Our market continues to move up albeit at a slow pace.

As you can see in the below chart the rate of the increase is slower but steadier then the previous moves up. This could mean that we are moving into a period of the market stabilization. The volatility since the start of January is less than in the previous months.

It is still a common thought that the market will fall further and there is still worst to come.

As investors we must be careful not to get confuse from the media hype. Yes, a recession is coming or is already here. No, this does not mean that the market will collapse.

There was no recession in 2007. In fact most would describe it as boom time. A recession is the result of the GFC, not the cause.

Taking a look around the globe, all of the main markets have had a good start to the 2012-year. Although we still have a long way to go, I expect that 2012 will be a steady year.

I am not expecting any capital growth, I expect that we will continue to see volatility in the market but this will be less than last year. Companies will report modest profits and stable financial positions dividend will for the most hold steady and income will remain the key focus for investors.

The big change in 2012 will be social views; with the purse strings getting a little tighter I expect that 2012 will be the start of the change back to family and community values in Australia.

The 2013 election will be something to witness as will the Queensland State election this year.  Voters are doing it tough and are expecting that tougher times are ahead; they are focused on basic needs at present and will have little time for policy which does not provide services they need.

I will continue to look for opportunities in the market, chasing companies, which have been undervalued by emotional investors and buy these with a long-term view. 

Recession.

The media came out last week with the dirty word that Australia was going into a recession.

Thank you Captain Obvious, it has been clear since 2008 that Australia would at some point fall into a recession. It would have been sooner if not for the stimulus packages the government kept throwing at us. Remember the $1,000 for cyclone Yasi.

Back in late 2008 our large companies started to recapitalize. The funds were used to pay down debt and unwind all of the financial engineering, which went on for the past decade.

Next they reduced their dividends to make sure that their expenditure matched their cash flow. 

Now in 2012, companies are cutting expenses. The largest expense and the easiest to cut are wages. We now expect to see 7,000 jobs lost in the finance sector alone; manufacturing sector is also cutting jobs. The retail sector will also be cutting jobs as households slow down in their spending.

It should be no surprise that the average person is also now looking to reduce spending. Which means retail sales are down, housing is down and travel is down. 

Unfortunately the average person was not paying attention at the height of the GFC. I had many people tell me that the GFC did not affect them. They were not looking far enough into the future.

The Bad News

The next three years are going to be tough for the average household as they adjust to new spending habits. 

Unemployment will go up and house prices may fall further, for those coming out of University getting a job will be tougher and you can expect lower pays.

The Good News

The major companies in Australia have done most of the hard work and are now looking to obtain greater efficiencies over the coming 2-3 years. This will provide better results, producing higher income and dividends.

We can expect to see the markets start to head back to fair value.

I expect 2012 to still be ordinary which is why I am still chasing income stocks but 2013 should be a much better year for growth. 

Contrarian 

We all like to think we walk our own path influenced little by the world around us, even that we influence those around us. This week we were shown that in the financial world this is not the case.

The victim was QBE; the herd were most of the major investment banks.  After announcing a 50% drop in profit for the year and looking to cut the dividend the priced dropped 20%. The very next day the large investment houses dropped their price target to fall in line with the current price.

It was not unexpected that QBE would have a disappointing year same with IAG and Suncorp, what is surprising is why it was sold down so hard given that the price has already been dropping over the previous months.

It comes down to the herd mentality.  

Managers of large investment portfolios are playing with your money, not theirs. Their bonuses are based on them achieving a result better than their competitors being other fund managers.  They do not care if they lose, only that they lose less than the other guy.

To me QBE is a buy for the longer-term investor.

The aim is to buy low and sell high. You will never buy a stock cheap if everything is going well, it is only on poor results or a mishap that the price of a company will fall below it fair value. This is when you buy, against the herd.

The trick is to know the company inside and out and be comfortable waiting for the turnaround.

All good quality companies will turn, take ANZ which was below $14 in 2009 now $21.

