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Just borrowed this link fromthe UK board in case anyone finds it of general interest.....
It is an extract from a book written by a US Investment Manager,
about market cycles........



http://boards.fool.co.uk/Message.asp?mid=6870226



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Good link.

Any particular thoughts on it fatcassie1?
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Hi Barcoo,glad you enjoyed the article,


I have been trying to figure out where we might be in the cycle,
but its beyond me ...Im no economist thats for sure, but I'm not very
optimistic....


What do you think, any predictions?





Cheers, FC..
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I'm a bit the same as you in that I try to work out where we are when reading articles like this, a bit like "the economic clock". It's easy to pin it down to a "sort of" area but to a specific point - beats me.
It all gets a bit blurred because of optimists, pessimists and contrarians.
It's easy to see when the companies are going bust but to read the predictions and psychology of the market with foresight is very hard for me. It makes reading the bounce/turn next to impossible. There are people that supposedly have done it, and they might have, once or twice, but to do it consistently correctly - well, there's a name for those that can - bull sh*t artists.
It's a very easy thing to do with hindsight but then again so is everything.
It is also a bit confusing for us at the moment because the Oz market has been robust whereas the rest of the markets are down. What happens to our stocks if the US recovers but ours start looking toppy. Will they hold there own, slide or keep on going.
The thing is no one knows so it all becomes irrelevant.
This is why I have come to the conclusion to follow Warren Buffett's lead and ignore the economy and be a stock picker. In most cases you don't have to be able to pick the bottom of the cycle to know whether ABC is a good buy at the moment.If you can't tell, then it's not a buy.I pick most of my stocks on my (simple)projections of long term fundamental earnings growth. With some stocks I will allow for p/e rerating - up or down.(eg PLF up- RMD down)
Relatively speaking, if a stock is cheap then it should be a buy no matter where the cycle is.
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Oz market has been robust whereas the rest of the markets are down."






Thats what's so strange!

The UK has been in a Bear for a while now, and the US has just gone into recession,but we are doing OK, not usually the case is it!

Best. FC.
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Relatively speaking, if a stock is cheap then it should be a buy no matter where the cycle is

Hi to all
New poster here - to this board anyway !! Hope you don't mind me butting in here but I'm not sure I would agree with this comment by Barcoo.
For me it's extremely important at which point you enter and exit. Here's an example of a bad buy I made recently (I can't give you a chart reference because its on the Sanford site).
I bought Austral Coal (AUO) at 35c about two months ago when the chart clearly said that it was falling - it was below the 50 day ema. I bought because it was cheap but had I waited until it bottomed I could have bought it at 25c - it's now at around 42 and rising. The point is that had I waited I could have bought a whole heap more at 25 than 35.
FA is the basis on which to buy but TA is the key to entry/exits points.
Regards
Harmy

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I quite agree with you on buying shares based upon the company rather than the movement (or predictions thereof..).

If you had sold your house, received a payout or had just decided you wanted to go onto business for yourself you wouldn't ask the business broker for a chart of the business price you would make your assessment on what you understand the business is worth.

If you can't determine whether it's a good price (and in this game you only have to be approximately correct rather than precisely wrong) then you probably shouldn't be buying in the first place.

Only thing to be careful of is whether the recent or predicted profits have a cyclical element to them that needs to be weighed up in the decision.

On Warren Buffett there is an excellent article in Fortune magazine at the moment (if you go the web site it's there) and he talks about predicted returns and on my understanding of what he was getting at I don't think we will have a crash as such but rather the market will continue to drag on until company profits catch up with current valuations. Of course that is the market as a whole there are still individual companies that represent reasonable value but there are a lot of companies where they will need an awfully big tailwind to justify their current prices.
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Wayjo

If you had sold your house, received a payout or had just decided you wanted to go onto business for yourself you wouldn't ask the business broker for a chart of the business price you would make your assessment on what you understand the business is worth.

Big differance Wayjo I've brought buisness & it's not the same as buying shares, if you think that owning some small % of shares in a company is the same as buying a private company out right than I really suggest that you are going down the wrong track.

The share market is a market that trades in shares, the basic aim is to be able to sell them for more than what you paid, most people have no chance of buying a listed company by themselves.

You only have to look at the fact that 10% of the population owns over 80% of listed Aussie stocks to realise that the big players are the ones that determine share price movement.

