By Rudi Filapek-Vandyck, Editor FNArena

I like to question the ruling logic that goads the herd, or at the very least stimulate independent thinking. There's a big difference between playing market momentum as a short term trader and trying to figure out what the best asset purchases are for longer term investing.

Since 2012 I maintain my own feed of quotes, comments, responses and market insights via Twitter. Not everyone is on Twitter, which explains the requests to make my Twitter items also available through the newsfeed on the FNArena website.

Usually I combine all Tweets from the week past in one weekly story. Below are my Tweets from the week past. Enjoy.

Investors can follow me on Twitter via @filapek

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- Who's afraid of the Big Bad Bear? My view on recent past, present & likely outlook for #equities http://goo.gl/nV1zTr  #ausbiz #stocks

- AllianceBernstein expects muted share market returns over the next couple of years, advises investors should be "active" #ausbiz #investing

- CLSA initiates manufactured homes (MHE’s) sector with Outperform ratings for Gateway (GTY) & Ingenia (INA) #ausbiz #investing

- Nigel thinks nobody likes him because he's a bear #ausbiz #investing

- Morgan Stanley nominates ACX, AOG, BAP, CSV and MTR as 5 top picks among Emerging Companies for 2016 #ausbiz #investing

- IG Markets' @EvanLucas_IG positive ASX will hold 4850 level - fundamentals suggest value will overwhelm bear trade at this point #ausbiz

- Moelis initiates coverage AirXpanders (AXP) on Buy rating, $1.95 price target citing leading product, favourable market #ausbiz #investing

- G.U.D Holdings $GUD is down 9.4%. Half year profits for the company behind Sunbeam fell to $1.7m. Revenue +20% to $354m #ausbiz ^SD

- CLSA's Brian Johnson thinks ANZ Bank's discount is entirely justified due to higher risks. Underperform. Target $23.60 #ausbiz #investing

- CLSA remains non-believer in ResMed due to potential impact from the third round of US Competitive Bidding (CB3). Sell. Target $8 #ausbiz

- Morgan Stanley suggests bear and bull scenarios for BHP generate price targets of $13.20 & $36 respectively #ausbiz #investing #stocks

- NAB lowered global growth forecasts to 3.0% in 2016 & 3.3% in 2017. 2015 cut to 2.9%. Same same for the years ahead? #ausbiz #investing

- Happy Australia Day everyone! (But don't forget, it's a Bear Market out there). Be alert, stay cautious and remain nimble #ausbiz #stocks

- ANZ Bank: it appears markets are coming around to the conclusion that there are limits to what central banks can do #ausbiz #investing

- Trading tip from Morgan Stanley: Sydney Airport (SYD) shares to underperform industry over next 30 days following rally #ausbiz #investing

- Trading tip from Morgan Stanley: APA shares to outperform industry over next 60 days following recent weakness #ausbiz #investing #stocks

You can add my regular Tweets on Twitter via @filapek

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

By Rudi Filapek-Vandyck, Editor FNArena

Amongst all the silly rules and the myths that continue to exist in the financial sector, surely the silliest amongst the silliest is that a bear market starts when prices fall by 20%.

History shows financial assets do not often fall by 20% and when they do, they are more often than not closer to the bottom of the downward spiral, effectively providing those investors brave enough to buy when others are fearful with an attractive long term entry point. If we stick to equities, the last time a fall of this magnitude hit US stock markets was in 2011 when disintegration of the European Union became a potential prospect. From top to bottom, between 2nd May and 4th October, the S&P500 index lost 21.58%. Australian shares posted similar losses at that time.

Did you spot the irony?

What exactly is the logic of declaring a bear market for US equities when there's but 1.58% left to the bottom? Would it not have made a lot more sense to declare THE END of the bear market when the down trend hit the 20% mark?

Of course, there are alternative versions too. The 20% fall pre-2011 takes us back to 2008-2009 when US equities lost more than half of their value measured from the October 2007 peak. Back then, 20% was barely half-way on the way down. Why wait until you're half-way down Armageddon to declare the bull market is over?

With 100% hindsight, and I am sure everyone agrees on this, the perfect scenario would have been to identify the bear market while financial markets were near their top. It would save us all a lot of money if we can just get out near the peak and back in close to the bottom. Alas, here too the financial sector excels in weakness. If we'd paid attention to every forecast made since 2011 about the next bear market unfolding, we'd been in and out constantly and never made any real money in between.

Let's forget about all these silly rules and bad predictions and go straight to what matters most for you as an investor: share markets globally are in a bear market.

To be precise about it: global equities have been in a bear market since the middle of last calendar year. Despite what many commentators and experts would like us to believe, bear markets never follow the same script. This one has gradually sneaked up on us, creating confusion and diversions along the way, which is why it has taken this long for most experts and investors to (finally) catch up to it in the opening weeks of calendar 2016.

You don't necessarily have to take my word for it. The price chart below should speak for itself.



Australian indices took a tumble in late April last year, then -without recovering from the first tumble- sold-off again in early August, then again in the first three weeks of 2016. Volatility has picked up significantly with the ASX200 since the August sell-off effectively moving up and down inside a trading range between 4900-5350, occasionally trying to break out to the downside.

Over the period, banks (and other financials), mining stocks and energy companies, including the telecom sector have all plunged by more than 20%. Even if we simply apply the silliest of all financial rules, any objective observer would have to conclude three quarters (approximately) of the Australian share market is in a bear market, and has been for a while.

But you would not know any of this if all your money was in Blackmores ((BKL)) shares, up 500% over the past twelve months. Or take ResMed ((RMD)), up some 12.90% in January with the broader market deep in the red.

The same pattern has played out in overseas markets too. In the US a small number of stocks has kept major indices not too far away from the all-time record high, but underneath the surface a different trend has taken shape. Close to half (47%) of all large cap stocks in the US is trading at or below their share price level from two years ago. This is similar to banks & financials, miners and energy producers in Australia.

