She’ll Be Right

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It’s the end of the week. Emotions are mixed. Half of us wants to throw our lot in with the “She’ll be right” gang, point out that unemployment in Australia has declined to just 5.1%, cite the positive IMF growth forecasts (4.6% for the globe, 9.2% for Chindia, and 3% for Australia) and go have a beer to celebrate how lucky this country is and continues to be.

But the other half just can’t resist watching the slow-motion decomposition that is the Euro and wonder if Europe’s banks are stuffed full of government debt that could make subprime debt look gold-plated. And to be fair, the IMF is also worried that a sovereign debt crisis in Europe is still a threat.

In its updated forecast for everything, the agency said a European debt crisis, “Could lead to additional increases in funding costs and weaker bank balance sheets and hence to tighter lending conditions, declining business and consumer confidence and abrupt changes in relative exchange rates.”

That doesn’t sound good.

Yesterday we promised to be more offensive. That is, we said that despite an outlook for the world that was full of de-leveraging and falling asset prices, there is a time and a place to go on the attack. But is now that time and is here that place? And how would you attack anyway?

Well, there is certainly a place (albeit small) for speculation in any well-diversified portfolio. But it’s important to remember that Black Swans – statistically improbable according to conventional models, but with very large consequences – don’t always have to be bad things. A big oil find by a small exploration company is a low-probability, high-magnitude event.

The same is true with a breakthrough drug by a small bio-tech company. These events don’t have to happen often. They just have to happen once. And if you have a small-portfolio of businesses that are exposed to these kinds of events, you are taking an essentially offensive position. You needn’t bunker down in your cave, at least all the time.

This kind of disposition is another way of telling Mr. Market, “Frankly don’t care what you’re doing…I’m going to own a portfolio of disruptive technologies and businesses with potential for big returns. And also, relax and quit being so manic.”

This, for the record, is our strategy as a financial publisher. We have no idea what will happen as the world wakes up from a hangover from one large leveraged boom, although we know what SHOULD happen. But we have tried to build a team of analysts – Alex, Kris, Murray, and Greg – who have their own ideas, their own expertise, and their own plan. We don’t know who’s right and they don’t always agree. But they always make us think.

By the way, if you replied to our Super request yesterday, thank you very much! The inbox had several dozen thoughtful letters and offers. It’s going to take us a few days to review them. So please be patient. But thanks again. It will be good to have someone on-board who can write about Superannuation.

We’ll be back on Monday with more from the world of finance. But that will it for today. Friday is the day we write a weekly e-mail update for subscribers to Australian Wealth Gameplan. And with mixed signals about whether China’s property sector is headed toward collapse or just slower growth, there’s a fair bit of work to do! Until next week.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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9 Comments on "She’ll Be Right"

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Realist
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Dan, i can’t say that any part of me is worried about European debt let alone 50% of me. Whether intentional or not the bad news is just pure market manipulation via the media, and it is always followed by REALLY good news a mere days or up to a week later. E.G. Data released to say that US housing had fallen off the face of the earth last month and trending down, unemployment grows and company profits are down. This week there are massive gains as unemployment lowers and company profit statements are higher than expected. Economies do not… Read more »
Ross
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Realist, look at the S&P 500 volumes on the days with big gains many times made in just a few hours towards days end. These are melt ups on no volume on those supposed good news reports. Mutuals are still net sellers.

And if DR USA could get some numbers on how big a % of daily trading the top 10 traded stocks were on average each year for the past 20 years it would likely track the debt curve.

Ross
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This is an interesting theory http://www.zerohedge.com/article/guest-post-fed-funding-treasury-through-banks Last week Bloomberg also said that US banks had bought about $45B in muni debt (I think it might have been this calendar year) and that was their largest sectoral growth. I don’t see where this game goes beyond extend and pretend. Real economy consumer credit, small business credit etc is going nowhere, fiscal programmes didn’t do anything in the real economy except bring forward demand and shrink auto inventory. Tax receipts are smashed. VAT’s will cause further pain in the services economy. I am missing something here. There will be a strategy even… Read more »
watcher7
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Relying on newspapers, conventional wisdom, and even fundamentals, is a very thin reed to lean on, when trying to anticipate where the market is heading next. For example: The first news snippet is from just over a week ago. Wall St Week Ahead: Bulls on the run in shortened week Ryan Vlastelica and Angela Moon, reuters.com, July 3, 2010: Bearish bets in the equity options market, coupled with an increasingly sour view from a technical perspective, suggest stocks will struggle to break from a vicious two-month downtrend next week. With few catalysts on tap, it could be difficult for investors… Read more »
Ned S
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Then again it is possible that America is having a few quiet doubts about its cannon fodder being up to the task? : “Most of today’s youth are not eligible for military service because they are too fat, too weak, not smart enough and prone to drug-use and criminal behavior, according to a panel of senior military officers.” http://www.airforcetimes.com/news/2007/06/navy_recruit_crisis_070621w/ Being raised on a diet of big macs and ‘coke’ just doesn’t produce the stern stuff that fatback and ‘corn’ did maybe? I can’t believe their military actually publish this stuff. Maybe it’s just an attempt to lull their ‘enemies’ into… Read more »
Grand Supercycle
Guest

More investors should use technical analysis in my opinion as it’s a leading indicator and tells us where the economy is headed.

In early 2007 I warned of an impending stockmarket crash and I confirmed an equity bottom by early April 2009.

The equity global uptrend since March 2009 was a bear market rally contained within a much larger downtrend that started in 2000.

According to my indicators the March 2009 lows will not hold.

Ross
Guest

Watcher, the volumes are way down. This has been the pattern in all the meltups. Low volume and a smaller & smaller no. of stocks dominating trade. Show me the first report that shows mutuals returning to the market as net buyers and I will start buying into optimism that might provide a lead to sagging consumer sentiment and credit.

watcher7
Guest

Now, however, we learn that bullish sentiment is at an extreme low of 21%, according to the latest numbers from AAII. What this implies is that there are simply too many bears for stocks to collapse at this moment…

The last time there were so few bulls was in March 2009, when this Mother of All Bear Rallies commenced…

http://www.rickackerman.com/2010/07/our-man-chuck-turns-bullish-as-all-get-out/

Ross
Guest

Watcher, it must be the leverage ratio that scares the shorts into the short covering on no volume melt up? The ZIRP carry and plunge protection team threat might combine to see margin calls made narrow and early.

http://www.zerohedge.com/article/entire-market-rally-engineered-stock-volume-fumes

note too posters comment on 10:1 turning into 40:1 order cancellations on NASDAQ

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