What are we waiting for?

[Lizard]

Just thought I'd canvas some opinions on what signs investors on here are waiting for to signal time to buy NZX shares again? How long do you expect to have to wait? What sorts of shares might you buy?

I've never been particularly expert at timing the market - I just top up whenever things seem unbearably tempting and sell bits off when they start to feel too scarey. Right now, I'm tipping into Unbearably Tempted again... I know I am nuts - even my broker euphemistically suggested this when he tried to talk me out of placing buy orders for FPA and GPG today...

Though if we are near bottom, what I'd really like is some more property trusts, financials, retail and exporters

[ratkin]

I know I am nuts - even my broker euphemistically suggested this when he tried to talk me out of placing buy orders for FPA and GPG today...



Thats a buy signal if ever i heard one.

[shasta]

Just thought I'd canvas some opinions on what signs investors on here are waiting for to signal time to buy NZX shares again? How long do you expect to have to wait? What sorts of shares might you buy?

I've never been particularly expert at timing the market - I just top up whenever things seem unbearably tempting and sell bits off when they start to feel too scarey. Right now, I'm tipping into Unbearably Tempted again... I know I am nuts - even my broker euphemistically suggested this when he tried to talk me out of placing buy orders for FPA and GPG today...

Though if we are near bottom, what I'd really like is some more property trusts, financials, retail and exporters

The $A to drop to 75c or below

[777]

The $A to drop to 75c or below

This 10 year chart has a bottom of about 74c. Doesn't look too far away now.

http://www.chartflow.com/fx/charts.asp

You will have to change the US/Aust default to NZ/Aust to see.

[upside_umop]

i would be picking below 70 cent au...they have outperformed us in growth for the last umpteen years and looks set to continue...

buy signals? watch for economic reports and the trends to start changing positive...unemployment is going to rise, property prices are going to fall further - remember that lag effect from ocr.

it was funny, in august/sept last year, my mum wanted to sort some things out financially and try develop a plan. she saw an abn amro advisor (which was free - quite good i thought). i came along for the ride...what did they recommend? they were all for the new PIE schemes, and recommended kip, ing etc and all the related property trusts as they would benefit from PIE. at that time, property prices declines hadnt come through yet...but you could tell the economy was starting to grind to a halt. i found that funny that they were recommending the property trusts??

fpa is getting cheap...but you would be more relying on takeover at this stage more than anything. i think they are heavily discounted because of their finance operations...should definately ride out the storm, i mean they wouldnt let their finance operations go bust would they. heavily correlated to new house permits however - the us, nz, uk, are all down..aus will be down too.

[Lizard]

Some more thoughts:

Anyone cashed up at the beginning of the decline and wanting to get back in when the market turns faces two problems. Firstly, that the bounce at the bottom is quite likely to be fairly quick, steep and on low volume, making it difficult for all but the fastest hands to get back in. Secondly, that getting back in too soon is more costly than might be presumed - if a 33% decline turns into a 67% decline, the theoretical investor who puts money in at half way down will still stand to lose 50% of funds. So choosing when to reinvest is something of a balancing act.

Phaedrus has given plenty of ideas on how to find charting solutions to this problem. I've been giving lots of thought to fundamental indicators. Some things I've considered are:

1. Price/sales ratio of NZX50 stocks. This rules out the "declining proft margin" problem. At some point during a downturn, it is likely that a portion of NZX50 stocks will be reporting losses, but the market will still have to figure out a value for them. Plus "sales" are less volatile than profits. I've looked at price/sales data from the Market Analysis database at various times back to 1998. As an indicator, I've looked at 33 stocks in the index that were listed in 2003 when the recent bull market started. The average P/S ratio rose by 24% in the period until the peak in June 2008. It has since fallen back to be 7.5% below the 2003 level. I also looked at the 26 stocks in existence since the post-Asian crisis/NZ drought low of 1998 and at that point, P/S ratios averaged 9.4% lower than they are now. (I'd consider the main weakness with this method is that it doesn't consider relative levels of corporate debt). I think those stats indicate that the NZX50 is in range of good to excellent value.

