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ASX 5,000 and falling faster than the dying Aussie dollar

Financial pundits, investment banks and arm chair economists alike are falling over themselves to downgrade their Aussie dollar forecasts.

According to The Australian Financial Review, Credit Suisse now believes the Australian dollar will fall to US92¢ in three months and US85¢ in 12 months.

Throwing the cat amongst the pigeons, Goldman Sachs has told clients its “top trade” is to short the Australian dollar — bet it will fall even further.

On a day like today, where the S&P/ASX 200 has crashed back below 5,000, you can bet on just about anything falling and you’d be on the money.

ASX crash

Source: The Age

The old saying there’s always a bubble somewhere has never been truer. It’s just that today’s bubble is in forecasting the death of the Aussie dollar.

It wasn’t too long ago when investors were whinging the high dollar was killing our exporters, including our miners. Give us a weaker dollar, they’d whinge, and everything would be hunky dory.

Except, as they’re finding out today, it’s not…

In between times, they took their maturing term deposits out of bank accounts and merrily stuffed them into bank shares.

It was a truly magnificent trade. Not only did you get a massive capital gain — Westpac (ASX: WBC) shares are up 44% over the last year, with Commonwealth Bank (ASX: CBA) up 40% — but wonderful, juicy, fully franked dividends as the icing on the cake.

Human nature being what it is, we look backwards at what has recently happened in the share market and presume that state of affairs will go on well into the future. Bullet-proof banks, they said… until they’re not.

Motley Fool co-founder David Gardner says too many people are investing through the rear-view mirror.

Jack Bogle, founder of The Vanguard Group, calls it the rowboat syndrome…

“You are always looking back where you know where you’ve been but have no idea where you are going.”

A warning for your bank shares

Let me be very clear. Your bank shares have been on an unprecedented run. The future will be different to the immediate past. The downside risks far outweigh the upside potential, fully franked dividends and all.

The Motley Fool’s Investment Advisor Joe Magyer knows a thing or two about banks, and value investing.

Over in the States, and admittedly looking in the rear-view mirror, Joe’s Motley Fool Inside Value stock-picking newsletter was recently ranked the best-performing newsletter tracked by Hulbert’s over the past five years — and Hulbert’s tracks 147 newsletters!

We’re lucky to now have Joe with us in Sydney bringing his unique style of value investing to Foolish readers in Australia.

We packed Joe off this week to the Morningstar Investment Conference at the ballroom in Sydney’s Four Seasons. He was particularly taken with the “snappy dressers” attending, the gourmet ham and cheese croissants and the free after-conference beers — ‘free’ being his favourite price.

I nearly choked

In the conference, one analyst called all four major banks fairly to modestly undervalued.

Joe nearly choked into his croissant.

He strenuously disagrees — paying 2.7 times book value for a bank earning 1% returns on assets is tricky business at the best of time, even trickier when the mining boom, the one thing that’s been powering the Australian economy for the past decade, is over.

And that’s a fact!

Mining bust

Source: Bureau of Resource and Energy Economics — Resources and Energy Major Projects bi-annual publication, April 2013. Click here to enlarge.

Now I admit 2018 is some way out yet, and a lot can and will change. But the one trick pony Australia has collectively been riding to prosperity, including our still overvalued house prices, looks to be on its way to the knacker’s yard.

Do you still think our banks are the one-way bet investors have seemingly treated them as over the past 12 months?

Admittedly, there’s no obvious catalyst for a bank stock bust… apart from the usual “let’s all rush to the exits at the same time” syndrome that periodically afflicts stock markets. It’s the same affliction that sees many investors buy at the top of the market and sell at the bottom.

Why investors lose money

Which reminds me…

Yesterday, I had a call from one of our veteran subscribers. Let’s call him Syd.

Syd: “Hello, Bruce. I don’t know if you remember me… it’s Syd. I’m one of your older subscribers.”

Me: “Of course I remember you Syd. You called regularly in 2011 and early 2012. How are you doing? I haven’t heard from you since November last year, when Obama was re-elected and markets had a little wobble.”

Syd: “Well Bruce. Around then, last year I sold out of just about everything and I’ve been sitting in cash. I was waiting for the market to crash. I’ve only got two stocks now. One of them is Telstra (ASX: TLS). It’s fallen 12¢ today and I’m thinking of selling out…”

Poor Syd.

He really shouldn’t be investing. I only hope his savings are large enough to make up for his inevitable and ongoing portfolio-management disasters.

With Telstra shares down another 11¢ today, I suspect Syd may have sold out.

Poorer Syd.

Words of Foolish comfort from Warren Buffett

Still, it does seem our message is getting through to some subscribers, as witnessed by this email we received yesterday…

“I’m watching the gyrations of the market absolutely dumping share value everywhere and I must admit in the past I would have been very concerned without your ongoing words of comfort… you’ve instilled in me that we just have to ignore the daily events whether they’re positive or negative and just make sure we remain on the right journey.”

Personally, I’m watching the carnage from the sidelines. One of my holdings, a recommended stock, is down 12% today… on no news at all.

Rather than be scared, or regretful because I didn’t sell yesterday, I’m secretly excited, my feelings neatly captured by this timeless Warren Buffett quote…

“Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

I’m cashed up and ready to rumble.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Bruce Jackson has an interest in Telstra, CBA and Westpac.

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