The point I was trying to make (and perhaps the title was too inflammatory) is the people get overly het up about one-day movements in the share market - even big ones, and, furthermore, pay much more attention to falls than rises.

Robert, I found the downturn as of Tuesday scary. The pull-back from November 07 was about 23%, which is more than random noise or range trading. It’s fallen out of the up-channel and is definitely ‘bear’ rather than ‘bull’, but the downturn is so precipitous that it’s more than a normal bear. We had one of similar dimensions starting in March 2002, but it took a whole year. 7% in one day scared me.

The problem seemed to be driven at that stage by margin calls which caused more selling, which caused more margin calls…

The US rate cut and the steadying of the US market may have provided the circuit breaker, but almost certainly buyers were finding value in the market.

The market is now cheap, but only if the current profit forecasts are maintained in the forthcoming reporting season. In other words, it remains to be seen whether whatever happens in the US affects Australian companies or whether, as some say, the strength of internal buying in China and India will keep them and us rolling.

For the record, I didn’t sell anything, but I’m holding off buying until things are clearer and a support platform is built which breaks the downtrend. But you should consult your own advisor. I download prices every night when I feel like it and use charting software. In this case I’d be using the MACD at the very least and probably the 30-day moving average (weighted). What it means is that I’d be waiting for a definitive turnaround.

BTW there was no asset bubble in our share market. Certainly it was probably fully valued but the run up from 2003 to 2007 was driven by company profitability in the main.

In general terms leaving money in the bank is a sure way of destroying value. If you’d bought 1000 CBA shares in ‘91 at the list price of $5.40 you would have received a dividend of $400. Today those shares are worth $50,750 and the dividend for 2007 was $2560 fully franked (essentially tax free).

By contrast money in the bank in 1991 may have given you double the dividend of that time in interest, but your much depreciated $5400 would have remained exactly that and now you would get less than $400 in interest. And you’d pay tax on every cent of interest earned.

Yep it’s the % differences that count.
And real increases (real in purchasing power)…, so always adjust for price inflation.

cheerio

SJ: I know, but I figured that a log-scale graph might have confused matters further.

No, it wouldn’t have. The proper graph can be found here. Note that this one goes back to 1985, and so includes the 1987 incident.

Linear scales are absolutely useless on this sort time scale. A 1000 point fall from last year’s high represents a loss of about 15%. Back in 1987, it was a 50% loss. In 1986, it would have been a 100% loss. The proper comparison is percentage falls, and that’s what a log scale shows automatically.

joe2: share prices have been rising pretty much in line with corporate earnings. The disproportionate increase in earnings can’t continue forever, sure. But that doesn’t mean that the stock market is going to fall into a screaming heap for years on end. It’ll just start increasing roughly in line with overall economic growth.

Indeedy it is. Less risk, for sure, for many who already have a packet and do not give a stuff about how the money was made. Cheers, Tattslotto winners who are even further removed from understanding what their so called investment has done.

So Robert are you conceding it is more than just “Random noise” that we are talking about? Good luck with your optimism and just hope the ETrade website does not crash for your graph information like CommSec did yesterday.

http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSSYD3944720080122

none of the previous squiggles on your graph is as pronounced as the recent one.

I’m not criticizing Katz here, I’m just pointing out a fundamental flaw in the graph.

http://www.newmatilda.com/2008/01/23/key-crash

Your point is correct as far as it goes ambigulous, but over the longer haul, equities can’t perform much ‘better’ than the real economy forever, and certainly not at the level represented by the last five years.

This is true by definition.

The dividend flow to investors might have gone to employees or reinvestment in the company. This is a zero-sum game.

It is possible to conceive of a situation where all property in the economy is corporatised. In other words, all property is owned by shareholders whose holdings are traded on the stock exchange. This would be the end of the “forever” mentioned by Amused because the stock market would be the economy — they would be co-terminous.

It is equally clear that this is not the case. In fact, hedge funds have privatised recently much previously corporatised wealth. Qantas was an example where this process failed. The question is, do corporations produce a better rate of return than private firms (or vice versa)? If it is the former then corporations would tend over time to outcompete their private competitors, whether driving them to the wall or taking them over. If it is the latter then it is impossible for corporations owned by shareholders to increase its rate of return on invested capital “better than the economy” because private firms are doing it better.

Any fluctuations in share prices that take place outside these parameters are simply zero-sum games that take place between speculators, some of whom are bulls, some of whom are bears. These games add nothing to the size of the economy.

I wouldn’t have picked amused as a committed Austrian, but there you go. I reckon you’re onto something when you invoke GMB, Andrew.

BBB

Clearly, that can’t continue forever.

That would tell us more about the last twenty years than any bleating from the self interested spruikers posing as ‘financial correspondents’ for this or that media outlet. That is why there has been relatively little squealing about the privatisation of retirment schemes that occurred post Thatcher/Reagan across the english speaking world. Providing for a secure, worry free retirement for millions of working stiffs, on the basis of what is in effect a giant casino, overseen by the very people that benefit from the unending stream of liquidity this bonanza provides, and supervised by nobody that really represents said punters, is a recipe for political and economic turmoil.

then a very large swathe indeed of the increasingly hard working and decreasingly well remunerated working class, have just watched their retirment nest eggs permanently reduce in value.

Not necessarily, if they stay in (are able to stay in) for the longer haul, the “paper losses” of yesterday - or of the last month - are quite likely to disappear. See third paragraph from BBB @ 6 above.

If there’s one thing Robert’s graph shows, it demonstrates that nothing is permanent in the share market. No “permanent rises” no “permanent falls”. A mum or dad only makes a change permanent if they SELL their shares.

If my nest egg N drops to 0.80N, then in subsequent years grows by 50% from 0.80N to 1.20N, was the dramatic fall of 20% “permanent”? I think not. In analysing movements you should try to take the long-term view.

I read a Govt report circa 1992, which calculated the average rise in super investments at about 2% to 3% [in real value] in Australia during 1960-1990 approx. Some years there were falls, in other years rises. It averaged out as a modest rise.

It’s a sharemarket, not Tattslotto.

In the real world, deflation for the last twenty years has been obscured by giant speculative bubbles, one after another, as a veritable ocean of liquidity has chased the next best thing. The reality is that the capacity of the middling sort in the OECD to absorb more debt, as a means of ‘consuming’ the huge and growing surpluses generated by the efforts of the chinese and indian working class, and partly underpinned in the case of China, by a world record beating expropriation of the means of subsistence of over 300 million chinese peasants, is now drawing to a close, for the time being.

This one won’t be over until ‘markets’ (that greatest of political abstractions) are satisfied that someone somewhere, will be required to ‘pay’ some kind of return for all that stuff out there that has ‘disappeared’ as if by magic. In the end, the great milch cow of last resort, at least within the reach of those who are responsible for this laughable (because it was both predictable and avoidable) mess, will be the great mass of tax paying and voting publics, that were persuaded that asset bubbles beat being paid properly, every time.

The only imponderable in all this, is the precise nature and strength of the resistance to being required to shoulder this burden, and the form that the exhortations to undertake this noble task, will take.