Hello,

Just wondering if any of the more stock markety people here would recommend any funds to start buying into shortly. I am thinking as the stock market is in a downward spiral at the moment, it is a good time to start thinking about investing into funds for long term growth (5 years ish).

Thanks.

I think it would be a foolishly brave person who would recommend any fund at the moment. If a bear market is assumed (which lots of people seem to accept) then we should expect most stocks to fall in value - with only a handful of objectively under-valued shares rising.

My take is that funds tackling business sectors, geographic regions, market capitalisation size - etc. will find it very difficult to turn a profit for some time... and only then will it be possible to see which stocks offer value for money and present a solid foundation for investment.

I'm not at all convinced that anything is too cheap... hence my interest in shorts (one thread down) but that topic, I'm finding, is remarkably difficult to get my head around - let alone pursue to the point that even I think my ideas are a sensible investment strategy.

At the moment, I can't find anything more sensible to invest in than cash... and that includes commodities, "precious metals", shares that have dropped 90% in value already - and banks that supposedly won't be allowed to fail.

I like the iShares ETF range. There's lots of trackers for the main indicies (FTSE, Dow etc.), emerging markets and property. My SIPP is full of them.

They have ultra low charges of around 0.4% a year and many pay dividends. You buy them like shares and there's usually no stamp duty. Unlike funds they're also easy to sell out of if you need your money.

http://uk.ishares.com/fund/overview.do

There are also commodity ETFs, but they're very volatile and risky for us amateur investors.

I'm also drip feeding money into unit trusts - I'm doing this with my ISA with £50 a month into a UK financials, a Pacific Rim and an Indian fund. I chose my funds for their low charges. The Hargreaves Lansdown site have a list of their 150 favourite funds.

I don't think it is a good time to buy stocks, when we are in the midst of a secular bear market which I think will last many years. They usually last about 2 decades. That goes for secular bull markets also.

I like this fund...Merck Asian Currency Fund It has 41% exposure to the RMB and has a distribution in most of the other Asian majors.

I would also get into precious metals like gold/silver etc. The open interest shows there are some very large long positions building in Gold at this time, especially in the November contracts. That could be about the right time for the next crisis in the system.

The point to remember is that in every secular bear market in stocks this century, has coincided with a secular bull market in commodities. They move inversely. In each of these bear markets lasting 15-25 years, the DOW has always reached a ratio of 1/2:1 with Gold, ie, Gold 3000 USD:DOW 3000, Gold 10,000: DOW 10,000...In a deflation it would be more likely that the DOW would reach 3000-4000 and gold around 3000 USD...However, as this is an inflation, that I m sure of now, I think the DOW will trade in a large range, and gold could finish its bull market between 5000-10,000 USD. It is very cheap today. Look to a hard currency fund, or a futures in CBIT mini Gold...which I think is the best way to make alot of money on gold and silver.

Also, when investing in any stock funds, pay attention to the currency. The DOW is up in USD terms since 2002, but down in terms of every other currency and asset. After all it is priced in USD. 10,000 on the DOW means 10,000 USD....same applys to the FTSE...it is priced in sterling. So if the FTSE goes up, it will be down in sterling terms in my view...

Stay away in my view from all these western markets in my view. Get exposure to stocks in resource rich countries, and therefore their currencies. Places like Oz, Brazil, China. Stay away from countries that are running huge fiscal deficits and huge current account deficits. Go with net creditor nations....

The agricultural commodities are very cheap today. Sugar I think is one of the cheapest substances in the world today. Studies have shown that as people become more affluent, they eat more sweet stuff. From my own direct experience this is happening in Asia, China, Thailand....etc...Also the studies also show that coffee consumption grows. This is also true from my direct experience...and official coffee consumption figures also. Coffee is still very cheap. The other point is that Brazil the biggest sugar producer in the world, have turned alot their plantations into bio-ethanol producing plantations...so this will affect the longer term price of sugar.

Check out thr sugar and coffee charts...They are very cheap...These commodities have lagged other commodities so far, and they will do well over the next many years....

From where did you acquire this insight?

While I understand your insight that, historically, commodities and equities have appeared inversely correlated... I remain to be convinced that this will hold should we experience monetary contraction. It occurs to me that there is something very different about the world today - i.e. that derivatives provide a strategy by which to take profit in a falling market. Is this, as it appears, something 'new' - might it prove to be the undoing for strategies that worked in previous recessions but that have not been tested in the context of a credit driven economic decline?

The CFTC report. Non-commercials increased. The CFTC reported that hedgefunds and large investment banks have been building hefty positions. Net long positions last week gained over 200,000 contracts over shorts...



Historically? I thought it was still happening today? The negative correlation since 2000 is stronger than ever...and the correlation in the last 6 months is as strong for ever....During the period of the Great Depression, commodities including Gold went up between 1924 to 1955..this was a contraction a huge contraction of credit, didnt affect commodities prices, infact they went sky high over the next decade or so....during all major recessions commodities have went up...I find it very confusing and misleading the dichotomy the FED and the vested interests present us with...They keep saying that recessions and a slowdown will bring prices down...All the evidence is to the contrary. But I know their game, so I m not surprised. I would go as far to say, it is rising commodity prices which cause recessions, and not a slowing economy which brings the prices down...It is the chicken and the egg question. I think commodities go up first...and the economy downturns follows...or at least they excerbate the deterioting economy and throw it into a worse recession.

On one had they say the economy is suffering because of high oil prices, and a slowing economy will bring down prices...leading to a recovery. However, if the economy starts to recover, then will this not push oil prices up again...Talk about wanting your cake and eating it.


