Two dire warnings and one moment of brilliance

Fitch's warning of a cataclysmic collapse of the euro is outdone by QBE's dire profit warning.

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Fitch's warning of a cataclysmic collapse of the euro is outdone by QBE's dire profit warning, writes The Motley Fool

Not even a dire warning from ratings agency Fitch could put a dampener on the sharemarket's new year rally. Instead, it took an equally dire profit warning from QBE Insurance Group (ASX: QBE) to send the ASX into reverse.

More on QBE a little further down…

Yesterday the ASX ended near its highest point in four weeks. Leading the way were stocks at the riskier end of the spectrum, with White Energy (ASX: WEC), Mineral Deposits (ASX: MDL), Mesoblast (ASX: MSB) and Coalspur Mines (ASX: CPL) all up more than 6 per cent on the day.

Risk on
Risk is back on…not in a big way, but just enough for markets to put the European sovereign debt crisis to the back of their wallets and purses.

Investors have the U.S on their minds.

Slowly but surely, the world's biggest economy is recovering.

On Bloomberg, Laszlo Birinyi, says U.S. stocks will keep climbing in 2012.

"What we can see is that companies are still in business, balance sheets are good, earnings are still there and the negative case continues to be somewhat sketchy. The potential for surprise does exist…Later in the year, things will get a little bit better and sentiment will change, and we end up at the last leg where we've got the last-guy-in-the-pool scenario."

Raining on the parade
It takes two to make a market, and Fitch did their best to rain on the bull's parade.

According to Reuters, David Riley, the head of sovereign ratings for Fitch, said the European Central Bank should ramp up its buying of troubled euro zone debt to support Italy and prevent a "cataclysmic" collapse of the euro.

Europe. Out of sight, but definitely not out of mind.

An almighty rally, coming soon?
Is Europe the only thing holding us back from an almighty sharemarket rally?

Quite possibly.

Stock valuations are cheap. Dividend yields are compelling. The global economy is growing. The U.S. economy is recovering. China is engineering a gentle slowdown before potentially easing policy to again boost growth.

All might seem rosy, except for Europe. Admittedly, there still appears to be no obvious solution to the European debt situation.

But solve it they must. The potential cost of a country falling out of the euro, or indeed a broader breakdown of the Eurozone, is massive.

When push comes to shove, the European Central Bank (ECB), and the Germans especially, which is the most powerful and important economy in the Eurozone, will do what they need to do to hold it together.

The only question is whether we may need to get to a real market crisis before they're pushed to act.

Sitting, waiting, watching, hoping
Meanwhile, investors continue to sit on the sidelines, even whilst stocks are on the rise.

I don't blame them. Preservation of capital is essential. Plus, you can earn well above 5 per cent, risk free, by parking your money in the bank.

Australian savers don't know how good they've got it. Although 5 per cent per annum is not going to earn you a fortune, it's attractive when compared to the cash rate at 4.25 per cent (and falling) and 10-year bonds yielding 3.9 per cent.

Prepare for lower interest rates
It won't last.

U.S. and U.K. savers earn 0.5 per cent on their savings, if they're lucky. We won't get down to those levels, but we could easily get down to 3.5 per cent.

Suddenly, money in the bank, although safe, won't look very attractive at all…especially when compared to the dividend yields on shares on offer today.

Speaking of dividends, the poster-children for dividends are the big four banks themselves.

Company Recent Share Price Recent Div Yield
Australia and New Zealand Banking Corp (ASX: ANZ) $21.10 6.6%
Commonwealth Bank of Australia (ASX: CBA) $49.98 6.4%
National Australia Bank (ASX: NAB) $23.68 7.5%
Westpac Banking Corporation (ASX: WBC) $20.64 7.9%

I'm in two minds about the banks. I'm attracted by their dividend yield and their collective competitive advantage, but wary because I'm cautious about the local housing market.

Motley Fool Share Advisor Investment Analyst Dean Morel has previously named Westpac as his favourite placeholder for any major Australian bank.

Asked today, his preferred banks remain ANZ and Westpac, although it is much of a muchness, both with pros and cons.

One MAD stock still on our radar
Dean is hard at work preparing the next issue of Share Advisor. Just this week he has narrowed down his top pick of the month to just three companies. All will be revealed to Share Advisor members on Australia Day.

One company that isn't on Dean's shortlist, yet remains attractive is Maverick Drilling & Exploration Limited (ASX: MAD).

Dean highlighted Maverick as a stock on our radar back in August last year.

Maverick is a 35-year old company that has 'perfected a streamlined system to drill, complete, produce and sell oil.'

The excitement has gone out of Maverick's share price, despite the oil price rising to over $100 a barrel. But the long-term growth story remains on track.

Maverick is just the type of company Dean is attracted to…under-the-radar, growing and cheap. Unlike many investors, Dean follows the progress of the company, not the progress of the share price. Here at The Motley Fool, we call it business-focused investing.

Of course, danger lurks. As well as the macroeconomic risks, we have stock-specific risks.

QBE: down and out or a buying opportunity?
As we mentioned earlier, a big profit warning today from QBE Insurance Group (ASX: QBE) saw 20 per cent wiped off its share price in one fell swoop. The dividend is being slashed by a third. It's not pretty.

Whilst we feel for suffering shareholders (the shares are down a massive 70 per cent from their 2007 high) it's no use crying over spilt milk. The decision now is to buy, hold or sell.

On a cursory look at the QBE trading statement, and knowing how insurance is a cyclical business, I'd be interested in buying, betting on this not being a permanent impairment of their business.

Having said that, experience has also taught me not to dive into these situations. The shares are not going to quickly recover, and are more likely to drift even lower than the $10.50 they trade at today.

Patience is not my strongest suit, but when it comes to making, and not losing money, I follow one of Warren Buffett's quotes…

"There are times when doing nothing is a sign of investing brilliance."

This might be just one of those brilliant times.

Are you are looking for investing ideas for 2012? Request our free reportThe Motley Fool's Top Stock For 2012Click here, whilst it's still free and available.

More Reading
Rediscover that winning sharemarket feeling

Disclosure: Bruce has an interest in ANZ, CBA, NAB and WBC. Bruce and Dean both own MAD.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »