27 November 2020
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Pullback, smullback

Pullback, smullback

Peter Switzer
1 September 2009
The case for a September share market pullback is building, especially with the Chinese stock market starting to take a dramatic dive, but my old mate, ex-chief economist at Deutsche Bank, Don Stammer is not worried. He sees it as a buying opportunity of the stocks he wants to hold in his portfolio.

I asked him on my program – SWITZER – on Sky News Business Channel, to give me his view on the stock market in a year’s time and he fobbed it off as an unimportant matter to him. What he does is a great example for most of us who want to get richer via smart investment.

By the way, he thinks we will be up in a year’s time but he confidently predicts we will be up big time within 10 years, which is the time frame that gives him confidence.

Compound interest magic

He says a pullback is possible, given the big rally since March. The short-term trader who bought in during March could have pocketed 40 to 50 per cent and that kind of investor could easily take profit on the anticipation that he can buy in at lower levels.

Stammer believes in the “magic of compound interest” which says punt on quality assets and the normal annual average capital appreciation will snowball into something bigger and bigger over time.

To make this story shares specific, consider the history of quality shares that return around 10 to 12 per cent per annum. There will be bad years like 2008, but they will be offset by good ones such as 2004 to 2007.

Rule of 72

The Rule of 72 says divide your rate of return, say 12 per cent, into the number 72 and that will give you the time it takes for your money to double. So in this case, 12 goes into 72 exactly six times and so your money doubles every six years. These are averages and can be thrown out by one big bad year but it eventually works itself out.

That’s why Stammer is confident over 10 years of investing. And that’s why he sees a possible pullback as a chance to buy the share he loves — great quality brand names, blue chip and dividend payers. It’s very Warren Buffett, but it’s very much an example of a man who has learnt from experience.

Look at the data

So how likely is a pullback? On economic grounds, it’s less likely with most economists arguing the US economy is now recovering, but the size of the rally where the S&P 500 and the Nasdaq have had six straight months of gains screams a sell-off is overdue.

The Reuters/University of Michigan Surveys of Consumer confidence for August fell to 65.7 from 66.0 in July. By the way, this was the lowest level since April, but it still beat expectations.

Okay, these are a little bit negative but not market killing stuff.

One interesting negative is the Baltic Exchange Dry Index (BDI), which is a measurement of the cost to transport dry cargo, such as commodities. It’s calculated in London and tracks international shipping routes.

CNBC said the BDI went over 4000 in early June, but it has dropped about 45 per cent to roughly 2400 in the last two months. Add this to the fact that Chinese shares plummeted 6.7 per cent overnight, which means the Shanghai Composite Index has shed close to 22 per cent over August. However, it should be explained that it has rocketed up for seven months!

Ahead on Wall Street this week, we will see the latest ISM manufacturing index and then the ISM services index followed by the Non-farm payrolls figures on Saturday our time and the experts think a fall in jobs of around 200,000 would represent a trend improvement!

By the way, last night the Chicago Institute for Supply Management said the Chicago Business Barometer rose to 50, up from 43.3 in July. This was two-points higher than expectations and the best result since Lehman Brothers failed in September last year.

X-factor

I reckon it will only be a bad economic number from left field, what Stammer calls an X-factor, that could KO this stock market. At the moment I can’t see one, but that’s the thing about an X-factors — they’re not easy to see!

For advice you can trust, contact Switzer Financial Services.












Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.



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