Market Wrap - Week Ending Friday 27th June 2008

It’s the end of the financial year; overall this is one of the worst years on year results we have seen. As you can see from the below chart our market has lost around 1100 points for the year. This is a decline of 17%.
A couple of things to remember;

1. This is a book loss; the value of your capital invested has fallen over the past 12 months.
2. You still received income over the last 12 months on average this would be 4.5% fully franked. Grossed up for franking credits this is a return of 6.5%.
3. Our market is cheap, currently sitting 20% below fair value. Fair value is 6600.
4. Individual companies have performed well over the past 12 months; the market has been dragged down on the back of fear.
5. This reporting period will be one of the worst most have seen in many years as such the market will most likely get worst before it gets better.

The past year has been a bad result but it is necessary before the market can continue to move on. If we take a look at the past five years we see a couple of key issues.

1. Consumer spending had gotten out of control.
2. Increase in spending was being funded by debt.
3. Consumer debt levels are 5 times higher than in previous points in history.
4. Money was free and readily available.

With the above pressures it was only a matter of time before the market collapsed under its own false economy. This happens around every 5 years; many people have forgotten the poor results over the 2002 and 2003 years.

There are two things I can say with certainty;

1. This will happen again in the future.
2. The market will recover sooner or later, I can not say whether it will be sooner of later but it will recover back to fair value.

What to do.

1. If you have good quality stocks hold on to them and accept that the high dividend you are receiving at present.
2. If you have cash buy into the market in the coming weeks, it may not be the bottom but over the next 2-3 years it will yield fantastic results for you.
Until next week...