Other point which is very important to understand is that in the 1920's 1930's and so forth the US was a net creditor nation. Not today. Today they are the biggest debtor nation the world has ever seen...In my studies, I have found that countries who are net debtor nations, go into hyper-inflations...and countries where there was great deflations were creditor nations, The US in the 1930's, Japan 1990.




I thought the speculation in stocks during the Great D was mostly margin trading?Are not all collapse created by excessive credit expansion?

The world is not much different today. Jesse Livermores book "Reminisces of A Stock Operator" talked about all the bucket shops (todays equivalent is spreadbetting companies) he was in during the 1900-1930, and the short selling, and high margin...Not much different from today. Perhaps the means are different, but all in all....

If anything what you are saying about derivatives and all that makes me all the more bullish about gold...

Gold will do well in a deflation or an inflation....This has always been the case. Gold went up 300% between 1929-33. Around this, I m not sure exact figures off the top of my head.

Good answer.



This is where I'm being a sceptic. I agree with you that there is a complex interplay between economic downturn and rising commodity prices - but these are only two of the variables. I think that the reason for the downturn is significant, and that it is important not to confuse the timing of the "event" when fundamentals reversed with the observation of the consequences.

While credit is central to any economy, I can see two distinct reasons for economic downturn. First, there might have been over-production of (inappropriate) goods - which would being a recession... many of the ill effects of which could be minimised with some timely looser monetary policy. Second, there might have been over-investment in (inappropriate) capital assets. In the second scenario, I don't consider loosening monetary policy to be much of a help... in fact, I think, it could be a dramtic hindrance - permitting fundamentally insolvent propositions to continue for longer than is productive for anyone concerned. I think it matters which party called a halt... I think it matters that, this time, there was still strong consumer demand for debt - but investors who decided that they didn't want to lend (at the market price) any longer. I think this distinction is crucial - it is not that home buyers realised that prices were crazy... but that financiers of the mortgage industry realised that home buyers were crazy.

My take is that, this time, commodity prices rose (predominantly) after support was withdrawn for mortgage finance. I think that we are set to see substantial demand destruction - though production shows no sign of abating. I think this can only result in lower prices... within a few months or, maybe a year or two. I don't think lower commodity prices, however, will cause economic growth, however - the economic problems are far deeper than commodity prices.



I'm entirely unconvinced by your deflation/hyper-inflation argument. I think it is a mistake to consider debt without also considering dependence on foreign trade. I think that inflation - let alone hyperinflation, in today's global environment, poses such a risk as to make hyper-inflation of any significant currency extremely unlikely. If I were in the right authoritative position and sufficiently mad as to want to cause hyperinflation - I'd need to find a way to get more money into people's pockets. Today, I can't see any practical way to do that on any significant scale.

I'm reluctant to be sidetracked by gold - because I do not believe in it as an asset. I'm aware some do, and - as such - the movements of price are academically interesting. I note, however, that according to this list of gold prices between 1800 and 2008 the price of gold (in US$) was absolutely stable from 1929 to 1932 - and jumped 75% by 1933 - thereafter seeming pretty stable again... Quite different from the 300% you claim (were you talking about sterling prices? I can't find such historic data - but - if so, the abandoning of the gold standard in 1931 was a one-off event that rather undermines the predictive value for trends from that era.)

The curious thing about derivatives, in my opinion, is that they affect the market by exaggerating trends... so, if you were bullish on gold, the existence of speculators working on margin would likely make you more bullish. I'm bearish on all non-cash assets... and existence of derivatives suggest to me that prices might well fall faster than I expect.

If you don't mind can you please share which funds these are? I've been looking for a financials fund for some months but haven't been able to find one.

Thanks.

Yup, it's the Liontrust First Income, although it's more of a high dividend fund (yield ~ 4.7%) than a dedicated finance fund, with only 13% in banks...

Liontrust First Income

There are pure financial funds though, e.g. AXA Framlington Financial, JPMorgan Global Financials, Jupiter Financial Opportunities etc. Be aware that historically banks make their losses at the end of a recession, not at the start, so we are in uncharted territory right now!

Thanks for this much appreciated.

I have been putting £100 pm into the Allianz BRIC fund and £100 into Jupiter India. Which indian fund are you in if you don't mind me asking?

Yes I'm in Jupiter India as well, it seems to be well regarded. I've also got HSBC Pacific Index which is the cheapest Asian tracker fund I could find.

have you looked at the Vanguard indices and whether there are trackers for these?

http://money.cnn.com/2008/07/22/pf/funds/A...eymag/index.htm

No, I'm more interested in trading so I largely stick to ETFs as I can be in and out of them in a flash.

I will answer you in two posts Steve as my answers are quite long. I will deal with the first part of your post...first, and the second I will deal with the inflation/deflation debate...



What I did say was that, rising commodity prices at least exacerbate recessions…and cause deeper recessions. I m not saying they are the primary cause. I intimated at it as postulation, and perhaps in the latter stages of a commodity bull market it could be a primary cause, as the pain of rising prices wrecks havoc in the economy due to lack of any real productivity growth. If you look at the NBER statistics of US recessions during commodity bull markets you will see that that if you overlay commodity prices during the recessions, they overlap. If we split each trend into three sections a primary trend where prices are still “low”, the medium trend where people become aware of rising prices and the final phase of the trend where prices spike before a correction we can find some interesting findings. In the primary trend or beginning trend where prices start to rise we have no recession, it is in the middle trend and final phase of the trend on commodity prices that the recessions take place.

