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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cb…he’s a politician. He needs to show the crowds that “look it wasn’t us it’s these big bad guys”. I can confirm that he is definitely in the cross hairs of the Greek populace. They have been fattened up for generations and now you expect them to go in a diet?
Again, Greece is purely a “peep hole” into what the whole eurozone is currently experiencing. I didn’t say “crooks” for no reason. It encompasses BOTH parties. The Greek Govt AND the banksters.
What my concern is WHO is in the cross hairs of the banksters for the next “kill”. For to believe that they will give up this lucrative game would be very naive.
And the very next paragraph:
“Governments created the financial crisis
The current financial crisis was not created by the banks. It was created by governments’ irresponsible policies of buying votes by manipulating the financial system through constant money printing, especially since the creation of the Fed in 1913 and the abolition of the gold standard in 1971. In addition they have used interest policy as a popularity contest thereby creating a totally artificial market which distorts the normal laws of supply and demand. It is clearly ludicrous to artificially keep interest rates at 0% and print massive amounts of money. Neither governments, nor banks should be allowed to create money out of thin air or interfere with market forces by artificially setting interest rates. It is this corrupt manipulation of the financial system and the economy that has totally destroyed the value of money in the last 100 years. Measured against gold, the dollar and the pound have declined by 99% since 1913. This would not have happened if governments had not been allowed to use the financial system as a voting machine. But sadly this will continue at an accelerated pace in the next few years. Governments seem totally incapable of comprehending that they cannot solve the world’s greatest financial crisis by applying more of the same toxic medicine that created the problem in the first place.”
I would say, thoiugh, that the bankers are partners in crime with the politicians.
cb..#9…Yes I agree and perhaps this is where I feel some confusion lies in your views on real estate and other’s interpretation of it.
I agree with you that real estate “may” increase in nominal value in the coming years, however, that nominal value is illusionary in that the dollars in that property will have less buying power than the dollars you started with to buy that property. This is why I feel that property is no longer a good investment.
Exters’ Pyramid I feel is a very good graphic of explaining the stages of real wealth and where the last bastion of financial shelter lies.
I believe that we are witnessing this evolution of events. The manipulations may delay the process but not eradicate it. Frankly, the longer it delays, the more time it gives most of us to prepare.
The last paragraph of that newletter, here, but the graph immediately preceding it is a must see:
“Governments have suppressed the gold price in the last 30 years by both overt operations (official gold sales) and covert operations (manipulations in the paper gold market and unofficial sales). Central banks are supposedly holding 30,000 tons of gold but credible estimates suggest that this figure is around 15,000 which means that 15,000 tons of central bank gold has been sold covertly to depress the price. But the effect of manipulation of any market has a limited time span, especially if it is done in connection with a total mismanagement of the economy. Central banks have now stopped official sales and China, India, Russia and many other countries are major buyers. Production is falling steadily and investment demand is soaring. With the fundamentals so much in gold’s favour, it should have no problem to reach the 1980 inflation adjusted high of $ 6,400. With inflation or hyperinflation gold will go a lot higher than that.
During the next phase up in gold which we expect to start within the next few weeks [written on 11th February], main stream investors will discover what only a few investors have understood in the last ten years, namely that physical gold is one of the very few ways to protect their assets and preserve capital.”
http://matterhornassetmanagement.com/2010/02/11/sovereign-alchemy-will-fail/
Nick – Yes, overall I would tend to agree. The central focus of Exter’s inverted pyramid concerns the migration of accummulated savings through the various asset categories available for investment, and a critical aspect of the analysis it affords is that in a credit contractionary environment, savings will tend to leave leveraged asset categories, such as real estate, and will instead flow into less leveraged asset categories, such as physical gold and silver, both of which tend to be bought, not on margin, but with actual, unencumbered savings. Ergo: gold will be most likely to continue outperforming property.
Having said that, Marc Faber’s good advice always keeps ringing in my ears, that one must constantly ask and question oneself about the imponderable: What if I am wrong? What can I do by way of catering against what appears to be unlikely?
And the only answer I can think of, in terms of passive investments, is income producing property, and especially farm land. After all, apart from real money, which is gold and silver, the age old definition of wealth has been land and cattle, and not by coincidence. Hence, as a matter of precaution, a degree of diversification amongst the real assets in which one should seek to hold one’s savings should also include property, but against as little debt as possible, of course.
Nick @ 10 – Yes, as we have discussed before, our own turn will most surely come. The NBN, one of the biggest big white elephant dreamed up for this country, for example, financed through the valuable assistance of Goldman Sachs, is still firmly on track. No better time than this to get out of debt.
if cash is so terribly vulnerable today would 50% over valued real estate still be a better investmnet option – wouldnt it be better to lose 30%+ of your real estates value than potentially the full value of your cash?
Brilliant cb..land and income producing assets. farms, industry, manufacturing, innovation. Precisely. Gold is only the medium to take us from a disaster to safe ground. We have all that it takes here in Oz to get this into play. But are the pollies listening? are they capable of listening or understanding? Do they have the kahunas to act?
So until such time that we are ready to take on the “renewal” and get our country back, we need to save what we can from the “raiders” of our wealth and saving.
Let me explain it another way.
What was the most valuable item on the Titanic? Was it the furniture? The artwork? The jewellery? The silver cutlery? All very valuable items. NO!! The most valuable items were THE LIFEBOATS! For without them all else is sunk and consequently USELESS.
The irony of it all is that the LIFEBOATS were FEWER than needed so it made their value exponentially more valuable.
Now compare that to our quibbling about shares, real estate, cash etc. Gold is the life boat of your wealth and, just like the lifeboats on the Titanic, there is less gold than the market actually thinks there is. So accordingly, its value will rise exponentially. No?
That’s the first step.
GB @ 1:
this may be the end of the ‘mini’ bullrun … i.e. prices probably will pull back again, but this is merely an opportunity to buy more!
The overall medium term trend will be UP…
Oz property and gold sound like they are becoming very similar to me. Prices always go up, get in now before you miss out.
What I dont understand, is that if fiat currencies totally crumble..what will you do with your shiny metals? Put them in sacks and go around the streets buying things?
Currencies wont be pegged to gold again, poltical responsibility will return….not because the pollies are responsible, but because the people wont stand for hyper inflation.
Its scare mongering by the extreme right – its there way of criticising Government spending policies. MOney has always been printed…and from where I stand, its not the money printing that is the problem…its the reckless things we spend it on.
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