FYI | May 28 2013
By Peter Switzer, Switzer Super Report
Newspapers can’t help themselves — they’re running a scare campaign using headlines like “markets in turmoil”. I have no problem with this sort of thing as they are doing their job.
These people are writing about it but I have to make sense of it to give my readers a leg up for their investment decisions.
So, what’s going on with our stock market closing at 4,983.5 on Friday and the dollar diving to 96.51 US cents on Monday morning? By the way, this is not just an Aussie weakness story, it is also a stronger greenback story.
We haven’t fallen much against the euro in recent days but over three months we’ve gone from 0.81 euro to around 0.75 euro.
On the nose
Sure, our market stinks. On Monday morning, we were down about 4.5% from the high closing level of the S&P/ASX 200 index of 5,221 on Budget day before the Treasurer spoke. But this is not drastic stuff, as we are up about 7% since the start of the year and my bet is it will be higher by year’s end.
Some might say we have a market stench issue, but I prefer to say there’s a BO problem – a Buying Opportunity problem of when do I get in?
Regular readers know I have been talking about an eventual buying opportunity and so the question is – do we get in now or wait for further falls?
Our challenge is like the old joke about the Irish minesweeper, who tippy-toed across a minefield with his fingers in his ears!
(Is this racial vilification nowadays? Apologies to any sensitive Irish ex-pats out there, but my forebears were Irish, so I can get away with it. Google Switzer’s of Dublin!)
Right now our dollar has dived, which helps explain why our stock market has been slugged, so let me list what has been hurting the dollar and our stock market:
• Fear that the Fed could taper QE3 soon has worried Asian markets, including our stock market, but it has not badly affected Wall Street, which seems a little crazy;
• Tapering QE3 leads to eventual higher rates in the USA and the greenback has gained because of it;
• The budget deficit here being bigger than expected;
• The RBA is expected to cut interest rates again, after a surprise cut in May;
• China’s economy looks to be growing slower than expected;
• Commodity prices are softer, as the mining boom wanes, which means a lower dollar and less export demand;
• Our growth could be slower than expected, which could push up unemployment and this could hurt local companies selling into a worsening jobs market;
• The lower dollar is making some foreigners – especially US ones – take their profits home before the greenback goes much higher and our currency falls further;
• There is a Government confidence issue, which has been made worse by a pending election, which is never good for investor confidence; and
• The formerly high dollar, along with our relatively high interest rates, as well as wages rates and low productivity is not a great combination to inspire unbridled investment in the companies that make up the S&P/ASX 200 index.
Relativities
The above reasons explain why there is nervousness and selling, but it also needs to be remembered that our market is up some 30% since 26 June last year, when we closed at 4,103.
We’re due for a pullback, but now we have to guess how long this will last. I have to confess, I have a little war chest I want to unleash and so I want to time this BO to perfection. I know it’s hard but I’ll try.
I think the line in the sand is Friday week’s jobs report in the USA, and if it’s too good, then Wall Street might join us in a sell-off. Ironically, our dollar dive and the end of QE3 might coincide with a share market sell-off, but they both will usher in another period of higher stock prices after the short-sellers and hedge funds have their fun.
So, how do you play this?
I reckon there’ll be volatility until we see the next US jobs report and Chinese data could add to the negativity or reduce it. I’m holding fire on exploiting the buying opportunity but you’ll be the first to know when I go. I’ll not only tell you when, I’ll also tell you what I’ve gone for.
Watch this space – when you get a sniff of a BO, you have to act.
One final point has to be made. I’m not as negative on the Australian economy as many who are commenting in the media. The first half of the financial year ahead will be slower than the second, but when a new government mixes in with a lower dollar, a stronger US economy and a Chinese economy that will pick up as the year kicks along, then stock prices here will react positively.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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