We have again this week seen the market make a higher low, all of the big investment banks are negative on the market and across the globe we are hearing that China is slowing, European countries are having their credit rating drop and housing prices are coming off.  

To me this points to the market being close to a bottom, making now the time to start getting cash back into the market.

Ask yourself, which bank do you use, will you be shopping at Coles or Woolworths this week and are you going to stop insuring your property?

These sectors are good long term investments; I can assure you that everyone will also be using these businesses.   

A: A real estate agent works for the seller, a portfolio manager works for the buyer.

If you are buying a property you have no one to provide you advice on what the property is worth, agents work for the seller. It is their job to get as much for the property as possible, as such they are always talking the price up, the market up and the economy up. There is no commission for the agent to try and talk the seller down to a lower price. For real estate it is always about the seller not the buyer.

As a portfolio manager dealing in direct shares my job is to look for bargains, to look for those businesses that are trading below their intrinsic value. My job is to provide professional advice for the buyer to assist them in buying a good long term investment. To do this I need to form an opinion of what a company is worth and then wait for an opportunity to buy.

These events are very common especially in a market like we have experienced for the past 4 years. Most people assume that all investors are logical and make their decision based on careful consideration. In fact this is far from the truth; even the large players have a herd mentality and will sell a quality company because everyone else is. Keep in mind that the large players are not using their money they are playing with your superannuation.

I, on the other hand invest directly into all of the companies which I recommend for clients as such I carry the same risk as my clients. I only look to buy companies which are fundamentally cheap and pay a high dividend yield out of free cash flow. I have strict criteria when researching  a company, I do not concern myself about what the herd is doing and only worry about the performance of the company.

Unlike the real estate business I look to see what the market is doing at any time and then focus on the opportunities this will bring. If the market is moving up I will look to the growth stocks in the materials sectors if down the value stocks.

I work for the buyer; you make your profit from buying at the right time not from the sale.

At present the market is low and there are plenty of opportunities.

I have completed my model portfolio for the 2012 year and will be sending recommendation out to clients in the coming week. The model will be posted on the web site but only after clients are set.

Everyone likes a good news story; well the good news for 2011 is that it is over. 

For me 2012 will be another year of consolidating client’s investment portfolios to take advantage of oversold companies, holding the quality companies for yield and taking profits on the growth stocks in the materials sectors when available. 

I am hearing that 2012 will be a much better year; I am hearing this about Real Estate and from Broking houses. If we think back to the start of 2011 the major investment houses were forecasting that the market would be anywhere from 5000 to 5700 by the end of 2011.

I expected to see it at least in the mid to high 4000 point level. The market (ASX 200) closed around 4050 down 700 points from the open at 4750, which is around 15%.  

But it is not all bad news. There are a number of quality companies trading 20-30% below their intrinsic value and paying gross dividends between 7-12%. Telstra is one of these and it also produced a positive result for the year. 

Below are the broking houses predictions for 2011 and 2012.

As you can see from the above predictions all broking houses got their call about the market wrong. It goes to show that simply talking the market up is not enough to actually make it move. It also holds true for the property market. 

2011 provided investors to go bargain shopping and get their portfolios set up for future capital growth.  

2012 I expect will be just a tough although I expect that in 2012 we will see the market move back closer to fair value. It will be a year to take some profits when available.  

I expect that residential property will look unattractive with low yields and values expected to continue to fall. 

Interest rates have been cut; as such investors holding cash will start looking for a better yield. This should start to push money back into the markets bringing shares back closer to fair value. 

There are two big head winds for 2012.

First is the European Crisis, this will continue to play out through 2012 and no doubt continue to bring volatility to the markets. The issue however has the full attention of the world as such I expect that it will be handled as efficiently as possible. I expect the IMF will be quick to move and should avoid any large scale disaster. 