I am of the opinion that credit expansion and asset bubbles are the cause of recessions, initially. We do have recessions of course in secular commodity bear markets, however, we have fewer recessions in this phase. Yes, it is complex to conclude that commodity bull markets exacerbate recessions and deepen them by only looking at a high correlation between commodity bull market and a recession, however the logic stands firm. There can be no doubting this correlation exists.

Firstly let’s look at a recession in a secular commodity bull market. We have some kind of bubble bursting, real estate, stock market like the NASDAQ for example. This is the initial shock, the bubble deflates, credit is contracted, businesses go belly up, and people hold onto their money and reign in spending. We then have rising unemployment and so forth, leading to more reduced consumer spending. Commodities are non-discretionary items for the most part…food and energy. It stands to sense that if food and energy are rising, peoples discretionary income becomes tighter…Companies input prices, producer prices rise, and profit margins become tighter. This leads to following earnings and a falling share price, and redundancies. Consumers also now face higher costs and spending becomes concentrated, in food and energy…the service sector of the economy and the economy GDP output as a whole drops due to falling output from business with falling profits…which is technically a recession. I believe that commodity prices exacerbate recessions at the beginning of a commodity bull market, but are not the initial cause, and in the middle and final phase stages of a commodity bull market they can be the primary cause.



I thought it was when the lower sub-tranches and sub-prime tranches of the mortgage CDO’s starting to implode in July of last year that led to two of Bear Stearns hedge funds going belly up, which led to a quick contraction of credit in the STIR markets, which then led to the Northern Rock (due to their reliance on STIR markets) blow up due to a huge contraction of credit…I don’t think we can assume that, one day the bankers walked into work, and thought, lets reduce credit…I haven’t heard of any asset bubble bursting with such rationalisation of thought. Due to the nature and the degree of high leverage in the market, I thought that it was this initial souring of the CDO market going wrong that led to a very quick liquidity dry up…which is why the FED dropped interest rates to provide liquidity…to paraphrase their own words...

Check the CDS spreads at the time…see chart below.

If you look at a longer term chart of the credit spreads you will see that volatility was extremely low before the credit spreads spiked in July. Perhaps the calm before the storm. I guess with hindsight it was the calm before the storm. With such low spreads and low volatility and then the consequent spike in July that would say to me there was no decision to contract credit. Instead it was a shock to the system, which was forced, which led to a “liquidity vacuum” for want of a better word.




Commodity prices had made more than triple digit percent gains since 2001. See chart below. Some 7 years before support was drawn from the mortgage market. The rally starting since August last year when the credit crunch began was a normal secular rally within a commodity bull market. The FED “announced” to the world that they were debasing the dollar, back in 2007, and this has led to a huge run up in prices of hard assets. The FED has cut interest rates in half since August 2007. The USD dollar has played a major part in this latest phase of the commodity up swing…The market seems to agree, as the USD has fallen against every hard asset and currency apart from the Zimbabwean Dollar in that time.

See commdity chart attach

The commodity Bull Run began 2001. This was due to structural changes in the world economy. And 2000/01 fits in nicely with the normal cycle of commodity/stock market bull/bear markets. A structural change is something that has long lasting effects and does not reverse quickly if at all once the change takes place…for example the UK moving to net importer of gas and oil in 2007 is a structural change for the UK economy, which is 99.9% irreversible. This will have a structural effect on the UK economy for years to come, and is sterling bearish.

I will list the structural changes below that have taken place or were already in place by 2000 and give a brief analysis of each:

Outsourcing of labour to developing countries.

The structural changes were an outsourcing of labour to China/India and developing economies meaning we had a benign inflation in consumer goods…as reduced labour costs in developing nations allowed us to consumer goods made in Asia. This was a change that happened, and it is a change that has gathered momentum during this decade. It is not going to be reversed overnight or for a very long time if at all. The infrastructure has been put in place. The other reason this is a structural change built in stone is that the developed countries of the world such as the US and the UK do not have the manufacturing capacity to meet even an infinitesimal demand for production in the global market.

The FED kept interest rates artificially low after the NASDAQ fallout. And this outsourcing of labour helped keep interest rates low, as the cheaper manufactured goods had little effect on the CPI, which was benign during the dotcom recovery. However, the CPI is a measure of the price of consumer goods and does not include real estate and other assets, which is just another form of inflation. Hence the interest rates had no dampening effect on credit creation.

The main purpose of interest rates is to control the amount of credit creation in an economy and to maintain a stable currency. The artificial manipulation of keeping the interest rate too low allowed the uninterrupted growth in credit to consume. The FED did tighten rates ever so slowly between 2004/05 from 1% to 5%, however, credit growth still continued to grow at the same pace as when interest rates were 2%. Credit growth grew at a pace of between 14-16% a year, even after the FED stopped tightening in 2005.
Check M3 chart

Savings Rate falls to ZERO/Negative savings rate

Due to very low interest rates in the US it provided a disincentive to save, as the returns on savings deposits were very low. Conversely this was an incentive to borrow and increase debt. Japan, China and India have very high savings rates, and they were willing to lend 70% of their savings to net debtor nations such as the UK and the US. This led to speculative activity in paper asset markets such as real estate and the stock market….Alas we had this twin economy. We had a deflation of consumer prices due to the outsourcing of labour to developing nations, and as money was cheap, this was a disincentive to save, yet an incentive to borrow and speculate in search of higher yields, we had inflation in paper assets such as real estate.

