Bull Market & Bank Bubble – May 2013

This investment update as at May 2013 examines the continuing positive trend in the investment markets and the great  Bank Bubble of 2013. 
This summary will include the property markets and the local and overseas share markets.

Australia – Heading for a slowdown with the recent RBS cut to 2.75%  …. 
a 50 year low …. and an expected harsh budget will add to a negative sentiment in the economy.

Equities Markets:   The equities market over the past 5 months, has shrugged off all concerns about Korea, Europe and the US situations. Following the rise in the US market and also recognising the past interest rate cuts from the RBA. This has also lead to various market analysts scratching their heads over the strong performance, lifted almost exclusively by the financial sector – the big 4 banks and the smaller banks.  Other sectors have been left behind.  The RBA cut indicates a period of sluggishness in a number of sectors of the economy – so no short term joy there.

Bank SafeThe Great Bank Bubble 2013.  The fall in interest rates and term deposits has lead to invidulas chasing higher dividend paying “safe” stocks.  All markets move in cycles and the end of each cycle often has a bubble.  (Think IT and internet stocks  at the end of the 1995 – 1999 bull run.)  There is more to the valuation of a company (or  bank) than the dividend yields – but this is the only thing driving the bank prices right now. 

Bank prices may rise further and it is driven by small mum and dad investors exiting term deposits chasing the dividends. It is also driven by the same style of investors managing their SMSF’s. 

Additionally large overseas funds are chasing the dividends – however they can have counterbalancing investments such as warrants and options that cover them in case the capital value of the shares fall, protecting themselves from capital loss. 

The smaller investors seem to be making the mistake buying a $31.00 share for  $2.20 worth of dividends over 12 months and then seeing the share price later falling by $2 or more, without such protection ….. But most bubbles run for longer than is justified – someone will get hurt.

Property:  The same low interest rates are now affecting the property market in Australia, particularly the upper end higher value properties that fell substantially in 2009-2012 as well as the investor property segment. The low rates by the RBA will help to fuel what they hope will be a building led lift to compensate for lower resource / mining investment.

If the government increases tax rates on higher earners while maintaining limited salary sacrifice options into Superannuation – then the investor market will continue to grow – pushing the first home buyers further out of the market.  – The budget next week will reveal all.

Overseas Markets:  

Europe:  Is still a mess – and the politicall fallout of the handling of Cypress bailout will probably haunt the Eurozone for a long time. However, the global investment markets appear to have worry fatigue and have temporarily dismissed the ramifications of the Cypress bailout in the short – medium term.

The USA – Equities:  Again most analysts have been surprised by the strong rise in the US equity market and believe that it has been activity by optimists rather than realists.  The reality is that many companies results have not surpassed the original forecasts of 6 – 9 months ago.   They have only marginally outperformed more recent lower targets.

In fact only 47% of companies in their latest reports met their original stated revenue targets.  Yet the surprise is the strong employment figures which have been revised upwards for both February and March. The results from January through to April mainain a strong steady positive reinforcing a hope and expectation that increased consumer spending will follow, eventually.  See the chart below for non farm payrolls 2006 to April 2013.

 

 

 

 

USA Property:   This has, for the past 6 months, shown all the signs of bottoming out. New home sales have improved consistantly and existing sales have also improved.  When new homes show improvement – other areas follow such as major consumer goods as well, TV’s, Fridges, Lounge Suites etc.  This in conjunction with the employment figures above, is a positive sign.

Yes the US economy is a slow growth story. Unemployment has fallen from 10%  in 2010 to 7.5% last month. The target of 6.5% when the Federal Reserve will stop throwing money at the economy is about 16 months away at this rate. However, before 6.5% is reached, major investors may pre empt the share market reaction to interest rate increases. Given how optomistically the investment markets are reacting now – it’s a hard ask to estimate when that might happen.

In the next 6-9 months there should be a meduim level market correction.
Then the Big Picture will prevail – see next page in the drop down box.