The second head wind is more concerning, “The Carbon Tax”. We truly do not know how this will affect big business in Australia. The Carbon Tax will push up prices in Australia and put more pressure on the already overtaxed Australian public. I am not sure what the Australian government is thinking with this kind of behavior especially when there is no backing from major world players. 

For me, the instability in our government and its relentless pursuit to tax the average Australia more and more only to waste these funds on fruitless activities is the biggest threat to the prosperity of the average Australian. As such I will be closely monitoring this issue and making investment changes according. 

Below is a quick reminder of what happened in Australia and around the world over the past 12 months:

1. Our market was down 15% but the Dow Jones was up 6%. China worst performer down 19%.
2. Fosters was sold off shore to SAB Millers
3. Our dollar hit a high of $1.10 US and a low of $0.96 US.
4. Telecom sectors the big winner up 18% while materials were down 23.4% being the big loser.
5. Gold up 12.8% while Tin down 28.3%
6. Euro Debt issue
7. Unemployment up, interest rates down.
8. Australian Budget has a $37 billion deficit
9. Home ownership drops to 66% from 73%.
10. Car sale strong close to a million units again in 2011.
11. Australian terms of trade highest in 140 years thanks to Iron Ore.
12. Retail sector suffers as Australians spend $30 billion online.
13. Industrial action is stepped up in Australia with the QANTAS grounding and port lock outs. 
14. Queensland has a 100 year flood and worst cyclone ever.
15. Japan and Christchurch both suffer from earthquakes 
16. Bangkok suffers floods in July.
17. 3500 boat people arrive and 53,000 overstay their visa.
18. The population of Australia hits 22,786,000. 

Saying good-bye to 2011 will not be tough as all up it has been a tough year from most Australians.  

Fundamentally, Australians are going to have another tough year. I expect 2012 will be hard for the average Australian as the costs of living continue to increase, full time employment will be harder to find and loans for housing harder to get. 

The average family is about to start making the same tough decisions which our Australian businesses made back in 2009, cutting their budget, getting rid of unnecessary expenditure and reducing debt. 

I expect to hear more in the media about Australian families doing it tough. 

Do not confuse this with Australian businesses doing it tough. Our major Australian companies have already made the necessary hard decisions and as such are now well structured. Australian companies are cheap and this is clearly shown by the high level dividends they are paying, dividend yields are well above the historical average. 

For me 2012 will be another year of consolidating client’s investment portfolios to take advantage of oversold companies, holding the quality companies for yield and taking profits on the growth stocks in the materials sectors when available. 

The market hasn’t been at this low since August 2011.

All indicators point to the market moving higher in the near term.

The real questions are when and will it be able to maintain itself above 4500.

If we look at the year in review, the market started the year at 4745 and is currently 4140, this is a drop of 605 points or 12% over the past 12 months. The big catalysis was the European Debt Crisis, which brought renewed fear that another GFC was to follow. The high for the year was 4950 and the low 3850; the market was very volatile over this period.

We still have a week to play out before the year is over and I will not be surprised to see the market move lower once again. I suspect that this will be the last time before the market stages a noticeable recovery.  Fair value for me is 5200, however, in this market I would be happy to see the market above 4500 with reduced volatility.

Many broking houses are saying that 2012 year will see the market close around 4100, these are the same broking houses who put out figures at the start of this year saying that the market will close anywhere between 5200 to 6000. As such I pay no attention to their comments.

I expect that given the fundamentals of the major players in the market that we will have a higher close around this time next year.

2012 is the start of the recovery in my book and by 2015 we can expect to see the market back in full swing.

For people holding cash trying to get the timing right my advice is start to dollar cost average now.

Trying to time the market is too hard for the professionals so what chance does the average investor have.

Look to buy quality companies while they are undervalued and then hold for long-term growth. 

The market continued to head down this week as earning forecasts started to come out with some downgrades such as JB Hi Fi which pushed stocks lower. 

I expect that we will see the 4100 floor hold up in the coming weeks. 