But you wouldn't know it if your focus was solely on Netflix, or Alphabet (new parent for Google), or Facebook.

One possible conclusion is thus that whatever is worrying investors today has already been impacting on the weaker sectors and the weaker stocks in the share market since mid-2015. The majority among us is only paying attention now on broad indications that, maybe, what is weighing upon the banks and the resources stocks has started to affect the rest of the market too?

So what exactly is causing all of this?

A badly timed bad combination of things. Most economies are operating below potential, and they have been for a while, irrespective of central bank policies. Now many economies (including Australia and China) are slowing down further when central banks already are employing extreme stimulus measures. At the same time, bond yields near zero have created a layer of debt, leverage and complacency inside the global corporate sector nobody's really certain or comfortable about. We know about US shale producers that are under duress to pay back their debt. But Chinese companies, including many miners and steel manufacturers, also have a lot of debt and cannot pay it back either and there's stress on various regional borrowers inside the country too. The Federal Reserve would like to move away from its emergency interest rate setting, which is strengthening the US dollar and tightening USD liquidity elsewhere around the world.

Against the background of all of this, the global corporate sector is facing its Fourth Industrial Revolution, with new technologies and new business models disrupting (and threatening) established market dynamics and business strategies. At a time when large demographic shifts are taking place, not only in developed countries, but in China too. Governments across the world are struggling with rising expenses and lower income. Their reactive policies and market interventions add a new constraint for businesses.

In Australia, the impact of all these factors has manifested itself most clearly at the top of the market, which is why the Top20 last year was the worst performer amongst all indices, followed by the Top50. This marks a major reversal from previous bear markets when investors would seek safety among the so-called Blue Chips in the market. Not all of them, of course, but during times of low risk appetite (which is essentially what makes a Bear) large companies tend to perform better than their smaller peers. Bear markets do not by definition follow an identical blueprint. This one is different from 2008-2009 and from 2000-2003.

(Last year I wrote and published a book about the many changes taking place around the world. It's available in eBook format via Amazon and most other online distribution platforms. It comes as a free bonus with a paid subscription to FNArena).

Probably the biggest misinterpretation of events has been the tumbling oil price. Most experts regard this as a positive for the global economy as cheaper oil increases the spending power of both businesses and consumers. But it takes a while before such benefit shows up in actual spending and it's not like businesses and consumers have nothing else to worry about. What had been widely ignored is the energy sector has been an active contributor to economic growth and investment in recent years and its absence now is going to be felt first.

Sovereign wealth funds of oil producing nations have reportedly been among the big sellers of global equities and other financial assets in January, creating a double whammy effect for financial markets.

Most experts and commentators turn to precedents from the past as to how best to deal with a prolonged period of sharply reduced investor risk appetite, but as said, I think this one is different. I believe many of the answers investors are looking for can be found in the price action since late April last year. Over the past nine months, CSL ((CSL)) shares have appreciated by 20.50%, while shares in Sydney Airport ((SYD)) are up 31.50%. Clearly, this Bear Market is impacting more on some shares than on others, and on some shares not at all.

What are the selection criteria?

When risk appetite flees the markets, investor focus makes a radical shift from potential return to maximum security. This means stocks with too much debt, a bad track record, a doubtful outlook or any degree of too much uncertainty become a whole lot less attractive. Instead investors will flock to stocks that offer a whole lot certainty and security. This on the basis of the sector in which they operate, the health of the balance sheet, the ability to generate cash, degree of pricing power and/or customer loyalty and management's track record during testing times.

"Valuation" as such is a much less reliable indicator as shown by the fact that BHP Billiton ((BHP)) shares have kept falling from $30 to below $15 despite many experts calling them "cheap" at just about every level during the process (continuous falling commodity prices and a major disaster in Brazil will do just that).

Looking at price action of the past nine months, it is clear investors remain willing to back strong, multi-year, solid looking uptrends including infant formula food products into Asia/China, outdoor advertising, aged care and cloud services. The main danger for companies like Bellamy's ((BAL)), Ooh!Media ((OML)) and TechnologyOne ((TNE)) seems to be more related to share prices potentially rising too fast, too high than otherwise.

Yield stocks remain in high demand, but not every yield stock is equal. Compare Sydney Airport, Transurban ((TCL)) and Goodman Group ((GMG)), all supported by strong, solid looking growth trends, with the banks and most insurers and there's no denying the difference. REITs too have significantly outperformed in recent years and sector analysts still believe most REITs in Australia remain poised for 5-10% return by year-end.

My post-GFC analysis suggests we are witnessing a golden era for All-Weather Performers(*) -stocks whose growth outlook remains independent of the economic cycle or pace of GDP growth- and the past nine months have simply further reinforced this view. Observe how ARB Corp ((ARB)), CSL, InvoCare ((IVC)) and Carsales.com ((CAR)) have held their own during the January turmoil. Hospital operators Ramsay Health Care ((RHC)) and Healthscope ((HSO)) on the other hand have lost some of their gloss because the government is looking into cutting healthcare costs and this means too many question marks at a time when investors are looking for safety and certainty.

One easy to make observation is these stocks might not be 100% immune when investor anxiety hits peak levels, but their falls are more shallow and the subsequent recoveries much quicker. Observe how Domino's Pizza ((DMP)) shares are trading in positive territory year-to-date, and the same goes for Hansen Technologies ((HSN)) and IPH Ltd ((IPH)).

Of course, one obviously different approach is to jump on board when shares appear at their lowest point, taking advantage of the fact that share prices always fall too far when fear and discomfort over-rule everything else, and simply await for better times to arrive. No doubt, this is also the approach applied by most investors with a long term horizon who've been caught out by the downtrend over the past nine months.

