BEFORE we have to read another opinion about the market, let us get a few things clear.
We know there has been a 25-year credit boom and we know that whoever borrowed the most money is up the creek without a paddle. We know that some individuals, businesses and countries don't earn enough to service their debt and we know that unless their debt is forgiven or restructured they will go bust. And we know there is an exclusive club of countries who are "too big to fail" and that central government will ride to their rescue plugging up the holes with more debt that they most surely can't pay back but will take anyway, because there is no other option, and in doing so they will consign their economies to years of austerity-inhibited zombie growth.
And we know all the rescue solutions now being discussed are just a reshuffling of the deckchairs by self-interested governments and bureaucrats backed into a corner by necessity, and we know that there's a risk the spin will run out and the ship will sink, taking the equity and property markets with it. We know.
And we know that the heady days of ingrained irrational exuberance, of borrowing to consume and borrowing to speculate, of assuming that equity markets always go up and property investment is safe are no longer unquestionable assumptions. And we know the long-term outlook for the market has been dulled by a huge debt hangover and we know that in the short term one or other European nation could default and generate panic. We know, we know. Stop telling us. We know.
Everyone has got the message by now and any investors that don't want to take the risk are already nestling in term deposits and are not coming back until someone blows the "all clear". Which leaves everyone else, the people who know the risks but have chosen to play anyway. They fall into two groups, one looking for action and the other, forced into equity market interest by falling interest rates, looking for income and, faced with falling returns and rising living costs, prepared to take a risk to get it.
For those two groups the market discussion has moved to their peripheral vision and the focus is on buying or trading individual stocks not on buying or trading "the market". Last year one in four stocks went up. The game now, as always, is to focus on finding those stocks while staying clear of the stocks going down. How do you do that?
One of the best ways to pick stocks is to pick themes, to come at the stocks from the top down. Last year, for instance, the main drivers were a flight to income stocks and avoiding resources. Who'd have thought Telstra's total return last year would hit 29.4 per cent and Rio Tinto would fall 28 per cent.
Themes that are working so far this year include first and foremost a resources resurrection on the back of less Chinese worry. The recent Chinese GDP number settled a lot of nerves and further Chinese policy easing is in the wings. It looks like China may just retain growth of 8.5 per cent this year rather than stumble below 8 per cent and on the back of all that commodity prices have firmed up and BHP and Rio looking better.
Other themes include buying any stocks that prove themselves "safe" in the results season. On telling us their results would be OK, Leighton jumped 15.8 per cent, Ausdrill 27.6 per cent. With the focus so acutely on risk rather than reward, any company that declares "no risk" will jump and against logic the stocks that hold the most risk running into results, like currency-affected stocks, steel, retailers, media and sharemarket-dependent stocks, are the ones that now offer the best prices and most upside if their results are OK.
The other big theme is the chase for defensive stocks with a decent dividend and we have listed them on the website this weekend.
This is the game this year. Playing themes and picking stocks. It's not rising tide investment, it's "taking advantage of anything on offer over any time frame". It requires more effort and a few basic trading skills, but for some of us that's the fun bit.