More news emerges to show that we’ve got it spot on when it comes to interest rates.
A report from Bloomberg News quotes Bank of England chief economist Spencer Dale speaking in London:
‘“If the financial markets are pricing in a sharp rise [in interest rates] because they think in the past, every time the economy’s growing quickly the bank’s raised interest rates, I think they should think again,” Dale said at an event in London yesterday. “Our forward guidance says clearly that’s not the case.”‘
If you’re not prepared to take your editor’s word for it, perhaps you’ll take the word of the Bank of England’s (BoE) chief economist. You’d think he’s got a pretty good idea about what the BoE has in mind.
Of course, even though we’re convinced that interest rates are staying low for the foreseeable future, nothing is set in stone…
That’s why it pays to think about ways to play the market if interest rates do the opposite of what we expect. Yesterday our old pal Dan Denning showed subscribers of the Denning Report a neat little way to punt on the market if the worst happens.
He wrote:
‘What’s at stake for Australia is trillions of dollars in foreign capital that has been flowing into the country since 2003. That money from hedge funds and traders has propped up Aussie stock and property prices. If the core of the financial system – the engine which allows for so much credit expansion and borrowing – becomes engulfed in a serious crisis, then all the assets that have gone up since 2009 are at risk of falling.‘
When Dan says ‘all the assets‘, he means all the assets. That includes stocks, house prices, bond prices, commodity prices…everything.
The Most Opportunities in Seven Years
But like your editor, Dan isn’t 100% sure when the worst will happen.
The truth is no one knows when it will happen. All we know is it will happen, because it’s plainly obvious that a financial system can’t go on forever the way it is now.
The question is whether it will happen this year, next year or in 50 years.
As we’ve explained to you before, if you consider the creation of the US Federal Reserve in 1913 as the beginning of the current financial mess (which many do), it took 95 years before it finally wreaked havoc in 2008.
That’s a long time to wait.
Only, if it took 95 years for it to wreak havoc, it has only taken another five years for the stock market to gain back all the losses. After all, US stocks as measured by the Dow Jones Industrial Average and the S&P 500 are now trading near their all-time highs.
Even the NASDAQ index, which collapsed so spectacularly in 2001, now only needs to climb another 31% in order to take out the all-time high. And in the world of high technology and innovation, 31% isn’t that big a deal.
This is exactly why we choose to remain in stocks.
But don’t get us wrong. Don’t for a minute think that we’re trying to tell you all stocks are cheap. But some are, especially those at the small end of the market – small-cap stocks.
In fact, we’re constantly coming across so many cheap tiddlers that we almost can’t keep up with them. It helps to explain why we’ve now got 30 stocks on the Australian Small-Cap Investigator buy list – that’s the most we’ve had in play since launching the service more than seven years ago.
That should give you some idea of the amazing value and the speculative opportunities we see on the Australian market.
But as for blue-chip stocks, we’ll agree that it’s hard to find good value there…
A Bellwether for the Australian Market?
One stock that Dan has kept his eye on in recent months is Commonwealth Bank of Australia [ASX: CBA]. Dan sees CBA as something of a bellwether for the Australian market.
The stock price is down about 5% since hitting an all-time high of $75 in August:
Source: Google Finance
As far as buying a stock at a good price goes, it’s hard to make the case that CBA shares are good value…if you’re looking for capital gains that is.
If you’re looking for income, that could be a different story. If you held CBA shares before 19 August, today you’ll collect the latest dividend cheque of $2 per share. Add that to the $1.64 you could have received in April and that’s $3.64 or a yield of 5.1%.
Like it or not, that’s better than cash in the bank, plus you’ve got the potential for capital gains by holding shares.
Naturally, share investing is a double-edged sword, because there’s the potential to lose a bunch on your investment as well. CBA shares fell from $74 to $64 in May and June. And while we told investors not to sell stocks during that period, we know that many ignored our advice. They panicked and sold.
So not only did they lose by selling low and missing out on the recovery, but they’ve also missed out on a whopping $2 dividend.
Risks You Can’t Afford to Miss
Hopefully you’ve got the message. This is why we only recommend having 20-40% of your portfolio in dividend stocks.
That’s because they aren’t cheap…you’re paying a premium. But if you buy good quality and reliable dividend payers you should be able to ride out any short or medium term downturn.
As for the growth side, this is where small-caps (or even mid-caps) enter the picture. In some cases you’ll get dividends from small-cap stocks (almost half the Australian Small-Cap Investigator stock tips pay a dividend), but the main reason to buy small-cap and mid-cap stocks is the speculative gains.
If we’re right about the general direction of the Australian market – 6,000 points by early next year and 7,000 points by 2015 – we’re certain that the small-cap and mid-cap indices will clock up even bigger gains.
As we often warn, these gains won’t come without risks. But in a low interest rate environment where central banks force you to take risks, you simply can’t afford to just sit on the sidelines and stay in cash.
Cheers,
Kris
Special Report: UNAVOIDABLE: Australia’s First Recession in 22 Years