2. Historical patterns - I think Brian Gaynor covered this pretty well on the weekend with his article "Shocker of a Half Year for Investors" (http://www.nzherald.co.nz/category/62/story.cfm?c_id=62&objectid=10520041).

3. Recessions - past analyses have shown that the time to be out of the market is for the first half of a recession - download this research paper (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=999100) for a good read. What's the chances of a recession in NZ lasting more than 4 quarters? As Brian said in above article, the country's last full-blooded recession ran four quarters from July 1990 to June 1991. Yet old NZ Herald Index charts I've seen show the stock market ran hard from January to June 1991.

4. Interest rates - I think in the past, markets have started to turn up when interest rates are cut. Many people think the RBNZ will need to cut rates sooner rather than later.

5. Speculative Bubbles - feel free to correct me, but I can't think of a prolonged downturn in stocks of more than 40% that wasn't preceded by a speculative bubble in stocks. 1929 US, 1987 NZ, Nikkei, Shanghai, dot.com....We may have had one in residential property - and it has to be expected that it will spill over to some extent - but I've yet to believe it damages the stock market to the same extent as a spec bubble in stocks.

6. Experimental voodoo - I've been experimenting with various tech levels using retracements for medium term - I wouldn't put too much faith in them, but having Thursday's close sitting right on a key target I set at the end of the last bear-market rally probably gives me (unwarranted!) confidence to buy a few bits and pieces here.

Maybe we're not at bottom - but for now I'm prepared to take a limited bet on being within 10% of bottom. Especially since I've got a few commitments this month which means I won't be sitting around waiting for a capitulation day.

[troyvdh]

Lizard...the mere fact your broker thought the opposite from you is a HUGE plus.
Why do you use one ?

[Footsie]

Liz

I agree. 10-15% lower max. But dont underestimate the fall-out from property... it will hang on our economy for a long time.

However, whatever happens nobody will be expecting it.

the market will not rally until oil falls substantially or at least stabilises. SO long as oil keeps rising at $10 a month we will stay in a bear market.

For me... its too hard to predict what is giong to happen. I will react to what i see.

I have my eye on a few key stocks for a rebound. FBU, RAK, PPL, TEL, WHS

ALSO read this carefully, All those idiots who appear on CNBC and tell you to stick your money in commodities and BRIC economies are just lemmings. BRIC's are slowing. The market always goes before the economy. CHina... massive bubble market now off 60%, India off 40% Brazil of 25%.... Russia is the only one holding up.

If anything i'd be moving out of commodity stocks and emerging markets and into IT, healthcare financials and later on retail......

In summary what i'd like is a small rally now..... 1 more re-trace then a good couple of months stabilisation then a big rally in 2009..... but it wont play out like this

[peat]

I'd be looking for RSI divergence on the daily or weekly charts and a rally followed by a 67-78% retracement that didnt create a new low. then you risk 22% of that rally by buying in at that point with a stop loss at any new low.

[scamper]

Lizard, re your interest in property trusts.
I've been a very long term holder of Kip -- plus or minus few now and then -- and it's beginning to look cheap.
PE 6.64 and div ~7.9%.
i haven't compared it with others, eg, pfi -- which has quarterly interest payments, i think.
there is nothing about the chart that suggests a buy -- a turn-around isn't even hinted at, except that the W%R is beginning one its periodic oversolds. the history of these is not promising -- a return for the fast-fingered, but very small.
perhaps worth watching, however. cheers, scamper.
ps. good posts.

[Lizard]

Thanks Scamper. I have KIP, PFI, NAP, APT, IMP - and like each of them for different reasons. KIP/APT have been my recent additions, along with increasing the NAP holding. I reduced into last years "PIE rally" and am now rebuilding the allocation, but still have more $'s I will drip feed in.

[Footsie]

by the way.... many are calling for a capitulation and the hedge funds might fust force that issue.....remains to be seen.