One oft quoted Wall Street saying states that if you want to panic, you better do it early. Arguably, investors have missed that opportunity. (This does by no means imply portfolios and strategies cannot still be amended and re-adjusted - they can. It's never too late to re-assess, re-position and re-calibrate).

Traditionally, when equities are no longer in a solid, up-trending bull market, volatility tends to spike and share prices start making big moves to the downside and to the upside. Many an investor responds by taking a shorter-term, more trading oriented approach. It goes without saying those shares that fall the deepest can rally the most when market direction turns north, as witnessed by recent price action for Slater & Gordon ((SGH)), LNG Ltd ((LNG)) and Santos ((STO)), to name a few.

Gold has seen its own bear market unfolding after surging to US$1900/oz in August of 2011. The subsequent multi-year decline has seen the price of bullion deflate by some 45%. History shows a bear market for equities tends to go hand-in-hand with a rise in investor interest for gold. Thus far price action in gold has remained fairly benign, but one can take the view gold appears to be forming some kind of a bottom. In January last year gold surged to US$1300/oz and the price today still remains below this level.

Gold producers in Australia were very much in demand in 2015 but that was driven by a weakening Aussie dollar, not by gold priced in USD which still experienced a negative year. Gold remains poised to step back into the limelight when times get genuinely tough for risk assets and investor angst and anxiety surge (even if it's only temporarily). Rising US bond yields and a stronger US dollar are the to be expected headwinds for gold.

Recent research by Morgan Stanley suggests the median bear market for US equities lasts 272 days and pushes down the index by 28%. Research by Cornerstone Macro puts the mean duration at 8 months and the median duration at 7 months. The mean decline, reports Cornerstone Macro, is 33.37% and the median decline 31.12%. Research by Credit Suisse suggests Australian equities, once down 20%, either rally by on average 24% in the following year, or they fall by another 20%.

These numbers are very much dependent on where analysts pick starting points and what exactly are their criteria for bear markets. I doubt whether many place the start of the current bear market in late April last year. Besides, historical averages are just that, averages. Apart from this, US equities are thus far only down by some 12% from last year's peak, versus 18% for Australian equities and larger falls for equities in Japan, China and in Europe. Strictly taken, according to that silly 20% rule the current down trend doesn't yet register as the next bear market.

While the magnitude of declines for the likes of BHP Billiton, Woodside Petroleum ((WPL)) and Origin Energy ((ORG)) have surprised many, valuations for the banks in Australia are now back to levels last witnessed during the 2008-2009 bear market. On a relative basis, vis-a-vis the broader market, Goldman Sachs analysts believe banks are now the cheapest in 25 years.

I use the banks as a broad indicator for investor sentiment so it's probably fair to say the sector is now priced for a prolonged period of low risk appetite, which is in my view the correct definition of a bear market. This also suggests further downside might be dependent on whether analysts forecasts can remain at present levels or whether they will be negatively impacted by future developments. There's a lot of chatter about ANZ Bank ((ANZ)) and National Australia Bank ((NAB)) potentially having to cut their dividends, so this remains very much an open question at this stage.

Needless to say, I don't think there's anything "wrong" or "right" about current market valuations for bank shares in Australia. It's simply a reflection of the risk aversion that has come to dominate general market dynamics.

How long is this period of subdued enthusiasm for all things risky going to last? Credit Suisse strategist Damien Boey has made the effort to construct a proprietary econometric model of risk appetite based on bond and commodity market pricing, which supposedly correlates reasonably well with risk appetite six months ahead. The model continues to point to negative risk appetite over the next six months, albeit at less negative levels than in the opening weeks of 2016.

We all know this model is probably not going to be 100% accurate, but it provides us with some sense of direction, far better than simply sticking one's finger in the wind and plucking an opinion out of thin air.

Whatever your own views, goals and horizon, hope is seldom the best strategy, and neither is plain ignorance. Expecting the next sustainable uptrend to commence imminently simply does not seem like the smartest option available.

Notes:

(1) I published a book in December last year, Change. Investing in a low growth world. It is available in eBook formats through Amazon and all major online distribution networks. FNArena subscribers receive their copy for free. Feedback and reviews to date have been extremely positive. The book covers pretty much all the issues that are impacting on global equities this year, plus it outlines the sectors, stocks and strategies I believe are most suited to the current macro environment.

(2) My research post-GFC has identified All-Weather Performers as the prime go to stocks for investors in the post-GFC era. Apart from a series of eBooklets, which are all freely available to paid FNArena subscribers (Make Risk Your Friend, parts 1 & 2), the research has led to the publication of an eBook (see above) and to the establishment of an All-Weather Model Portfolio in late 2014. The portfolio has significantly outperformed the broader market in its first year of existence, including the opening weeks of 2016.

(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.)  

P.S. I - All paying members at FNArena are being reminded they can set an email alert for my Rudi's View stories. Go to Portfolio and Alerts in the Cockpit and tick the box in front of 'Rudi's View'. You will receive an email alert every time a new Rudi's View story has been published on the website. 

P.S. II - If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

By Rudi Filapek-Vandyck, Editor FNArena

I like to question the ruling logic that goads the herd, or at the very least stimulate independent thinking. There's a big difference between playing market momentum as a short term trader and trying to figure out what the best asset purchases are for longer term investing.

Since 2012 I maintain my own feed of quotes, comments, responses and market insights via Twitter. Not everyone is on Twitter, which explains the requests to make my Twitter items also available through the newsfeed on the FNArena website.

Below are my Tweets since January 8. Enjoy.

