Friday, August 28, 2009

WHAT DRIVES THE MARKET -SENTIMENT or FUNDAMENTAL


As I prepare the final "Golf in Dubai Steers" post and video I thought it would be good to dicuss these 2 words Fundamental and Sentiment. Understanding these 2 words has made for me a real difference in the way I understand markets.
Let's first get the definition :
Fundamental : being or involving basic facts or principles.
Sentiment : A thought prompted by passion or feeling; a state of mind in view of some subject; feeling toward or respecting some person or thing; disposition prompting to action or expression.

So now we know the meaning it can help us understand how both fundamentals and sentiment drive markets. Let's use the share market as an example then equate that to the livestock market.

The share market is driven by both Fundamental and Sentiment.
Fundamental is things like:
Is the company making money EBIT?
Are they paying dividends ?
Is the Price to Earnings ratio P/E within the parameters for that sector ?
Is management growing the business ?
Is the market for the products growing or falling ?
All information one can obtain to understand the Fundamentals of a company or industry.

Now on the other hand Sentiment is the emotion out there in the market and tends to overshoot on both the upside and the downside. Emotions of Fear and Greed drive market sentiment as people jossle to get it right.

Both Fundamental's and Sentiment are important when you are looking at the market.
Let's look at the last 2 falls in the share market - 9/11 the market crashed based on sentiment - the fundamentals allowed it to recover within a month - this last crash was led by fundamentals where banks and company's were going broke - serious financial strife for a lot of company's.
The sentiment drove the market down to silly levels based on fear, so you saw CBA(Commonwealth Bank) at $24 with a dividend yield much higher than bank interest about 11% at the time. Fundamentals took over and yesterday CBA closed at $44.75 ,83 % gain not a bad return from 23 January until 28th August. I will remind you of this when we look at the investment in "Golf in Dubai "steers exactly same time period.
Now even though the world has serious financial hurdles ahead the sentiment is back in charge and we are seeing share markets trending up.
This will be a tug of war for quite a while as Fundamental's and Sentiment opose each other.

So how does this apply to the livestock market - well the fundamentals for cattle last year dropped significantly as offal and hides became worthless yet the restocker market remained strong for quite a period.The bigest driver of livestock markets is sentiment as producers bet on a rain event.Right now market fundamentals for sheep and cattle is really good but market sentiment is down because it may remain dry.

Knowing all this can be to your advantage - in both the share market or livestock market fluctuations in sentiment will provide many trading opportunities. If you have grass & money in your inventory (fundamental) when every one is desperate for rain the market sentiment will provide very profitable opportunities.When there is lots of grass and you have lots of animals in your inventory your animals may become overpriced due to sentiment so again opportunity.

The weaners sales early in the year are driven by sentiment - a market view it is going to be good in the spring.
Well next week let's see what has happened to the "Golf in Dubai" steers after 7 months - now sitting at 480kg.

Any thoughts on this email me at : peneena@gmail.com


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