2007 has started off with a bang as the proposed merger of AGL and Origin energy attracts attention and Alinta executives propose a management buyout. Given this, it looks likely that we will see the spate of mergers and takeovers continue on from last year’s high number. Whilst the prospect of owning a share in a company with a proposed takeover is exciting because of the positive short term benefits if the merger goes ahead, investors still need to be careful.  Throughout history, certain market conditions unfold prior to the completion of a bull market including rising interest rates, low unemployment, high levels of consumer borrowing, rising commodity prices, abnormal high rates of takeover bids and acquisitions, and rampant speculation all of which are occurring now. While I don’t believe that rampant speculation has hit the levels of pre October 1987, we are still seeing a form of this with record numbers of mum and dad investors trading highly speculative instruments such as CFDs Warrants and Options.  Sadly there are many alarming stories of investors losing significant amounts of money when trading these instruments with the current life span of new options and CFD traders calculated in weeks not months. Remember bull markets come and go, but it is often costly for the uneducated investor if they fail to recognise the warning signs of when a bull market is ending. Investors need to be conservative right now and leave the high risk markets to the experienced so that they can live to play another day.   

 So what’s happening on the market this week?  

In my last report for 2006 I stated that I expected the market to continue rising, which it has done, rising to a high of 5671.10 on 3 January. From late last week to 8 January the market briefly fell away before continuing to rise. Now that the holiday season is over we are starting to see more volume on the market and as such we should see it rise up to make a new all time high in the short term.  This next rise should last around four to six weeks before we see any downside. On the bigger picture our last yearly low was June 2006 with the peak for the year occurring in May 2006. I believe this year will be almost a repeat of this given that am I expecting the market to peak in April or May; however, as we are also due for a 4 year low the market may peak earlier. As always only time will tell, but what I do know is that the run down into the yearly and 4 yearly low this year will be longer in time and further in price than the fall in 2006.      

This week has seen increased volatility in the market with the All Ords falling 88.5 points on Monday only to rise back once again over the last few days. So, is this something we should be concerned with? Not really, because I believe the volatility is being driven by Telstra with the float of T3 and the takeover announcement of Qantas.

Given that Telstra and Qantas are two of the biggest companies on our exchange, they tend to influence the movements in the All Ords. Following the T3 listing on Monday Telstra fell by 3.2% whilst the All Ords fell 1.63%. Since then Telstra has risen 3.5% whilst the All Ords has only risen 2.32% with 1.5% of that rise occurring on Wednesday. Qantas rose 14.94% following the takeover announcement on Wednesday and Telstra rose 2.47%. That said, once the dust settles on these two shares, which should be any day now, the All Ordinaries index will return to more normal trading as I have been expecting.  

So what’s happening on the market?

In previous reports I indicated that the market should peak between the 15th and 20th of October and then fall for 4 weeks into a low between the 15th and 20th of November. However, because the market peaked later than expected the time period for the low needs to be extended.

We have just entered week 23 in the current move, and I don’t believe the rise this week signals an end to the down move I have been expecting given that the market hasn’t fallen enough in either price or time to confirm the low. Normally the market will fall for 3 to 5 weeks into a low and we are currently only in week 2 of the current fall, therefore we need to be prepared that the market may continue to fall for at least another 1 to 3 weeks with my target for the fall likely to occur between 5200 and 5000 points.

This week I watched a documentary about the collapse of Enron which was reported to be the 7th largest company in the world prior to its collapse. While I was amazed at how they deliberately manipulated energy prices which they then profited from, I will say that I was not surprised. Whether we like it or not insider trading does occur and possibly on a more regular basis then we might think. While it is not always possible for the small investor to know the inside workings of a company I will say that it is important that they arm themselves with as much knowledge and independent information as they can prior to making a decision to invest. That said I also believe more needs to be done to ensure a higher level of transparency in reporting by listed companies, so that we don’t experience an ‘Enron’ in Australia. 

So what’s happening on the market?

Since the all time high of 5460.40 on 7 November 2006, the All Ords has fallen just under 2%, which suggests that it is now falling into the low I have been expecting. I believe the market will continue to move down for at least another week or two with the fall likely to be quite sharp in terms of price and time. I am still expecting the market to fall below 5200 points although it could go as low as 5000 points before it finds support. As I previously indicated the recent volatility has caused many shares to move strongly and erratically in both directions although I believe this will subside by the end of next week; therefore we can expect the market to return to more normal trading conditions.      

Over the last few weeks financial analysts have been encouraging the public to buy Telstra because they claim it is cheap and a good long term investment since it pays a solid dividend. But how cheap is cheap? Is a stock that is falling in value really cheap? I remember reading reports claiming Telstra was cheap at $6 and then again $4; so the question you have to ask is cheap in comparison to what?  Let’s face it, you don’t get rich chasing a dividend yield and I can’t comprehend buying a share now in the hope of getting a good return in 3 to 5 years, as there are plenty of other shares that pay good dividends and are rising in price like City Pacific that has risen 47% in the last 7 months and pays a fully franked dividend of 9.34% or Zinifex that has risen 105% this year and pays a fully franked dividend of 7.9%. Colorado is another example of a good stock that has risen 30% since mid June and pays a fully franked dividend of 7.37%. If you ask me, the only people really pushing this stock are the ones who stand to gain something. 

 So what is happening on the market?

Last week the All Ordinaries Index broke above my previous target levels as it continued to trade up strongly. I recently indicated that there was a high probability that the market would peak around the 15^th to 20^th of October; however, it now appears as though this won’t occur until the 27^th to 31st of October given that the market broke through the previous all time high of 5352.10 achieved on 10 May 06, on 26 October 2006.  I believe this is a false break that could catch many traders out as I am still expecting the market to fall away for at least two to four weeks into a low with price falling to between 5200 pts and 5000 points around the 15^th to 22^nd of November. You will most likely see more volatility in the market from late this week to mid November which means we will see some shares move strongly and possibly erratically in price.

Since the launch of the marketing campaign to promote the sale of Telstra’s T3 float, people have been wondering why they should buy it and if they did buy it how much money they would make from it. I certainly won’t be promoting it, but if you want to buy Telstra there is a way you can almost guarantee that you will make a profit. Let me explain.

Let’s say you decide to purchase 1000 shares for the first installment at $2 and you borrow the money from a margin lender at a cost of 8.25%. Over 18 months you would receive a 14% dividend yield giving you $420 in income and you would pay $247.50 in interest on the margin loan resulting in a profit of $172.50 or a 69% gross return on your investment. The story gets even better if you use installment warrants to buy into the T3 float. While on paper this looks like a great return, this assumes the price of the Telstra won’t rise or fall during the 18 month period, which, of course, no body can guarantee.

So what is happening on the market this week?

 The All Ordinaries Index has continued to move up strongly in the last week, breaking through my target of 5200 points. However, I doubt whether this strong rise can continue for much longer as we are now entering into the period where I am expecting the next peak to occur which should be between 5260 and 5275 points around the 15th to 20th October. It is possible that the market could rise to its previous all time high of 5352.10 achieved on 10 May 06, although I believe this is unlikely