Investors can follow me on Twitter via @filapek

****

- Citi sees global econ balance at risk; rising downside risks growth + central bank policy stimulus less forthcoming, less effective #ausbiz

- Macquarie sees near-term downside risk to #bank earnings but sees this risk as captured in current valuations #ausbiz #investing #stocks

- "the Fed Funds futures market is now also pricing in four rate hikes - but over the next three years" - BofA

- UBS has lowered year-end 2016 price target for ASX200 to 5,500 from 5,700 on further downgrades to #commodities prices forecasts #ausbiz

- Credit Suisse's model continues to point to negative risk appetite over next six months, albeit at less negative levels #ausbiz #investing

- Trading tip from Morgan Stanley: ANZ Bank shares to underperform the ASX200 over next 60 days on dividend and other risks #ausbiz #banks

- Ord Minnett is preparing for yet another dismal reporting season from mining services providers #neverendingstory #ausbiz #stocks

- Tadaaa... Morgan Stanley predicts ANZ Bank will cut dividend in second half of FY16 on higher than forecast loan losses #ausbiz #investing

- Bell Potter initiates coverage on Temple & Webster (TPW) with Speculative Buy rating and $1.30 price target #ausbiz #investing #stocks

- Trading tip from Morgan Stanley: Crown Resorts (CWN) to outperform the index over next 30 days on strong VIP turnover #ausbiz #stocks

- Trading tip from Morgan Stanley: Star Entertainment (SGR) shares to outperform over next 30 days on strong VIP momentum #ausbiz #stocks

- CommBank believes RBA's cash rate will remain at 2% throughout 2016 #ausbiz #investing #stocks

- China's 6.9% GDP figure masks two concerns: that growth is weaker than reported, and that much worse lies ahead

- UBS predicts a tough quarter ahead of tough results for #energy stocks in Australia, but the worst is likely yet to come #ausbiz #stocks

- Translation of today's #China data: happy to admit we're not making our targets, but allow us to save face #ausbiz #commodities #stocks

- JP Morgan concludes Rio Tinto no longer offers compelling value for long term investors. Cuts target to $36 from $60 #ausbiz #investing

- Low, lower, lowest... JP Morgan updates commodity prices forecasts and cuts price target BHP Billiton to (wait for it) $13 from $18 #ausbiz

- Morgan Stanley strategists say investors should focus on cycle agnostic growth + defensives with catalyst #ausbiz #equities #investing

- Morgan Stanley has a message for investors banking on PE re-rating in 2016: tell them they're dreaming... #ausbiz #investing #stocks

- CLSA: rising risk aversion overwhelms all other considerations. Companies with solid free cashflow + earnings visibility stand out #ausbiz

- 2015 marked a turning point in #china steel over-capacity, argues @GaveKalCapital. 2016 should see more of the same #ausbiz #investing

- CBA economists predict #China Q4 GDP growth 6.9%, right on 7% target full year, but warns things will get worse #ausbiz #commodities

- Australia's ASX 200 down 1.73% at 4808.3 in early trade. Just 10 points away from entering a technical bear market

- Woolworths $WOW said it intends to "pursue an orderly prospective sale or wind-up" of its Masters Home Improvement business #ausbiz ^SD

- #ASX 200 closed below the 4900pt level on Friday for the first time since 5 July 2013 #ausbiz ^SD

- Moelis suggests RCG Corp (RCG) is worth chasing through equities carnage. Buy. $1.75 price target #ausbiz #investing #stocks

- Deutsche Bank suggests Fed will relent post March hike if market conditions to remain shaky and volatile #ausbiz #investing #stocks

- Investors pay attention: it's a global bear market. Act accordingly #ausbiz #investing #stocks

- Must read for investors in #commodities stocks: http://www.moneyweb.co.za/moneyweb-opinion/the-depressive-super-cycle/ … #ausbiz #investing

- Question: is this a market wherein retail investors are buying shares and instos then grab opportunity to sell? #ausbiz #stocks #investing

- UBS sees another good year for A-REITs, prefers Westfield, anticipates recovery property developers #ausbiz #investing #stocks

- RBC Capital lowers Brent #crudeoil forecast to US$43/bbl (from US$56/bbl) in 2016 and to US$60/bbl (from US$67/bbl) in 2017 #ausbiz #energy

- Trading tip from Morgan Stanley: BlueScope Steel (BSL) to outperform broader market in next 60 days as guidance to surprise #ausbiz #stocks

- CBA: continue to believe sub-trend Asian GDP growth will complicate the commodity complex, but fail to derail US expansion #ausbiz #stocks

- Shock and awe? Credit Suisse continues to see the ASX200 at 6000 by year-end #ausbiz #investing #stocks

- UBS' revised #crudeoil price forecasts place BHP forecasts some 60% below market consensus. Retains Buy, $22 target #ausbiz #investing

- CLSA downgrades Greencross (GXL) to Underperform as competitive pressures are building and take-over may not eventuate #ausbiz

- Morgan Stanley upgrades BHP Billiton to Overweight, lifting forecasts and price target to $22.50, on long term investment horizon #ausbiz

- Morgan Stanley has lowered its 2016 year-end target for ASX200 to 4800 from 5150 citing lack of earnings support #ausbiz #stocks #investing

- CIBC: Fed's Beige Book yet another reason we believe that central bank won’t be able to hike rates four times this year.#ausbiz #investing

- Deutsche Bank predicts EM assets will remain under pressure, though do not expect 1980s-90s style EM crises #ausbiz #investing

- Deutsche Bank sees 10-15% upside US &Europe #equities, earnings growth + slightly higher valuations contributing to index gains #ausbiz

- Credit Suisse suggests a merger between Santos (STO) and Origin Energy (ORG) would make a lot of sense #ausbiz #investing #stocks

- CLSA further lowers commodity prices forecasts, but also upgrades Rio Tinto and Independence Group to Outperform/Buy #ausbiz #investing

- CLSA warns the risk of #equities meltdown is growing. Advises investors to sell any strength in 1Q #ausbiz #investing

- Citi: 2016 likely a year for careful and selective approach to portfolio construction, not a year for aggressive risk taking #stocks

- ANZ Bank predicts #ironore prices are likely to retest recent lows over the coming weeks #ausbiz #investing #commodities

