Since the Australian Taxation Office announced that Self Managed Super Funds (SMSF) could invest in Contracts for Difference (CFDs) there has been significant debate as to whether this is a sensible move. Given that investing in CFDs is considered high risk because of the leveraging involved, the opponents to this move believe that this product is not really suitable for a SMSF. Those who support this move, however, claim that investing in CFDs is just as safe as buying shares, so why shouldn’t it be allowed. Interestingly, the people opposing the move are the dealer groups and financial planners who won’t benefit from a SMSF investing in CFDs.

While CFDs are a highly leveraged instrument, the problem for the ATO has been that they support options and warrants in SMSF’s, therefore it would be difficult to argue excluding CFDs.  While I agree it is a concern, particularly if the investor does not have the knowledge or skill to trade CFDs, I believe trading CFDs is lower risk than trading options and warrants. My recommendation to anyone considering CFDs as part of their investment strategy should ensure they are educated in the reality of the risks and the knowledge to minimise their losses.

 So what is happening on the market?

If you remember, I was expecting the market to fall around 9% over 2 to 4 weeks from the all time high set on 18 April, however, as we now know it only fell 1.77% to 1 May. Based on this some of you may be thinking that is good because it signifies that the market is still bullish. While in essence this is correct, we really want to see this sort of bullishness at the start of a bull run not at the end. Let me explain.

Price travels at a certain speed in percentage terms over a period of time and since March this year price the market has travelled at twice the speed for more than twice as long as it did following the March 2003 low. This indicates one of two things: either the market is more bullish now than it was when it rose out of the last 4 year low in March 2003, or the market is in a state of euphoria like we experienced just prior to the tech wreck in 2000. In my opinion I believe it is the latter, hence my concern. Whilst I am certainly not suggesting the market will fall as heavily as it did during the tech wreck, I do believe we need to be very conscious of where the market is right now and what may occur in the future.  

So what can we expect from here? It is now likely that the market will continue to rise over the next few weeks to around 6500 points before we see a much larger fall than my original expectation possibly into June or maybe July. That said we still need to be aware that the market could still fall away at any time over the next few weeks to achieve my original price target.

It is anticipated that at the end of this financial year superannuation funds are set to deliver around a 13% return to investors, which will be the fourth year running that funds have delivered this type of return. While investors appear happy, the question to ask is are they really getting a good deal?

While funds do tend to benchmark themselves against various indices such as the S&P/ASX 200 or 300, if we just look at the All Ordinaries which comprises the top 500 stocks on the Australian market, it returned (excluding dividends) 17.79% in financial year 2004, 19.82% in 2005, and 19.01% in 2006, and so far this year it has returned 18.77%. If we include the average 4% dividend yield, then growth in each of the past 4 years has averaged over 20%. Given this, I would argue that there is a strong case for investors to set up their own self managed super funds. After all if an investor achieved only 10% capital growth and 4% income from dividends plus franking credits, it seems obvious that they would be beating the major super funds performance.    

So what is happening on the market?

Predicting what will happen in the share market on a weekly basis is a tough job because at times the market behaves erratically, which has certainly been the case over the last month.  In the past week, this erratic behaviour has really only seen the market trade sideways, with the peak on 18 April yet to be broken, which suggests we may have seen the short term peak I have been expecting.

In previous reports I indicated there was a high probability that the market would peak sometime up to and including April 18 and it is now 5 trading days since then and the market is finally falling away, which I expect will continue for at least another 1 to 3 weeks. Whether this peak is the actually yearly high I have been predicting is yet to be confirmed. If it is, then I expect the market will fall to around 5800 points. As I have indicated previously, I don’t believe medium to long term investors need to be worried about the current fall as I expect the market will return to being bullish in the not too distant future.