Today your editor is wrapping up the August issue of Australian Wealth Gameplan. With the market up 40% from the low you might think it’s not the best time to be tipping stocks.
That may – or may not – be true for blue chip growth stocks, but blue chip income stocks are a different story.
Anyway, I won’t give away the details here, but if you’ve already secured your subscription to Australian Wealth Gameplan just keep an eye on your inbox over the next couple of days.
Speaking of stocks, so far earnings season seems to be going tickety-boo. According to the analysts, half of the major companies to have reported earnings so far have exceeded analysts’ expectations.
What do we make of that?
Well, it shouldn’t be a surprise to anyone at all. Doubtless the analysts lowered their expectations going into the earnings season based on the theory that the worst global recession in seventy years would have a negative impact on profits.
Of course the big unknown for analysts was the effect of stimulus, lower interest rates and rising unemployment.
All three are bound to have had an impact on company profitability. Those that received the stimulus, have been paying lower interest rates and haven’t be laid off are more likely to celebrate their good fortune by splashing out on a treat for themselves.
Those less fortunate are not.
The trouble is, neither the low interest rates nor the stimulus are sustainable. All they have succeeded in doing is bringing forward spending, or creating the environment for spending that would not have otherwise been there.
It’s part of the distortive effect that stimulus and low interest rates have on an economy.
Those in favour of stimulus and low interest rates can easily argue that it has worked. They can point to company profitability and argue convincingly that without billions of dollars of government bribes the economy would have fallen into a recession like the US and most of Europe.
They are right.
We have no intention of arguing with that standpoint.
The only problem is that it hasn’t solved anything. In fact it has potentially made the outlook for the economy worse.
How so? Well, put it this way, if you’re encouraging spending to be brought forward, the money has to come from somewhere. In this case it is from government borrowing or private sector borrowing.
Governments, businesses and individuals are spending now in the false belief that this will cure the economy of the past ills. It doesn’t. It merely postpones the effects.
Let’s take a company such as JB Hi Fi as an example. Company sales were up 27.3%. That must surely be good news. The problem is that such a result has the potential to lure the company into believing this result is sustainable and that it is the result of their business decisions rather than as a result of artificial stimulus programmes.
JB Hi Fi are forecasting a 20% increase in sales for 2010 on the back of the 27.3% increase for the last year.
We’re sure this will mean JB Hi Fi will look to make further investments in the business. Maybe they’ll open new stores, take on new staff, make acquisitions.
All the sort of investment a business does in anticipation of future growth.
But what if the growth doesn’t materialize? What if the 27.3% increase in sales was due to the stimulus and the artificially low interest rates?
What happens when there is no stimulus for the rest of this year and next? And what happens when interest rates have moved higher?
That’s a lot of questions, but hopefully you see the point. JB Hi Fi’s profits are likely to have been directly impacted by government stimulus and cheap money. Therefore once that stimulus is withdrawn there is a reasonable chance the outlook won’t be quite as rosy.
Other Stuff on the Markets
The S&P/ASX200 gained 0.57% on Friday, while on Wall Street the Dow Jones Industrial Average dropped 76 points. In Europe the FTSE100 slipped 0.87% and the CAC40 fell 0.83%..
The price of gold in Australian dollars is trading at $1,140.96, while in US Dollars it trading at $947.45.
The Aussie dollar weakened slightly versus the US dollar and Japanese Yen, trading at USD$0.8297, and JPY78.57.
Crude oil closed the week at USD$67.56.
For the biggest movers on the market yesterday click here…
{ 2 comments… read them below or add one }
Good basic synposis. Simple logic is quite often the best.
“”"JB Hi Fi are forecasting a 20% increase in sales for 2010 on the back of the 27.3% increase for the last year.
We’re sure this will mean JB Hi Fi will look to make further investments in the business. Maybe they’ll open new stores, take on new staff, make acquisitions.”"”
i suppose @ the end of the day its still a good thing ……
but if they loose out ..big deal.. claim it on tax
herald-sun last saturday reads interset rates are set to go UP 2-3% maybe more .. ..that will sort out the enocrombie for sure