Capitulation on NZ would probably see us fall intraday to sub 3000 and asx to around 4700-4800

[Lizard]

Footsie, thanks for the interesting post. I agree with you on most of what you say - my instincts have me out of oilers - and all resource stocks except BHP. Not that I've ever been big on resources, so don't read too much into that.

As far as emerging markets go, some of the comments made by Templeton and the fact they undertook a buyback to let some large shareholders exit their holdings has also had me reducing there recently.

Another factor in NZ we haven't covered is exchange rate. The dramatic move against the AUD will help alot of exporters - and linked to the fact that some of these exporters (like FPA) have suffered more from the two way effects of high exchange rates (lower export margins/returns and more imported competition), means that these companies are already well "cheap" by historical standards. So potential "recovery" set-up in some of these stocks looks quite large.

[Lizard]

by the way.... many are calling for a capitulation and the hedge funds might fust force that issue.....remains to be seen.

Capitulation on NZ would probably see us fall intraday to sub 3000 and asx to around 4700-4800

Yep, I think there is a good chance of that too.

[Footsie]

I can smell the fear!!
especially when i talk to aussie brokers at the moment

[duncan macgregor]

Plenty of time to work out when the tide turns. It has a long way to fall yet in my opinion.
I really dont care if i am wrong its not my money being risked in this down trending market. Macdunk

[Dr_Who]

Compare to the Chinese market, we are not that bad. The Chinese sharemarket fell over 46% this year.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aYFtrqoe08wI&refer=home

[malcolm]

hAD MARKED A COUPLE OF specs but orders did not get filled --so completly empty-- sold all my stocks in past 2months (nog last wed 1.84) i believe the USA finance stocks are deep in sh-t. dow will keep diving sub 11000 this week mid 10000 end of july- thats been my feeling for last 3mths the rash is contagious we will catch the desease

[Footsie]

re your post DR WHO

and as i said those idiots on CNBC still telling people CHINDIA is going to lead world growth!!


China is a mass manufacturer.... world recession is bad for china....

forget the "emerging middle class" in China buying plasma tv's argument.

[MoSteph]

For stocks with NZ sourced income, I'm waiting for signs that inflation of inputs are fully included in outputs, and that those inputs are stable or reducing. Although the CPI has been highish recently, I can see it being much higher. What I think we're witnessing now is the lag as the increases (mostly oil) circulate through. Rate increases in NZ are not impossible, while in Asia, Europe and US I feel they're certain. With China lifting subsidies on oil (and the dollar dropping) a new round is just starting. Short earnings. Long debt collection. Short D&G and Prada. Long unemployment.

[Lizard]

Some more reading for anyone interested - RBNZ June 2008 bulletin (http://www.rbnz.govt.nz/research/bulletin/2007_2011/2008jun71_2.pdf) which explored the history of recessions in New Zealand - and was not too optimistic in its conclusions.

[Mick100]

Liizard, if your on a spending binge check out CLQ on ASX

[Lizard]

Hi Mick, I had a look at CLQ some months back and had a few concerns. Will have another look though and post thoughts on the CLQ thread when I get the chance. :)

[MoSteph]

Lizard - that RBNZ article is a great read, thanks. I went through the tick box (factor matrix thingy) on page 19 and felt almost every box needed a "critical factor" or "contributing factor" awarded. Portentous or not; buggered if I know.

(Mick100 - I suspect what Lizard just wrote you was the smoothest 'mate, please stay on topic' that ST has ever seen. With sly rhetoric like that Lizard should think about moving into politics).

[Footsie]

I'm going to wade in today....

The catalyst I've been waiting for has emerged... OIL falling.

If oil continues to fall then this could cause sentiment to change quickly.

nobody rings a bell when the market bottoms... you just have to do your best.

All trades will be on tight stops this time.

[Hoop]

Hmmmm...interesting!!

Investors popping up out of their bomb shelters........I'm passing them by walking (nearly running) the other way down into mine...

[Kookaburra]

I'm going to wade in today....

The catalyst I've been waiting for has emerged... OIL falling.



