The stock market reaction to Westpac’s loss in its New Zealand court case was wonderful.
If you haven’t seen the news, then you won’t know that Westpac has been told it must pay almost $1 billion in back taxes to the New Zealand tax office.
The response from the market? Westpac shares finished 3% higher.
That reader, is something that can only happen in a bull market.
It is perhaps, confirmation the bull market has well and truly begun.
Of course, the market is already up over 40% since the March low. So you could argue the Bull Run has been going for seven months already. Even so, it’s been seven months of high risk investing.
If you had the stomach to go for it then you should have picked up a nice return on blue chips, and an even nicer return on small caps.
However, with the two announcements we’ve seen this week – RBA and Westpac – you’ve now got to look at the market in a different light.
And that is, to repeat what I wrote yesterday, there’s a very strong chance this market could still be pushed much higher.
Look, it’s not without risk. You should never think the stock market is a risk free investment.
But you should recognize the point at which the bulls look to have taken complete control of the market. This week could be that point.
You see, what’s happened is that the market has the excuse it was looking for to go up. Fundamentally, the market and the economy is little different today to how it was last week.
In fact, the only difference is that today interest rates are 0.25% higher than they used to be. As we highlighted in Wednesday’s Money Morning, that’s going to mean an increase in finance costs across the board.
Not just to homeowners, which most people have focused on, but to everyone – businesses too. And those costs will need to be filtered through to the end user – the consumer.
But right now, no-one cares about that. And as an investor, while you shouldn’t forget about it, you should continue to look to benefit from what it will mean to the market. And what it will mean for profit opportunities.
The economic propaganda machine is in full flight at the moment. Rising interest rates and rising financing costs on an indebted population and an indebted private sector is seen as a positive sign.
The justification is that interest rates must “return to normal” because at the moment they are below normal. Look, we’ve got no idea what normal is. But the economic know-it-alls suggest “normal” is somewhere around 4-5%.
Personally we think they’re talking through their you-know-what when they suggest they know what the ideal interest rate is. But we’re happy to play along.
It means though, that this market bull run should still have plenty more fuel in the tank.
The futures markets are now pricing in interest rate rises for November and December. That means by the end of this year you should look for the RBA to have the cash rate at 3.75%.
And by the end of next year the cash rate is likely to be somewhere between the “normal” rate of 4-5%.
So if the market continues to view interest rate increases as a positive sign for the economy, there’s a real chance the stock market will follow suit.
For you as an investor it means beefing up your portfolio in different sectors. But that doesn’t mean you should abandon what you’ve already got, because odds are that will rise too. Let me try and explain what I’m on about…
Over the last ten months in Australian Small Cap Investigator, as well as picking up some great opportunities in LNG and natural gas, we’ve also added a number of stocks that you would call “economically sensitive” or “cyclical.”
In fact, as I look at the portfolio now, there are four stocks that we added as punts on an economic recovery and another two stocks that were economically neutral but had nonetheless been unfairly punished by the market.
That’s roughly 21% of the portfolio that we picked banking on what is happening now. Although to be fair, we didn’t think the Bull Run would start this soon.
We were banking on at least another six months of a stagnant market that would allow us to keep picking up these gems on the cheap.
In other words, while it’s been the resources plays that have given us some of the biggest returns over the last year, looking ahead the way is now open for all sectors of the market, and especially the cyclical stocks to start pulling in some good returns too.
Looking at the sectors it’s hard to find one that you wouldn’t buy into to take advantage of the surge. As you know we’ve got a personal dislike of the banking sector. And quite frankly I believe there are enough other and better opportunities around.
But if you don’t have the same dislike, then as I’ve mentioned before, if you want a punt then go for it. Just beware that when the Bull Run finishes the next time, it’s the banks that are likely to suffer the biggest fall of all.
As for the other sectors, energy and materials equally remain very attractive, and remain the best opportunity for the kind of triple-digit gains we’ve already seen this year.
We’ve just added two new energy plays to the Australian Small Cap Investigator portfolio, so while you can look to get high double-digit percentage returns in the lower risk cyclical small cap stocks, the really big winners will still come from the same place as always…
The resources sector.
But don’t forget, the stock market is risky. Even in a bull market you’ve got to remember you can’t afford to just buy and hold.
Monitoring your stocks is just as important today as it was a year ago.
Other Stuff on the Markets
The S&P/ASX200 jumped 1.55% yesterday, while overnight on Wall Street the Dow Jones Industrial Average added 61 points. In Europe the FTSE100 gained 0.90% and the CAC40 added 1.34%.
The price of gold in Australian dollars is trading at $1,164.20, while in US Dollars it is trading at $1,055.00. And the price of silver in Aussie dollars is $19.62 and in US Dollars it is $17.77.
The Aussie dollar gained versus the US dollar and eased versus the Japanese Yen, trading at USD$0.9059, and JPY78.91.
Crude oil closed overnight at USD$71.69.
For the biggest movers on the market yesterday click here…
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PF, please do not apologise for disagreeing with me. If I am wrong, then I definitely want to know about it, or risk doing myself harm with having the wrong ideas and perceptions about what is happening. Why have I turned so gloomy?, so bearish? Because I have just seen confirmation in the actions of the movers and shakers that they will not hesitate doing the economy great harm for no legitimate reason. Yes, rate rises could be expected, but the way they are doing it is very destructive.
