As we confidently predicted, the Reserve Bank of Australia (RBA) kept interest rates on hold this week. Phew.
We were really sticking our head out there, saying we thought the chances of them raising rates was close to 0%. That said, we did get a little nervous at 2.30pm on Tuesday. Who’d be a gambler, or a forex trader for that matter?
Plenty, it seems, for we are a nation of gamblers. But the stock market is not about gambling. Taken with a long-term perspective in mind, you can generate serious wealth.
Just not in a single day, or even a single year, as investors are finding out for themselves in this year of stock market boredom.
A 1% chance
Following weak jobs data out this week, the chances of an interest rate rise in July are now just 1%. It seems like all the jawboning of the RBA — them talking about raising interest rates — has had the desired effect of slowing the economy. The mortgage-belt will be thrilled.
We’ve written here before about the current economic disconnect. Falling house prices and very tough conditions for retailers are hardly a recipe for raising interest rates. For those of us not directly working in the mining industry, stepping out the front door and smelling the economy tells you most you need to know – it’s a struggle.
So much for the boom
The Australian Financial Review (AFR) leads with “So much for the resources boom” saying “The biggest investment boom in the nation’s history may be under way, but so far it has been hard to detect much sign of it in the jobs market.”
If the mining boom can’t save us, we’re all cooked. And it doesn’t look like the job situation is going to get better any time soon. The ANZ jobs ad survey showed employment ads fell by 6.5% in May. Oops.
Perhaps the current 4.9% unemployment rate might be “as good as it gets.”
We are an optimistic bunch here at The Motley Fool. Looking on the bright side, Australia is still sitting in a very good position. Close to China, abundant natural resources, low unemployment, inflation under control, and still relatively low interest rates, doing it tough we’re not.
When the bear roars
You could almost call it the Goldilocks economy.
Except, ‘Goldilocks economy’ conjures up memories of around 2006-7. Back then, all seemed like it was going swimmingly, thank you very much, except Goldilocks was feasting on a diet of leverage and debt, and when Papa Bear woke her up, he let rip with an almighty roar that wreaked havoc on the global economy.
Could it happen again now? Almost certainly not to the same extent as we had in 2008-9. For stock market investors, there were some scary days in there, days like when you weren’t sure if your money was safe in any financial institution, anywhere in the world. I think we can safely say that was a once in a lifetime event.
Still, there are plenty of doomsayers out there, predicting the worst. But they can get it wrong too, like Harold Camping, the U.S. preacher who predicted the world would end on May 21st. The last time we checked, everything still looked in place.
Not deterred, Harold is at it again, saying he was off by five months, and the Earth will be obliterated on October 21st. Perhaps Harold would have better luck trying to predict his own end date. At 89 years of age, we’d suggest he doesn’t look too far into the future.
Speaking of the future, where next for the local stock market? The front page of the AFR recently lead with “Falling stocks pose investor dilemma”, saying “One-fifth of Australia’s top 100 companies are trading near their lowest levels in a year…and could fall further.”
Yikes. Maybe Harold will be right? October 21st is eerily close to the anniversary of the October 20th 1987 stock market crash, which wiped 20% from world stock markets in a single day.
Here at the Motley Fool, cheap shares get us excited. But how do you assess cheapness? It’s the difference between being a Warren Buffett or an also-ran. A billionaire or a life of baked beans and lentils.
How to become a millionaire
Take Qantas (ASX: QAN) for example. At $1.90, the shares are trading at one-year low. But just because they are trading at a low point, it doesn’t necessarily make them cheap.
When it comes to airline shares, I take a leaf out of Richard Branson’s book on how to become a millionaire — start off with a billion and buy an airline.
And then there’s a company like Fairfax (ASX: FXJ). Their shares are trading at just $1.00, giving the company a market capitalisation of just $2.35 billion. We know they are facing some serious structural challenges as the world moves online, but maybe they are cheap. Maybe.
As ever, there will be pockets of value out there. In fact, some stocks will be downright cheap right now.
I haven’t done any great research into them, but former S&P/ASX 200 company Carnarvon Petroleum (ASX: CVN) might be one of them. A recent company presentation said they generate operating cash flow in the order of $30m annually. Not bad for a company with no debt and is capitalised at $130m of which $25m is cash. Maybe.
Isn’t the stock market such a wonderful intellectual challenge?
Bruce Jackson doesn’t have an interest in any of the companies mentioned above. We think the Motley Fool’s disclosure policy is wonderful.