- CLSA's Brian Johnson questions validity sell-off Macquarie (MQG) shares. Retains stock as Conviction Buy #ausbiz #investing #banks

- WilsonHTM cuts price target for 3P Learning (3PL) to $2.07 from $2.49 as CEO departs, casting doubt over growth beyond FY16 #ausbiz #stocks

- Bell Potter responds to share price weakness. Upgrades CommBank (CBA) to Buy, target $85.50 #ausbiz #banks #investing

- Macquarie stubbornly projects 17% total return for Oz #equities this year. Top picks LLC, ORA, ECX, IPL, BBN & QAN #ausbiz #investing

- CLSA sees reasonable chance Crown Resorts (CWN) might be privatised this year. Lifts rating to Outperform #ausbiz #investing

- #Oil just wants to drop -- WTI down as much as 2% and #Brent crude falling as much as 1.8% in early Asian trade

- JP Morgan is targeting ASX200 at 5500 by 2016 year-end for a return of 10% for the year, despite many challenges #ausbiz #investing

- Citi report suggests #energy stocks to make a come-back later in 2016, but first #crudeoil price to head lower in Q1 #ausbiz #equities

- Current conditions warrant a pause in Fed hikes to June, says UBS. Still not too late to sell #energy stocks #ausbiz #investing #stocks

- UBS's Art Cashin: Stay wary, alert, and very, very nimble. Have an absolutely wonderful weekend! You deserve it #ausbiz #investing

- Deutsche Bank says ABS surveys overstated jobs creation by up to 13k/month in 2015. Unemployment rate likely move sideways in 2016 #ausbiz

- Global markets are facing a crisis, investors need to be very cautious, George Soros warns http://bloom.bg/1mDTtuN

- Saudi Arabia contemplating IPO for Saudi Aramco is bearish signal for outlook #crudeoil prices, argues @CreditSuisse #ausbiz #investing

- It's a bear market, says Dennis Gartman. Advises investors should treat/trade accordingly #ausbiz #investing #equities

- GaveKal's Joyce Poon predicts emerging markets will be hurt by inevitable renminbi devaluation #commodities #ausbiz #investing

- Deutsche Bank sees better year ahead for global #equities, but admits earnings growth a challenge in Australia, most regions #ausbiz

- Deutsche Bank suggests #China has now joined global currency war and financial markets are understandably uncomfortable about it #ausbiz

You can add my regular Tweets on Twitter via @filapek

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

By Rudi Filapek-Vandyck, Editor FNArena

Global risk assets have started the new calendar year on the back foot, and that is some serious understatement. According to people who have access to many more years of data than I have at my disposal, never ever in modern history have global equity markets started a new calendar year with losses to the extent as witnessed in the first two weeks of January 2016.

Adding more bad news into the mix, the continuous sell-offs have forced asset prices through and below various multi-year trend lines and technical support levels. Even if one does not practice technical analysis, or one doesn't "believe" in it, I'd say that if history shows us one thing it is that when such events take place on a mass-scale -as has been the case these past few weeks- it is time for every type of investor to take note.

At the very least one would have to acknowledge the overall environment has changed rapidly. On my observation, selling orders have been hitting the local share market pretty much in indiscriminate form. The difference between stocks of various quality and vulnerabilities is no longer the difference between gains and losses, it's merely smaller losses versus larger losses, with only a small number of exceptions (CSL, ResMed, Medibank Private, etc).

Has there been panic? I believe not. But this can be explained either way. If we had experienced a cataclysmic sell-everything-at-all-cost event by now, maybe our confidence could be higher that we had at the very least seen an intermediary bottom?

Technical market signals have been flashing oversold signals for a while now, so a bounce is to be expected. This by no means implies all of the bad news has been accounted for. As a matter of fact, some of the more bearish chartists in the local market believe the upcoming bounce should be used to offload shares and to raise more cash. Targets to the downside vary between 4200-4500 for the ASX200 (though I have seen one mentioning of 4000). This implies potential for 7.5%-13.5% in further losses.

Not something any of us is looking forward to, I am sure.

Yet, the majority of market commentators and investment expert has remained relatively sanguine about it all. When asked about whether he would change his view for the year ahead, Commsec chief economist Craig James responded to an AFR journalist "It's just day 17. A lot can happen over the year".

It sure can.

Most projections are for the ASX200 to reach 5500 and higher by year-end, which would make for a juicy double-digit return, in particular now that we have lost more than 8% already from the late December reference point. Unfortunately, the track record for most of these forecasters is not very good. I might be a little harsh, but if my memory serves me correctly then index projections in Australia have mostly been well off the mark post 2010. While the share market managed to post positive returns in the past two years, despite many headwinds and a noticeable pick-up in volatility, it failed to even approach the kind of projections put forward at the start of each of these calendar years.

None of this means that predictions this market is heading for 4200 are thus of greater validity.

What Not To Like

A few things not to like about the current set-up:

- Valuations are not excessive, but they are not cheap either. The market PE in the US is still above long term average, in Australia it is merely around the long term average
- Market breadth in the US is very narrow (a la 2007)
- Unless we see a major rally in the next two weeks, January is starting the year on a negative footing. Statistically, in 72% of all such cases, this translates into a negative year ahead
- Equity markets are falling through December-lows. Statistically this usually means more weakness ahead (only two exceptions out of 31 such cases)
- Technical damage is rife and widespread, extending from commodities to Emerging Markets to equities in Developed Markets
- Global equities seem to take guidance from crude oil markets where the focus remains to the downside
- Anecdotal evidence suggests all is not well inside the Chinese economy

With regards to the latter point, consider the following statement published by CBA on Monday afternoon (after first explaining as to why China's GDP release is likely to confirm the government's 7% has been met in 2015):

"However, we expect the downturn in China's economy to resume in Q1 2016. A recent trip back to China suggests the economy remains in a rather bad shape. Public confidence and expectation are very low. Faced with rising non performing loans (NPLs), banks are cutting credit lines to private sectors despite the policymakers are calling for more supports in this area. New credits are mainly used to repay existing debts, rather than flowing into new investment projects. Such environment is expected to last a while, and get worse before get better.

