Share Market Wrap 1st June 07

Australian Capital Reserve (ACR) is yet another property group to collapse within the last year. ACR targeted small investors promising above average returns to raise money via unsecured deposit notes to fund property developments. While on the surface it appears as though this is a good investment, there are at least two issues of concern; firstly, the fact that the investment was unsecured and secondly, the investment is only as good as the company backing it. If funds had been invested in well established and well run companies like Westfield or Lend Lease, then the investment could have been considered low risk, given their long track record in property. While the lure of higher than average returns is attractive, investors should have been warned that ACR was a high risk investment given the money was unsecured. That said higher than average returns doesn’t always mean high risk; it just means the investor needs to understand the investment vehicle and who they are dealing with, what is securing the investment and how liquid it is in case they need to exit.

So what is happening on the market?

Last week I stated that it was still too early to confirm that the market was falling into its yearly cycle low as it had traded sideways over the previous three weeks. And this indecision has continued in the last week resulting in the All Ordinaries trading roughly within a 2% range throughout May. Given that the market has continued to trade sideways following the rise of around 10% from early March to mid April indicates that the current bull market is definitely slowing.

Although there haven’t been many instances where the market has traded sideways in the past few years, it is a very normal occurrence and, once disequilibrium occurs between the buyers and sellers the market will find its direction. As you know I have been expecting the market to move down into its yearly low, therefore I believe the sellers will take hold and the All ordinaries will fall away. That said it could still rise up strongly to break above the all time high of 6390.3 set on 22 May, although I believe the probability of this occurring in the near future is low. Right now, I think investors should take a wait and see attitude until the market settles on a direction.

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