Bear in mind that energy is only 10% of the cost of production in the US. 70% is labour and 10% rent (See latest GaveKal quarterly report 7th July). While a drop in oil may change sentiment it can only be briefly because the fundamentals of loss of credit formation, consumer overcommitment, increasing unemployment, falling real wages and consumer caution still promises dropping demand, dropping profits, disinflation and a high probability of a depression. Sorry to be so gloomy! But this is not the time to be holding anything other than cash. Unless you are a skilled trader with tight stops or short side bets.

[Dr_Who]

Bear in mind that energy is only 10% of the cost of production in the US. 70% is labour and 10% rent (See latest GaveKal quarterly report 7th July). While a drop in oil may change sentiment it can only be briefly because the fundamentals of loss of credit formation, consumer overcommitment, increasing unemployment, falling real wages and consumer caution still promises dropping demand, dropping profits, disinflation and a high probability of a depression. Sorry to be so gloomy! But this is not the time to be holding anything other than cash. Unless you are a skilled trader with tight stops or short side bets.

I agree with Kookabura. I am still holding cash. In no hurry to invest in this climate, even thou alot of assets looks soooooo cheap! I fear a long dragged out global recession. I just have a feeling that oil maybe a buy once it hits a bottom.

Who Dares Wins!

[Footsie]

follow through rally tonight in the US and it will be all on...... but its all predicated on oil dropping again tonight as well.

check out all the articles in the States for a fall in Oil
http://www.marketwatch.com/news/story/have-commodities-peaked-two-day-sell-off/story.aspx?guid=%7BD2C42AC7%2D423A%2D4437%2D9FBF%2 D16623F1C69EE%7D

[Arbitrage]

An interesting analysis of the bear market:

http://money.cnn.com/2008/07/08/markets/markets_bear/index.htm?postversion=2008070814

[Lizard]

Lizard - that RBNZ article is a great read, thanks. I went through the tick box (factor matrix thingy) on page 19 and felt almost every box needed a "critical factor" or "contributing factor" awarded. Portentous or not; buggered if I know.


Hi MoSteph - I did wonder to what extent the identification of key factors was influenced by the writers intent to explore factors within the framework of the current situation... for instance, perhaps it could be turned around and demonstrated that 5 out of 6 downturns were caused by well below trend commodity prices??? Exaggeration of course. No doubt some or all of the other years were within a "normal" trend range.

Also interesting to note how strongly exchange rate factors were implicated in each case.

Another point is that many people seem to be implying that the sharemarket will not turn up until the economy does, whereas I would not be surprised at all if the sharemarket made its major trend change before economic factors had resolved. I have been trying to find sharemarket data to match each of these downturns, but with limited success.

For instance, looking through "Bulls, Bears & Elephants; A History of the New Zealand Stock Exchange", I've located an index chart for the period 1926-1935. This shows the index falling 40% from peak to bottom over a period of from mid-late 1929 through to early 1932 - in fact the first 30% loss seems to have occurred at a similar rate to what we have just seen and then slower decline over the next year. Following the low, the index recovered nearly all of its losses by early 1935, though not quite regaining the former peak. The initial recovery reversed the final 10% loss in a period which looks to be around 2 months.

Another index chart in the same tome shows a more extended, but weaker, decline of about 15% over the period 1935-1939 from which the recovery was also much slower.

The "1967-1969 Wool Bust" mentioned in the RBNZ documents showed about a 25% decline in the share index over the period 1965 to roughly the end of 1967 with a very sharp recovery in 1968/69.

The "first oil price shock of 1974-1977" can be set against Brian Gaynor's stats in the previously mentioned article, showing that the index bottomed in November 1974. Once again, the decline stopped just short of 40%.

The "second oil price shock of 1979-1982" seems to have had little impact, with the index rallying strongly throughout this period - possibly driven initially by oil stocks.

For the "1991-1992 recession" (though other data reports GDP contraction as mid 1990 - mid 1991) - the majority of the sharemarket fall was already over by the time a recession occurred.

