers, IT services and outdoor media companies (the growth stories that made them popular last year hasn't changed, however)
- Dividend payers in general have outperformed non-dividend payers
- Wealth managers are amongst the heaviest de-rated stocks in the share market
- There simply is no allowance for disappointment, nor for obvious risk. Whitehaven Coal ((WHC)) shares are down -46% year-to-date. Ten Network ((TEN)) is down -45.8%. Select Harvests ((SHV)) has lost -45%. Mesoblast ((MSB)) is down -35%.

Some Final Advice

It is at times like these, investors look back at some of the good old fashioned Wall Street classics, with lots of sound market advice to digest once more. One of the oft quoted from books these days is "Reminiscences of a Stock Operator" by Edwin Lefevre about the life of Jesse Livermore, according to some the greatest share market speculator in Wall Street history. I read the book a while ago and can absolutely recommend it. One of the best lines in the book (but a quote I cannot find today) is that it's most difficult to sit tight and undertake no action at all. This, I believe, is the most difficult thing to do in particular in a bear market when one is always inclined to jump in too early.

My best advice to investors today is: patience and cash are your most valuable assets. Use both sparingly and wisely.

Ok, one more quote from "Reminiscences of a Stock Operator", to finish off this week's story on a high note:

"There is only one side of the market and it is not the bull side or the bear side, but the right side."

See also: Who's Afraid Of The Big Bad Bear: https://www.fnarena.com/index4.cfm?type=dsp_newsitem&n=0DDC5EBD-FEC6-BFEC-C06D9595253DE826

NigelNoMates - The Live TV Debut

In case you missed it, #NigelNoMates made his live TV debut last week. Keep an eye out for this week's Rudi On Switzer story/video if you'd like to see the event with your own eyes.
 

Dividend Cutters Facing ETF Back Lash

There's undeniably a role for Exchange Traded Funds (ETFs) in modern investment times, but I cannot but notice how little (if any) intelligence is often on display when looking through the nitty gritty details for underlying baskets of stocks. My strong suspicion is in many cases someone opened an excel sheet with basic, backward looking data and created a selection after applying one or two filters.

For Australian investors this means there might be a delayed impact for share prices of former high dividend yielding stocks that will be reducing their dividend this month. Sustainable or not, stocks that were once upon a time high yielders are likely to be part of the basket of stocks underlying dividend ETFs and if/when they are removed, automatic selling orders by the operators of such ETFs will ensue. At what point exactly remains at the discretion of ETF operators, but there's a strong argument to be made in case of mid & small cap stocks that the execution of such ETF amendments should now be regarded highly market sensitive information.

[Note: I wrote about this last year when the share price of NRW Holdings ((NWH)) was temporarily subjected to similar ETF related shenanigans].

To prove my point, analysts at Goldman Sachs track the 12 largest dividend ETFs that invest in Asia. They have a combined $9.2bn under management. It is Goldman Sachs' assessment that no less than $4.2bn -46% of total funds- is held in ASX stocks. Given the emphasis on historical yield/data, exposures almost certainly include stocks such Woodside Petroleum ((WPL)), BHP Billiton ((BHP)), Rio Tinto ((RIO)), Monadelphous ((MND)), Mineral Resources ((MIN)), WorleyParsons ((WOR)), et cetera.

The message for investors holding on to many of these battered & bruised, beaten-down resources stocks is thus: once reality hits these over-inflated historical yields, there might be more selling from the passive ETF managers coming. Exact execution timing unknown.

Corporate Profits Remain The Beez Kneez

Amidst all talk (noise?) about recession yes/no, negative interest rates and further central bank stimulus yes/no, it's important to remember for investors in equities that ultimately much of the future outlook and performance comes down to how profitable listed companies can remain amidst sluggish global growth and intensifying competition and scrutiny from authorities.

Zooming in on this matter globally, recently one of the interesting reports was released by analysts at Goldman Sachs. They put together a Bull & Bear case on the matter, ultimately concluding:

"Over the next 2-3 years, we expect the Bear arguments to overpower the Bull arguments and weigh on high-versus-history margins as input cost benefits are competed away, room for further cost cutting shrinks, the headwinds of greater competition (from asset-light business models and EM competitors) gather momentum, interest costs bottom out and social/regulatory pressures become a more sizable part of P/L statements."

Goldman Sachs advises investors should focus on consolidating industries as consolidation decreases competition and thus should support margin expansion in the absence of other negative influences (such as government intervention, for example). Other observations made include new technologies helping create new competition, Chinese companies facing a terrible outlook (marred by rising costs) and years of cost cutting having today made many companies too lean.

