Just when you thought it was all clear to pile back into the share market…
Overnight Friday, U.S. stocks fell, the Dow losing 140 points, the Nasdaq slumping a rather more significant 1.75%. What goes up must come down. Or, as Tom Stringfellow of Frost Investment Advisors told Bloomberg… "We've become sensitive to having too many days of gains, and eventually there has to be a move down."
Regular Motley Fool readers will know we don't play such silly games as trying to predict the market's next move, nor get caught up in sayings like "sell in May, go away, come back on St Leger Day." St Leger Day in the UK is in September.
The AFR today reports Australian shares have a history of being sold off in May, the S&P/ASX 200 having fallen every May for the past four years, for an average decline of 4.33%. Sounds serious, huh? A similar fall this May would leave the ASX languishing at 5,300… which is where it traded a whole five weeks ago. It IS serious. Call me a fool, but I'm going to try riding it out.
Such a strategy didn't do Warren Buffett any harm. The world's richest investor is made of stern stuff, once saying… "Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market." You could, of course, just stick to term deposits. They're a whole bag of fun.
Or you could leverage up your SMSF and pile into investment property, right at the top of the market. Property prices never fall, huh? Or, like me, you can look at any falls in the stock market as buying opportunities… going by the motto "the harder they fall, the better the future growth prospects."
ASX 5,800
"Fund managers say earnings growth on way," says the headline in the AFR article. Yes, Foolish readers, the cavalry is on the way, and according to Wavestone Capital's Catherine Allfrey she expects…… the Australian sharemarket to be trading much higher by the end of this year helped, by positive earnings results this year. Ms Allfrey, using a refreshingly simple calculation, takes the market now, adds earnings growth of seven or eight per cent, and gets an ASX target of about 5,800. Simple. I'm all over it.
Using that same simple formula, if you can find a stock that's trading at fair value today, and you forecast it will grow earnings at a double-digit percentage clip for years to come, you'll be onto a good thing.
Likely because the ASX is flat, tensions in Russia have increased, the gold price is going up, and Australians are bracing themselves for the Coalition's great big new tax (more on that below), the latest Motley Fool Share Advisor stock tip is actually down a few cents. What was it I was saying about falls being buying opportunities?
Changing tack, all eyes today are again on the big four banks, with The Age saying… "Banks to reward shareholders with higher dividends" The article says "three of Australia's biggest banks are expected to reward yield-hungry investors by unveiling higher dividends amid predictions that low default rates by borrowers will continue to boost the sector's profits."
Hungry for yield
With interest rates at record lows, who can blame yield-hungry investors?
Australia and New Zealand Banking Group (ASX: ANZ) kicks off a round of results from the banks, with analysts expecting them to increase their interim dividend on Thursday by almost 10%. Westpac Banking Corp (ASX: WBC) and National Australia Bank (ASX: NAB) report next week. No wonder banks, and their fully franked dividends, remain the favourite love-children of the SMSF Army.
Best to enjoy it while they can, I say, for it doesn't get much better that this for bank stocks, and bank earnings. Couple "low default rates by borrowers" with "generational low interest rates" and you've got a heady growth cocktail.
House prices flashing red
What bank investors seem to be conveniently ignoring is that it was only a few weeks ago when Barclay's chief economist Kieran Davies was quoted in The Sydney Morning Herald as saying housing valuations are "flashing red." Mr Davies said Australian household debt has hit a record 177 per cent of annual disposable income. What could possibly go wrong?
Nothing for now, party-goers, especially with interest rates set to stay at these low levels for an extended period of time. Property never falls, right? But with Australians levered up to the max, unemployment growth tepid and a horror budget on the way, never say never. Then again… it could be worse.
Scrap this great big useless tax
Instead of Tony "you can't tax your way to prosperity" Abbott threatening to introduce a great big new budget deficit tax, he could have scrapped negative gearing. It's a tax break for the rich. It doesn't increase housing supply. It keeps house prices artificially high, pricing first time home buyers out of the market. There's nothing good about it. Best of all, it's not a great big new tax.
Don't get me wrong. I'm happy to pay my fair share of taxes… and believe me I do! Blasphemous although this comment could be, I'm also open to the idea of paying this mooted great big new deficit tax. What I'm not open to is two-faced politicians who say one thing to secure votes, and do another thing when in power, especially when they blame someone else.
A temporary great big new deficit tax might chip away at the problem, but doesn't solve the structural budget deficits Australia is looking at for as far as the eye can see. A first step is to scrap negative gearing. Next up, the incredibly generous paid parental leave — a $5.5 billion election bribe to garner the female vote — shouldn't even see the light of day. And after that, middle-class welfare has to go.
The bottom line is simple — either taxes go up, permanently — or tax breaks, including on superannuation, and capital gains tax, go down and out. In true Clive Palmer fashion, I'll do you a deal, Mr Abbott. I'll pay your great big new deficit tax if you scrap your great big paid parental leave policy. I'll pay more if you scrap it, and negative gearing. Where do I sign?