For the "1997-1999 Asian Crisis and Drought", the low point in the index appears to have been around October 1998, after a one year decline of around 27%.

My argument is not that the New Zealand economy is about to make an overnight recovery against the global tide, but that I think investors may soon start to look through the cycle. The dates above show that this has happened on most of the previous occasions.

Along with that, I think that the downside risk no longer outweighs the potential upside risk based on historical norms. Also my argument is not about the ASX or the Dow - it is about the NZX, which although affected by both overseas bourses, will nonetheless have its own path through the turbulence.

[Mick100]

follow through rally tonight in the US and it will be all on...... but its all predicated on oil dropping again tonight as well.

]

I'm watching $134 on oil - if it falls below that , the short term uptrend is broken
/

[Footsie]

not sure when the market started to rally in the early 90's but gathering it was before the economy bottomed

i'm told the general rule of thumb is the market is 6 months ahead of the economy
suggesting the market bottomed late 1991? ie end of 3rd qtr?

GDP
NZ US
1990Q1 0.6 3.2
1990Q2 -0.2 2.9
1990Q3 -0.2 2.4
1990Q4 0.0 1.9
1991Q1 0.0 1.9
1991Q2 -0.1 0.9
1991Q3 -0.7 -0.3
1991Q4 -1.7 - 0.2
1992Q1 -1.3 0.7
1992Q2 -0.6 1.6
1992Q3 0.0 2.6
1992Q4 0.7 3.3

source RBNZ

[Lizard]

Footsie, Market bottom was in January 1991 by my records of NZ Herald Index. It appears the market rallied very strongly - (estimated 25% in about 3 months?) with majority of the gain occurring in just two periods of one week each - one in February and one in March.

[Footsie]

brace for impact

looks like i might have been a day or two early.

but we are close

[dumbass]

maybe im missing something but what makes you feel its close to a bottom

[Footsie]

the reason i think we are close to a bottom is because nobody agrees with me.

[Lizard]

Maybe we're not at bottom - but for now I'm prepared to take a limited bet on being within 10% of bottom. Especially since I've got a few commitments this month which means I won't be sitting around waiting for a capitulation day.

This quote from 2 days ago remains my position. I'm not particularly trying to pick the exact bottom. I just know I'm not likely to move fast enough coming out the other side, so I'd rather begin accumulating when I feel the upside risk starts to outweigh the downside.

[Dr_Who]

the reason i think we are close to a bottom is because nobody agrees with me.

Have you asked the taxi drivers and the dairy owners? Usually thats a sign. :D

The taxi drivers in Aussie are buying banking stocks, so maybe it hasnt bottom yet.

[Hoop]

brace for impact

looks like i might have been a day or two early.

but we are close

DOW S&P500 NASDQ down over 2%. Now you know why I was heading towards the shelter passing you guys coming out.
Footsie & Liz...not going over this topic again, many months of research on this was done by me. Winner69 has some input + Mick valuable commodities inverse correlation curve which I highlight because that one post made this year of the bear a very successful one for me. Some of this study can be seen on the Investing Strategies and Secular Bear Markets (http://www.sharetrader.co.nz/showthread.php?t=5171) thread. Advise people to re-read it from the beginning to the end. Read it from the beginning because it shows the Bear conception TA wise when 80+% investors thought the opposite. Later in the thread it shows where to hide from the bear (commodities) and tries to pick points where bear rallies start and finish. The Life expectancy of this current Bear is mention and its moods and temperament and many links highlight the PE Ratio behaviour and forward earnings... over optimism which leads to investors perceiving wrongly that stocks are cheap. Also mentioned the behavioral aspects of the bear market investors ranging from denial at the beginning to that of total gloom and Doom at the Mid/end of the cycle and often the lag effect that all is well in reality but investors are stuck in the gloom attitude.