Incremental Demand Increase from Developing Nations

As the developed nations such as the US and the UK followed this unsustainable and bizarre economic model of “borrow and consume”, the developing nation’s economies were fuelled with money coming from “our” consumption. This money was used in capital formation as China built what are now some of the best roads and transport systems in the world. They also used capital to form factories, and build some of the largest most modern cities in the world today…With this capital formation and expansion came incremental demand for resources, such as iron, coal, oil, corn, wheat, lead, aluminium and so on. Well as economics would dictate increasing demand will lead to higher prices in a global market.

The world is also a different place from the between the 1970’s bull market in commodities. I mean this in the sense that the world has got bigger in a population sense in the last 2 decades. For sure population has been growing at a fast pace, however I mean the population has grown in a socio-economic sense. There are 3.6 Billion people in the Asean region.

Last year the World Bank finally approved Chinas rise to that of middle income nation, from that of a low income nation. The evidence is that when a nation moves into middle income status, their appetite quite literally for meat, coffee and sugar increases. It also means a general level of higher consumption.

With the world population growing at a rate of 1.16% per year that means the world has to find food to feed an extra 70 million mouths every year.

Falling supply fails to keep up with demand

After the 20 year bear market in commodities in the years 1982-2000, supplies of all major resources were at all time lows. Due to tight margins in the period 1982-2000, there was lack of expansion and under development in raw materials. Also the coming incremental demand increase from the BRIC nations was unforeseen in its size and scope. By 1999, inventories were at an all time low. The wheat and corn warehouses were empty.

No major metal mines have been opened for 20 years, aluminium production by 2004 is running at half its production since 1960, even though the world population and demand has increased many multiples.

Lead production has been falling at a rate of 1% a year since 2000, after peaking in 2000.

No major oil fields brought online in 40 years. Production has hit a plateau.

The use of sugar and corn for ethanol has also reduced acreage dedicated for corn and sugar.

The problem with bringing new supplies of commodities online is that it takes a very long time. Metal mines, wheat corn farming can take 3-5 years to come online, oil fields take 10 years. This is why in the past commodity bull markets last so long…as the supply and demand fundamentals take along time to change.

For me, even if demand falls for a period of time, supplies are still not sufficient. In a Merril Lynch report highlighted the serious problem of desertification and land loss. The UN estimates that “12 million hectares of land are lost to desertification each year”

Commodity production is water and energy intensive. Ready available water is at a critical level. I logically conclude that the input costs of water and energy will have an upward effect on prices, before we even take into account the individual supply/demand issues for any particular commodity.

The reason commodities are so volatile at times is due to supply side shocks. Most of the volatility in the price of commodities is supply side related. As much as demand grows incrementally and is reasonably predictable, supply is not. Droughts, war and extreme weather condition effects all kinds of commodity prices, like this year in wheat, and when the supply side shocks to oil during Hurricane Katrina.


Japan ZERO Interest Rate Policy

Another important structural change in the world economy this decade has been the BOJ zero interest rate policy since 2000. In effect, Japans deflation has been our inflation. The rise of the Japanese carry trade has added huge dollar liquidity to the global economy. Buying yen at cheap rates and converting in into higher yielding assets such as stocks, real estate and bonds. This policy has been highly inflationary for the reason that it has kept world wide interest rates artificially low. Converted yen carry trade money has found its way into mortgages and real estate as far away as Bratislava, Slovenia and New York.

US Current Account Deficit, USD Dollar Crisis

The above policies have lead to a huge US current account deficit. The demise of the USD began in 2001. I believe we will see the USD drop substantially more over the next 5-10 years, and possibly sooner we could have a real crisis of confidence in this faith backed currency. Forgetting all the fundamentals for commodities on the supply/demand side, a collapse in the USD alone will lead to higher commodity prices as it is the reference currency of the world.
The US is not a self-sufficient economy like in the 1930’s nor is it a creditor nation. The US imports 70% of it energy requirements. With higher oil prices, and other currencies in the BRIC nations rising relative to the USD, I can see demand for oil increasing with the increased purchasing power of the BRIC nations currencies. The US has to compete in a global market for oil. It is estimated this year that nearly 600 Billion USD will leave the US to fuel its energy needs. That is a huge downward pressure on the USD. As oil prices rise, perhaps we will have demand destruction in the US, however, this will be somewhat offset by the weaker dollar due to higher oil prices as it will take more USD’s to purchase the oil.





This is wholly inaccurate. Take a look at the CRB, or Rogers Commodity Index chart attached. The Rogers Index was up 400% since 2001 before the mortgage crisis hit. The FED by cutting interest rates and bailing out every investment bank in sight just threw petrol on the fire of the commodity bull market, as the market read these actions as undermining the USD.

The fundamental conditions I have briefly outline above were in place by 2000, and ironically the fundamental conditions for a secular bear market in stocks and a secular bull market in commodities formed in the period 1982-2000, when stocks were in a bull market and commodities in a bear market. In previous bull markets 40-50% corrections are normal. If you believe this is the end of higher commodity prices then I think you are misreading the fundamentals.

During the Great Depression, with the exception of gold as Roosevelt made it illegal to buy gold all other raw materials went up in price. Between 1930 to 1954 raw material prices increased. If you believe in commodity prices falling then you must be in the deflationist camp, even though the evidence shows that this is an erroneous point of view.

On a final note, I am not saying we won’t have large corrections, perhaps lasting 6 months, 1 year or more, however, I know that when people are calling the end of the bull market I’ll be buying in again. When my granny or my aunt rings me one day and tells me she is working as a commodity broker then it is time to sell commodities.

Given that there are some chunky dividends around, why not look at Perpetual Income fund? Neil Woodford has a good track record of canny investing in troubled times.

I think the key is to take a 5 year view, and maybe not put all your eggs into one basket at the moment but save money regularly, maybe topping up on any stock market blips.

