RBA Governor Glenn Stevens may finally look beyond the mining sector and the lifestyle his $1 million pay affords, and see the problems most Australian businesses and consumers are facing. The Motley Fool is sticking to last month's prediction of a rate cut.
A mystery glitch has led to the suspension of trading on the Australian Securities Exchange.
Not good timing for ASX Limited (ASX: ASX), given Chi-X Australia's soft launch into the local market starts in just four days. Chi-X's market entry breaks the Australian Securities Exchange's 21-year monopoly on market exchange operation in Australia.
We suggest desperate traders head down to their local club, pub or casino for a session on the poker machines, whilst it's still possible to blow hundreds of bucks in double-quick time.
For us Fools, we're not bothered by the suspension. Markets are closed every weekend, and on public holidays, and we all cope very well. Today is no different.
On with the regular Take Stock show…
The interest rate cut we've been talking about…
Underlying inflation is running at an annual rate of just 2.2 per cent. At that level, it's towards the bottom end of the Reserve Bank of Australia's (RBA) 2 per cent to 3 per cent target range.
Economists far and wide are now almost unanimously predicting a 25 basis point cut in interest rates on Melbourne Cup Day.
Welcome to the party. Here at The Motley Fool, we've long been expecting rates to be cut. Heck, we said we wouldn't be surprised if the RBA cut last month. It looks like we'll be out by a month. Can't win them all…
Blind Freddie, not helped by our constantly bickering, pessimistic politicians, can see the local economy, outside the mining sector, is struggling.
Now, finally, the RBA is seeing it too, although it has to rely on the Australian Bureau of Statistics to tell it what we can all see with our own eyes.
Still, you can sympathise. When you take home over $1 million in total compensation, as RBA governor Glenn Stevens did in 2010, it's not like you hang out with battlers in the western suburbs, people who live pay cheque to pay cheque, and who struggle to pay their bloated mortgage or rent, grocery and utility bills.
Prepare to hit the shops
Yesterday, the S&P/ASX 200 index performed a 70 point turnaround on hopes of an interest rate cut.
Consumer discretionary shares lead the way, with the likes of Billabong International Limited (ASX: BBG), JB Hi-Fi (ASX: JBH), David Jones Limited (ASX: DJS) and Myer Holdings Limited (ASX: MYR) all jumping at least 3 per cent higher. Scott Phillips recently wrote about whether it was time to catch Billabong's wave.
None of this interest rate talk took much of the shine off the Aussie dollar. It's still trading at $US1.04, and riding for a fall. If we were to guess, we'd say it'll be trading closer to $US0.90 in the next year or so.
As we've said repeatedly, we're not forex traders or speculators. We're happy to leave that pastime to the gamblers, most of whom lose money.
But we have an opinion. The U.S. economy, for all its problems, including massive government debt and stubbornly high unemployment, is recovering at precisely the same time as ours is stumbling.
Down down, Aussie dollar going down
The only way for U.S. interest rates is up. Ours are falling. It doesn't take a rocket scientist to work out which way the Aussie dollar is likely to go.
The only chink in the armour is the timing. It's one of the reasons why, when it comes to investing in the sharemarket, we are long-term investors.
Trying to predict the movements in sharemarkets, commodities, currencies or gold over the short-term is a mug's game. We prefer to focus what will happen three, five and ten years ahead.
Who's the clever Fool?
On that point, we received a great email from Owen…
"Any Fool can write up the history of share trading & pontificate about what has been– but only a clever fool can tell investors what will happen by Christmas 2012 or better still by Christmas 2013 – so get your finger out FOOL & give us your predictions lets say to the end of 2011 first up, so we can see if you are a CLEVER FOOL.
From 84 year old Owen (buying, selling & holding Australian shares since 1952 when my bank of NSW manager said buy bank shares son)- so take my advice– buy the well managed Companies that PAY dividends."
Having been at it for almost 60 years, Owen has focused on the very long-term. We love it. Very Foolish of him.
As for our predictions, we make them regularly. For example, on October 4th – just a few short weeks ago, and the day the S&P/ASX 200 sunk as low as 3,840, our Investment Analyst Dean Morel said…
"What is in front of us now is a sharemarket on sale…Buying during market sales is the holy grail of investing. Higher potential returns for less risk…Buying during this part of sharemarket cycle is an excellent path to market outperformance."
Since then, from its low point, the market is up around 10 per cent. Nice money if you can get it. We hope some Fools have benefited.
October 4…was that the low?
Prediction it was not. At the time we had no idea whether markets would fall further or start the recovery. We still don't know if that was the low point for 2011. But it could be…
Anyway, almost as important as encouraging you to buy shares at these low points is our advice not to panic and sell when fear is persuasive. It can be a truly wealth-destroying mistake.
As for dividends, we couldn't agree more with our friend Owen. A few weeks ago Dean presented his ultimate high yield dividend portfolio. With a gross dividend yield of 12%, it's a set-and-forget portfolio that should reward investors well in the years ahead.
Gloom to doom to boom
Overnight, U.S. markets had their usual thrash-fest, going from gloom to boom to doom and ultimately back to boom all within the space of six and a half trading hours.
Markets have Europe on their mind. A sense of relief was in the air as Europe reached an agreement on plans to recapitalise banks. The S&P 500 closed up 1 per cent on the day.
With Europe, naturally, nothing is yet finalised, with the FT reporting the lack of an agreement with bondholders on the size of their Greek write-down was likely to make another major element of the European plan almost impossible to finalise: the size of new firepower for the Eurozone's €440bn bail-out.
On and on it goes…the can being kicked further down the road. The big losers were the Italians. Silvio Berlusconi vowed to increase the retirement age of all Italian workers to 67 by 2026. What could possibly be next? Only 4 weeks holiday a year? This must be serious!
So that's why he said to buy the banks…
Meanwhile, back in Australia, for all the worries about Europe, it seems our banks continue to do very well, thank you very much.
National Australia Bank (ASX: NAB) has just increased its full-year cash profit by 19.2 per cent to a record $5.5 billion, coming in at the top end of analyst expectations.
Perhaps that's why, back in early August, Dean said it was time to buy the banks…
Owen will be pleased with the full-year dividend of $1.72 per share, fully franked, up 13 per cent.
As for the share price reaction…we'll have to let you know. But based on yesterday's closing price, NAB shares trade on a gross dividend yield of close to 10 per cent.
If you are looking for specific stock ideas, look no further than The Motley Fool's Top Stock For 2012. Click here now to request this special report, whilst it's still free and available.
Bruce has an interest in NAB. Dean has no interest in any of the companies mentioned above. The Motley Fool's disclosure policy is not a glitch.