We recommend our readers to maintain a cautious view on China’s economic outlook in 2016."

There will be relief rallies along the way, but it's probably worthwhile keeping in mind the trend in Chinese growth remains negative, opening up all kinds of unexpected and unforeseen risks for further negative shocks.

I don't want to spend too much time on the nitty gritty of all the things that can impact on the fundamental outlook for global equities, but in a world of too much debt, with slowing economies and a tightening Federal Reserve, after nine years of exceptionally low bond yields and exceptionally cheap and abundant money, I don't think any among us should be too confident other than that 2016 will offer a rough path, filled with potholes and traps, on top of much higher volatility, and a far from certain outcome.

Minus 20%

One of the confusing characteristics of financial commentary and predictions is that not everybody is working off the same terminology and interpretations. Last year Citi's Willem Buiter predicted a Global Recession in 2016. He wasn't talking about negative growth. His interpretation is (much) lower than potential growth, so low that it will open up all kinds of negative side-effects and problems. Thus far his prediction seems on the mark.

Dennis Gartman has already declared the world is in a bear market. Colin Twiggs is referring to "Primary Downtrends". RBS, as we are all aware by now, simply advised investors to "sell everything".

I am not a big fan for using the -20% rule in order to declare a financial asset is in a bear market, in particular in commodity markets this rule has been more violated than validated, I believe. But in equity markets, believe it or not, equity indices do not fall by -20% or more often.

I did a little research into the matter and the only times the Australian share market has fallen by at least -20% since 1994 was in 2008-March 2009 (we all know how devastating that was; in the end the market lost more than 50% from its November 2007 peak) and before that it happened in 1994. Back then the market peaked in January and troughed twelve months later losing 20.5% along the way. That proved an excellent starting point as the market subsequently started an uptrend and never looked back.

Despite all the carnage in 2011 when the eurozone was on the brink of collapse, the local share market "only" lost -17% during the process. Back in the post-Nasdaq meltdown bear market, shares lost -19% in 2002-2003.

For US equities -20% is equally a rare occurrence. The two most recent times it happened both marked a savage bear market; in 2008 and in 2000.

The good news is US equities are only down by -12% thus far from their 2016 peak, while the ASX200 has lost some -18% since its failed attempt to reach for 6000 last year. In both cases these numbers suggest investors who have been buying beaten down stocks will be rewarded for their bravery and their market savvy.

But who's to say this is the end of it?

Conviction Is Key

One of the smartest things I heard one fund manager say when interviewed last year was: "we cannot predict the future, but we can manage risk".

And that, I believe, is the smartest thing to do. I too do not know what exactly the remainder of 2016 is going to throw upon financial markets. It might be much better than what financial markets are anticipating/pricing in/reflecting right now. It might be worse. We do not know. It just seems to me that preparing for a good outcome and hoping it proves to be the right set-up doesn't seem to be smart. Hope never is a valid strategy.

Regardless of what exactly is going to be the outcome in twelve months' time, I think 2016 should be the year of Conviction. Time to take one hard, critical look at our portfolios and get rid of everything that hasn't worked out, that looks more vulnerable than strong, that is only in there because of our own mental weakness. Concentrate on "strength" and, above all, on Conviction.

Not everything that falls in price becomes a bargain, but once the (near) indiscriminate selling stops the strong, solid growth stories will prove their true value. 2015 has shown that tough times open up landmines and torpedoes. Think Primary Healthcare ((PRY)), Spotless ((SPO)), Santos ((STO)), Origin Energy ((ORG)) and many others. 2016 is likely to reveal an even tougher environment.

Do not underestimate the value of cash. Cash protects against instant losses. Cash offers freedom of choice and freedom to act on opportunities. Cash gives you comfort during times of turmoil.

Whatever you decide and do, do it with Conviction. This is not an environment to take weak punts and stay the course for all the wrong reasons.

Change. Investing in a low growth world

Feedback on the book I released in December last year has been overwhelmingly positive. The one and only review posted on Amazon.com gave it five stars. Subscriber Ivo messaged me last week, he enjoyed reading it so much, he's going to read it again!

While I did by no means predict the horrible start to the new calendar year, all the themes I touched upon in "Change. Investing in a low growth world" remain valid throughout the turmoil, and they will remain valid for a long time to come.

Paid subscribers (12 & 6 months) can get their free copy as a subscription bonus. Send an email to info@fnarena.com if you somehow missed out on your copy.

All others can purchase a copy via Amazon or any other of the main online distribution platforms (thus far the book is only available in eBook format).
 

(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.)  

P.S. I - All paying members at FNArena are being reminded they can set an email alert for my Rudi's View stories. Go to Portfolio and Alerts in the Cockpit and tick the box in front of 'Rudi's View'. You will receive an email alert every time a new Rudi's View story has been published on the website. 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

By Rudi Filapek-Vandyck, Editor FNArena

I like to question the ruling logic that goads the herd, or at the very least stimulate independent thinking. There's a big difference between playing market momentum as a short term trader and trying to figure out what the best asset purchases are for longer term investing.

Since 2012 I maintain my own feed of quotes, comments, responses and market insights via Twitter. Not everyone is on Twitter, which explains the requests to make my Twitter items also available through the newsfeed on the FNArena website.

Usually I combine all Tweets from the week past in one weekly story. Below are my Tweets from the week past. Enjoy.

