There's a buyer's strike here in Australia. Share market volumes are low. Volatility is low. The ASX is at a two-week low. Interest rates are low, and possibly going lower. Consumers are on strike, protesting about the horror budget. Not even an Australian economy growing at its fastest pace in two years can galvanise Aussie investors into action.
On the bright side, you know it's only a matter of time before Aussie investors wade back into the market. There is, after all, a wall of money sitting on the sidelines, earning paltry rates of interest. Something, eventually, has to give. My bet is they start looking for high yielding, dividend paying stocks outside the usual suspects of the big banks, Telstra Corporation (ASX: TLS) and Woolworths (ASX: WOW). I certainly am, having recently snapped up a couple of our Motley Fool recommendations for my SMSF. One smaller stock, trading on a fully franked dividend yield of 5.7%, was simply too good an opportunity to let pass.
Overnight, US markets closed at yet another record high, prompting S&P Capital IQ to say… "… we continue to be bullish and anticipate further gains." Rocket science it's not… but it's simple, and I like to keep things simple.
Wall street veteran Sam Eisenstadt went one step further, his latest six-month forecast seeing the S&P 500 hitting 2100 by the end of November. No wonder then the AFR reports Aussie investors, especially through their self managed superannuation funds (SMSF), have for the first time in at least 25 years, accumulated more equity investments abroad than foreigners own in Australia.
A client note from analysts at Deutsche Bank recently said that Australian banks are "not as expensive as they look." The Age yesterday reported the "brave team" at Deutsche Bank as saying "relative valuations and earnings certainty" suggests the banking sector is not expensive.
Joe's Magyer's response to this was swift, and damning… "This is a pretty wacky valuation methodology — that banks are selling at a discount to other shares, therefore they are cheap. That assumes 1) other shares are efficiently priced and 2) ignores that banks have historically sold at a discount to other shares. As for earnings certainty, I won't even go there."
It reminds me of the dot com boom… where nose-bleed valuations of loss-making companies were justified because they were "cheap" when compared to other similarly insanely over-valued loss-making dot com stocks. When it comes to investing, two negatives never make a positive.
I realise we're not about to win many friends and influence many investors by saying Australian banks are as expensive as they look. Aussie investors, particularly of the SMSF variety, LOVE their banks, especially their juicy fully franked dividend yields.
And who can blame them? A modest investment in Commonwealth Bank of Australia (ASX: CBA) when it floated back in 1991, with dividends reinvested, has turned into a small fortune. I know — my family has experienced the phenomenon with our very own money!
But, you don't make investing fortunes by looking in the past… Deutsche Bank themselves admitted the banks' P/Es look "a little on the nose," noting Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank (ASX: NAB) are trading on forward P/Es of 12.8 and 12.2, while CBA and Westpac Banking Corp (ASX: WBC) are more expensive, on forward P/Es of 15 and 14.3.
I can't argue that the banks dividend yields still look compelling, especially when compared to term deposit rates of 2 and 3%. But there's more to yield than bank stocks… like the five companies Scott Phillips and Andrew Page featured in Motley Fool Share Advisor's brand new feature, Income Extra.
I was thrilled, but not surprised that one of my existing holdings made the list — it trades on a forward fully franked dividend yield of around 5%, and a forward P/E of around 12. Scott and Andrew recently met the management of the company, coming away suitably impressed. The stock is already up 63% since we tapped it as a buy for Motley Fool Share Advisor subscribers, but as judged by Scott and Andrew's recent comments… "With lots of reliable cash flow, a modest payout ratio and a management team with plenty of skin in the game, we're confident that the dividends will continue to roll in as reliably as ever." .. the best could yet be to come.
While on the subject of dividends, the AFR reports mining stocks may need to "turn off dividend tap." Uh oh…
Just at a time when interest rates are at rock bottom, and prominent commentators like David Bassanese are sticking to their view that if interest rates are changed this year, they are more likely to be down than up, this is the last thing income-hungry investors want to hear.
Who'd be a miner?