Positive Surprise From RCG Corp?

Footware retailer RCG Corp ((RCG)) is one of many small cap stocks that has underperformed the broader market parallel to the ASX200 descending below 4800 this month. However. analysts at Moelis believe the market is getting the wrong idea with the company likely to deliver an upside surprise when it releases interim financials on February 24.

Moelis draws its conclusions from USA company Skechers Inc which reported on Feb 10, while providing positive comments about strong growth momentum in Australian stores. RCG holds the domestic license for Skechers which just happens to be one of its major profit contributors. In other words: an upside surprise from Skechers is more than likely to translate into an upside surprise for RCG as a group.

Investors looking for a bargain post share market damage should look elsewhere as RCG shares are trading around a multiple of 20x projected FY16 earnings per share. The latter is cum upside surprise if we can take Moelis' confidence at face value. Regardless. the analysts believe RCG's premium is more than warranted given track record and prospective above-market average growth potential.

Moelis' projected EPS growth numbers are above market consensus this year, but fall in line in FY17 and beyond (see also Stock Analysis on the website); +49.8% in FY16, +23.7% in FY17 and +21.4% in FY18.

On another, vaguely related matter, I observe how the share market had become overly cautious on Amcor ((AMC)) with the share price surging more than 10% after the release of interim financials on Monday. Remember what I wrote in my opening story for the year: 2016 will be the year of Conviction. Amcor remains firmly held in the FNArena/Vested All-Weather Model Portfolio, alongside sector peers Orora ((ORA)) and Pact Group ((PGH)).

To re-read "2016 Is The Year Of Conviction": https://www.fnarena.com/index4.cfm?type=dsp_newsitem&n=43D43D1D-0384-7DE8-8E86FC084338F320

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: http://www.amazon.com/Change-Investing-Low-Growth-World-ebook/dp/B0196NL3KW/ref=sr_1_1?s=digital-text&ie=UTF8&qid=1454908593&sr=1-1&keywords=change.investing+in+a+low+growth+world

See also further below.

Rudi On TV

Due to peak activity in local reporting season, no TV appearances this week.

(This story was written on Monday 15 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: info@fnarena.com or via Editor Direct on the website).

****

BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

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): https://www.fnarena.com/index2.cfm?type=dsp_signup

In this week's Weekly Insights:

- The January Effect: Omen Or Nonsense?
- FNArena's Reporting Season Coverage
- Change. Investing In A Low Growth World
- Nigel NoMates #selfie
- All-Weather Performers Performing
- Rudi On Tour
- Rudi On TV

The January Effect: Omen Or Nonsense?

I have a very simplistic, but oh so logical explanation as to why investors believe there's a predictive relationship between share market performance in January and for the rest of the year.

Most calendar years take off on a positive note. Most calendar years generate a positive return. History shows a few examples of shares starting off on a negative note with returns never recovering over the subsequent twelve months.

Tadaa! It really doesn't get much more complicated than that, in my view. For the same reason commentators are every year talking about the danger that lurks in October when more often than not equities take a turn for the better in that month.

We all still remember 2009, when the relentless bear market continued its downtrend until March 6. That was one year in which a bad January proved in complete contrast to what happened after that first week of March. History also shows opposite scenarios. In 1974 shares gained more than 10% in the first month, but by late December total returns were close to double digits in the negative. That's the kind of stuff that makes a bear market.

This year January has clocked off with losses of some 6%, triggering public debate about whether there is, or there isn't, a genuine January effect.

Luckily we have Macquarie analysts going through the numbers from the past. As expected, if there were a correlation between January and the rest of the year, it would be an inconclusive relationship. Shares can and do turn around at any point during any calendar year, depending on what impacts on the underlying direction.

However, Macquarie's research also suggests January seldom takes off with losses greater than 5%. Whenever it does, total return for the calendar year as a whole remains below average. Note: it doesn't mean the return will be negative. Even the exceptional 2009, marking the end of probably the worst bear market in modern history, merely turned out a rather "average" year by December 31. It felt like a fantastic year, of course, because February and early March had pushed indices to ever lower levels, thus the subsequent recovery and rallies felt like a rocket taking off from Cape Canaveral.

In conclusion: Macquarie's data collation suggests spurious predictive powers of share market performances in January, but when the year opens on a decisive negative note, as it did in 2016, history suggests relatively benign returns are likely for the full year. Ignore at your own peril.

About Macquarie's chart: the grey bars show the January performance for the year. The corresponding bullet point shows the return for the full calendar year. All negative January starts are on the left.