A brief response from me - and thanks for being so thorough...

With respect to our perspectives on commodity prices, I draw a distinction between the mean appreciation of commodities 2000-2006 and 2007-2008. We've recently seen an increase at about 50% in a year - while previously we'd averaged only about 20%. I can easily believe that the 20% arose as a consequence of monetary expansion, but I'm finding the 50% more difficult to believe. My intuition was that the 20% was somewhat rational, While the 50% is not - in my opinion. If I had to take a punt at what will happen next, I'd expect the CRB total return index to pop off the top of the graph for a short while before crashing down to below 300... possibly in a very rapid reversal. BTW - if the rumours I've heard about institutional investors buying commodity long investments with ~2% of their capital are true, I'd conclude that your granny is investing in commodities already...

I am very interested in your idea of calm before a storm... I wonder if this observation can be used to predict 'unlikely' events that should be insured in future?

I recognise the demand increase from china - but I don't accept that abrupt changes in price will arise/have arisen. I think sentiment can turn on a pinhead, but real needs/wants/demands change rather more slowly.

I am in the deflation camp - and I am yet to see any evidence that shows this to be an erroneous point of view. I believe that we can have any outcome, in principle - but that biflation is most likely (rising costs for small ticket items; falling cost of assets) in the short-to-medium term (measured probably in years) followed by modest overall inflation - perhaps at between 1% and 3% per year - both for assets and for day-to-day expenses.

IMO, the vast majority of people on here were recently recommending the following

Short FTSE @5100
Long oil @140
Long gold @900

It will be interesting to see how this pans out.

I think if you check my posts you will see, I shorted oil at 145 USD,I implicitly stated that on here to RK, A.Steve, Ab Harrison. and I ll be buying in at circa 100 USD.

I bought into gold a couple of years back...I ll be buying more when I get the reversal from this current dip.

I went short the FTSE at circa 6150.

I ll be shorting the end of this present rally in the FTSE.

But were you not last week saying that oil wasn't a bubble when it has subsequently come down ~20%?

I'm happy to confirm that VT. Not that you need my confirmation, or anyone else's.

I also stated on here when I went short WTIC at 125, then 135, closing out my 125s and rolling that into 145s. I've taken part profits, letting part run. I have been short USD/Euro several times under 1.60 - currently running a short. Again, I think I've posted this.

I've been short Au several times since January. (I used to post my trades on here but stopped due to the disquiet it seems to cause physical longs - The words "idiot" and "troll" were most frequently used I think). I suggested the banks would see a massive rebound a couple of weeks before they bounced from 15th July. I didn't trade that, because I'm not comfortable with any bank right now. I am waiting for a sell signal in the US banks to go short on the DOW. I think this will come soon -around 11,750-12,000. I don't trade the FTSE as a rule, due to the DOW having lower costs and being the main driver.

I only trade for my own benefit and would never suggest anyone follows my trades since everyone's circumstances/timeframes are entirely different. As I've posted before, for a longer timeframe (5 years+) I would use a slow moving average to time entry. i.e. Jumping on when there is already a clear uptrend. That applies to any market/instrument imho. Non of the US/European markets exhibit that right now.

Yes, oil is not a bubble. However, I never said markets go up in a straight line. I have always said we could get meaningful corrections. Hence why I shorted oil as it was due a correction.

Can you give me your definition of a bubble?

My definition of a bubble is an asset which collapses in price, and doesn't make a new high for at least 5 years, but more normally it could be much longer. Anything between 10-25 years.

The NASDAQ was a bubble, it is 50% below its all time high 8 years later...

The FTSE was a bubble...It hasnt made a new high for 8 years.

The NIkkei 225 was a bubble in 1990 at 39,000, 18 years later it is still 70% below its all time highs.

Gold was a bubble in 1982...it declined for 20 years.

Silver was a bubble in 1982...today it is 50% below its all time high in nominal terms,inflation adjusted, it is 70-80% below its all time highs.

Japanese Real estate was a bubble. 18 years later it is 50% below its all time high...

and the list goes on...

Since 2000, oil has had...

two 50% corrections

two or three 40% corrections

Since 2005, the Amex oil index has had

12% correction
18% correction
12% corrections
15% correction
15% correction
11% correction
19% correction
23% correction
24% correction...

However, within months to a year oil made new highs.

Oil will go to 300 USD and more over the next 5-10 years. That is my price target.

Perhaps this correction could last 1 year, 18 months, or until autumn who knows. These corrections are normal.

So my definition of a bubble, is an asset, that deflates to 40-80% of its value. And remains depressed for many years. At a very minimum 5 years but usually much longer.

So if oil stays below, 147 USD a barrel for 5-10-15 years, and goes to 60-70 USD, then you will have been right...It was a bubble. However, I have done a resonably deep study of the fundamentals, many of which are structural in nature.

I m not going to try to predict a bottom, I have my system that does that for me. Whenever the price tells me, then I ll know. However, at an educated guess, I ll say we could be in a range for a while, around 100 USD.

Cheers RK. I think you and me seem to understand each others trading style. Quite similar perhaps. Do you use the longer term fundamentals to judge general trend? Before I was an staunch technical head. Fundamental analysis was evil,lol, But I guess thats just stupid and a little immature trading wise. Understanding the fundamentals helps me stay with my postions easier, as I feel I can justify my entry, and I guess anything which makes it psychologically easier is a positive... I remember the your oil and euro shorts, and DOW was it also?