Capital intensive. Mining commodities. You have no control over the supply or demand of your commodity, and therefore no control over its price. We've just been though one of the biggest mining booms ever, yet over the past five years, the share prices of BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) have fallen 5% and 8% respectively. And now, to rub salt into the wound, the dividend tap might be turned off…
On the bright side, the time to buy mining stocks is in times of distress. We're not there now — not by some distance — but we're certainly closer now than we were even a few months ago. Watch this space…
Another space to watch is volatility.
To say it's low is an understatement — over in the States, the VIX index, otherwise known as the fear index, is trading at a lowly 12. That compares to a peak of close to 80 at the height of the GFC. I made a lot of money shorting the VIX during the GFC — betting that volatility would fall as markets stabilised — although it was a hairy ride there for a few weeks. No pain, no gain.
You can either look at low volatility as a sign all is well with the markets, and the global economy, or you can look at it as a sign that things can only get worse. Place the Bank of England's Deputy Governor Charles Bean firmly in the latter camp, saying the lack of volatility is "eerily reminiscent" of the run up to the financial crisis.
Uh oh…Do I detect some storm clouds gathering? That investors are becoming fearful? Perhaps, although that may not stop the market going higher. As Chris Gaffney of Ever Bank Wealth Management said on Marketwatch… "We expect the market to keep grinding higher. However, with volatility at low levels, there is a fear among investors and everyone is waiting for that big 'black swan' event."
There go those markets again, climbing a wall of fear… as they've always done. In my 25 years of investing experience, I'm yet to come across a rich, fearful investor. No pain, no gain.
Still, if you want fear, you don't have to go far to find it. A quick search for "the next black swan" revealed the following predictions…
- Cybercrime.
- Ukraine.
- Iranian nuclear attack.
- North Korea nuclear attack.
- Inflation.
- Deflation.
- Stagflation.
- Chinese credit crisis.
- Australian house price crash.
Shall I slit my wrists now? I mean to say, before 2007, a black swan was just a large waterbird.
The moral of the story is clear…
Your time, and your investing dollars, are spent far more productively picking the next stock market winner than predicting the next black swan event. And that's exactly what we do here at The Motley Fool.
Sure, many of us here take the view that our big four banks are much higher risk investments than is presumed by many others, including many of our readers. So we avoid them. Simple.
Yes, the big banks have had a great run, without us. So has Telstra and Seek (ASX: SEK), both Motley Fool Share Advisor recommended stocks. And so have TPG Telecom (ASX: TPM) and Ramsay Health Care (ASX: RHC), without us. Welcome to the wonderful world of investing… the game you can win, convincingly, by NOT coming first.
Just as you can win by NOT investing in the banks, you can win by NOT buying Mint Wireless (ASX: MNW) and Mobile Embrace (ASX: MBE), up 1233% and 781% respectively over the last 12 months.
Funny old game.
Not so funny for the doomsters and gloomsters who are waiting for the next black swan event. They've got their money "safely" parked in term deposit accounts earning a paltry 2.5%. Shall I slit my wrists now?
Another funny thing… The "next black swan event" has already happened. You're living through it. Who'd have thought, almost six years ago, when governments and central bankers around the world started throwing "free" money at the global economy, that interest rates will still be so low, and that inflation would still be benign?
Even the great Warren Buffett got this one wrong. In his famous New York Times op-ed of October 2008, he said… "…the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary." If Warren Buffett can't get it right, what hope have mere mortals like us got of predicting the next black swan, the next market correction, the next market crash? Can you feel those storm clouds parting? Breathe, deal Foolish reader, breathe…
I'll close with the names of those US-quoted stocks Motley Fool Advisors Scott Phillips and Joe Magyer like today… Scott likes Warren Buffett's Berkshire Hathaway (NYSE: BRK-B). It's his biggest personal holding, and mine too. We sleep very well at night. Joe likes Amazon.com (Nasdaq. AMZN), one of his largest personal positions. It's one of the most dominant companies on earth.
With the Aussie dollar still riding high, now could be the perfect time to take the plunge into US-quoted companies. You'll likely do well with the two companies mentioned above. It's real-life examples like this that show you how investing fortunes can be made… and not an Aussie bank stock in sight.