JR

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Of course that is the market as a whole there are still individual companies that represent reasonable value but there are a lot of companies where they will need an awfully big tailwind to justify their current prices

Wayjo
I haven't figured out yet whether the Fortune article from WB is directed at the US or whether he is talking globally. Given that all markets interact it seems to me that there will still be some countries that will do a lot better that the 7% return predicted by Buffet - over the long term Australia is one of them !!
I think that a lot depends on a country's growth cycle and its resources - the US is probably at its peak (although I have no facts to back that up) whereas Australia still has a long way to go.
Its interesting that Australia is predicted to have a 3% GDP growth in 2002 and 4% in 2003 which I assume is real growth. This is in contrast to the US which is still mired in recession and probably will be for some time despite Greenspan pumping liquidity into the market like crazy. Any increase in US market prices will be as a result of this pumping and not because of a turnround in company profits and productivity.
JMO
Regards
Harmy
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If you had sold your house, received a payout or had just decided you wanted to go onto business for yourself you wouldn't ask the business broker for a chart of the business price you would make your assessment on what you understand the business is worth

Wayjo
I think you're missing the point of what a chart actually is !! It is a graphical representaion of the rise and fall of that particular share which factors in volume, moving averages, momentum etc. If a chart was available for the purchase of a house or business I certainly would ask to see it to find out where in the pricing cycle is was sitting. Why would you want to buy a house at a particular price if the information was available that showed you that house prices in that area were in decline and that if you wait another, say, six months you could buy it for a whole heap less.
I've been through the cycle of LTBH, FA and analysing annual reports and I have to say that the one key element missing was the lack of TA to indicate entry and exits points.
TA is just as essential as FA, perhaps more so !!
Again JMO !!
Regards
Harmy
(who has just joined this board and hopes that I'm not being too intrusive too early)
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Harmy

I think that a lot depends on a country's growth cycle and its resources - the US is probably at its peak (although I have no facts to back that up) whereas Australia still has a long way to go.

I don't understand your thinking , why do you see that Australia has a long way to go?

Its interesting that Australia is predicted to have a 3% GDP growth in 2002 and 4% in 2003 which I assume is real growth

Interesting or just a wild prediction based on past economic data?

This is in contrast to the US which is still mired in recession and probably will be for some time despite Greenspan pumping liquidity into the market like crazy. Any increase in US market prices will be as a result of this pumping and not because of a turnround in company profits and productivity.
Well it's been pumped for years so whats the dif?
Increase in market prices is caused by more buyers than sellers nothing else.

JMO
JR


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I don't understand your thinking , why do you see that Australia has a long way to go?

For the simple reason that the US has outstripped it's natural resources to a large extent - it has to import 30% of its energy, huge imports of practically everything else required to run the country. If it wasn't for the fact that it is the world leader in technology it would be in trouble. The US relies on consumer spending to keep the economy afloat. Australia is still a young country with enormous resources - look at the mineral finds recently - they range from natural gas to tantalum to gold to bauxite etc etc. All of this wealth is contained within Australia - it doesn't have to be imported. Therefore, I say that Australia has a long way to go in its growth cycle and wealth creation.

Interesting or just a wild prediction based on past economic data?

I think you have to give some credence to the economic indicators - the last report I read gave a 3% growth rate in 2002 and 4% in 2003.

Well it's been pumped for years so whats the dif?

I don't agree. For the last ten years or more the US has not needed to prime the economy - it carried itself forward on what Greenspan called "irrational exuberance" - as a result Greenie was forced to raise interest rates to curb this. The result of rising interest rates then caused the bubble to burst and he is now trying to pump the economy with a continuous string of interest rate cuts.

Increase in market prices is caused by more buyers than sellers nothing else.

Of course !! - but what causes more buyers ?? To buy they have to have more money in their pockets or to have access to more credit. If you continue to pump liquidity into the market ie make it easier to get loans through lower interest rates, then people will spend that money. Either through direct investment in the market or else through buying consumer goods. This is what Greenie is trying to do - make people take on more credit to pump the economy.

Regards
Harmy


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Harmy

For the simple reason that the US has outstripped it's natural resources to a large extent - it has to import 30% of its energy, huge imports of practically everything else required to run the country
Not so my friend the US has big reserves of coal & gas & iron ore & gold to mention a few of the natural resources, lets not forget that they are also major beef,sheep & agriculture producers.
USA has an internal market of over 240million thats a lot of consumers Aust has a tiny population & is much more effected by external factors that may decrease the call for exports, that income we rely on.
I agree that we have great resource reserves & that this will help long term but over the shorter term you still got to find buyers for the products.