You are right about US and European markets. They are in a longterm secular bear market, which is ideal for selling the rallies. Of course, the DOW, FTSE could make a new high, but I would think it wil collapse again after that. In real terms they are going nowhere.

Noel,go on make a call.The only one I remember you making was that Taylor Wimpey was a long term buy just before they cancelled their rights issue.

Vedanta -I've asked RK as well, since both of you address the markets in the same way (correctly imo),could you tell me what are you using to take your positions in these various markets?Do you spreadbet or use options?
I'm just starting out and could use any useful pointers.

I've already said. I buy a diversified portfolio and hold indefinitely, as numerous studies have shown that it is nigh on impossible to time/beat the market. Still hold TW BTW

I like ABM Amro market index account. It has some commodities that I like to trade...like sugar,coffee, oil.
I have a Futures account with Infinity AT. They are American, for mini DOW...
I have a Finspreads account. Emptied it. Dont like it.

I like MG Forex. I want to get a forex account with a larger direct market access broker...looking into Daniels Trading. Good demo available.

I would recommend a mixture of leverage and unleveraged vehicles. Futures accounts and trading on the exchange is very good level playing field. Some forex retail accounts are good for practise, and any money under 5000 USD, as they don't like you to make money. I was up quite alot in my forex account with IBFX, and I withdrew my money, as the more succssful I seemed to be getting the worse my spreads were, my fills were, and the platform froze at times when I tried to close a position.

Alot of the retail forex brokers are cowboys. Choose carefully.

Socieite General have a range of options to trade, with low starting costs.

I quite like the look of ODL markets, for their range of markets.

Use ETF's, leveraged forex if you like currencies and understand them. It all depends on timeframe. I use leverage for short term and indexes for drip feeding earnings into over time if I m bullish.

good lad.Is there anything else you'd be adding at the moment?

Noel...

I have several points I want to address. I want firstly to clarify your thinking and reasoning…

The FTSE data only exists in the time the FTSE was in a secular bull market.
We have no point of reference regarding the performance of the FTSE during a secular bear market.
PE ratios behave differently in a bear than a bull market
PE cyclically adjusted ratios are different from normal PE ratios
Normal PE ratios have little predictive power
No model on the FTSE for long term valuation wave analysis.
The real rate of inflation is higher than the FTSE yield.
The static PE ratio is useless as a valuation indicator, as it only takes ones years earnings and extrapolates that earnings will continue at this rate for the next 10 years. However, in secular bull and bear markets, the rules for PE ratios are different. It is much better to use an average earnings over ten years for a company, or an index and ideally for an index or company that has 30 years of earnings data.
Also in a secular bear market PE ratios can stay well below the average PE ratio for a decade or more.
Companies have a poor record of forecasting future earnings.


• In short you believe that the FTSE will be a winner over the next 20 years, reasoning that the PE is historically low, and the yield is 4.8%.


I will deal with these points one at a time, and also contrast why oil/gold/commodities will offer much higher returns than the FTSE or any of the stock indexes will.
The FTSE was born into existence in the year 1984 if I m not mistaken. There was more or less an uninterrupted bull market, with some fairly large corrections along the way, which were short lived, with a v-shaped bounce…The FTSE went from 1000 before topping out at nearly 7000 in 1999/2000. This was the end in my opinion of a secular bull market. I believe we have been in a secular bear market since that time.
The problem I have with your view on the FTSE is this. The FTSE has been in existence for 24 years. Since the incarnation of the FTSE we were in a secular bull market in the US, Europe and the UK. For me that means that you only have a secular bull market as a reference for the FTSE. You do not have a long enough data sample for the FTSE to have any context…for instance…

• The FTSE only came into existence at the end of a long term secular bull market in commodities, which ended in 1982. In the time the DOW, S+P and the FTSE have been in bull markets the commodity markets have been in a bear market. Commodity prices went down in real terms between 1982-2000.
• We have long term pricing data for commodities, the DOW and the S+P. In 200 years it has been without fail that commodities go up in cycles lasting a minimum of 16 years, a maximum of 40 years and an average of 22 years…In the times that commodities were in bull markets stocks were in bear markets. The reasoning stands to sense…I’ll not go into it here.
• For example, in the period 1930 to 1953/54, commodities went up in price. In that time the DOW dropped 80% and it was until 1954 that a new bull market in stocks would begin, just as commodities topped out.
• The DOW went up until 1966, and commodities went down.
• By 1982 the DOW was no higher than in 1966. Between 1966 and 1982 commodities were up many multiples from their 1966 price. Oil went up by a multiple of 35, from just over 1 USD to 37USD. Gold went up from 35 USD to 850 USD, it went up 25 times its price.
• Also in the period 1966 to 1982 the DOW had many 40% and 50% corrections. Very choppy sideways markets.
• And then we had like I said the bull market in stocks between 1982-2000, and predictably enough commodities by 2000 were the cheapest in real terms they have been in 200 years of capitalism. As the bull market in stocks began in 1982, commodities had topped and declined for 20 years
• As the FTSE, S+P, NASDAQ topped out in 2000, commodities have been going up for the last 8 years. Stocks are no higher, and infact 20% from their all time highs in 2000.

My point is this. There is no reference point for the FTSE as regards performance, PE ratios and so forth during a commodity bull market. You are extrapolating future earnings and FTSE performance based on a bull market…However, using the DOW as a proxy for the FTSE it becomes clear that PE’s and growth are two entirely different things, depending whether or not we are in a secular bull or bear market. The FTSE is in my view in a bear market. In the time the FTSE dropped from 7000 to 3200 in 2003 and until today commodities have been rising. We are only 7 years into this commodity bull market. Using 200 years of price data we can expect this to be the start of the game as far as this commodity up run will go. Yet the FTSE is no higher in that time than when the commodity run started. In act it is much lower now.
The price action is so similar to the DOW price action during the period 1966-1982.