Investors can follow me on Twitter via @filapek

****

• Morgan Stanley further reduces price target for Cimic (CIM) to $13.10 suggesting Spotless-alike downside in 2016 #ausbiz #investing #stocks
   
• Goldman Sachs remains underweight Resources (especially energy), targets 5600 for ASX200 by end 2016 #ausbiz #investing #stocks
   
• Stockbroker Morgans initiates coverage on Aventus Retail Property Fund (AVF) with Add rating, $2.28 target #ausbiz #investing #stocks
   
• Credit Suisse added Lend Lease (LLC), Stockland (SGP) to its Oz Top Picks List #ausbiz #investing #stocks
   
• Bell Potter initiates Beston Global Food (BFC) with Hold rating and $0.425 target. Still lots to prove #ausbiz #investing #stocks
   
• Goldman Sachs not enthusiastic US #equities 3 months outlook, thinks equities elsewhere to outperform on 12 months horizon #ausbiz #stocks
   
• Goldman Sachs remains Underweight #commodities on 3-month basis, mainly due to downside for oil, less bearish over 12 months #ausbiz
  ?
• Don't fight the macro, says UBS. Cuts estimates for Monadelphous (MND) further, target drops to $5.15. Sell #ausbiz #investing
   
• The global #steel industry is in a world of pain, reports Macquarie, and no solution seems to be in near-term sight #ausbiz #investing
   
• UBS analysis confirms solid growth potential for iSentia (ISD) but is it all priced-in? Neutral with $4.70 target #ausbiz
  ?
• Ord Minnett downgrades Platinum Asset Management (PTM) to Hold, target $7.91 as flow outlook challenged #ausbiz
  ?
• Stockbroker Moelis initiates coverage on Simavita (SVA) with Buy rating, $0.56 target #ausbiz #investing
   
• A stoic Morgan Stanley retains $0.98 Broadspectrum target. They do not believe Ferrovial's $1.35 offer stands a chance #ausbiz #investing
   
• Goldman Sachs sees bright outlook for Super Retail (SUL), but all priced in already. Downgrade to Neutral. Target $10.80 #ausbiz #stocks
   
• Ignore the commodity, focus on the company, says Goldman Sachs. Newcrest (NCM) upgraded to Buy. Target $14.50 #ausbiz #gold #investing
   
• Thought of the Day: More Money Has Been Lost Reaching for Yield Than at the Point of a Gun #ausbiz #investing #stocks
   
• UBS analysts post #China trip: normalisation commodity demand seems further away post our trip. Downside risks rising #ausbiz #investing
   
• CLSA reiterates Incitec Pivot (IPL) as a Conviction Buy on Louisiana ammonia contribution #ausbiz #investing
   
• CLSA Initiates Hub24 (HUB) with a $4.42 price target and BUY rating #ausbiz #investing
   
• Haven't seen this in a while: spot #ironore sank below US$40/tonne on Friday #ausbiz #commodities #investing
   
• Trading Idea from Citi: Aconex (ACX) top pick for December within Small Cap universe #ausbiz #investing #stocks

You can add my regular Tweets on Twitter via @filapek

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

By Rudi Filapek-Vandyck, Editor FNArena

I like to question the ruling logic that goads the herd, or at the very least stimulate independent thinking. There's a big difference between playing market momentum as a short term trader and trying to figure out what the best asset purchases are for longer term investing.

Since 2012 I maintain my own feed of quotes, comments, responses and market insights via Twitter. Not everyone is on Twitter, which explains the requests to make my Twitter items also available through the newsfeed on the FNArena website.

Usually I combine all Tweets from the week past in one weekly story. Below are my Tweets from the week past. Enjoy.

Investors can follow me on Twitter via @filapek

****

• When is cheap too cheap? asks @CreditSuisse. Upgrade to Outperform for Santos (STO), but Woodside (WPL) downgraded to Neutral #ausbiz
  ?
• CLSA downgrades ASX to Underperform frm Outperform (double whammy) on bloated valuation, pending margin pressure #ausbiz #investing #stocks
   
• Historic Day in the Markets. Only the 10th time in history where the S&P, Long Bond & Dollar Index all down >1%
   
• All eyes on #agedcare sector as analysts anticipate government funding cuts. Deutsche Bank downgrades the sector #ausbiz #stocks #investing
   
• Now is time to be selective about portfolio risk, not bullish across the board, say Citi strategists. Cautious US #equities outlook #ausbiz
  ?
• Morgan Stanley sets price target of 2175 for S&P500 for year-end 2016 on minimal EPS growth ex-buybacks #ausbiz #investing #stocks
   
• Credit Suisse today downgraded both Ramsay (RHC), Healthscope (HSO) on reduced growth expectations to Neutral & Underperform #ausbiz
  ?
• Goldman Sachs has removed Costa Group (CGC) from its Conviction Buy List; not enough upside potential left #ausbiz #investing #stocks
   
• Morgan Stanley suggests profit warning by Linde Group warrants more cautious view on ResMed (RMD) due competitive pricing US #ausbiz
  ?
• Citi analysts are suggesting it might be worthwhile adding #commodities stocks in anticipation of the inevitable rally #ausbiz #investing
   
• CBA: With China’s commodity-intensive sectors weakening further than anticipated, see further downside risk to our price forecasts #ausbiz
  ?
• 2015 has been a year of many twists & quirks and of some valuable lessons for investors http://tinyurl.com/q2xturj  #ausbiz #investing #stocks
   
• Goldman Sachs has added McMillan Shakespeare (MMS) and iSentia (ISD) to its Australia Small and Mid Cap Focus List #ausbiz #investing
   
• CLSA initiated coverage on iSentia (ISD) with Buy rating and $5.41 price target; sees CAGR EPS 25% next three years #ausbiz #investing
   
• Credit Suisse's Hasan Tevfik names 12 picks for decades of low growth $WBC $BHP $RIO $MQG $AGL $CTX $RMD $LLC $ALL $FLT $CRZ $NEC #ausbiz
  ?
• Strategists at @CreditSuisse maintain ASX200 to reach 6000 by end 2016, despite low growth outlook. Investors too bearish? #ausbiz #stocks
   
