Been awhile since I posted at length, primarily because I really havent been trading much, just a little short here and there.
On the whole, my P&L is largely static for the past 3 months, probably slightly down if anything, thanks to my retained earnings in overseas currency eroding.
I have been working on a few projects on a consultancy basis, and while I'm sitting here on James Street having a coffee, I thought I'd pop in my two words of caution.
The best performers in this market this year have been those who have had ZERO experience. Undoubtedly, if you were an entrant to the market at the start of this year, you could be forgiven into thinking how easy this game is.
For those who have been scarred mentally by last year (and I doubt many were as scarred as I was), you tend to approach this rally with skepticism and caution.
Much to my detriment, I had allowed for my past experiences to dictate my future trading strategies, and what I failed to realise was that at some point middle of this year (when I was blatantly trying to short this market) that the sentiment had truly changed from risk aversion to alpha chasing.
I stand by my bearish dictum, that this market is trading at unsustainable PEs, but like I said, chuck everything you have experienced in the past 10 years out the window, as we are seeing unprecedented moves and behaviour in the markets.
The fact remains is that alot of cash is underperforming at the moment. A swag of fix deposits matured last month, and many funds who are supposed to be index weighted performers are horrifically underperforming.
Nothing kills a fund more than underperformance in a rising market. These funds are forced to buy CBA at 58 dollars after selling out at 40.
A few things to note.
a) Post dilution, all the banks are circa near their record highs, if not higher. b) The market, with the exception of middle tier miners and Rio Tinto is virtually back to boom levels. c) AUD is back to "super duper upsmish I love risk" levels. d) Interest rates are going to go up in Australia. e) Oil prices are continuing their rise f) The unemployment in America is still high, and while the reporting season thus far seems spectacular, revenue growth hasnt been correspondent to PE growth.
So what can a funnymetal person gauge from all this?
The market has definately run ahead of itself. Economic theory on high oil prices, increasing interest rates and still highish unemployment does not bode well for the general scheme of things. There is no doubt that the market is overpriced.
But it would take a miniature crisis to cause the momentum to shift back to risk aversion. I can't see anything coming in the horizon, the market seems to have sucked everything up and spat it out with "better than expected" arguments.
The ARM resets at the end of the year could bring some pain, but if the banks have provisioned properly for them, its going to be in the "factored in" basket.
People are always talking about a potential crisis here and there developing, but the truth is that we have just witnessed a monster margin call that lasted 18 months, and now it seems that business is back to normal.
I can't see any reason why anyone would buy here at these levels, but by the same token, if you were already long, you would be hesitant to take profit too, as the markets look buoyant.
It is for this reason I feel that possibly, the markets are in for a holding period, with a gradual dispersement and distribution of wealth created, before moving on higher or lower depending on how the economic environment performs.
Basically, the markets panicked in 2008, realised it overdid it in 2009, and in 2010 it will be price discovery, i.e. back to normal where economic data, high oil prices and currency correlation means something.
One thing to note. The amount of wealth created in a relatively short span of time MIGHT see the resurgence of a mini property boom. Especially if the RBA doesn't tighten at the same rate it chopped.
I remain a bear, but purely because of past experiences and the economic data. However, until the market begins to function in lockstep with the data expectations, there is still an all consuming desire to match the market's stellar performance.
It would not surprise me one bit, to see this market reach record highs (past 1400 on SPX) before it realises it's gone too far.
Buy if you like, I can't see why you would. But what do I know....I'm not the one managing 3 billion bucks worth of superannuation staring at a 50% underperformance for 09 calendar year with 2 months to go to make up.
(20min delay)