I feel it is a very risky to apply a buy and hold method in a secular bear market. Price data in the DOW and commodity data and S+P data going back to 1870 show that it doesn’t work. Buy and hold only works in a secular bull market…and it finished in 2000.

1. (1)y first point is that applying a method that works in a bull market does not work in a bear market.
2. You do not know how the FTSE will perform in a secular bear market, as there is no context for it.
3. You don’t know how the FTSE will perform in a commodity bull market, as there is no context for it.

However, by using the DOW or S+P as a proxy for the FTSE as we do have a context for these indexes then it should become clearer that the buy and hold is financial suicide in commodity bull market, and a secular bear stock market.

That brings me on to the PE ratio for the FTSE. The same as above applys again. You have no reference point or context regarding how the FTSE PE ratios will act in commodity bull market, and a secular bear stock market.

Stock price data on the S+P and Dow going back to 1870, and recent examples in Japan show that in a stock market secular bear market PE’s can stay at 70-80% below their all time highs for a decade or more.

You state that the FTSE PE is 10. This low in bull market terms, but perhaps it is high in bear market terms. The evidence shows that PE’s can move much lower in bear markets and stay their for a decade or more.

Check out the PE’s on Japanese Nikkei 225…They remain far below their PE’s, for more than a decade. As the Nikkei is down 70% also.

Schillers study on data on the DOW and S+P going back to 1870 shows that as long as PE’s stayed above their highs in a bull market they spend the same amount of time below the mean PE in a bear market.

Today the cyclically adjusted PE’s which is a long term average, and not just todays PE shows that fair value on the S+P is 600-700. Unless you think the FTSE is going to decouple in a big way from the US markets, if we can use them as a proxy for the FTSE then your idea of the FTSE being “cheap” is unfounded on a longer term wave valuation, ie Buy and Hold. Future earnings will continue to disappoint for a number of years, and the FTSE is going nowhere.

BTW, Smithers did research on British companies going back to the start of the century, the same as had been done on the S+P and DOW by Schiller. His findings using the cyclically adjusted PE was that the FTSE is 60% over valued, based on along term historic average of earnings and and buy and hold methods. Now thats perspective. Not 20 years of a goldilocks bull market in the FTSE since 1984, where people use the same rulers in a structurally different market place and economy.

Chart Three shows that normal PE's did a terrible job of value in the 1930's to 1955.

We will be at the end of this bear market when DOW PE's are at 5-7.

Am about to top pension up with BAT, BT.A, AVIVA and TATE

why Bats?small divi doesn't make a defensive to me.agree with you on aviva and BT,why not L&G?Glaxo looking good value imho,BP/RDSB too

great post btw.I gave up on fundamentals a year or two back after years of watching markets do irrational things.But over the longer term,they do not lie.I agree with what you say about the FTSE but if you pick up individual stocks at the right price,whenever that is,you will do well.

FWIW,I am honing my skills as a day trader and I much prefer to trying to make medium term calls.

why Bats?

Diversification. What else can I get from the sector?

Got Glaxo and BP, haven't looked at L&G. Will add it to list

I can't do your post justice while I am at work and the gimps at Bloomberg can't answer my question, but have you included dividends in your analysis or are you use the index exclusing divis?

The FTSE went from 1000 before topping out at nearly 7000 in 1999/2000.

It has actually gone from 356 at end of '85 (earliest data I can get), and topped out at on 31/10/07 at 3889. It is currently 3246. Trying to find equivalent data for Dow, but as explained, struggling.

I have the Dow Jones TR but BBG only have it back to 1987

Trying to find another source

http://siepr.stanford.edu/papers/pdf/99-16.pdf

"If Dow Jones & Co. had included dividend returns in the DJIA
when it was reformed in 1928, the index would be over 250,000 today."


"The average dividend yield on the Dow stocks has varied from between 1.96 (1998) and
9.72 (1950) percent per year.6 The average dividend yield over the whole period was
4.87 percent"


I think I may be able to download the historical index level and yield in a spreadsheet

Apologies for my fragmented responses. Have you got data on FT30?


http://www.ft.com/cms/759ac604-a4ca-11dc-a...00779fd2ac.html

This has been going since 1935

However, the average DOW dividend in secular bear markets is 1.96%. In the 1970's the average dividend yield in the US was 1.96% yet the average inflation rate was 14% in that decade. This is a real loss. The other thing is that this report doesn't take in the value of the USD. In the 1970's the USD I think lost about 70% of its value against tangible assets. After all the DOW is priced in USD, so it is the most important thing to look at.There is no getting away from the fact that in real terms you it is hard to break even in a scular bear market.

In a bull market yes, dividends and rising stock prices will give a great return, but even with dividends in a bear market, the market under performs other assets.

For example...

year one, DOW 4000...dividend yield 1.96%
Inflation 14%
Ten years later DOW 3000,
Dividend return is negative in real terms.
Stock market growth down 30%

This study does not compare real returns in cyclical bull and bear markets It lumps the whole study into a 100 year study, rather than looking at the cycles individually...I have some studies where it splits the returns into the secular bull and bear cycles.I ll point you in the direction of two books on the subject.

from my days investing directly in equities,dividends formed the central plank of my strategy.I very rarely after the tech bubble,dealt in anything without a well covered divi.The tech bubble was a one off and you had to be involved to make cash.

