The Money Morning Mailbag is bursting at the seams this morning. And your editor’s pea-brain is equally overloaded with ideas…
Yield curves, Superannuation – Mercer research, House rental yields, Deleveraging, Today’s RBA Cash Rate decision, Tomorrow’s Aussie GDP numbers, the United Nations’ World Economy Report, New consumer credit laws, Gold , Aussie dollar and GM/Holden.
But this morning we’ll ignore all of those because…
The Bull Market is Back!
Ok, we’ll qualify that. The market thinks the bull market is back, and therefore you’d be completely mad to stand in the way of it.
As subscribers to Australian Small Cap Investigator would attest, despite the market’s recent aversion to risk, we’ve continued to search for cheap-as-chips value and growth plays at the small end of town.
So far it’s paying off.
We’ve also argued the case for the small end of the market here in Money Morning. Plus we’ve added to that the belief that income earning stocks are a better ‘safe haven’ for your cash than blue-chip growth, bonds or cash.
Nothing we’ve seen in recent weeks and months changes our view on that.
But enough of the rear-view mirror gazing. What you need to know is what the market will do in the next six to twelve months. Before I get into that, take a look at these two charts…
“Oh no, we’ve missed it, buy NOW!”
That’s one reaction to seeing the 3-month chart of the S&P/ASX200. The index is up by around 20% since the low.
But then of course, there’s this chart…
It’s the 2-year chart of the same index. The rise from the bottom doesn’t look quite so impressive now does it?
So what do these pretty pictures tell you about the market? Well, as we stated above, you’d be mad to stand in the way of it. Just as you wouldn’t stand in front of a freight train.
Equally, you need to be just as cautious about diving in head first. My reason for caution stems from the list of ideas at the top of this letter. Because, although I firmly believe certain equities have presented the best investment opportunity for the last eight months, I’m under no illusion that the economy is in as good a position as it appears.
Because rather than all the problems being left behind, they have actually been pushed ahead of us. It’s just that between now and when the effects will be felt again, we should continue to see a nice little bull run.
And here’s the punchline, you’d be mad not to take advantage of it.
If you’ve been in cash for the last eight months then that’s been a big mistake. Being in cash is not a conservative investment. Being in cash means that you are making a conscious decision to see the value of that investment erode.
It’s the same with bonds.
Those two investments which are touted as being ultra-safe, ultra-conservative, and a ‘flight to safety’ investment. They are also a guaranteed way to see your investment portfolio go backwards as the value is chipped away by inflation.
If you’ve missed out on the rally so far, the key is not to panic. I know from my research for Australian Small Cap Investigator and my new income based newsletter, there is still good value if you’re prepared to look for it.
The mistake many investors make is to jump into the big blue-chip names they are most familiar with. Guess what? That’s what many investors have already done. And that’s what the fund managers have already done.
So it’s no surprise that many of those blue-chips have put in a good run already. Now, that’s not to say they don’t have further room for growth, but there’s something you need to consider…
Is it likely that after these blue-chips have already surged by 20-30% that they will have another major surge?
Look, it’s certainly possible. Look at the 2-year chart again. Stocks are still a long way below the record levels of late 2007. But you also need to consider what the probability is of blue chip stocks gaining by 30%, 40% or 50% in year.
That doesn’t normally happen…
But, if they do, then based purely on the dynamics of risk/reward that should indicate small caps – on average – will rise even further.
That’s probably being a bit too simplistic, but based on what I’ve seen of Australian small cap companies, there’s still plenty of value regardless of what the lumbering blue-chips do.
Other Stuff on the Markets
The S&P/ASX200 gained 2% yesterday, while there was even better news overnight on Wall Street with the Dow Jones Industrial Average adding 221 points. And in Europe the FTSE100 picked up 2%.
The price of gold in Australian dollars is trading at $1,204.38, while in US Dollars it trading at $974.83.
The Aussie dollar strengthened again versus the US dollar and Japanese Yen, trading at USD$0.8048, and JPY76.68.
Further strength for Crude oil overnight, closing at USD$67.94.
For the biggest movers on the market yesterday click here…
And today on the economic calendar we have the RBA Interest Rate indecision at 2.30pm.
