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Dust off your term deposits — interest rate cuts on the way

Did you sell your Medibank Private Ltd (ASX: MPL) shares yesterday?

My guess is not, given they are only trading 6% above the $2.00 retail punters paid for their shares.

It hardly seems worth the bother to bank a few hundred bucks profit on Medibank, especially when your portfolio has likely been smashed these past few days.

Like mine…

You do have that cash buffer I’ve long been talking about, don’t you?

Sure, cash in the bank doesn’t earn a whole heap of money, but it sure does act as an excellent hedge in volatile times like these.

Not only that, it gives you the opportunity to buy high quality stocks when they are trading on the cheap.

A little like now… and I’m not talking oil stocks either.

More on oil a little further down, and why I’m not (yet) bottom-fishing in the sector.

The AFR reports yesterday as being the ASX’s worst trading day for eight weeks.

As reported on Livewire markets, John Robertson from E.I.M. Capital says Monday’s 12.8% fall in the small resources share price index was a record daily decline with the index down 58% this calendar year.

Who’d be an investor in resources stocks?

Not Scott Phillips from Motley Fool Share Advisor, our subscription-only stock picking service. Not once has he been tempted to bottom fish the sector, despite ample prodding from yours truly.

That’s why I leave the stock picking to him…

Speaking of which, Scott has just tapped a recent IPO as his top stock for new money, exclusively for Motley Fool Share Advisor members.

As it so happens, it’s a stock I already own, and therefore hopefully a case of great minds thinking alike. If not, I can always blame Scott.

I jest, of course. Given Scott’s track record, including one stock pick being up 340% since he first tipped it to Motley Fool Share Advisor members a little over two years ago, I have every confidence in his stock picking abilities, and in the long-term future of his latest pick.

That said, I fully acknowledge these are volatile times. And if there’s something private investors hate, it’s volatility.

Not me. I embrace it for the inevitable buying opportunities it brings. Ride out the storm now, and enjoy the sunshine on the other side.

That said, in markets like we saw yesterday, there really is nowhere to hide.

I tried it myself. I tried not looking at my portfolio for fear of seeing something quite unpleasant. Eventually I cracked, I looked, and I cringed. Thank goodness for my cash balance.

I tried counting the number of stocks making 52-week lows and gave up — the answer is LOTS, with many of them being energy stocks.

Australian investors, already on the ropes because of the plunging iron ore price, got hit with the mother of all sucker punches — a collapsing oil price.

Like most, I did not see that one coming, at least to the extent of the fall — oil is now trading as low as $US65 a barrel.

Once again, it’s what happens when supply exceeds demand — those dynamics will do it for any commodity, from oil to wheat to milk to nickel to beef, coffee and even wine. On the last one, as a consumer, long may the wine glut continue!

The temptation is to buy oil stocks now, especially given the savage sell-off of the past couple of days. Heck, large blue-chip stocks like Santos Ltd (ASX: STO) and Oil Search Limited (ASX: OSH) have been taken to the woolshed, losing 21% and 14% respectively over the past two trading days.

I’m having none of it. Yes, there’s blood in the streets, some good old-fashioned indiscriminate selling. But if there’s two things I’ve learnt in 25 years of investing, it’s that…

1) Just when you think it just can’t get any worse, more often than not, it can, and does.

2) Don’t buy too early. Wait till the margin calls. That’s when the blood will be flowing down the streets

In the twinkling of an eye, the universal view is that we do have an oil glut, and even the majors themselves — including ExxonMobil and Oil Search — do not expect a rapid rebound in the oil price.

Sure, there might be a short-term bounce in some oil stocks, particularly the juniors, but don’t count on it lasting.

Once the current ‘excitement’ subsides, the most likely scenario is a slow, long, boring grind lower and lower and lower.

Are we there yet?

Not if hedge fund manager Pierre Andurand is right. The AFR quotes him as saying Brent crude will continue its collapse to $US60 a barrel by the end of the year and reach $US50 in early 2015 as OPEC stops balancing the global market.

If all that comes to pass, it doesn’t take a rocket scientist to work out oil stocks will be lower in 2015 than they are today. Perhaps substantially so. Ready your watchlist now.

In the meantime, the silver linings of a falling oil price are numerous…

1) Lower petrol prices.

2) A falling Aussie dollar.

3) Lower Aussie interest rates.

On the last point, regular readers of our Motley Fool Take Stock email will know I’ve long suggested the next move in local interest rates could be down, and not up.

I’ve long been suggesting, even before any potential interest rate cut, that by comparison to term deposits, dividend paying stocks are attractive.

That’s today.

Imagine how good a 5.3% fully franked dividend (7.6% when grossed up for franking credits) looks in comparison to a cash rate that could potentially fall to 2%, and maybe even lower.

I’m not one for looking a gift horse in the mouth. Just last week, as I said I would, I put $15,000 behind Andrew Page’s most recent stock pick for subscribers to Motley Fool Dividend Investor.

I’ve had a sneak preview at Andrew’s next update to Motley Fool Dividend Investor members, due out this afternoon, after the market close.

In one section he says…

“… with energy prices consuming such a significant proportion of household and business budgets… certainly, xxxxxxxxx xxxxxxx(ASX: xxx) won’t be cursing lower fuel prices!”

Andrew’s also licking his lips at the opportunities on offer given the falling market, so much so that today he’s alerting Motley Fool Dividend Investor members to the fact his next dividend stock pick is just around the corner.

Back to interest rates.

The Age is today reporting a Credit Suisse index based on interest rate swaps showing an almost 80% chance of a quarter of a percentage point cut to the cash rate some time next year.

How quickly things can change. A lower oil price. A still soft iron ore price. The country’s budget deficit blowing out. Politicians playing silly bugger games with our economy.

Heck, the 80% is higher than just a day ago, when the same measure put the chances of an interest rate hike next year at a ‘mere’ 65%.

Look at the front page of today’s AFR and it’s not hard to see where the Credit Suisse index is coming from…

“Markets smashed by oil plunge”

“Income recession ‘already here'”

“PM prays for iron ore rebound”

TS 2 Dec 14

A lower oil price means lower inflation. Lower inflation gives the green light for lower interest rates.

An income recession means lower consumer spending. Lower consumer spending gives the green light for lower interest rates.

This PM praying is nothing new, but no matter how hard he looks to the skies, in the face of continued over-supply, the iron ore price is unlikely to rebound.

That means a bigger budget deficit. Given the electorate is just about done with this PM breaking promises, it’s unlikely he’ll raise taxes as a way to fix the budget problem.

Which means a bigger budget deficit. A bigger budget deficit puts the kybosh on fiscal stimulus from this government, and in the face of this moribund economy, gives the green light for the RBA to stimulate it via lower interest rates.

The RBA meets today. The overwhelming consensus is interest rates will stay on hold.

But for how much longer?

I don’t know about you, but I’m getting in ahead of the curve by buying dividend paying stocks now.

Add it all up, and it seems the perfect time to dust off those term deposits…

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