I don't agree. For the last ten years or more the US has not needed to prime the economy - it carried itself forward on what Greenspan called "irrational exuberance" - as a result Greenie was forced to raise interest rates to curb this. The result of rising interest rates then caused the bubble to burst and he is now trying to pump the economy with a continuous string of interest rate cuts.
Disagree all you like but it's fact.

Of course !! - but what causes more buyers ??
The hope of making money, emotion makes people buy.

To buy they have to have more money in their pockets or to have access to more credit. If you continue to pump liquidity into the market ie make it easier to get loans through lower interest rates, then people will spend that money. Either through direct investment in the market or else through buying consumer goods. This is what Greenie is trying to do - make people take on more credit to pump the economy.
I agree up to a point but the very low employment rate was a big factor in the US boom(as in Aus,restructuring has helped that),it may not be enough to pump the market when the unemployment rate is heading up.Most recent gains in the markets came in a short time so I feel it was a rally that was caused by the market been oversold short term a technical rally if you like, rather than a rally caused by Greenie.

JR Restructed Out




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I feel it was a rally that was caused by the market been oversold short term a technical rally if you like, rather than a rally caused by Greenie

JR
Yes - you're probably right - Greenie's rate cuts take around six months to take effect so the latest cuts haven't taken effect yet. However, there is a wall of money about to be dumped on the market some time in the new year - this will cause prices to move upward but the problem is that the US economy is still going downhill. The latest prediction is a turnround sometime in 2H02.

Not so my friend the US has big reserves of coal & gas & iron ore & gold to mention a few of the natural resources, lets not forget that they are also major beef,sheep & agriculture producers

Yes they have - but they still import 30% of their energy needs and the cost of energy will continue to go up. Japan around thirty years ago used three barrels of oil per head of population whereas today they use ninety per head (think that's right - it's the last figure I read).
When you consider developing countries such as China, India etc the energy demands will be enormous - and the US will be in competition to get its supply. Coal is under fire because of greenhouse gases and its use I believe will be more and more restricted. The US gold reserves that are easily mined are played out and only the hard stuff is still available but at prohibitive cost in extraction. Australia is in the lucky position of being nearly self sufficient in energy with new discoveries all the time. Time will work in favour of Australia with the WTO breaking down trade barriers and newly industrialised countries demanding more raw materials for their own economies.

Interesting subject JR - can lead to plenty of discussion.
Thanks for your ION input - looks like a long term buy based on its fundamentals - if it keeps going at this rate it will be a winner.

Cheers
Harmy
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Harmy

Yes they have - but they still import 30% of their energy needs and the cost of energy will continue to go up
Not energy just oil thats the biggest import, sure a lot ng comes from Canada but they got big reserves of ng in the US.
Something to consider the recent & projected massive(whale) oil field finds in the Caspian sea & to a lesser extent Russia, these finds will take some of the pressure of the US as far as opec pricing is concerned.
Also it is one thing to say the US is dependant on the Arab nations for oil but that has two sides countries like Saudi Arabia,s budget is something like 80% reliant on oil income, so big drops in the price really hurt them.This is the main reason why Opec targets what it considers reasonable prices for oil because they don't want to lose market share & thus income, it's a balancing act.

The other thing that needs consideration when looking at this subject is the USD which has been strong for years.All oil contracts worldwide are in US dollars which has distorted the oil price in the US's favour. Thats the other thing to note the strengh or other wise of the USD & how the oil & gold price responds to the USD movements.

As far as the credit question well I'm miles away from you In agreeing the USA has had strong debt growth since 1987 & that has increased yearly as this Gov link shows.
http://www.publicdebt.treas.gov/opd/opdpenny.htm
It, to me, seems crazy to suggest that any rate increase delivered now is not going to effect the market until six months. For if that was a given prices would increase as soon as the reduced rate is disclosed.

JR


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Also it is one thing to say the US is dependant on the Arab nations for oil

Uhhh !! - I didn't say that !! What I said was that the US depended on 30% of its oil supplies from overseas. Regardless of where it gets its energy it will have to pay in hard currency for it - it's a drain on it's economy that will get worse over time.