1. I do not believe that we are overheating. Ask almost any small business owner and will tell you that much. Plus, wage rises, let alone a real increase in income and take home pay, are nowhere to be seen, while many expenses, government fees, insurance, you name it, all keep going up. Where is the overheating? Who has the money?
2. Rates are historically low, but how much business are the lenders actually writing? I have contacted my bank, believe me, trying to move onto a slightly better package. They did not want to hear from me. I have also been chasing lenders through half a dozen brokers over the past two years, trying to buy residential and commercial, and with what result? ZERO. And I have a spotless credit history.
3. If there is excess liquidity in the system, then it is nuts and very destructive to mop it up through rates, instead of cutting out the debt binge on the nation’s credit card. I explained why in other posts, so I will not repeat the arguments here.
4. But even more worrying is to see the RBA in action. Glenn Stevens has shown himself untrustworthy and duplicitous. I would not trust his motives as far as you can throw him. Why? He talks out of both sides of his mouth. There is either too much liquidity in the system, or there is not. If there is, then he should speak out against the debt binge stimulus. But, NO, he says instead that stimulus is fine, while he is raising rates. Well, what is that? He cannot have it both ways. Or maybe he can, and is having it both ways: Stimulus is indeed fine, as it gives him the opportunity to raise rates. But why would he want to do that, instead of speaking out against the debt binge? It just doesn’t add up, PF. Sorry. And if we have someone like that in charge of a debt dependent economy, our goose is getting cooked. That is the only conclusion I can draw, so, yes, I am negative and bearish. In sum, it is not the rate rise itself, as this will not do all that much harm all by itself, a few more like it, but what this rate rise means, what it potentially portends, is what spooks me.
5. But don’t worry, if the RBA will not lead us quite over the edge, the politicians will. They seem hellbent on yoking us with “the GST from hell,” which will be an unbelievable burden on an already weighed down economy.
I agree with what you say, PuntPal, but the correction you way we need to have could have been too disruptive, and much can be lost that is valuable through uncontrolled crashes and the turmoil they create. Jobs and even industries, for example, that go belly up without help, can be lost, never to return again, whereas if they get a little help for a while, they have a chance to survive the storm and flourish again, providing employment and income, in this country. We have lost enough jobs to China and India as it is, so I for one, I am not against short term borrowings and stimulus.
What I am against, and very much so, is what is being perpetrated now, continuing the debt binge stimulus AND the RBA raising rates on businesses and people. That is nothing short of disgusting.
As to whether there really is a tension between the politicians and the Treasury and the RBA, I don’t know, but my my instinct tells me that Glenn Stevens might have suspect motives and allegiances at best, and that him and the politicians, rather than being at odds with each other behind closed doors, are doing what they are doing in cahoots.
You can call me distrustful and suspicious.
cb – I agree that some industries/businesses that are viable should be protected from external shocks and credit crunch…temporarily – but that is not what is happening. They gave out $900 to millions of people and just hoped it got channelled into the right industries. For all we know they spent that money supporting overseas jobs. It wasnt about protecting jobs – it was about manipulating GDP figures so that Swan and co. can brag like they were yesterday.
Even when you do target support for industries – which ones get the support. Thats right, the ones with the most lobbying power and these are usually the ones that are propped up in good times and bad.
If we are going to stiumlate to support industries, then it needs to be done in a more tranparent way. Maybe some form of industry government body that assesses claims for support against a criteria.
The problem right now is that money can be dished out to anyone and its justified in the name of the GFC.
I do not disagree PuntPal. Stimulus and low rates have kept us afloat in heavy seas and stormy weather, so I am not so fussed about short term stimulus, when it looks like it is needed, and arguably we did need it very badly at the time.
What I do object to, is the raising of interest rates, instead of cutting stimulus, if such is no longer needed. Why? Because it impoverishes the nation and pushes us all into more and more debt. Just listen to the section: AM with Tony Eastly, at this link:
http://www.abc.net.au/rn/breakfast/
The number of people who already cannot feed their families, pay the rent or service the mortgage is only going to increase with every rate rise. If I were to sum up my position on this question with an analogy, this would be a good one:
If stimulus is keeping us afloat, rate rises can only push us under.
And the reason I have turned so pessimistic is that the process of pushing us under has started and it is deliberate. If I can see it, then so do the movers and shakers. And if they see what they are doing, you have to ask: Why are they doing it? Ignorance is no excuse, and if that is what it is, then it is criminal ignorance.
But, of course, the simplest questions to ask is the familiar one:
Who benefits, and who loses? Or, Who benefits at whose expense?
Depending on how well one answers those questions, one will be getting closer, or further away, from the truth – the truth about why we are getting rate rises while at the same time we are still trying to hold off an economic collapse by borrowing and going into more and more debt.
cb – I was sorry that the increase would adversely affect you. I hope that you are able to shield yourself from the increase, although from a recent post that appears unlikely.
PuntPal I answered your post on the next thread.
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