Bad Times Ahead for Shares. Good Times Ahead for ‘Not Shares’

Sorry about the gap in communications. I’d like to say that it was due to all that EOFY stuff (which is partly true), but our VCo Defensive 50 (“The Tuna Salad Wrap”) has been so popular of late, that we’ve busy been serving them up to investors all over Australia.

The main reason our VCo Defensive 50 (“The Tuna Salad Wrap”) is so popular is because investors are getting sick of unsavoury returns in the equities markets and are craving more delicious avenues.

Unfortunately, there’s more bad news for equities investors, and we are expecting losses to widen.

Here’s why:

  1. Interest rates still haven’t curbed inflation and we don’t expect they will until later in the year. Shares will continue to fall until inflation gets under control.
  2. Higher interest rates = less spending. Less spending = lower corporate profits (or bigger losses). Lower corporate profits = lower share prices (in times of economic decline).
  3. Historically speaking, when the S&P500 enters a ‘bear market’ (losses of 20% from the peak), there is an approx. 80% chance of falling to -30% or below.  
  4. Despite already having dropped 20% this year, the S&P500 remains to be 31% above its long-term trendline. This means the S&P500 needs to drop a further 31% to get back to its average valuation. We are not predicting a further 31% drop (although we are not discounting it either), but we are predicting further losses of at least 10-15%.
  5. The big ‘R’ word, which I’m not afraid to say, RECESSION, is likely going to be announced next week for the United States. The ‘R’ word is normally enough to spook institutional investors causing major selloffs. We are 50/50 on whether RECESSION will hit Australia.
  6. Speaking of Australia, the Aussie sharemarket seems to be in better shape than the S&P500 right? Afraid not… remember that we were one of the last countries in the world to start raising interest rates. This means we’ll be one of the last countries to stop raising interest rates. The flow-on effect will be felt on the ASX200, and while the rest of the world rejoices in a faster economic recovery, we’ll be dragging behind. The ASX200 will reflect this, as it has done in every historical major sharemarket correction.

For the above (and many more) reasons, we’re ditching equities until we are confident that they have bottomed out. We are focusing on inflation-proof fixed income investments and are re-entering the crippled bond markets to take advantage of interest rate rises. We have also slightly increased our ‘short positions’ on the US (S&P500) and Australian (ASX200) sharemarkets.

This is by far our boldest and most controversial move to date. We also believe it to be the most sensible and safest bet for our clients.

If our predictions are correct (equities down 10%) the Tuna Salad Wrap will go 10% up in the next 6 months. In fact, the more the sharemarket drops, the higher the Tuna Salad Wrap will go.

If our predictions are wrong (equities up… somehow) The VCo Defensive 50 (“The Tuna Salad Wrap”) will at worse breakeven in the next 6 months, and in any case we’ll be keeping a close eye on the ‘short positions’.

If you’ve read this far, some commentary on recent Tuna Salad Wrap performance:

We are still smashing benchmark performance of Balanced Funds. Equities had an ‘okay’ month in the last 30 days, which closed our margin of outperformance, but don’t be fooled, every major correction is full of little relief rallies. The biggest divergence is yet to come.