At our July 2009 international investing seminar, we reviewed the Dow’s previous 16 year down cycle which ran from February 1966 through August 1982.
Here are delegates at a local winery for a wine tasting after the course.
During that seminar we saw that in the first 12 years of that period, 1966 to 1977, the Dow dropped 1% overall in 135 months.
Then we compared the similar period in the current Dow downside which is from 1998 until May 2009. The Dow had also dropped 1% in 135 months.
Then we looked at three charts comparing the Dow’s performance over various two year periods to the period July 2007 to July 2009.
We viewed how the Dow appears to be entering the 12th year of a 15 to 17 year down cycle that began in 1998. We compared the last two years of this cycle, with the equivalent period in the 1966 to 1982 bear cycle.
We saw an amazing 93% correlation between then and now.
The chart below from Moore Research compares the Dow from 1976 through 1978 with the same time to July 2009. The Blue line is what happened in the equivalent period in the 1970s to now.
Then we looked at what might happen in the next two years. Ignore the black line which shows the Dow for the last two years. This should not correlate with the next two years period.
This suggests that in the next two years, we’ll see a lot of sideways motion with some severe drops.
The next chart suggests that between 2011 and 2014 we’ll see even more severe drops. Again ignore the black line. This represents the Dow over the last two years and has no bearing on these periods.
The blue line is what history suggests the Dow might act in the years ahead.
Down… down… down… until late in the two year period when the bull finally begins.
Then the bull trend continues over the next two years.
According to our 35 + or – year wave theory some great new innovation should come along around 2014 and ignite the next 15 to 17 year bull in 2013 or 14. The steam won’t really pick up till about 2016… or even a bit later.
This will be good news for retiring boomers who manage not to be wiped out from the next half decade of sideways and downwards motion.
This led us in the seminar to see seven places to invest now.
Value Markets for the long term
Multi Currency Spread
Emerging Markets for the long term
This message focuses on value markets and reviews Michael Keppler’s just released three month Major Market Value Analysis.
If you are a new reader learn about Keppler Asset management here.
In my Spring 2009 edition, I wrote that Benjamin Graham’s margin of safety indicates that much better times may lie ahead for global equity investors. I was not aware, however, that such a powerful turnaround was underway. After seven consecutive negative quarters, global equity markets had in the second quarter 2009 their sixth best return since inception of the MSCI Indices at the end of 1969. The Morgan Stanley Capital International (MSCI) World Total Return Index (with net dividends reinvested, December 1984=100) advanced 16.5 % in local currencies, 20.7 % in US dollars and 14.3 % in euros.
All markets covered here advanced in the second quarter. Singapore (+39 %), Hong Kong (+35.8 %) and Spain (+29.3 %) performed best last quarter.
The United Kingdom (+10.2 %), Australia (+10.3 %) and Switzerland
(+11.2 %) had the lowest returns.
During the first half of the year, sixteen markets advanced and two markets
Hong Kong (+35.1 %), Singapore (+33.4 %) and Sweden (+23.8 %) fared best. Germany (-1.5 %).
The United Kingdom (-1.3 %) and Switzerland (+0.5 %) came in at the bottom of the performance range.
The Top Value Model Portfolio based on the Top Value Strategy using national MSCI country indices as hypothetical investment vehicles, finished the second quarter 2009 at +21.9 % in local currencies, (+30 %) in dollars and +23.1 % in euros outperforming the benchmark by 5.4, 9.3 and 8.8 percentage points,
depending on the currency.
Year-to-date, the Top Value Model Portfolio is up 13.3 % in local currencies, 17.8 % in US dollars and 16.7 % in euros. These results exceed the benchmark returns by 8.5, 11.4 and 11.3 percentage points in local currencies, US dollars and euros, respectively.
There were two changes in our performance ratings last quarter: Hong Kong and Belgium were downgraded to “Sell” from “Buy”.
The Top Value Model Portfolio currently contains the following six “Buy” rated countries at equal weights: Austria, France, Germany, Italy, Singapore and the United Kingdom.
Our current ratings suggest that these markets offer the highest expectation of long-term risk-adjusted returns.
Last quarter, I showed our implicit 3 to 5 year return projections of 27.8 % p.a. for the equally weighted World Index. The projections stood at their all-time high at the end of March 2009. The equally weighted World Index better
represents the global equity environment than the cap.-weighted MSCI World Index with its 48.5 percent weight in US stocks. After having risen 19.4 % last quarter, the equally weighted World Index now stands at 1,816.9. During
the last three months our expectation of the index level in 3 to 5 years declined from 4,055 to 3,852, which in combination with the strong price appreciation over the last three months leads to a drop of our current estimates of the annual price appreciation over the next 3 to 5 years to 20.7 percent.
I show these numbers with the usual caveats: Forecasts are dangerous, particularly those about the future.
Keppler’s analysis shows that low value markets are: Canada, Belgium, Denmark, Hong Kong, Switzerland and USA.
Neutral value markets are Australia, Japan, Netherlands, Norway, Spain and Sweden.
It is interesting to show that Keppler’s projections for value investments shows appreciation into 2014.
History however suggests that equity investments may be subject to a lot of turmoil for the next few years. The down periods will create exceptional value if you can ride though the storm and hold on medium to long term. The volatility will also create some trading opportunities for those who are qualified to buy and sell shorter term.
I am especially cautious now. See why at International Investments Warning.
You can see several ideas on what to do now at our password protected site as a Multi Currency Portfolios Course subscriber.
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