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The ASX All Ordinaries Index, ETF GOLD, BHP and QBE.

February 22nd, 2010 · Greg Atkinson · 23 Comments

It may not appear to some investors that the stock market is functioning normally again, but the manner by which the  recent correction was quickly reversed indicates that in fact things are getting back to normal. Certainly there is a long way to go before the ASX All Ordinaries crawls back up to 2007 levels, but at least now a correction is just a correction and not the start of a massive wave of panicked selling.

Since that the worst of this bear market appears to be behind us it is sometimes easy to forget how far backwards stocks have gone over the last few years. Yes the market rallied strongly in 2009 but  as of today the ASX All Ords is at a level seen back in late 2005 as we can see from the chart below.

ASX All Ordinaries (XJO) 10 year chart

asx-all-ords-10-year-chart-feb-10

That means that if you owned a basket of widely held Australian stocks that there is a good chance that this basket is now worth what it was around 4 years ago.

For long term investors however, the chances are you would still be ahead if you entered the market before that time and of course most people would have also been paid some healthy dividends over the years.

So yes the bear market has been painful, but very survivable and not quite the end of the world as we know it.

The really good news however is that the stock market has stopped being dysfunctional as it was during 2008-2009 when massive waves of frenzied selling gripped the markets and there was no way of telling when this selling would stop.

Now at least a correction is somewhat orderly and although panic does creep into the minds of investors, they are not overcome by it as they were during the worst of the global financial crisis. As I have mentioned many times before, stock market corrections are common and actually good for the health of the market.

To prove my point let’s look at some charts and see how the stock market is sorting itself out. Firstly let’s have a look at what the gold price and BHP shares have been doing over the last 5 years. Once again I will use the ETF:GOLD to track gold prices since this makes charting it against stocks easier.

ETF GOLD vs BHP Billiton 5 years chart

gold-vs-bhp-5-year-chart-feb-10

According to many people gold has been the best investment for years but in fact it hasn’t and if you had been in BHP shares over the last 5 years then you would have done better than investing in something like the Exchange Trade Fund (ETF) GOLD.

Yes the ETF:GOLD is slightly ahead of the BHP share price now and pulled well ahead after the Lehman Brothers collapse but it pays no dividends. If you factor in dividends then  BHP has been a better investment than GOLD unless of course you timed things perfectly and cashed in your GOLD holding in late 2009/early 2010.

Personally I would rather hold BHP stocks than gold in any form.  Maybe gold is a good store of value but so are productive mines, and BHP owns and operates some of the best mines in the world.

However the real value of the chart above is that it shows how the BHP share price took a hit during the panicked selling of late 2009 but has since recovered as fear of a global economic meltdown subsided. On the other hand gold prices surged in late 2009 and although prices have come back a little in $AUD terms , gold still looks pricey to me.

The GOLD versus BHP chart suggests to me that investors are still nervous (as indicated by the high gold price) but are also starting to buy into the global recovery story. (as indicated by the recovery of the BHP share price)

When gold drops below $1000 USD I will start to become comfortable that the global economic recovery is taking hold. So I reckon watching gold prices and the BHP stock price is a wise thing to do.

Another interesting chart to watch is QBE versus the ASX All Ords Index.

QBE Insurance versus ASX All Ordinaries Index 5 year chart

qbe-vs-asx-all-ords-5-years-chart-feb-10

I have been watching the relationship between the QBE share price and the ASX All Ords Index since 2007 and first wrote about it on this blog in 2008 since I believe that the QBE share price acts as a very good indicator of investor appetite for stocks. (see: QBE and the All Ordinaries – do the charts tell us something?

Now I did get some comments to the effect that I was crazy to suggest that this relationship was worth watching but history has proven me correct, and QBE is once again giving us a hint of where the wider market will head.

The chart above tells me two things. One is that the relationship between the All Ords and QBE is working again after it fell apart in 2009 and two, is that the next major move on the Australian stock market will be upwards and to be more specific; into the 4800 – 5200 range again.  (probably above 5000)

All in all, most charts I look at now seem to be showing signs of normalcy. I am not saying a recovery is in full swing, what I am simply saying is that the recovery has started and that stocks are getting back to being traded on their own merits, and not simply because of fear and rumours. This is a good thing for investors.

But that is my reading of the charts…what do others think? Is this perhaps the quiet before the storm and could it be that we are simply enjoying a moment of stability before the markets take another major plunge?


