All Ords Report 08/02/2011

Historically, it generally takes around three years for the markets to recover following a crisis as significant as the GFC. If this is correct, why is it that the financial institutions that were offered very good deals to put a lot of money into capital raisings during 2009 are now holding companies over a barrel, to either pay back the money or increase dividend payments?

I believe the push stems from the fact that the Australian share market has fluctuated sideways for more than 12 months and therefore institutions are not making the returns they were accustomed to prior to the financial crisis. These same institutions tell us to be patient and invest for the long term, yet it seems they are becoming impatient. In my book “How to Beat the Managed Funds By 20%”, I talk about the three laws of wealth creation: 1. Spend less than you earn 2. Invest wisely and 3. Leave it alone so it can grow. While it seems that institutions have invested wisely, now they just need to leave it alone so the companies can deliver the results.

These are unusual times, therefore institutions need to allow companies to remain cashed up on solid foundations, ready to ride the wave of the inevitable golden opportunities as they arise. Cash is king, especially in volatile times, and I believe it is prudent for companies to hang onto their cash.

So what can we expect in the market?

Over the past two weeks the Australian share market threatened to pull back to the all-important 4,800 point mark by falling into a low of 4,850 points on Monday 31 January. From there, the market rallied later in the week on the back of strong gains from some of the big miners to end last week on a high, with the rally continuing yesterday in what must be seen as a good sign. What I find reassuring is that the market continues to weather both the political and natural storms of the past 12 months which have presented huge challenges for Australians and for our economy.

All things considered, I believe the market is holding up quite well despite the slow start to the year, and from a technical view is now starting to look bullish once again. This is supported by last week’s rise above the November 2010 high of 4,885 points. As such, I am still expecting the market to rise to a new two year high early in 2011 to between 5,000 and 5,200 points. Given this, I believe now is a good time for investors to make some decisions about their portfolios and look for stocks with the potential to rise nicely. Again I believe that the best opportunities will come from Materials and Infrastructure stocks.

Until next time
Good luck and profitable trading

Dale Gillham
Chief Analyst