Howard wins, is it time to sell?

I made my money by selling too soon. At a first reading, that sounds like an odd comment. Analysed a bit more deeply and you get the message contained in a brilliantly pithy observation on how to play stock market from Bernard Baruch, a legendary New York stock broker – and a man who would know exactly which investment direction to take in the early months of the fourth Howard government.

Baruch’s ability to play the market from the 1890s to the 1960s made him one of the world’s richest men, and an adviser to every American president from Woodrow Wilson after the first world war, to John F. Kennedy.

A large chunk of Baruch’s fortune was made by selling just before Wall Street crashed in 1929 – but, he went on following the central theme of his own advice, which is to never try and pick the top of the market; always take a fair profit when it’s on offer and never hang on for too long.

Consider these other classic Baruchisms: "Don’t try to buy at the bottom and sell at the top. It can’t be done, except by liars" and "the main purpose of the stock market is to make fools of as many men as possible".

Briefcase reckons that if Baruch was alive today (he died in 1965, aged 94) he would look at the current state of the Australian stock market and give one piece of advice, sell – not because he is concerned about Howard’s agenda (which is very pro-business) but for an even more simple reason; this is about as good as it gets.

The outlook, once election euphoria dies down, is of a time when two great forces are bearing down on the market, rising interest rates and the deeply-troubling spectre of oil north of $US50 a barrel.

Quite simply, this is a scenario that equates to that famously dry observation about there being no crocodiles in the sea off Wyndham, because the sharks cleared them out years ago. For the economy, it is a case of either interest rates squeezing the daylights out of the market, or oil prices doing it first.

The interest rate story should be well known to all investors, whether they’re playing in the property market, or the stock market.

In property, there is only one direction to travel, down. The residential market is already grossly over-valued and even without the next few rises in official interest rates it would fall. But, now that Howard and Costello are back you can expect a couple of quick upward moves to dampen residual enthusiasm, kill off the speculators and return the market to normality in plenty of time for the next election – and that means property value falls in the order of 10 per cent to 20 per cent.

True, the Reserve Bank sets interest rates, but only after the Governor has had a quiet cuppa with the Treasurer and/or the PM at Kirribilli House.

The urge on the part of the government to move quickly to correct a market imbalance is why anything to do with the property market should be avoided and that includes the many industries that sell goods and services to the property sector – from retailers to developers.

And, if the government does not move quickly on interest rates (and that includes a nasty little pre-Christmas surprise of another 0.25 per cent increase) it will be for a very simple reason – the oil price is already doing the job.

Like the cost of money (interest rates), the price of oil is all pervasive. It effects every sector of the economy. Accurate numbers are yet to filter out to the investment market but the evidence is there for all to see, or as Baruch said: "a speculator is a man who observes the future, and acts before it occurs".

Take transport stocks such as Toll or Qantas and ask what oil at $US50 a barrel does to profit margins? Or consider mining companies that haul ore over long distances, or use diesel to provide electricity. An alphabetical call of the ASX sectors shows that everyone (apart from oil producers themselves) is hit by higher oil prices.

The point being made by Briefcase is that the stock market, in the weeks before the election surged to a series of records and those records are simply unsustainable.

BRIEFCASE, for a variety of factors, is a politics free zone. The most compelling reason for this position is that business is so much simpler, being all about how to make a buck. In politics there are always slippery motives and a lack of the sincerity that comes with good, old-fashioned, greed.

However, in the interest of being topical, and because Briefcase is rather amused by the nonsensical spin coming from the defeated Labor Party, a few somewhat observations are offered.

First, no matter what Labor says, the return of Howard was a monumental defeat, and to argue that Labor ran a good campaign is garbage.

Second, Mark Latham and his bovver-boy appearance, style and voice, might be acceptable in western Sydney, but it is highly unacceptable in the rest of Australia. This is a classic example of how Sydney (such as Canberra) can sometimes be out of touch with the rest of the country.

Third, Labor has too closely aligned itself with the loony left now represented by Bob Brown and his tree-hugging greens. Traditional Labor supporters wear blue workshirts, struggle for a living, slog every day to keep their families above the bread line, aspire to giving their kids a private-school education (because the government system is failing) and value jobs more than trees. On this score, Howard has tapped a rich seam of discontent in the Labor heartland.

Fourth, Labor has failed to recognise that the near-death experience being endured by the union movement (membership in WA is somewhere around 20 per cent of the workforce today) has produced a wide gap between what mainly union-linked Labor Party officials stand for and what the workforce actually wants.

Fifthly, the further Latham takes Labor to the left the greater the rise of the far-right and religious parties and the more assured Costello can be of comfortably inheriting the job of PM.

"Politicians are the same all over. They promise to build a bridge even where there is no river." Nikita Khrushchev.