Last night your editor presented at the Melbourne Adam Smith Club. The venue was the Curry Club on Bridge Road, Richmond.
About forty people turned up including a handful of Money Morning readers.
It was a good evening, rounded off by a few curve ball questions from the audience at the end! So it was a good job we only had the one beer to make sure we still had our wits about us.
Anyway, on to today’s Money Morning…
Take a look at this not-so-pretty chart:
Yesterday the S&P/ASX200 was pounded down by a whopping 3%. It’s given back all the gains it made from last Monday’s surge.
Pleasingly, the Aussie zombie banks took it hard in the neck. Westpac [ASX:WBC] picked a bad day to go ex-dividend. Punters that had bought in beforehand looking to pick up a tidy little 65 cent dividend and then hope for the stock to rebound were sorely disappointed.
The stock closed the day down a massive $1.61 or 6.47%.
The potential for a small profit would have turned into a decent sized loss:
![Westpac [ASX:WBC]](http://www.moneymorning.com.au/images/mm20100518b.jpg)
ANZ Bank [ASX:ANZ] suffered a similar fate a couple of weeks ago when it went ex-dividend, also picking a bad day:
![ANZ Bank [ASX:ANZ]](http://www.moneymorning.com.au/images/mm20100518c.jpg)
As you know, we think the banks absolutely stink, so it doesn’t surprise us to see the share prices get hammered.
Believe it or not, but the big four banks have all fallen by nearly 20% over the last couple of months. That means we’re pretty sure your broker will be on the phone to you soon telling you to buy them up cheap.
But with dividend yields only around 5%, is it worth the risk?
Quite frankly we still wouldn’t touch them with a barge pole. Especially not with the housing market teetering on the edge of an abyss.
Just a quick note on that. We’ve read several commentators that have pointed out how the defaults on Australian mortgages are at very low levels compared to historical and overseas numbers.
Well, d’uh! That goes without saying considering the housing market hasn’t crashed yet. It’s a big like saying, “look no-one’s injured”, before the car hits the wall head on. You do the body count after the crash, not before.
Anyway, we’re not touching property today, so back to stocks. One word of warning. Typically when markets have this kind of slump you tend to read and hear commentary from fund managers talking about they’re rotating their portfolios and how investors should also “rotate” their portfolio into non-cyclical stocks.
In other words, sell stuff such as BHP Billiton [ASX:BHP] or JB Hi-Fi [ASX:JBH], and instead buy stuff such as Woolworth’s [ASX:WOW].
Of course, the selling advice is the sort of thing they should have recommended before stocks fell, but that’s another story.
Following the advice of the funds management industry can be bad advice for the individual investor. Simply because funds manage their portfolios in a different way. They need to rotate their portfolio from one sector to another in order to pick up gains on the upside and reduce falls on the downside.
For an individual investor it’s different.
Check out the prospectus for any managed fund and you’ll see they have certain minimum and maximum amounts that they need to invest in shares.
For instance, a growth fund may not be able to hold less than 80% of the fund in shares. That’s why they need to rotate the portfolio into non-cyclical stocks when the market heads south in order to reduce the downside.
But for an individual investor, you just need to sell out of stocks and head straight for cash if the market takes a turn for the worse. Because obviously, you don’t have any requirement to maintain a minimum holding in stocks.
When stocks are nosediving you just want to be out of them. You don’t want to stay fully invested so that you’ve only lost 25% instead of 35%.
We’ve warned for some time that having a big exposure to large blue-chip growth stocks was risky considering the massive rally since the bottom of the market last year, so hopefully you’ve been able to reduce your exposure.
But unfortunately, even blue-chip income stocks aren’t paying great yields at the moment, which makes it tough if you’re looking for an income.
Just to give you an idea about how mean dividends are right now, in Australian Small-Cap Investigator during late 2008 and early 2009 we tipped a couple of tiny small caps that were paying good dividends: Retail Food Group [ASX:RFG] and Cash Converters [ASX:CCV].
They were good sound companies with solid earnings that in our opinion had been unfairly dragged down.
We’ve since sold out of both positions after the stocks more than doubled their lows, although I’m certain many punters have stayed in there to keep receiving the dividend.
But back when we tipped them – from memory – these stocks were paying around a 9% yield, which was pretty darn good.
Today those yields are down to 4% and 5.5% respectively.
So what I’m saying is that you’re getting the kind of dividend yield that until a couple of years ago you’d expect from a large blue-chip income stock. Today you’re getting the same yield on much higher risk stocks.
Let me put it this way, although I think both stocks are still great little businesses, I’d certainly have to think more than twice before tipping them for income. Simply because you’re not getting paid that much extra for potentially taking on more risk.
So, which way will this market go?
Unfortunately I don’t have the proverbial crystal ball, but my view is still to remain cautious. I certainly wouldn’t be following the advice that I heard on CNBC this morning which was to dive back into the market and pick up cheap stocks.
Because at the moment picking stocks is like poking a stick at an angry dog. Feel free to give the market a poke, but don’t be surprised if you get bitten.
But the big winner over the last month has been, yep, you guessed it, Gold:
As you can see from the chart above, Gold has majorly outperformed the Australian stock market over the past month. [Ed note: Your editor owns shares in the Gold exchange traded fund; ASX:GOLD]
It’s been a pretty amazing performance picking up over 15% during the time that stocks have dropped nearly 10%.
Is now a good time to buy more? Again it’s hard to say, your editor certainly wishes we’d picked up another batch a month ago when the Gold ETF was trading at just $120 per share. Today it’s trading above $138.