As far as the credit question well I'm miles away from you In agreeing the USA has had strong debt growth since 1987 & that has increased yearly as this Gov link shows

Not sure I'm with you on this one. Regardless of how big the debt becomes eventually the piper calls the tune and the debt will have to be repaid. If the economy continues to boom then it can carry the debt but when the economy falters then the debt becomes a real worry because it has to be repaid. Look at Argentina, for example, it has just defaulted on a 95 billion dollar debt and as a result inevitable inflation will ensue. You can't put off paying back debt for ever. In its simplest terms providing the average householder has a job and can continue to pay off his credit card all will be well - the problem comes when he's laid off at work and can't pay the debt - in comes the debt collector, repo man and bank enforced mortage sales. This is the worry that the US man in the street has at the moment.

It, to me, seems crazy to suggest that any rate increase delivered now is not going to effect the market until six months

It may seem crazy but that is how long a rate cut takes to wash through the economy. It may affect the market temporarily but additional liquidity will take time to work its way through. People have to decide to spend the additional money available, then buy the product which in turn generates a demand that companys take time to react to by increasing inventories. Six months is what it takes all right.
Lets take it a step further. The only thing that pumps the market when a rate cut is announced is peoples expectation that prices will rise. It has nothing to do with a companys balance sheet, increased sales, additional eps etc. If the economy is faltering, as it is in the US, then any rate cut as I've said will take months to work its way through. If the rate cuts had an instant effect then why is the US economy still going downhill ???

Cheers
Harmy


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Uhhh !! - I didn't say that !! What I said was that the US depended on 30% of its oil supplies from overseas.
So you didn't say that but it's fact & whale discoveries in the Caspian have at least longer term reduced that dependency, which will help oil prices stay low.
Regardless of where it gets its energy it will have to pay in hard currency for it - it's a drain on it's economy that will get worse over time.
True up to a point, but once the price starts getting to high alternative energy becomes much more attractive.

Your debt comments I agree with, however the link shows debt increasing each year since 87, thus long term credit pumping of the US economy.
That was what we are talking about if the pumping has only been short term as you suggested or over a long period which was my suggestion.
It's been long...... thats unquestionable.

If the rate cuts had an instant effect then why is the US economy still going downhill ???
The market had already factored in (anticipated) the rate cut.
The recent plunge in the market & bounce back have been more significant events that the market has had to deal with(factor in).
The market is saying that the rate cut isn't enough to change investor confidence & that other factors are driving market sentiment.

One of the worst things about credit expansion is the false demand created by the spending of credit(future income)as in your little example.

JR


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I agree a chart is a visual representation of a company's share price - OF THE PAST, the same as financial reports. I have a view that they are not predictive and therefore don't necessarily provide guidance on entry/exit points. Each to his own on this and I don't wish to belabour the point.

I also have the disadvantage of being an accountant and feel most comfortable analysing financial statements and hence if I find something selling at a price I think represents reasonable value then I start to buy it. If the price should go down for a while and I don't think I have made a mistake I simply keep buying. If something made sense at $1.00 then in my mind it makes even more sense at 80c as long as my analysis is correct. So I limit the number of companies I follow to reduce the chance of getting it wrong

I don't pretend to have the skills or foresight to pick every bottom or top and am happy to make a decent return on my money which over 20 years this has done. Probably missed plenty of exit and entry points in this time but I've been buying NAB for 13 years now and hope to still be buying for another 20 or 30 years so I don't lose sleep over it.

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hence if I find something selling at a price I think represents reasonable value then I start to buy it. If the price should go down for a while and I don't think I have made a mistake I simply keep buying. If something made sense at $1.00 then in my mind it makes even more sense at 80c as long as my analysis is correct.

Absolutely correct Wayjo, and I think we should feel indebted to investors who think like harmy and jono, for it is their style of investing which makes ours work. Mind you I reckon jono probably does do all right because he seems to have a fair bit of Fisher in him.

Your analogy about the house works too. If some people can't see that then that is also to our advantage.

Harmy, welcome to the board. Make yourself at home here,no problem with you voicing your opinion even if you see yourself as a newbie to this board. "Jump right in" works for me.
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Thanks Barcoo. Totally agree that the TA's have increased the liquidity of the market 3 fold over the past 3 years and I thank them for that as a shareholder in ASX and as a buyer of shares, because I always need a seller. Now if could just get them interested in a couple more companies I want to buy shares in...

