2011: The year of the nincompoop

Founder and Publisher of the Switzer Report
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It turns out 2011 has been the year of, not living dangerously, as some might believe, but more like living ‘nincompooperishly’.

The year started with so much promise after the typical end-of-year rally in the United States inspired our S&P/ASX 200 index to jump from 4,584 at the beginning of December 2010 to a New Year reading of 4,745.

But it didn’t end there with buyers outnumbering sellers in the early months of 2011, and April 11 brought us the best close of the year at 4,971.2. That’s a long way from the low 4,000’s we find ourselves in as Christmas looms.

My take on 2011

What we have here is a historically significant year of investing because the third year of a US presidential cycle has traditionally been the best for the market and this is then followed by the actual year of the poll, which President Obama faces in November next year. However, we are living in unique times with the global economy and financial markets still dealing with the debt fallout from the Global Financial Crisis of 2008-09.

If I had to tag 2011 and what it brought, I would have to remember it as the year of the ‘nincompoop policymaker’.

Markets are driven by economic data, company fundamentals and speculation, which of course can be heavily influenced by politicians and regulators. Governments played politics with a dangerously precarious economic and financial market situation and that’s why the likes of Associate Professor Steve Keen from the University of Western Sydney is still being given oxygen for his doomsday debt view.

On my SWITZER Sky Business program in April, I found history a more reliable guide when I reminded viewers that on Wall Street, the cliché “sell in May and go away” has had a very high strike rate. My charts guy, Lance Lai of Accountancy Invest, had his own Asian take on the rhyme, which he explained on our Switzer website under the title “Sell in May and Go to Shanghai”, which is exactly where he went while being absolutely on the money.

It didn’t have to happen

This year’s disappointing market result, which could see us down 15% or more, is really testing the long-term patience of many investors. But it didn’t need to happen — not everything went wrong.

Equity markets were battered by the effects of the earthquake followed by a tsunami and then a nuclear disaster in Japan. It brought out the alarmists who claimed the US was heading for a double-dip recession. They were wrong, with the US recovering and showing signs that it is poised to grow by 2-3% next year.

Meanwhile, US companies outperformed all expectations and even our own have done well enough for the likes of RBS Morgans chief economist, Michael Knox, to say that our S&P/ASX 200 should be over 5,000 by a long chalk! However, economic data and company fundamentals have played second fiddle to the fiddling of EU politicians and regulators as Europe burned.

Things were made worse by the US Congress, which fought out a battle over debt and deficits. The Republicans, who dominate the House, frustrated President Obama and his Democrats on the basis that enough debt had been run up; the lack of decisive action saw US Government debt downgraded.

Chaos breaks loose

August brought the collective chaos of the USA and the EU political processes to a head, driving markets down. Our focus gradually went off the US, as it seemed likely that the Yanks were defying the doomsday merchants who talked about double-dip recessions.

The new focus became Greece and then Italy and inevitably the EU’s process of garnering support for debt rescue action. This was like watching paint dry in a Tasmanian winter, but even more impossible and even more frustrating.

As the calendar flipped over to November, hopes were raised that the Europeans would come up with a credible plan, but once again they underwhelmed financial markets. While the Dow Jones index gave up its positive return for the year, our stock market indexes were down 10% and you can blame the local Reserve Bank of Australia (RBA) for our relative weak performance.

The RBA Board and its Governor, Glenn Stevens, have completely misinterpreted the negative effects of a year of market anxiety, too-high local interest rates, a dollar on steroids and Europe’s falling demand impact on China, along with that country’s own policies of restraint to beat inflation.

They shouldn’t have missed it – the Shanghai Composite Index has been falling precipitously since May — how could they have missed that? ‘Nincompoopery’ can be the only answer and there is a lot of it around nowadays.

And that’s where we find ourselves at the end of 2011 — we are still waiting for action from the procrastinators and poor performers of the EU, and the US Congress is still playing silly buggers — excuse my French.

As an economist, financial planner and media commentator for over 25 years, I have never seen the role of politicians being so critical to our bottom lines. I can read and predict economies and company results pretty damn well, but as Paul Keating once said: “Never get caught between ‘politicians’ and a bucket of money!” (He actually said “premiers” but I have taken licence with this very apt observation.)

2012 has to be better

One final point: calendar years are milestones, but not as significant as the financial year, which we pay the tax on our investments on. In 2009-10, if your portfolio of shares matched the S&P/ASX 200, you made 8.7% plus dividends and franking credits; in 2010-11, you pocketed 7.9% plus.

This is why I like income-yielding stocks of companies I want to hold for a long time. It is the only defence from the nincompoops who can make a year of investing bloody hard work!

I believe 2012 has to be better. The close on Wall Street on 20 December, which saw the Dow end up over 337 points on better European Central Bank and bond yield news, shows how important the EU story has been and gives us hope that 2012 will bring an overdue bull market.

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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