But you can’t win them all. The combination of a strong gold price and a weaker Aussie dollar has helped to pile on the gains for gold. The game with buying gold – as with many other things – should be to buy in on price weakness.
We’d look for both the gold price to ease back slightly and for the Aussie dollar to temporarily strengthen before rushing in to buy up more.
Of course if you’re a compulsive buyer of the stuff then any time is a good time, but we think we’ll wait a bit longer before tucking back in.
Cheers,
Kris.
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puntpal….hyperinflation is and has been a very real thing. My parents lived through it in the old days and in recent times there has been a long list of counties that have experienced it.
The value of our currency has been deteriorating for a long time. Hyperinflation is a collapse in confidence of a currency. Lets take your scenario of “what will you do with your shiny metals? Put them in sacks and go around the streets buying things?”..my answer to that is Yes. If the currency has failed and I need food to feed my family, (screw the TV’s, PC’s and other such toys.. just plain old survival) then I can walk up to a grocer and offer him a fiat note and he will tell me where to stick it, however, if I offered him an ounce of gold he will gladly accept it because he knows that the next guy he gives it to will also accept it.
Then when the new currency is printed you can then trade that shiny gold in and receive its “purchasing value” in the new currency, and life goes on.
This is how the smart Europeans survived the 1930′s. With gold sovereign coins. Then transported those coins when they migrated to other countries and converted them to that currency and made a life for themselves. Their houses and any other possession was all left behind.
PP -
i love the bit about
“Its scare mongering by the extreme right – its there way of criticising Government spending policies.”
IF it is indeed the extreme right who hold this view, then full points to them for their brilliant insight!
the insane ‘social’/socialst spending by western governments and the resultant debt created is what has screwed their economies up…
The printing presses are printing away in response, and gold WILL revalue itself (and more) to take this into ACCOUNT.
PuntPal – I agree, i bought some gold and it makes me nervous when everyone says gold only goes up
However, I think gold is insurance against politicians. The alternative is cash and the price of cash is determined by political decisions. So if you only hold cash you are relying on the politicians to make the correct choices so that the value of your cash increases (so to speak).
Therefore, just incase the politicians make a mistake I bought some gold
Etch @ 8 – Loved it! You can can that little beauty and stock your shelves with it.
Puntpal – You are a wise young man but be careful to include yourself in the big picture. There is a long and winding road ahead so to get to the other side you’ll need to step through it all.
Nick – The near future is settled the long term is up to the people I’m sure you agree. You are right, there are more of us out there and the ship will be righted.
cb – keep it up, you make it all worthwhile.
Sandra – congrats on your silver buy, you won’t regret.
Oh and Sandra we currently have the most right-wing government in this nations history. Look closely and you will see.
Fitch…amen to that.
Fitch @ 24:
i think there is much confusion over the term ‘right wing’.
i think what you actually mean is we have a government which is interfering unduly in peoples lives and severely limiting their freedoms and choices. But that is typical of a socialist government.
individual’s freedoms are inevitably lost.
in Australia this is easily seen in some of the draconian laws and by-laws which the government (at various levels) uses to water down property rights. Pretty much we have the most overpriced property on earth – almost exclusively due to government meddling and outright thievery.
On top of this, property owners are often at risk of losing value on their properties due to government interference.
Again, very socialist. very left wing…
Sandra @ 26 – all good points but how does any of that relate to the Gov’t in Cantbearithere? KRudd is nothing but a puppet. The only original thought this jokers ever had it to squint real hard and blow it out his arse.
Like his cohort Obama he is little but a remote controlled drone. These are not real people, they’re megalomaniacal sociopaths with absolutely no connection to real people. There is nothing wrong with democracy, socialism or communism if only we could see and feel any real example of them anywhere in the world past, present or future. Instead we judge one flawed and failed system with another and that’s hardly an apples for apples comparison.
In a true socialist state any one with more than one roof over their heads would swiftly loose their second and/or third roof and be satisfied with it.
We aren’t dealing with socialist, we are dealing with sociopaths who hate and will randomly discard both you and me equally.
GB @ 22 – Actually, politicians have a terrible record as regards the purchasing power of money issued by the state, or its contracted bedfellows, the banksters. What was that figure again? A 99% loss in the purchasing power of the dollar since the US Federal Reserve was entrusted with the job of looking after the value of the currency. Nothing short of a joke of a record, I would say. So, yes, with serial arsonists running amock in the village, you better get insurance, I should think.
PuntPal – Actually very few people are of the view that gold is such a good thing to own, although that should change over the coming decade. A bull market in anything can last decades, and the gold bull is barely a decade old, and for most of that time, it has been running in stealth mode. It is becoming noticed now, because just about everything else, and largely everything that carries counterparty risk, is more and more evidently reisky. The pattern of people being burned with this and that, one thing after another, will continue with the uncertainty and volatility, and while these last, gold and silver, carrying no counterparty risk, and depending on no honesty from banksters and politicians, will be likely to continue to benefit.
But, no, gold is not going to keep going only just up and up. It will go up and down, but while real interest rates remain negative, its chart pattern will keep showing higher highs and higher lows, with the occasional more serious pullback, at which time one should back up the truck and load up with whatever savings one has accumulated in the meantime.
But, for the time being, most of the buying will continue to be done by those from outer space, and of course the earthlings that have probably been examined on occasions by aliens. When the genral public starts buying the yellow stuff, these oddballs will probably be selling and paging Scottie to beam them up. When the lunatic fringe start being listened to, you know the time is ripe for leaving the asylum.
CB,
Comment #28 about gold is one of the best I’ve ever seen here. That just made my day (however, you could be entirely wrong).
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