And Harmy I endorse Barcoos welcome and look forward to hearing more from you.
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Harmy I also forgot to mention that I have been involved in a number of acquisitions for a Top 50 public company and never at any stage did anyone on the investment committee say anything along the lines of "yes we understand the figures but have you got a chart as well so we can see our entry point".

The acquisitions either made sense and we proceeded or they didn't and we withdrew. I was personally involved in 4 acquisitions in the private market and the company also made 2 public takeovers during this period and no-one ever told me they asked for the chart on the public takeovers either.

For a long term investor I agree there is 1 more factor more important than fundamental analysis but I suggest that factor is the assessment of the CEO's ability and whether they will either build or destroy the company and whether they have the shareholders interest at heart or their own. A trader can ignore this point but I don't think an investor can.
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Wayjo

Totally agree that the TA's have increased the liquidity of the market 3 fold over the past 3 years
I would have thought that the number of long term buy & holders has increased 3 fold not the amount of TA followers, but I don't mind been corrected so were's the meat(evidence) or is this just an opinion?

I thank them for that as a shareholder in ASX and as a buyer of shares, because I always need a seller.
Well you sure wouldn't be selling to a TA'er that knows what they are on about.

Now if could just get them interested in a couple more companies I want to buy shares in...
Which companies.....& I'll let you know.

JR Helping a accountants is my favourite past time.




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Harmy, welcome to the board. Make yourself at home here,no problem with you voicing your opinion even if you see yourself as a newbie to this board. "Jump right in" works for me

Barcoo
Many thanks for the welcome !! I post regularly on other boards - Mishedlo and the NZ board, lurk around trenchrat, CANSLIM and RAMBUS.
However, as I invest in Australia (and the US) I thought it was about time I followed the Oz board. Also (and I hope I don't hear a collective groan - "Oh God, not another bludger coming over" ) I'm planning on moving to Brisbane in the New Year so that makes it another reason.
Regards
Harmy


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never at any stage did anyone on the investment committee say anything along the lines of "yes we understand the figures but have you got a chart as well so we can see our entry point".

The acquisitions either made sense and we proceeded or they didn't and we withdrew.


wayjo
Mmmm !!! - yes, I think I would temper my comments about TA by saying that TA for me provides a short term indication of a buy point and if you have doubts about where the price is heading a positive indication of the exit point. I have to say that re-reading some of Warren Buffet last night he has the same opinion that you do - providing the fundamentals and management are right and the price is low enough he will buy and keep buying. He does stress though that buying good companies at the right ie low, price is not easy.
However, there is only one WB and probably ten zillion like me just trying to make a buck in a difficult market and I find that, for me, TA is a great help.
Regards
Harmy
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True up to a point, but once the price starts getting to high alternative energy becomes much more attractive

jono202
Yes, - that's problem. Alternative energy sources are just too expensive and for many applications, impractical. Any increase in energy cost simply adds to the overall cost burden a country carries when producing its goods. NZ, for example, when it discovered a monster gas field off the West Coast (during the 1970's oil crisis) decided to produce methanol (LNG) from the gas . The cost of the plant was colossal with a poor rate of production around 30% to the amount of gas used. Incredibly wasteful !! NZ also used CNG but, again, there were many disadvantages and the system has fallen out of favour.
Digressing for a moment !! - did anyone catch the latest news on the oil front from NZ during the last week or so ??
NZ has produced oil and gas for years offshore and onshore around the New Plymouth area, however, apart from the monster gasfield I've just mentioned nothing much has been found. Two companies have just carried out a very deep water survey ie 2000 metres, and have found a sedimentary layer at least 5000 metres thick extending over a huge area. These sedimentary layers are where large oil finds are made in other parts of the world and this particular seismic survey has indicated large structures that have the local scientists quite excited. Drilling in this depth is well within the current capability of deep well rigs - the deepest so far is off the Carribean drilling in 3000 metres of water.
Just my luck it seems - when NZ is on the verge of making us all rich I am leaving for a jump across the Tasman !!!
Regards
Harmy
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Just my luck it seems - when NZ is on the verge of making us all rich I am leaving for a jump across the Tasman !!!

Look on the bright side. It might not matter wether the last one to leave turns off the lights.
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