23 responses so far ↓

  • 1 Anon // Feb 22, 2010 at 8:33 pm

    Basically its over – Charlie Munger
    http://www.slate.com/id/2245328/pagenum/all/

  • 2 Ned S // Feb 23, 2010 at 3:18 am

    Satyajit Das is never a bloke I feel very comfortable ignoring:

    http://articles.moneycentral.msn.com/Investing/SuperModels/greek-tragedy-is-just-the-first-act.aspx

    I see the RBA’s Debelle reckons Asia is OK – It’s just the rest of the world that’s crook:

    http://www.theaustralian.com.au/business/markets/weak-bank-books-in-us-europe-pose-big-risk-says-guy-debelle/story-e6frg926-1225830970999

    If the punters really believe that, then now might be as good a time as any for the Asian stock markets to begin to decouple from the rest of the world perhaps?

  • 3 George // Feb 23, 2010 at 10:44 am

    Greg Atkinson: But that is my reading of the charts…what do others think? Is this perhaps the quiet before the storm and could it be that we are simply enjoying a moment of stability before the markets take another major plunge?

    Yes Greg, that’s what I see, a moment of stability, a pause before the next major plunge. On basic technical analysis, both XJO(S&P/ASX200) and XAO(ALL ORDS) showed signs of weakness when they could not break above their respective 50% retrace levels. They would both need to breakout by at least 5% above the 50% to indicate higher moves, or go above 5250. Even the Dow Jones managed to exceed its 50% retrace level by almost 4% (before its 900+ point correction), so to me, the Australian market looks weaker than the Dow.
    I can’t see the XJO, XAO, or Dow Jones index breaking their January highs, and it looks to me we have just begun a major Wave3 down, it will be a beauty! If I am proven wrong on this, I will cease trading stock markets, as currency devaluation will be immense, and trade only gold which will then see its greatest increase in value in history.
    On the subject of best performing stocks, I have yet to see one that recouped its losses (from extreme high to major low) – the best gains were made by NCM.AX (Newcrest Mining Limited) – they mine gold – which by December 2009 had regained 96% of losses, and currently sitting above 70%+.

  • 4 Greg Atkinson // Feb 23, 2010 at 11:40 am

    Thanks for the comments George. I am ready for another correction (or 4) but I am not expecting a big move downwards (i.e below 4000). But that’s the things about looking at charts and trends, we can never be sure what will happen going forward so your assessment is just as good as mine or anyone else’s.

    I guess over the next 6 months we will find out if the bulls or bears are in control!

  • 5 Anon // Feb 23, 2010 at 12:41 pm

    Yeah this market is impossible to call….likely when we make a prediction we’ll be wrong anyways!
    I think we need to look at the fact you can get near 8% fixed in a term deposit for 5 years. So to match these returns you would need the xao to be about 7000 in 5 years.
    Given the risks I’m not sure this is possible.

    Remember, above just discussion — seek financial advice from a qualified financial adviser.

  • 6 Greg Atkinson // Feb 24, 2010 at 1:36 pm

    Yes near 8% for a fixed term looked pretty tempting especially on a day like today! Still nothing to worry about yet, let’s see how Q1 ends 🙂

  • 7 Anon // Feb 24, 2010 at 3:31 pm

    If we go back to Benjamin Graham 101.
    You can get 6% for a 6 month term deposit.
    Current PE of ASX = 16.97 = 5.89%
    PE Forecast Y1 = 15.25 = 6.55%
    PE Forecast Y2 = 12.77 = 7.83%

    So returns are barely above a 6mth term deposit. Theres a negative margin of safety for current asx returns and a 5 year term deposit (~8%).
    Thats a shokka 😛

    Remember above not advice, just discussion — seek financial advice/decisions/info from a financial adviser.

  • 8 Greg Atkinson // Feb 24, 2010 at 3:38 pm

    Anon my view is that if you are getting into stocks now you have to be prepared for the long haul..5 years plus. But that is just my view and of course not any form of financial advice. I also avoid following the “smart” money now as the GFC showed me that the so called “financial guru’s” were just risk takers who had a few good years.

  • 9 Anon // Feb 24, 2010 at 4:05 pm

    At the end of the day Greg hedgefunds dont control the market interest rates do. Theres no point following any hedgefunds if you have no safety margin over the risk free bank rate.
    At current term deposit interest rates we have negative margin of safety.
    For things to change we either need to see a big uplift in earnings much higher than forecast or interest rates to drop.
    Thats not to say stocks couldn’t go higher, they may well…but I dont like playing hands where the dealer has the odds 😉

    Remember above not advice, just discussion — seek financial advice/decisions/info from a financial adviser.

