In the past week, Storm Financial has been exposed in the papers with claims that their clients are facing significant margin calls and, in some cases, financial ruin, as a result of the group’s aggressive gearing strategy. As we all know, gearing provides investors with the ability to magnify their gains during the good times, but the over use of leverage during a severe market correction combined with the mentality of a buy and hold strategy is like a ‘severe storm’ waiting to happen.

In my opinion the strategy adopted by Storm Financial was not only very high risk but fundamentally flawed as it is highly unlikely that investors clearly understood the risks of such a strategy during a market correction. It is critical in my books that if you use leverage you need to be prepared to sell your investments to not only protect profits but more importantly capital. This is the strategy I have adopted for my clients during the past 12 months, and I am pleased to say that not one of them has experienced a margin call.

So what can we expect in the market?

I have been expecting the market to rise over the past two weeks but instead it has displayed indecision by trading sideways between 3400 and 3600 points. Whilst this is not exactly positive news, it does confirm that the volatility in the market has settled.

With Christmas upon us, volumes will decrease which means it is possible the market may fall away over the next few weeks to test the low of 3201.5 achieved on 21 November. There is a small possibility that this level will not hold and that the market could fall further with the next support level at 2800 points, although this is highly unlikely. My expectation is that the market will find support in early January, and trade up until late January or early February 2009 before we see it pull back.

My longer term view is that the market will generally trade up until May or June 2009 to at least 5200 points. For the regular readers, I wish you a very merry Christmas and I look forward to returning in the New Year with some positive news on the market.

Dale Gillham
Chief Analyst
Wealth Within

Dale Gillham, ‘one of the country’s most respected analysts’ (Wealth Creator Magazine, Nov/Dec 2004), sought after key note speaker and author of the best selling book ‘How to Beat the Managed Funds by 20%’, has assisted thousands of traders and investors to become confident and profitable in their direct share investments. Tired of an industry saturated by quick fix gimmicks and expensive short-courses, Dale co-founded Wealth Within to provide ‘ real education and ongoing personalised support’, as well as independent investment advice to traders and investors who have become disillusioned by the market for one reason or another. As testament to this, Wealth Within launched Australia’s first and only nationally accredited Diploma and Advanced Diploma of Share Trading and Investment.

For more information please visit www.wealthwithin.com.au

There has been a significant increase, of late, in the number of industry experts espousing the benefits of ‘time in the market’, with claims that investors are better off than if they had tried to ‘time ‘the market’ over the past 12 to 18 months. What always strikes me as interesting is that many in the Financial Planning industry believe ‘timing the market’ is about picking exact tops and bottoms, but this is probably the most perpetuated myth in the financial planning and managed fund industry.

The reason why most of us hear the words ‘buy and hold’ or ‘it is time’ in the market that yields returns is because the industry cannot or does not want to time the market. Consequently investors are cautioned about the perils of market timing and have to be content with ‘average’ returns at best. However, the reality is that market timers exit near market peaks using stop losses to protect capital as part of sound risk management, and enter near market troughs to capitalise on the inevitable rally that occurs.

This strategy not only reduces portfolio risk, it increases returns both of which benefit the investor. Let me say that anyone following a buy and hold or ‘time in the market’ strategy over the next two to three years will be disappointed with their portfolio returns. Times have changed and so must investors thinking if they want results.

So what can we expect from the market?

In my last report I indicated that it was still too early to tell if the low of 3201.5 set on 21 November may actually be the bottom on our market and this is still the case. To confirm the bottom we need to see the All Ordinaries Index rise strongly, however, over the past week it has literally traded within the same range of the past few weeks.

Whilst this is not what I was expecting, the positive news is that the volatility in the market is settling, therefore I believe the pendulum may be swinging for the market outlook to be more bullish than bearish. If this is correct, we should see the market rise up from here into late January and possibly early February before we see another move down. Once again, and without wanting to sound like a broken record, I would caution all investors to wait until the market proves it is rising before buying.

Dale Gillham
Chief Analyst
Wealth Within

Dale Gillham, ‘one of the country’s most respected analysts’ (Wealth Creator Magazine, Nov/Dec 2004), sought after key note speaker and author of the best selling book ‘How to Beat the Managed Funds by 20%’, has assisted thousands of traders and investors to become confident and profitable in their direct share investments. Tired of an industry saturated by quick fix gimmicks and expensive short-courses, Dale co-founded Wealth Within to provide ‘ real education and ongoing personalised support’, as well as independent investment advice to traders and investors who have become disillusioned by the market for one reason or another. As testament to this, Wealth Within launched Australia’s first and only nationally accredited Diploma and Advanced Diploma of Share Trading and Investment.

