article 3 months old

Here’s Why You Dump Stocks Or Load Up On Them

FYI | Feb 11 2016

By Peter Switzer, Switzer Super Report

Right now, stock markets are at a base level from which they could take off or nosedive. So how do you make your bets? Should you sell everything, as RBS recommended a few weeks back, or do you hang tough and buy great companies at much lower prices?

Recently, I talked about a UK-based fund manager, who recommended that FANG was a good strategy for anyone wanting to play overseas stocks. I saw him last week and he corrected me saying it was (excuse the French) FAG because he thinks Netflix has too many rivals compared to Facebook, Amazon and Google.

Amazon is a crusher and doesn’t care about earnings but about revenue and buying or crushing rivals.

Commentators point out how Amazon’s share price has fallen about 25% since mid-January. However, they leave out that it climbed from about $370 to nearly $700 in the nine months from March to December! That was around a 90% spike, which makes the 25% pullback look a little more understandable!

Let’s apply the same analysis to a great stock, such as Macquarie Group. In November, Macquarie was over $85 and many were expecting it to challenge the $100-mark but then it turned to mush. On Friday, the millionaires’ factory was down to $63.74, so that too has slipped about 25%. The question you have to ask yourself is this: “Is this buy time or dump time for stocks?” The same should be asked of others such as Amazon, if you play overseas.

So we get back to the key question: should we buy these once stellar stocks (and let’s throw in the likes of CBA and other great quality dividend-paying stocks)?

I pointed out in last Saturday’s Report, that Mary Ann Bartels of Merrill Lynch Wealth Management in the US told CNBC that morning that we were in the early stages of a secular bull market, which historically lasts over a decade!

Gary Stone of Sharewealth Systems said the same last Monday.

Against this, the Citi team has come out with this negative pearler that “the global economy seems trapped in a death spiral that could lead to further weakness in oil prices, recession and a bear market!”

Now death spiral could be an exaggeration for public relation effects but it could be that this possible cyclical bear market inside a bull market has some more time to run.

The drops we’ve seen since April (when the S&P/ASX 200 index nearly hit 6000) and what we’ve seen since November last year (for some stocks) and then January might be enough adjustment and we could be close to a bounce.

What adjustment? Answering this question and believing the answer will determine whether you’re a buyer or seller now.

In April last year, it was thought that:

  • The US economy was improving strongly.
  • The Fed would soon raise rates.
  • China was slowing but no hard landing was expected.
  • The Chinese Shanghai stock market had spiked from 2000 to 5000 in one year!
  • Japan was doing well enough to avoid negative interest rates.
  • Commodity prices had fallen but no one expected the falls we’ve seen since that time.
  • Europe and the UK were on the mend and this has been about the only view that has held right.

From the middle of 2015, it all went pear shape and positive views on the future that pushed share prices up were downgraded so stock prices had to be adjusted downwards.

So we’re now seeing the opposite of the excessive enthusiasm that pushed stock markets up, company valuations up and even that crazy Chinese stock market up to a new level.

The consensus of economists backs the fact that the world economy is not going to hell in a hand basket. That’s my view too. The world’s central banks are on board too, so I’m looking to buy great companies for the future at nicely lower prices.

Sure, I could be wrong for six months but I bet I’m right in 12 months and even more right in 24 months.

The history of secular bull markets is on my side but I do have to hope we’re seeing it correctly. Usually, secular bear markets, which ended around 2010-13, are followed by secular bull markets that come out of recessions and are powered by low interest rates and accommodating governments.

I’m seeing that so I’m happy to believe that we’re going through a rough patch that will give way to a better patch.

Are there any recent positive signs to support my contention?

Well, try the US job numbers. Here, non-farm payrolls (employment) rose by 151,000 in January (forecast: +190,000), but average hourly earnings rose by 0.5% (forecast +0.3%) and the jobless rate fell to an 8-year low of 4.9%. Meanwhile, consumer credit rose by US$21.27bn in December, against a forecast of US$16bn!

This doesn’t sound like an economy heading towards recession!

In fact, the Dow fell on Friday because the economic numbers say the US economy is good enough to see a rate rise in March!

My case for believing that some good news will show up in 2016, which will turnaround stocks, looks stronger than last week and I like that kind of thing. That’s why I’m loading up on stocks whenever I can.

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

Content included in this article is not by association the view of FNArena (see our disclaimer).

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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.

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms