We have now entered the last week of the election campaign, and I believe no matter who wins there are two things that will occur for sure. One is that inflation will rise and the other is that interest rates will continue to rise.

Up until now the rising Australian dollar has protected the economy from any significant inflationary increases given that it has risen 20% against the US dollar since the start of this year.

The strong Aussie dollar has also kept petrol prices down despite oil rising around 50% this year.  Over the two last weeks the Australian dollar has fallen over 6% against the USD, and whilst this fall my be short term my concern is the effect it will have on inflation, interest rates and the overall Australian economy if it continues to fall for a prolonged period. 
    
So what can we expect in the market?

The All Ordinaries Index fell into a low of 6503.80 points last Tuesday, before rising strongly on Wednesday. It then rose early in the day on Thursday before falling away and it continued to trade down on Friday.

As you know, I am expecting the market to be bullish until around Christmas and given that it has already traded down for two weeks I am expecting it to rise this week. To confirm that the market will be bullish, it needs to stay above the low of 6503 from last Tuesday.

If the market falls through the low and continues down this week, it is possible that the market will fall until Christmas. Right now only time will tell but if I am correct and the market does rise, it will rise quite fast and present some great opportunities.

While there have been rumours that BHP has been contemplating a merger with RIO, the rumour is now official following the announcement last week by BHP that it had written to the board of RIO outlining its plans, RIO has rejected the offer, but are open to sell at the right price.  Irrespective, the question that has to be asked is whether a merger between these two entities is really good for Australia and for investors.   BHP is already the biggest mining company in the world, and a merger with RIO would decrease competition and in turn cause potential concerns for steel prices not only for Asian steel producers but the rest of the world.  I also don’t foresee any significant benefits for investors if the merger goes ahead. While it will mean there will be one less mining company in the top 20 shares on the Australian market, it also means that investors will potentially miss out on the individual opportunities presented by these companies. Let me explain…   BHP has risen 860% since December 1998 while RIO has risen 532%. This year to 31 October 2007, BHP has risen 81.93% while RIO has risen 47.85%. What this highlights is that if I invest in each of these companies separately, it is highly likely I would make much more money than if I invested in a single merged entity.  

So what can we expect in the market? 

In the past month I have stated that the market would display signs of volatility and unpredictability up until 1 November, and that during these times we could expect a number of false triggers.   In my report on 26 October, I also stated it was possible that the current fall may continue for another week to around 1 November with the market falling to between 6480 and 6300 points. However, what actually occurred is that rather than continuing to fall the All Ordinaries Index rose on 26 October and continued to rise until 1 November achieving a new all time high of 6873 points.   It was not until last Thursday when the market fell below the low of 22 October to 6537 points that we could confirm the move up to 1 November was a false trigger. The market now needs to fall for one to two weeks into a short term low from the all time high achieved on 1 November, and given that it has already been falling for 6 trading days up until last Friday, the current fall should be over soon.  The good news is that I still believe the market will be bullish until Christmas. There is also a high probability that the market will move up very fast from the low and present some great buying opportunities.

Last week the ATO announced that it was relaxing the rules for SMSF in regards to leveraging, and whilst the industry is still grasping with exactly what these new rules will mean for Australians, on the surface it looks to be a positive move.  However, if the new rules mean that investors will be able to borrow to purchase property in their SMSF, this may well have a significant impact on both the share and property market.  Currently SMSF’s invest heavily in cash and shares therefore if money is shifted into the property market it could cause a major decline in the share market. On the flip side, increased demand for property will force prices even higher making it harder for first home buyers to break into the market.   Whilst leveraging can magnify returns, the opposite is also true and while the economy is booming there is usually little to worry about. However, economists are predicting a worldwide recession in the next decade which may cause problems for many baby boomers particularly if they are over leveraged in the property and share markets because they may well struggle to cash up for retirement. 

  So what can we expect in the market? 

Over the last month I have been indicating that the market needed to fall for one to two weeks into a short term low, which it did falling to 6559.6 points on Monday 22 October.  Since that time the market has been very volatile and displaying signs of indecision with a number of stocks swinging strongly in both directions. This made it difficult to confirm the low, however, late last week the market moved up to make a new all time high of 6873 points on Thursday, signalling that the market will most likely be bullish until around Christmas. That said the DOW fell heavily Thursday night and in a reaction to that the All Ordinaries fell heavily on Friday. Right now I do not believe our market will fall below the low achieved on 22 October and that the fall on Friday is nothing to worry about.  While I indicated that the market would display signs of volatility and unpredictability up until 1 Nov, I believe it should settle over the next few days. Once this occurs we should see some great opportunities in the market.

New research conducted by Standard and Poor’s highlights that financial services professionals are ignoring SMSF investors, and failing to provide them with the necessary education and tools to adequately manage their investments. No doubt, this stems from the fact that there is no long term gain in providing services to the DIY market. Yet SMSFs have experienced record growth, accounting for around 25% of the nation’s total superannuation pool and this growth is expected to continue.

While the research indicated that the education needs specifically related to investment fundamentals, risk and return, risk management and the importance of diversification, I would argue whether financial professionals such as advisors are the best people to be educating the DIY investor.

Furthermore, while the current bull market has made it easy for investors to profit, I believe mistakes are being hidden by the strength of the market in recent years. This raises major concerns, particularly when the market changes, which it will invariably do, as to how SMSFs will cope if they do not have the required knowledge and skill to manage their own investments.   
 
So what can we expect in the market?

The strong move up on our market last Thursday (18 Oct) potentially indicated the down move was over, however, it proved to be a false signal given that the market moved down on Friday and then again on Monday of this week falling 131 points in one day. As I have previously indicated, the market is currently in the time period for both increased volatility and unpredictability, and this is certainly the case right now.

During these times, investors need to be cautious as false triggers often arise, which was evident by the move last Thursday. I am expecting the volatility to ease around 1 November, at which point the market will settle into its normal rhythm.

While my medium term view is that the market will generally be bullish through to late December or possibly early January, it is possible that the current fall may continue for another week to around 1 November with the market falling to between 6480 and 6300 points. Following this, the market will present an opportunity to purchase some great shares at lower prices and with more certainty.  

With the ASX launching its new listed CFD product in November, there has been an influx of attention in the media with many suggesting that the demand for this product will be strong. Not surprisingly there has also been an increase in advertising from other providers, no doubt, in an effort to maintain market share. But the question that has to be asked is this product really suitable for retail investors?  Trading CFDs is very high risk and should only be contemplated by those with the required knowledge and skill in trading and in handling highly leveraged instruments. Some of the providers promote they offer education but you have to question how good is it when the average CFD trader only lasts a matter of weeks in the market. In my opinion, the education is used as a lure to attract clients, rather than to genuinely educate them. This was prevalent when options and warrants were introduced into the market, and we may just see a repeat of the providers coming out on top and the mum and dad investors left wondering what just happened. 

So what can we expect in the market? 

Last week I indicated that I was expecting the market to fall by a few per cent over one or possibly two weeks in order to bring some normality into our market. Since last Friday, the market closed lower up until Wednesday falling less than 1.5%. Yesterday, in a surprising move it rose strongly to recover what it had fallen in the preceding four days.  While I expected the market to rise slightly on Thursday before falling away again into next week, it now remains to be seen if the recent strong move has just delayed the fall I have been expecting. While the market will generally be bullish through to late December or possibly early January, I still believe it needs to fall over one or two weeks in the very near future.