For more information please visit www.wealthwithin.com.au

Given the current market conditions, listed companies are being closely scrutinised by the industry with respect to their debt levels which are expected to be in the order of 30-50%.But this poses an interesting question. Why does the same industry allow individuals to take on significantly greater risk by borrowing up to 70% of the value of their shares or 100% of a property?

Over the past two years we have seen record levels of debt accumulate in Australia which has resulted in record levels of margin calls. This has occurred because of the overuse of leverage and the lack of knowledge on its proper use. In my opinion, retail investors would be better off following the practices of the corporate world. My view has always been that for every dollar you invest in the share market, only leverage to a maximum of 50% of the value of your shares, just like the industry expects any listed Australian company to do.

So what can we expect from the market?

The activity in the market this week has taken some of the shine off of my earlier optimism following last week’s strong rise, given that the market has already given up most of last week’s gains. Markets always test previous highs and lows, and the current down move could be just that, but it is still possible that the market will fall below the low of 3201.5 that occurred on 21 November.

It is for this reason why I continue to say that it is better to wait for confirmation that a market or share is rising before buying. While I believe the low of 3201.5 may actually be the bottom on our market, it is still too early to tell. That said once the bottom is confirmed, which may occur in the next few weeks, my expectation is that the market will rally for at least two months and possibly up to eight months.

Dale Gillham
Chief Analyst
Wealth Within

Dale Gillham, ‘one of the country’s most respected analysts’ (Wealth Creator Magazine, Nov/Dec 2004), sought after key note speaker and author of the best selling book ‘How to Beat the Managed Funds by 20%’, has assisted thousands of traders and investors to become confident and profitable in their direct share investments. Tired of an industry saturated by quick fix gimmicks and expensive short-courses, Dale co-founded Wealth Within to provide ‘ real education and ongoing personalised support’, as well as independent investment advice to traders and investors who have become disillusioned by the market for one reason or another. As testament to this, Wealth Within launched Australia’s first and only nationally accredited Diploma and Advanced Diploma of Share Trading and Investment.

For more information please visit www.wealthwithin.com.au

For over a year BHP has been aggressively pursuing a takeover of RIO, however, it surprised the market this week by calling it off. Whilst the announcement was enough to cause a rally in the price of BHP, the same cannot be said for RIO as its shares fell around 35%. RIO has now been left to battle with its significant debt, which has brought into question whether a capital raising is likely in the near future.

Overall I think the decision was a good one as it will maintain competitive tension in commodity prices between the two players, which will potentially result in lower steel prices. That said I don’t believe BHP is finished with RIO rather the recent announcement is more like half time at the football, with the game likely to resume sometime in the future. Given the current share price of RIO, it is likely that BHP will reconsider the idea of a merger when the economic clouds start to clear– perhaps next time they may only need to offer 1.5 shares for each RIO share!

So what can we expect from the market?

After falling to lows last Friday morning (21 Nov) not seen since August 2003, the All Ordinaries recovered to close higher for the day. The recovery has continued this week with the gains providing encouragement that we may have seen the bottom but we won’t have confirmation of this for at least another month.

The hot question on most people’s lips over the past 6 months has been are we at the bottom? Trying to second guess the inevitable bottom on a share or market, for that matter, is high risk and has cost many people a lot of money over the past 6 months. Remember smart investing is not about getting the cheapest price rather it is about getting in at the safest price.

It is for this reason why I continue to say that it is better to wait for confirmation that a market or share is rising before buying. While I do believe it is possible that we may have seen the bottom last week, it is still too early to tell. That said once the bottom is confirmed, my expectation is that the market will rally for at least two months and possibly up to eight months. For now I still encourage all investors to sit tight as you will be rewarded for your patience.

Dale Gillham
Chief Analyst
Wealth Within

Dale Gillham, ‘one of the country’s most respected analysts’ (Wealth Creator Magazine, Nov/Dec 2004), sought after key note speaker and author of the best selling book ‘How to Beat the Managed Funds by 20%’, has assisted thousands of traders and investors to become confident and profitable in their direct share investments. Tired of an industry saturated by quick fix gimmicks and expensive short-courses, Dale co-founded Wealth Within to provide ‘ real education and ongoing personalised support’, as well as independent investment advice to traders and investors who have become disillusioned by the market for one reason or another. As testament to this, Wealth Within launched Australia’s first and only nationally accredited Diploma and Advanced Diploma of Share Trading and Investment.

For more information please visit www.wealthwithin.com.au