• Yesterday JPMorgan, today Citi. #commodities analysts are once again reducing forecasts and downgrading ratings, again #ausbiz #investing
   
• More trouble? Deutsche Bank says forecasting Dick Smith's (DSH) future is "difficult" - as in future of company itself #ausbiz #investing
   
• Citi analysts effectively issued a 2016 profit warning on behalf of management at Cimic (CIM) - watch this space #ausbiz #investing
   
• Ord Minnett lifts price target Bellamy's (BAL) to $14 from $10.50 on sooner-than-expected product price increases. Buy #ausbiz #investing
   
• Trading idea from Morgan Stanley: Independence Group (IGO) shares to outperform ASX200 over next 30 days following recent weakness #ausbiz
  ?
• Canaccord Genuity initiates coverage on uranium hopeful Vimy Resources (VMY) with Spec Buy, $0.70 target #ausbiz #commodities #stocks
   
• JP Morgan: In line with our continued bearish outlook in base metals, we have trimmed 2016 price forecasts across the board #ausbiz #stocks

You can add my regular Tweets on Twitter via @filapek

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

By Rudi Filapek-Vandyck, Editor FNArena

I like to question the ruling logic that goads the herd, or at the very least stimulate independent thinking. There's a big difference between playing market momentum as a short term trader and trying to figure out what the best asset purchases are for longer term investing.

Since 2012 I maintain my own feed of quotes, comments, responses and market insights via Twitter. Not everyone is on Twitter, which explains the requests to make my Twitter items also available through the newsfeed on the FNArena website.

Usually I combine all Tweets from the week past in one weekly story. Below are my Tweets from the week past. Enjoy.

Investors can follow me on Twitter via @filapek

****

- Debt is back as the dirty word. Slater & Gordon is becoming a worry. ALS announced cap raising. Woolworths next in trouble? #ausbiz #stocks

- Stop the Press! JP Morgan cuts BHP Billiton target to $18 on further cuts commodities prices forecasts. Downgrades to Underweight #ausbiz
?
- A bit late, but stockbroker Morgans finally bites the bullet and downgrades Slater & Gordon (SGH) to Hold. Too much risk... #ausbiz #stocks

- UBS thinks ASX200 can reach 5700 by year-end 2016. Remains underweight #Resources, but Overweight #banks & USD-earners #ausbiz #stocks

- Moelis likes Mantra Group (MTR) fundamentals but doesn't like risk associated high PE leveraged off acquisition growth model. Sell #ausbiz
?
- Macquarie: With $600+m net debt, SGH's balance sheet position doesn't afford much flexibility to withstand significant earnings hit #ausbiz
?
- Initiation of coverage for iSentia (ISD) by @GoldmanSachs on Buy, target $4.80 on promising Asian expansion potential #ausbiz #investing

- Big 2016 Call from @GoldmanSachs : S&P500 will end 2016 at 2100, unchanged current level, Fed to tighten more rapidly than expected #ausbiz
?
- Research report of the Day: takes a fair amount of digging to find the appeal of resources (Deutsche Bank) #ausbiz #investing #commodities

- Moelis initiates coverage Quickstep (QHL) with BUY rating & $0.21 share price target, representing +31% total return #ausbiz #investing

- McMillan Shakespeare (MMS) shares boosted as @GoldmanSachs has upgraded to Buy on solid growth outlook, target $14.95 #ausbiz #stocks

- Stop the press! Goldman Sachs added Blackmores (BKL) to Buy Conviction List with new target of $220 (was $195) #ausbiz #investing

- CommBank (CBA) downgraded by @Bell_Potter to Hold from Buy as share price now considered fair value #ausbiz #investing #banks #stocks

- Analysts at @CreditSuisse have crunched the numbers, believe market running well ahead of itself with a2 Milk's (A2M) share price #ausbiz
?
- Morgan Stanley thinks investors not appreciating changed dynamics for global #gold producers. Sees opportunity in selected stocks #ausbiz
?
- Canaccord Genuity initiates Collins Foods (CKF) with Buy, $5.22 price target #ausbiz #investing #stocks

- Ord Minnett raises NextDC (NXT) to Hold with increased price target $2.80 as capex now seen fully funded, but higher risk profile #ausbiz
?
- JP Morgan's favourites for 2016: Stockland, Westpac, Tatts & ResMed. Stocks to avoid: Investa Office, Woolworths, Newcrest #ausbiz #stocks

- CLSA's Brian Jonson predicts major #banks most likely have to come back to the market to raise more capital in the next year or so #ausbiz
?
- Huon Aquaculture (HUO) initiated by @Bell_Potter on Buy with $4.55 price target #ausbiz #investing #stocks

- Australian Pharma (API) downgraded by @Bell_Potter to Hold, $1.92 target on lower forecasts + post strong rally #ausbiz #investing #stocks

- Thought of the day: I guess Slater & Gordon (SGH) shares were looking "cheap" last week. Not sure what that makes them this week? #ausbiz
?
- Is that CSL heading for $100 milestone again? Me thinks yes. Once the market has a target... #ausbiz #stocks #investing

- Goldman Sachs continues to see downtrend for over-supplied #ironore markets; prices to average US$44/t in 2016, US$40/t in 2017 #ausbiz
?
- Goldman Sachs finds more supply cuts need to occur, to remain underweight #Commodities for the next 12 months #ausbiz #investing

- Trading Idea from @MorganStanley: James Hardie (JHX) shares to outperform ASX200 next 60 days following recent weakness #ausbiz #stocks

- Next! UBS has cut price target for BHP Billiton to $24.50 #ausbiz #commodities #investing

- Citi strategists cut their ASX200 forecast for end 2016 to 5900 from 6200. Note improving momentum Aus domestic economy #ausbiz #investing

You can add my regular Tweets on Twitter via @filapek

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.