I read a barclays Gilt Equity study that showed that without dividends being included shares did pretty badly over the last century,not much better than gilts.Include divis and it was a stonking eprformance.sorry i can't quote it exactly but those results are relatively well known.

nice to see woolworths in the FT30

Man, if I may say so, you are one extremely well informed, widely read and interesting dude. Kudos to you.

I agree wholeheartedly with this. I have a couple of deferred pensions so long-term I guess I am long whatever they are long in so with the rest I may as well trade.

I have an embarrasingly small/average sized brain so couldn't keep the level of detail in it that you have at your fingertips. I readly admit to liking pictures. They make sense to me. So whilst I am aware of general trends over the longer-term, and listen and pay attention to the big players, I still trade using charts. I mostly swing/position trade so am not overly concerned with, say, a 5/10yr trend.

Because I like looking at pictures, I prefer to look at the public charts on somewhere like stockcharts.com for inspiration than listen to the media. If we go back just 3 weeks, to the doom and gloom of Freddie/Fannie and Indymac it is interesting to note that the US bank index BKX has risen 50% since then. Oil has dropped 20%, airlines have virtually DOUBLED! In only 3 weeks. So, leverage isn't necessarily needed as much as courage, timing, risk management etc etc. Stuff you and I have mentioned time and again. You need easy to access instruments such as ETFs to take advantage of such sector plays.

The Reaper, I have tried day-trading (by which I guess you mean mostly intra-day) and find a few days to several weeks to be a more relaxed and less stressful period to trade in. Of course it depends on your leverage and what you trade etc, but I find it suits me much more. I've gone from intra-day over-trading at the beginning to more leisurely stuff with less leverage and definately benefitted. I think we each find what suits our temperament, resources and timeframe through trial and error.

Books links would be appreciated.

"However, the average DOW dividend in secular bear markets is 1.96%."

Am I missing something obvious or are you saying the Wikipedia link is wrong?

I know what you mean RK,there are some seriously interesting people knocking around these parts.I too am humbled sometimes by the knowledge and intelligence of some of the posts we get.

Re day trading,I don't really understand all this stuff about leverage,I just switch on look at the charts and the various indicators I use and off I go.If i was trading a longer time frame it would be more ralaxing but then I would need to use the fundamentals more and at the minute,there's madness everywhere.I haven't been doing TA for as long as you guys obviously have but I find tradign a mildly discretionary system,comforting.

Yes I agree with you. By leverage I simply meant the £ per point of a position relative to your trading capital. So if you traded, say, £10 per point on the FTSE when it was 5450, then you are effectively "investing" 10 x 5450 = £54,500 in the FTSE. If it goes up 10% you gain £5,450. If you would invest £54,500 capital in it then you are unleveraged. If your capital is £5,450 then you are leveraging at 10:1. If your capital is £545 then you are leveraged at 100:1 and so on. Obviously the use of stops limits losses but you choose your leverage by the size of £ per point for a trade relative to your capital available.

By the way, I also agree with sticking to your discretionary system and whatever indicators/signals you are familiar with. I do exactly that too.

I use IG's trading platform too, but also stockcharts.com and bigcharts.com for non-interactive/delayed charts. If you put UK: in front of the ticker symbol on bigcharts.com you get the UK shares. I am considering a subscription to stockcharts.com, although it would be so much more useful if they covered UK/European stocks. I think I have only touched the surface so perhaps they cover stuff I haven't found yet. If I am trading currencies, I also use fxstreet.com to compare prices, and read some of their technical advice/contributions/news which seems pretty good quality and much is available free.

"The FTSE data only exists in the time the FTSE was in a secular bull market."

FTSE 100 maybe, but not FT30. I can't get this info from before, and I'm not sure how FT30 compares to FTSE 100 in terms of returns

"We have no point of reference regarding the performance of the FTSE during a secular bear market."

See above

"The real rate of inflation is higher than the FTSE yield."

Not sure why this is relevant to the argument. We are comparing total returns for different asset classes. Inflation affects everything


Agree with the rest from the section


In short you believe that the FTSE will be a winner over the next 20 years, reasoning that the PE is historically low, and the yield is 4.8%.

"That about sums it up

"I will deal with these points one at a time, and also contrast why oil/gold/commodities will offer much higher returns than the FTSE or any of the stock indexes will."

Obviously in your opinion, rather than a statement of fact

"The FTSE went from 1000 before topping out at nearly 7000 in 1999/2000. This was the end in my opinion of a secular bull market. I believe we have been in a secular bear market since that time. "

As discussed, need to be using FTSE TR

"This was the end in my opinion of a secular bull market. I believe we have been in a secular bear market since that time.

The FTSE PE was around 33 IIRC at this time. So even thought PE is now a third, index is off by only 25%

"Using 200 years of price data we can expect this to be the start of the game as far as this commodity up run will go"

So you are saying that historically repeats itself? What were the valuations on the Dow before prior downturns?

"However, by using the DOW or S+P as a proxy for the FTSE"

Has the FTSE always had a greater yield than the DOW? If so, you can't really compare like for like



I think we will need to get better FTSE data if we are to continue the investigation

Not sure why you keep mentioning inflation. Surely you should be comparing to risk free rate, if at all? Inflation will affect commodities as well.

I don't see any 20 year down periods on here

http://www.thedividendguyblog.com/wp-conte...d-dividends.gif

http://bigpicture.typepad.com/comments/ima...otal_return.png

Thanks VT-I've got soo much to learn!!

Fascinating posts, VT... I'd like to echo the interest already noted...

Which books?

Relevant article in Torygraph

http://www.telegraph.co.uk/money/main.jhtm...C-mostviewedbox