FNArena's Reporting Season Coverage

Later this week FNArena will publish a general preview on what investors should expect from the February reporting season. In the meantime, colleague Greg is making preparations for our daily excel sheet updates, as has become usual practice during local reporting periods.

Stay tuned, we are gearing up to serve you the best insights on what is happening inside corporate Australia, and its potential impact on the outlook for Australian equities.

Those readers/subscribers who are as yet not familiar with FNArena's efforts in the past can use the following two stories in relation to last August's season as reference point:

- FNArena Reporting Season Monitor August 2015
- Rudi's View: Lessons From The August 2015 Reporting Season

Change. Investing In A Low Growth World

My book "Change. Investing in a low growth world" has been well-received since publication in early December last year. Below are some of the feedback messages.

Paid subscribers get a free copy. Others can purchase their copy through Amazon or most other online distribution platforms for eBooks.

****

Hi Rudi,

I just wanted you to know how much I enjoyed reading your ebook over the Christmas break.

You are spot on and the start of 2016 has re-iterated a lot of the key themes you wrote about.

Wishing you the best in 2016 and I look forward to all the great content and interviews you put out there

Regards,

Lucas

****

Rudi,

your book was fantastic, thank you so much for your insight.

I read it over Xmas and enjoyed it so much I may read it again.

All the best for 2016!!!

Ivo

****

Those who know and enjoy Rudi's frequent appearances on Australia's Sky Business channel will expect a good read here - and they won't be disappointed!

Kim

Nigel NoMates #selfie

Nigel is one of those acquaintances who come and go in an unpredictable fashion. I am sure we all have at least a few of such contacts in our social lives.

Nigel is quite a nice guy, but you have to get to know him first. He usually spends a lot of time on his own, thinking nobody really likes him. Because he's a bear. I think he's right.

I also think Nigel is here to stay a little longer. Expect more updates on social media, on TV, or here in my written updates.

See also my story from last week: Who's Afraid Of The Big Bad Bear?

All-Weather Performers Performing

It doesn't take a genius to figure out that when selling orders become a flood, and indiscriminate selling is the order of the day, there are but few places to hide in the share market. But look through the rubble of the January sell-off and one finds CSL ((CSL)) shares are up for the year (yes, up!), and so are shares in Domino's Pizza ((DMP)), and in Hansen Technologies ((HSN)), and in Amcor ((AMC)), to name but a few.

No wonder thus, the FNArena/Vested All-Weather Model Portfolio equally stood its ground when few others did. The Model Portfolio extended its market outperformance from 2015 into the new year, but couldn't avoid suffering small losses. At the end of January the month's performance stood at -2.5%. From its early beginnings in December 2014, the portfolio has generated a positive return since inception and nobody who joined over the past 14 months is under water.

I reckon the chart below is what every investor/manager of funds would like to see in terms of market outperformance:



As evidence of a complete lack of complacency at our end, we have raised cash levels significantly and concentrated the portfolio's composition around strong thematics with solid, long term growth trajectories and growing dividends built upon reliable, expanding cash flows. We find ourselves in good company too. According to data collected by BA-Merrill Lynch, the world in general has shifted a lot more into cash throughout the second half of last year, with the trend extending in the opening weeks of 2016.

The Australian Investors' Sentiment Survey for January, organised by FNArena in cooperation with Australian Investors' Association (AIA), also showed rising cash levels in investor portfolios. You can read the latest results here: https://www.fnarena.com/index2.cfm?type=dsp_newsitem&n=D9348334-BECE-C7DA-CB9C99D94F144F87

Equally eye-catching was the news Australia's Future Fund, considered one of the best investors in the world, has lifted total cash holdings in its $118bn international, multi-asset portfolio to 20%. This is the highest level since inception of Australia's sovereign wealth fund. Managers of the Future Fund reportedly see elevated risks and relatively low returns. I'd say: investors pay attention.

FNArena has updated the monthly excel sheet on All-Weather Performers until January 31st. Subscribers who would like a copy can send an email to info@fnarena.com

Rudi On Tour

- I have accepted invitations from 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.
- I have accepted an invitation to present at the Australian Investors' Association's (AIA) National Conference in August on Queensland's Gold Coast.

Rudi On TV

- on Wednesday, Sky Business, Your Money, Your Call Equities (host), 8.00-9.30pm
- on Thursday, Sky Business, Lunch Money, noon-1pm

(This story was written on Monday 1 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: info@fnarena.com or via Editor Direct on the website).

****

BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

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): https://www.fnarena.com/index2.cfm?type=dsp_signup