  • 10 Anon // Feb 24, 2010 at 4:50 pm

    “I also avoid following the “smart” money now as the GFC showed me that the so called “financial guru’s” were just risk takers who had a few good years.”

    I try and go in with the mindset everyone has something to offer. I used to extrapolate bad calls and then say everything doesn’t work related to that person or method in the past. I think alot of people do this and its very limiting. I’m trying to be more open to ideas but selective and cautious at the sametime. Somethings work sometimes, other times they are useless.

    Remember above not advice, just discussion — seek financial advice/decisions/info from a financial adviser.

  • 11 Greg Atkinson // Feb 24, 2010 at 6:22 pm

    Anon I agree with you regarding keeping an open mind but there are certain ex-high flyer’s who I won’t be listening to much in the future.

    When I look at the chart of the ASX All Ords above I just wonder how long it will take to get back up to around 6500. It isn’t going to happen this year, if it does I will gladly be buying the drinks!

    How about 2011? That also looks a bit of a stretch which means your P/E analysis above is very relevant. Maybe it is best to sit in cash for some years?

  • 12 Anon // Feb 24, 2010 at 7:17 pm

    “How about 2011? That also looks a bit of a stretch which means your P/E analysis above is very relevant. Maybe it is best to sit in cash for some years?”

    It sure looks that way right now.
    The rogue element here is low interest rates in multiple countries fueling carry trades. The international monies will likely end up in Australia and you’d expect some to end up in equity markets ?
    Its also important to note just because the margin of safety is negative doesn’t mean it cant get worse! Remember the dot com boom 😛

    I make a rule if I enter the ASX meaningfully I need at least 100% M.O.S. in bull markets and 200% M.O.S. in bear markets. This takes alot of the downside out of the equation.

    So to give me 100% M.O.S. (assuming earnings stability) the market will need to drop to ~2,365.
    50% M.O.S. would be ~3,547.
    If Term deposits fall to 4% (from 6%) and earnings stay constant:
    100% M.O.S. market would be 3027
    50% M.O.S. 3878.
    So lots of variables here…and these will keep changing no doubt.

    Of course these rules do get broken, but I need to very certain that i’m correct. Atm i’m not confident in the ability of the market to outpace bank returns from these levels. Normally I would use government bonds as the benchmark but given bank deposits are guaranteed this is abit pointless !

    Remember above not advice, just commentary — seek financial advice/decisions/info from a financial adviser.

  • 13 Anon // Feb 24, 2010 at 7:26 pm

    “Anon I agree with you regarding keeping an open mind but there are certain ex-high flyer’s who I won’t be listening to much in the future.”

    Which high flyers are no good? I might put them on the ban list lol.

    Some good ones are: Seth Klarman, David Einhorn, Stuart Walton, Paul Tudor, Buffet of course ;).

    Soros is very difficult to track. He is very erratic and says one thing and does another.

    Also you need to be careful Einhorn some of his picks are real dogs. I prefer his macro and industry bets rather than individual stock picks. Infact he likes to buy alot of dogs that woof 😉

    Remember above not advice, just commentary — seek financial advice/decisions/info from a financial adviser.

  • 14 Anon // Feb 24, 2010 at 8:16 pm

    “If Term deposits fall to 4% (from 6%) and earnings stay constant:
    100% M.O.S. market would be 3027
    50% M.O.S. 3878.’

    *Correction
    Should be:

    100% M.O.S. ~3,500
    50% M.O.S. ~4100.

    Remember above not advice, just commentary — seek financial advice/decisions/info from a financial adviser.

  • 15 Ned S // Feb 24, 2010 at 8:27 pm

    There’s definitely some unhappy campers out there. Cyclical bull within secular bear that has maybe 5, maybe 10 more years to run being a take that isn’t just coming from the traditional “music to slash your wrists by” chaps in the US.

    The RBA seems to have a different game in mind for Oz though? And as definitely taken to chatting about mining booms and upside risks and inflation. I found the following quote interesting:

    “There’s only so much activity that can take place and if we want to have all this mining investment and mining output, which is happening, then basically the other part of the economy, for the moment will have to be restrained somehow,” Mr Battellino said.

