Three of my favourite market experts are tentatively positive, but they all admit that there is a capacity for officialdom to really stuff up our investments. However, if they’re right, we could be off to the races on Cup Day!
Earlier this week, Professor Ron Bewley, the founder of Woodhall Investment Research, appeared on my SWITZER program on the Sky Business channel and argued that the Reserve Bank really needs to cut interest rates on the first Tuesday in November – that is, Melbourne Cup Day (you can watch a replay on Super TV).
He pointed to two factors that support a rate cut. Firstly, he looked at the Australian Bureau of Statistics’ longer-term trend for seasonally-adjusted unemployment and showed how the spike in recent months is less than, but still comparable to, the jumps seen in the 1990 recession and the GFC!
He also looked at the earnings projections of Australian companies and showed how the best three sectors were materials, energy and mining services. Most other sectors looked weak and in need of stimulation and Bewley says a rate cut is the exact tonic needed.
I asked him if the RBA would have experts seeing the same thing, and he replied: “They should, as I taught lots of the people at the Reserve Bank!”
A rate cut should soften the dollar and help many of the stocks labouring in the slow lane of the two-speed economy. Recently some discretionary consumer stocks have had a bit of a lift and this could be pre-emptive gambles ahead of a badly needed rate cut.
Bell Potter managing director and controversial broker Charlie Aitken insists we will see a cut in November and December, but Charlie’s ‘mail’ is more intuitive than statistical. Even so, his gut feelings have some reasonable history about them. He believes a rate cut and some sound European decisions in the coming weeks will set us up for a big market bounce before Christmas.
Finally, my charts guy, Lance Lai from Accountancy Invest, who is a professional trader, says his charts point to the likelihood of a Christmas rally, but it will be predicated on a European plan that meets market approval. But it’s not all good news.
Lai says the charts right now have a similar feel to around April 2008. In case you need reminding, this was when the market bounced after the first leg of the GFC crash, which started in October-November 2007. The early 2008 bounce fooled lots of experts, many of whom couldn’t believe a company like Lehman Brothers could be allowed to fail.
Here’s one way to look at it: the EU rescue meetings with Greece, which are at the centre of everyone’s concerns right now, are possibly akin to Lehman Brothers, but this time around we have to hope that the governments in question don’t stuff up.
In late 2008, the failure of Lehman led to a credit freeze where banks did not trust each others’ balance sheets and that’s why what happens over the next two weeks has to convince investors that the banks of Europe will be protected from failure.
Lenders to Greece and probably other PIIGS (Portugal, Italy, Ireland, Greece and Spain) could take a haircut on their lending to these nations, but the EU’s rescue plans must ensure that the banking system retains credibility.
Lai’s charts have two possible paths ahead; let’s hope the Europeans have the wisdom to choose correctly!
On Cup Day, I will be putting my money on the Europeans, but I’m aware I’m punting on horses. For stocks, I wish I were investing confidently on European officials because if they salute the judge with a winning plan, we will be off to the races and there will be a bloody great dividend.
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Also in the Switzer Super Report
- Paul Rickard: Do Woolworths’ hybrid notes offer good returns?
- Charlie Aitken: How great is the upside for Australian iron ore stocks?
- JP Goldman: Which Aussie index ETF is best?
- Tony Negline: Should you have income protection insurance?