Wednesday

Secular Bull Market Has Begun

Post a Comment September 23, 2009 – 3:25 am |   | Permalink |  Print This Post |

Apologies for the facetious heading - for our regulars reading (we know there is at least one - welcome Anthony), you will know that we remain sceptical of this rally. Perhaps the lows of March will hold, but in every bear market rally comes a “retest”. The Bulls argue that with India and China powering ahead, the world is quite a different one to that in 1929. I have to agree, but that does not mean the index cannot go lower. Whilst we see pictures of starved children during the Great Depression, now we see Chinese and Indian students globally in their fancy cars, brandishing their collection of Louis Vuitton bags - totally oblivious to the economic crisis at hand. We are definitely no economist (thankfully, they get it wrong all the time), but it is entirely possible for the Dow to retest March lows whilst China powers ahead, and for the Dow to fall further without extreme poverty and famine seen in the Great Depression. Look at Japan - the Nikkei’s steady decline from >30000 to 7000 saw the Dow, China and India surge to new heights.

Our take is for the Dow, Dax, and FTSE to head significantly lower than where it is now. Our charts show that the turn is not far away - and because our chart of our indicator looks over a 20-25 year timeline, its utility in picking turning points are not as precise. If you do not have any positions at the moment, do not feel like you NEED to participate in the rally. We are hoping for the rally to go higher, to suck in more Dumb money and for the Bull:Bear ratio of headlines to go higher. CNBC still gives some air time to the occasional bear analyst - that is a bullish sign.

There are still good buys in this market - as demonstrated by our recent purchase (and subsequent divestment) of Select Harvest. It was ridiculous to see that its share price fell everytime the company provided an update on its almond operations (informing investors that there is still no definitive solution to Timbercorps management rights assets). We knew it was a matter of time that someone would buy these assets, and that SHV would naturally retain its rights to manage the farms - and this great “unexpected” news would be factored into the shareprice (23% in one day was unexpected).

The PE for the S&P is now about 26-28 (depending on what you read) - in the territory of the 2007 peak. Are the fundamentals of the market any better? Definitely NOT. Should JB Hi Fi be trading at 19.22? (by the way we shorted another 1000 shares at 19.22 to take our total JB shorts to 2000 averaging at 18.96) .

A word of warning though for those foolish enough to join us on this one:

1.  There are Barrier Put Warrants for JB at $23-24 expiring in December 2009.  Barrier warrants are “shorts” with a ceiling - ie if JB shares hit $23 (or whatever the barrier price is set by the issuer) within that time frame, all traders who bought the warrants would lose their money ie they have been struck out. So, if there is a significant number of traders who have shorted JB via these warrants, it could be more profitable for the issuer to push the price of JBH up to the strike out price. At the moment, there are only 95000 shares for sale for JBH. Assuming no other new sellers come in, AND that the issuer snaps up all 94000 JBH shares over a short period of time (not a realistic assumption since the directors have been unloading their shares), that would be an investment of 94000 x $23 (average purchase price) = $2 million dollars. If there are $10 million dollars of Barrier Put Warrants outstanding, then the issuer would have an $8 million dollar profit as buffer to sell out the 94000 JBH shares it just bought.  The breakeven price is $8.50 (ie if they sold all 94000 shares at only $8.50, they would make a loss of $8 million dollars). So if you are shorting, make sure you have sufficient ammo to hold (and short more) at $24. And if you are residing in Australia, stop buying your plasma TVs in JBH.

2. ASX is “undervalued”. Unbelievable but based on our intermarket metric, the ASX is “undervalued” when compared to other markets. We say “undervalued” because it could also mean that other markets are overvalued. But if other markets stay the same, the ASX would have some catch up to do. This rally may result in indiscriminate buying and may push JBH higher (and help the issuer of those Barrier warrants to achieve point 1 above)

Disclaimer: All discussion above are hypothetical and for entertainment purposes only. We make no claims of the issuer of JBH Warrants engaging in such an illegal practice.