Wealth Within - Market Report 6 October 2009
The Productivity Commission’s draft report on executive pay and the potential influence that minority shareholders will have raises some interesting questions. The main one is whether so few shareholders should be able to effectively sack the board of a company. I am all for more accountability from companies and their boards as I believe many executives are paid too much especially when you consider that quite a few have received significant pay rises in the past few years whilst shareholder value has decreased.
It is well known that voting on issues at Annual General Meetings (AGM) are generally considered a forgone conclusion, given that deals are often struck before an AGM with the majority shareholders who are usually the institutions. This makes AGM’s merely a token gesture to at least look like the board is interested in what ordinary shareholders want. It’s no wonder that average Australian shareholders are calling for more transparency and accountability. The challenge for the commission now is how to balance the needs of the minority along with the need for boards to act effectively.
So what can we expect in the market?
I have indicated in previous reports that I believe there is a false sense of security emerging from the general investing public as many investors have been rushing into the market thinking they are missing out on the current bull-run. This is in contrast to the professionals who have been more cautious, which was reinforced last week with the results of a survey conducted by Sky Business Channel that I took part in.
Of the 26 experts, 20 expect the market to suffer a pullback in either October or November with the fall likely to be at least 7 per cent although some claimed it could be as much as 15 per cent. With this knowledge, it is important to plan for what may unfold because all too often investors react with fear rather than a cool head. If we plan for the market to fall and have a strategy to manage that, we are in a stronger position because if the market does continue to rise we know we will make more profit but if it does fall away we can exit early to protect capital.
Until last Friday the market continued to defy logic over the preceding two weeks by refusing to fall away in price, instead it really only traded sideways as the bulls were unable to push the market higher. Since 17 September the All Ordinaries Index closed lower on 7 of the 11 trading days, and also made a lower low and a higher high, all of which are signs of bearish indecision.
The Dow then fell 2 per cent last Thursday causing the Australian market to fall away heavily on Friday to below the low of 4646.30 that occurred on 25 September. Given this, it is possible that the market is finally moving into the short term low I have been expecting. If I am correct we could see a short sharp move down of one or possibly two weeks, with the market likely to fall by at least 5 to 10 per cent with a price target for the fall of between 4300 and 4500 points.
I expect it will more likely be the latter, and given last week was the first week down the market could continue to fall away this week to our target level. If the market doesn’t fall, it is highly likely it will rise for another one to four weeks to between 5000 and 5200 points, before falling heavily into November or possibly December. In any case I believe it would unwise to expect the market to continue its strong bullish run into next year.
Until next time
Good luck and profitable trading.
Dale Gillham
Chief Analyst