I haven't posted much on this thread recently because nothing much has happened until a few days ago. This Bear market is playing out according to plan and at the moment doom and gloom is setting in so one can expect we are maybe* entering the last part of the Bear Phase (3). If it is true that this is now the early part of BM phase 3 it is a very dangerous time. If this present BM has a capitulation element (severe wave C) it will happen early in this phase. Note that some BM events don't have this element. However this is the exact time I personally don't want to be around in the market when or if the big C happens, as the risk is greater than the reward, so I'm electing to stay out apart from my oil shares (having second thoughts about them too).

* Sometimes usually with long living Bears another bear market rally may occur (+10+%)...this ends in tears as most get caught out by adopting the beginning of the next Bull market phase strategies. A sign to watch for is sudden volume and sharp rise could be a bear rally sign.


The later part of the BM(3) is the time for investors to enter, especially long - termers as this is bargain time and everyone will be telling you not to buy and you have go against your instincts and force yourself to buy. This phase is marked by an increase or rise in stock prices with low volume only to be knocked by those sellers in Denial and the timid and the skittish, it a time where nothing seems a good investment not commodities, not banks, equities long or short both play badly...so this end of the last part of BM(3) and the very early beginnings bull market phase (1) where most investors have given up and left the markets. Because of this lack of available money the markets lag in the doldrums.....

.......this is the theory .....in practice however each BM and recovery from BM has it's own signature and it pays to watch for that behaviour and study it ... from a distance :).

As always there are good up-trending stocks in a BM and these are usually natural hiding places from the bear..if you go to one of these hiding places you will probably see me there :D

Also of interest is the fact that the US equity markets are in a secular Bear phase which started in 2000 and not expected to end before 2011 many predicting 2016. (ASX and NZX are in secular bull market phase)


PS........as one guy on fast money said this morning... " If you say buy this stock now because it is crazily oversold and is going to quickly rise up 600% (steep downtrend Financial), then Hell!! I won't mind waiting for the trend to change and catch 500% of it. I don't and won't buy in now and fight this trend. (downward)"

[Lizard]

Hoop, All your work on the bear market thread has been great and I'm sure much appreciated by us all.

I would just reflect that this thread was intended to be about the NZX, not the ASX or the Dow. There is a glut of analysis on both of those markets available on the internet, but alot less written about the NZX and factors that are likely to come into play here.

As you yourself acknowledge in the quote below, they're not inseparable.

Also of interest is the fact that the US equity markets are in a secular Bear phase which started in 2000 and not expected to end before 2011 many predicting 2016. (ASX and NZX are in secular bull market phase)

[Lizard]

So why is the NZX forum so quiet (barring resources and LPT's)?

Is everyone busy buying or still standing by? Quite a few things I am watching seem to be accelerating out of their downtrends - at least the short-medium term ones. Thought there would be a few more excited posts on different shares, but I guess we're all feeling pretty cautious after the last 12 months...

[macduffy]

So why is the NZX forum so quiet (barring resources and LPT's)?

Is everyone busy buying or still standing by? Quite a few things I am watching seem to be accelerating out of their downtrends - at least the short-medium term ones. Thought there would be a few more excited posts on different shares, but I guess we're all feeling pretty cautious after the last 12 months...

Hi Liz
I guess most of us holding NZ stocks are still a bit wary that all we are seeing is a bit of a weak bear market bounce. Not enough favourable signs to get us excited yet but good to see some of the so-called leaders looking a bit stronger. Getting knocked about in a regulatory sense on the likes of AIA, TEL and WHS doesn't improve confidence!
On the other hand, I bought a few NZR ( Refining, not Railways! ) the other day.

;)

[Dr_Who]

I backed up the min van and loaded it with WHS today. Not the truck, just a small jap mini van. :)

[Billy Boy]

I backed up the min van and loaded it with WHS today. Not the truck, just a small jap mini van. :)
Why do you think WHS wont go lower DOC ??
BB

[Dr_Who]

Why do you think WHS wont go lower DOC ??
BB

I dont. If it does I will buy more. This is for the long term portfolio and I am not afraid to buy more if it drops. :) WHS wont be on the NZX forever. Like all good NZ company it will get T/O by someone for a bargain.

