The Valor Blog.
Investment News and Views, Direct from Our Team.

Im Back…

After getting married and enjoying a wonderful honeymoon in the Maldives and the Great Ocean Road, I’m back to business.

A lot has happened in a few weeks. The share markets have run off on a bullish rant with little news to drive the returns. A 1% increase in CBA’s net profit for the last 6 months has let to a 35% increase in their share price. Is this logical? Perhaps if you are dividend lemming.

Aussie banks are a leveraged play on our housing market. If you believe house prices are going to boom from their very elevated levels then go ahead and invest, but if you are more prudent and believe that Australian house prices are somewhat overvalued then be very cautious. I once again return you to Steve Keens debt deflation blog and this all telling chart:

The banks are not safe investments!!!! The vast majority of banks around the world lost 80% or more during the last downturn and a good number went broke. Australia is just yet to have its downturn, but it is not a small probability that we have a sizeable correction. I strongly caution those who are piling their retirement assets into these shares to think about the downside before you invest too much of your capital.

As Graham always said, in the short term, the stock market is a voting machine and in the long term the stock market is a weighing machine.

A well renowned broker recently said to ignore the downside risks and dive into the share market. When brokers are speaking like this, it is time to be more cautious.

Our expectation for Australia having less than exciting times ahead has not changed, it has just been delayed by another enormous stimulus program in China. The sub prime issues of the US being mimicked by the frivolity of the current Chinese wealth management products. Whilst it is impossible to predict what percentage of these products will turn sour, the rate of their growth often gives an inkling into the rate of their downfall. With debt to gdp growing at a staggering 30-40% in the last 12 months, the slowdown in investment when it comes will be more severe.

The Chinese “building empty fixed assets” story is unlikely to end well when it finally turns, those that are piling into Aussie equities in the hope that they get a few extra percentage points of yield could have disappointment in the years ahead.

“Be fearful when others are greedy and greedy when others are fearful” (Warren Buffett). This becomes more apt the higher the market runs on very little earnings growth.