Heading towards the Christmas break I would expect investors and fund managers look to reduce their positions and sit on the side line. As such we can expect to see further down side in the coming week as no one will look to hold too much exposure during a extended holiday given the current volatility in the markets and news flow. 

I still expect to see the market higher in the New Year but I do not agree with the general market consensus for the 2012 year. 

I do not expect to see much growth in the value of your shares in 2012 as such I continue to buy undervalued shares paying high level dividends from cash flow. 

It is these investments, which will provide you a sold return over the next 12 months through the income they produce.  

The growth will come but it may take until 2013 before we truly appreciate how cheap these shares are right now. 

After a couple of strong weeks in the market we have seen it pull back in the later part of this week.

I expect that this move will stop somewhere between 4000 to 4100 points. 

Fundamentally Australian companies are in good shape and the European Crisis is on the right track. 

As such I am taking this opportunity to top up on a few holdings. 

The Market in the Coming Months

I am still expecting to see the market back above 4500 in the coming months. The volatility of the market is here to stay for some time but if we look at the below chart you will note the lows are higher each time the market bottoms. This is a good indication that investors are slowing getting the cash back into the market. 

Interest Rates

This week the RBA once again cut interest rates. For me this was a surprise given that they also cut rates in November. I suspect that this was a pre-emptive strike as job numbers start to weaken and housing sales are well down.

This is positive news for Australia as I am expecting that we are heading into tough time over the next 3 years. 

The lower interest rates should hopefully give the recession a soft landing. 

We just need to be careful that the RBA do not over do it. If rates drop too far and over stimulate the economy we can expect a very hard landing.  

For the last 5 months we have been waiting for the market to bottom, we believe that this bottom is now in.

If you take a look at the below chart you will notice that since the low of August 2011 the market has twice fallen back to and established higher lows.

This has on the most part been due to the European Bond Crisis; with the announcement last week by the central banks that they will now start to support banks and pave the way for a free flow of cash the market has made a significant recovery.

I expect to see the market continue to rally from here... and in the short-term (next 3 month) move back above 4500 and towards 5000 points.

Our view is that fair value for the market is between 5000 and 5200 points.

It is not all-good news, as I still expect that the volatility will remain in the market for the next 2-3 years before we start to see stainable growth return.

Investors need to be careful in the current environment as they can easily get caught between and economic down turn and a recovering market.

A recessions is still likely but history has shown us that the market will recover 12 months on average before the recessions is over.

There are some good gains to be made during this time.

We find ourselves in a world of technology, where information is being pushed at us twenty-four hours a day, seven days a week. This results in our idea of long-term becoming shorter and shorter.

My view is that time is relevant to the amount of information we receive in any given time frame. Due to technology we receive so much that time seems to pass very quickly.

It’s time to slow down.

Take a look at the below chart. We are expecting that the market will move back towards 5,000 points in the short-term. This is the level the market was back in 2006, a mere 5 years ago. 

You can see this on the left hand side of chart. It them moved rapidly up before the GFC occurred pushing it down to 3,100 in 2009. This entire move took around 3 years, a very short time when speaking of investments.

In less than a year the market recovered to 5000 from the lows.  It then travelled sideways for about a year before pulling back to the current levels.

Getting back to 5000 points in the next 6-12 months and back to the pre-GFC level of 2006 in not an unreasonable expectation.

This current fall is on the back of the Euro Crisis. We all know this because every financial commentator tells us around 20 times a day.

The real problem is that we do not know who is affected by this crisis.

However, we do know the businesses that are not affected.

Many large Australian blue chip shares have been oversold on the back panic. I do not know when they will recover, but I do know that they are very cheap at these prices.

To me this is a great buying opportunity. 

So instead of focusing on what we do not know or understand we should focus on what we do.

We know the businesses that are well financed, have strong cash flow and growth that will not be affected by the Euro Crisis. We also know that long-term in the market is 20 years not 2.

Long-term investors will make money in this market.