[Lizard]

For completion, have today closed out the trading portfolio on stocks bought when I started this thread (will still hold some for longer term investment).

We have seen some extreme moves in the last month - currencies, oil, plus a swing to falling interest rates and bounces on many stocks. However, the markets aren't just going to go back to where they were and carry on - OPEC probably ready to reduce oil production and we need to see oil stay at around present levels for a while if we are going to solve the longer term issues.

Beaten down NZ exporters/currency plays still look okay to me but more patchy than a month ago - the market looks to be at risk of another convulsion here, so going to just sit out for a few rounds and see if there is a chance to buy back cheaper.

[Mick100]

some of those goldies are looking cheap lizard:D

Now's your chance to get onboard the resouces boom

[Footsie]

well done Liz

hope you made some good $ from others pessimism

[Lizard]

Thanks Footsie. Yes, a bit of profit made. Just a bit busy again at the moment, so will just step back and see where we go from here as, short-term, upside risk seems less than downside.

Mick - some of those resource stocks sure look tempting - those IGO I sold at a range of $8-$9.25 are just begging to be bought back again here at $2.50! But my current instinct says maybe early 2009 might be better timing. Meantime, there are a plenty of high-yielding stocks with good prospects that seem more attractive on risk/reward.

[Lawso]

posted a month ago by Lizard
I have KIP, PFI, NAP, APT, IMP - and like each of them for different reasons.
It seems to me, Liz, that you have all the LPTs except the best one - Goodman PT. Top yield - 10.25cpu forecast, very low p/e - 8.18%, 97% occupancy across whole portfolio.Very low debt, excellent management. Their Highbrook Business Park in south-east Auckland is a stunner and still only part developed. Potential there is huge but they won't build anything more until they have pre-lease commitments. Definitely worth at least a look, Liz.

[Lizard]

Hi Lawso,

I used to hold them back in the Colonial First State days - I think I probably held from 2002 to 2006 (as MGP), but they really didn't perform as well as other trusts back then, so when I ended up overweight in property trusts, they were the first for the chop.

I've been underweight property trusts for some time now, since I dumped the last of the Metlifecare (which I count as "property") and only recently decided to start rebuilding the collection. However, I haven't spent as much time as perhaps might be justified in making distinctions about particular properties owned. Instead, I've tended to just look at the numbers on the day... pretty superficial method I guess!

[Lizard]

I decided to re-visit my price/sales analysis today and took a look back at the post I made on 8 July 2008.

First of all, I was wrong about my conclusion at the time:



Maybe we're not at bottom - but for now I'm prepared to take a limited bet on being within 10% of bottom. Especially since I've got a few commitments this month which means I won't be sitting around waiting for a capitulation day.

From Yahoo, it looks like the index closed around 3160 that day - about the same as it is currently. There was more time to buy at that level than I'd thought...:eek:

The index fell from that point to a low of about 2150 - a decline that was a further 15.7% from the original 4320 ish high (Footsie was closer - he suggested we were 10-15% from the bottom). Even worse, as happens when markets are falling, that meant a potential loss of 27.3% by buying in then. (Although, I'd say that, given the sharp recovery in some stocks, cherry-picking the opportunities back then seems to have more than adequately covered this)

Having said that, here is the background to the price/sales analysis that was one factor I was using as a potential indicator:


1. Price/sales ratio of NZX50 stocks. This rules out the "declining proft margin" problem. At some point during a downturn, it is likely that a portion of NZX50 stocks will be reporting losses, but the market will still have to figure out a value for them. Plus "sales" are less volatile than profits. I've looked at price/sales data from the Market Analysis database at various times back to 1998. As an indicator, I've looked at 33 stocks in the index that were listed in 2003 when the recent bull market started. The average P/S ratio rose by 24% in the period until the peak in June 2008. It has since fallen back to be 7.5% below the 2003 level. I also looked at the 26 stocks in existence since the post-Asian crisis/NZ drought low of 1998 and at that point, P/S ratios averaged 9.4% lower than they are now. (I'd consider the main weakness with this method is that it doesn't consider relative levels of corporate debt). I think those stats indicate that the NZX50 is in range of good to excellent value.