    Asked how the restraint would be carried out Mr Battellino said “through interest rate policy”.

    http://www.wabusinessnews.com.au/en-story/1/78742/Mining-to-double-boom-beyond-15yrs-RBA

  • 16 Anon // Feb 24, 2010 at 8:46 pm

    “The RBA also expects the size of the mining industry to double over the next few years in an effort to satisfy Asia’s vast appetite for energy and resources.”

    This is what worries me about that statement Ned:

    http://www.kitconet.com/charts/metals/base/lme-warehouse-zinc-5y-Large.gif

    http://www.kitconet.com/charts/metals/base/lme-warehouse-lead-5y-Large.gif

    http://www.kitconet.com/charts/metals/base/lme-warehouse-copper-5y-Large.gif

    Traditionally metals prices have a negative correlation to warehouse levels. China has also been accumulating more than they require from excessive credit and government stimulus.

    Remember above not advice, just commentary — seek financial advice/decisions/info from a financial adviser.

  • 17 Greg Atkinson // Feb 24, 2010 at 8:59 pm

    Anon, I am with you in this. I think the RBA are being overly bullish and effectively only planning for a future mining boom and little else. What happens if they are wrong? Like I have said many times, where is Australia’s plan B?

    By the way, Anon, if there are more than 2 links the moderation system kicks in and it holds the comment for approval..sorry about that.

  • 18 Anon // Feb 24, 2010 at 9:18 pm

    Thats cool Greg, its your site and you make the rules.

    Australia has no plan B. This is why I’m extremely bearish the AUD. Unfortunately there are one gazillion carry trades providing fuel to the fire !

    Remember above not advice, just commentary — seek financial advice/decisions/info from a financial adviser

  • 19 Greg Atkinson // Feb 24, 2010 at 9:24 pm

    Yes I am a touch bearish on the AUD as well. Seems people are counting on a few more interest rate rises as though they are a done deal.

  • 20 Ned S // Feb 24, 2010 at 11:21 pm

    Seems to me that what the RBA is talking about is investment that is actually happening. Plus some stuff that is projected. With the initial project developments expected to add strongly to growth. (“over the next few years”?) And implications for interest rates and inflation. Although they maintain they are better equipped to handle the latter than in the past. (Which would be nice! 🙂 )

    Effects of same on resource stocks, metal prices etc … Not something I’d pretend to be able to call.

  • 21 Greg Atkinson // Feb 25, 2010 at 7:06 am

    Ned I wonder where the RBA suddenly gained their amazing crystal balls skills from? Remember they totally missed seeing the GFC coming and were still raising rates in 2008 because…they were fighting inflation caused by a mining boom!

    It seems to me that the RBA are not ahead of the curve and not even on it, but way behind. Yes there is a lot of mining investment going on, but there was also a lot of building investment going on in Dubai as well 🙂

    I seem to recall BHP shutting down a mine major operation over in WA in 2008/2009 and as far as I am aware it has not re-opened. I also saw a warning the other day that there might be a LNG supply glut.

    Personally I think as a nation we are falling for the old supply/demand trap. We are ramping up supply egged on by nations like China & Japan because this will ultimately drive down prices and play right into their hands. Remember a lot of these new mining projects are foreign owned or are backed by foreign interests..why? Because they want to secure a supply of resources at the best price for them…not us!

    Maybe it is just me, but I reckon the RBA has a very messed up view of how the real world operates.

  • 22 Ned S // Feb 25, 2010 at 12:14 pm

    Marc Faber reckons China could have a bad year this year. Harvard University Professor Kenneth Rogoff reckons it will have a nasty setback sometime within the next 10 years. That’s quite a range.

    I guess my point is simply that Oz is seeing investment right now. Is it possible projects will be cancelled? Yes, but is it likely if China wants to diversify out of US Treasuries and does “want to secure a supply of resources at the best price for them”? Probably not I suspect.

    As to whether the Chinese are smarter than us with a long term plan that we seem to lack, then Yep, I reckon we can pretty much take that as a given! 🙂

  • 23 Greg Atkinson // Mar 10, 2010 at 7:56 am

    Well I know my reading of the charts above is not popular with a lot of people but the markets have rallied since I wrote the post above and it looks like we might be in the middle of rally that will take the ASX 200/All Ords above 5000.

    As for China, my hope is that as the Chinese economy slows (as it will) things will pick up in the U.S and Europe, thus the ying/yang of the global economy will be balanced.

    I am not sure I agree with Marc Faber that China will have a “bad year”, I just guess it won’t be a great one like they have been having for the past decade. All economic booms come to an end, if you believe otherwise then you are setting yourself up for a nasty fall.

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