Those who have jumped up and down fretting about the possibility of rising Aussie interest rates must feel a little sheepish this morning.
Yesterday the Australian Bureau of Statistics (ABS) released the latest unemployment and employment numbers.
The unemployment rate edged up from 5.7% to 5.8%.
The number of employed people fell by 22,600.
While the unemployment and employment rates aren’t the be all and end all, they are a key set of numbers analysts and economists like to watch. And they don’t like what they see.
The Aussie Dollar dropped more than a cent last night. The reason? Forecasters now see a higher chance of the Reserve Bank of Australia (RBA) cutting interest rates.
You know what that means…
If you’ve ever seen the movie All the President’s Men you’ll know that it’s a brilliant one.
It’s a docu-drama retelling the events of the Watergate scandal in 1972. The movie stars Robert Redford and Dustin Hoffman as legendary journalists Bob Woodward and Carl Bernstein.
The movie also portrays the anonymous character known as ‘Deep Throat’. He was the inside man who led Woodward and Bernstein on the trail that ultimately led to the White House. It also led to the resignation of US president Richard M Nixon.
We mention this story because in one memorable scene in the movie, ‘Deep Throat’ tells Robert Redford’s character, Bob Woodward, to, ‘Just follow the money.‘ In other words, cases of corruption always involve money. If you follow the money you’ll find the culprit.
You can apply the same advice to financial markets – just follow the money. Only in this case, we’re not interested in where the money has come from; we want to know where it’s going.
Don’t be a Lemming
Despite claims that asset bubbles are about to pop, the market keeps fighting off the bad news and continues to rise.
Two days ago the mainstream press was screeching about a 1.5% fall for the Aussie stock market. Apparently that fall had wiped $24 billion in value from stocks.
Well, it didn’t take long for the market to recover from that supposed disaster. Thanks to yesterday’s 1.2% run-up, stocks are back above Monday’s close.
We can only hope you weren’t one of the lemmings who read the bad stock market news and followed most mainstream investors by selling stocks.
Because if you did you’ve missed out on an 80-point rally.
But don’t beat yourself up too much. If you haven’t bought back into the market, it’s not too late. All you have to do is follow the money and you’ll see exactly where it’s is flowing from, and where it’s flowing to.
That should help you realise that the worldwide asset bubble that started in 2009 is still in full effect. And if we’re right about its impact on stock markets, this bubble still has much further to go.
Where is the Money Going?
You’ve heard the story. You’ve probably heard it more than you care to. Central banks are creating asset bubbles left, right and centre.
It’s a great piece of information. It’s a useful piece of information. But without the natural follow-up it’s also completely useless.
It’s one thing to identify an asset bubble, but what’s really important is the ability to take advantage of that bubble to potentially build profits. That’s what we mean when we talk about following the money.
Everyone knows where the money is coming from. The next step is to find out where it’s going. The answer worldwide is clear. Low interest rates have forced and are forcing investors to buy stocks.
And now that will start to feed through to the Aussie market in the same way it fed through to overseas markets.
One reason is that yields on dividend-paying stocks are typically higher than the interest rate on bank deposits. Investors would rather take on the extra risk of owning stocks to get the higher yield rather than have inflation eat away at their cash.
Second, you can get capital growth from stocks. You can’t get that from cash. If a company can grow its business it should lead to higher revenues, higher profits, and hopefully higher dividends. That’s a story we’ve followed in Australian Small-Cap Investigator for the past 18 months.
Many people I speak to are amazed that so many small-cap stocks are profitable and pay an ongoing and reliable dividend. And because small-cap stocks start from a low base they typically (but not always) have much further to go.
Of course, they’re also generally riskier than large-cap stocks, but if you like speculating then the small-cap sector is just about the best place to do it.
Aussie Stocks Heading to 7,000
This isn’t to say the small-cap sector will be the only place to benefit from the money trail. If the Aussie market follows the same trend as overseas markets you can expect other stocks to benefit too.
Remember, the Aussie stock market lagged most overseas markets. Part of that was due to the higher Aussie dollar, worries about China, and falling commodity prices.
Our bet is that the market will worry less about these things this year…especially if interest rates fall further and the Aussie dollar edges closer to US$0.80.
This is why we continue to put money on the Aussie market hitting 7,000 points next year. That would be 32% above the current level. You may think that seems like a big move, but in the context of low interest rates it’s par for the course when you look at overseas markets.
Make no mistake, it’s a risky bet. If interest rates don’t fall then stock prices could. That may happen if company earnings and dividends don’t rise.
But for now, and for at least the next two years, our advice is to follow the money. Everyone can see where it’s coming from, but amazingly in Australia, despite what has happened overseas, few are prepared to admit where it’s going – and that’s straight into stocks.
Cheers,
Kris+
From the Port Phillip Publishing Library
Special Report: The ‘Wonder Weld’