Price/sales is not a tool for all stocks or all occasions, but it is particularly useful for cyclical stocks and therefore interesting (if difficult to apply) for a market cycle. I've just had a further look at the same 33 stocks that I took from the 2003 NZX50. Last time I checked in November 2008, these stocks had fallen to a price/sales ratio which was 23% below the level in March 2003 (start of bull run). However, despite the 2009 recovery and the fact that some of the most indebted companies have restructured their balance sheets since then, these stocks still sit 20.5% below March 2003. Going back to the 26 stocks surviving since post-Asian crisis, this group now sits 20% below the low back then on a price/sales basis.

My conclusion:

Despite the recovery in world markets, NZ stocks (at least as represented in this analysis) appear to remain very cheap on a cyclical measurement. Is it time to buy back New Zealand (before the rest of the world steals your stuff)?

[beacon]

Interesting yardstick Liz. While agreeing generally with your analysis, I am now wary of NZ stocks, because of lack of transparency, prolonged Government interference and generally poor communication. Our market is shrinking, and that makes it worse. Slippery slope, but nothing beckons home as yet ...

[Dr_Who]

Top NZ companies have domestic exposure, while the top overseas companies have international exposure, esp to Asia.

NZ domestic economy is still weak.

[winner69]

Liz

You may be interested in this chart coming out of the stuff I looked at re THL re my discussion with bull

Sort of supports what you are saying .... in THL case if they get their act together than a price:sales ratio of 1 is pretty reasonable ... ie about $1.50 .... but the chart also shows that a ratio of .25 as it was in June this year was a bit ridiculous unless you thought they were going broke.

So THL undervalued at the moment ... prob yes .... get their act together and get some positive sentiment going and $1.50 plus is where its heading ... suppose what you saying about many other NZ stocks ... yes?

The price;sales is quite a good one. I remember when Baycorp was the darling of the NZX but it was trading at 20 times sales .... really stupid and we know what eventually happened .... the Baycorp job did a fantastic job in getting somebody to buy the company at that price .... and suffer the inevitiable writeoffs of goodwill.

There is a link with PE ratios .... like in THL case their business model suggests an NPAT margin of about 7% .... so a price sales ratio of 1 would equate to a PE of about 14 .... and as you say the revenue line is less volatile so can give a reasonable measure of where shareprices could be

Anyway just a rave .... and have a merry christmas

[Lizard]

Thanks Winner. Yes, that's a great example of what I am trying to say.

It's been a while since we had the chance to play cyclical recoveries and maybe we've forgotten what great trades they can offer. Low P/S (on a historical basis for the particular share or sector) and low pr/NTA are the two most helpful of the ratios for these trades. (Depends a little on the company as to exactly what to look for and a view on reality of their business sector will help.) And of course, always double check they're not actually likely to go broke in the next 6 months!

I appreciate where people are coming from in being negative on the NZ market. However, when negative sentiment starts to persist beyond reason (as it began to do with RBD at one time), it can set the stage for what often seems like a low risk gift-trade.

[troyvdh]

Great post lizard,,,,clarity is a great thing......I read papers from overseas often...they say in Oz that many companies (mainly small to med) are under huge debt......In China "they say" a property boom is reigniting.....the US is printing dollars....(by the way did you read the Guardian article where they reported that each american truck being driven through mujaaden terriorty pays 100' and 1000"s of dollars...per km not to be attacked.......)...each american soldier costs $1 million a year.... I suppose I am off beam here...but do you get the picture....is this sustainable.....I own a few rentals....most WINC...and pregnant......a 17 yr old...given the fact that currently 1/3 of NZ's are reliant on govt support....are we heading to be a " a fiji with snow"....sorry for the seemingly dour outlook...but I have travelled a bit...base camp last year and bolivia the year before....those with out anything...appear to me to be as content as ever....its a funny old world....merry xmas...you are a good person...