I have cash right now but what will I do with it? Personally, I’m caught between my long and short-term views, which most investors have to cope with all the time. I must admit I let my long-term view prevail.
Minute by minute
Let’s look at the short-term issues and potential investments first.
On issues, let’s throw them into one big negative mix first. It starts with a US stock market overdue for a correction (it has been around all-time highs for a long time). An interest rate rise, which is bound to hit stocks, short-term and even before it happens, could come as early as June. However, there has been a soft patch of economic data in the States, so I can’t see a rate rise before September. It could be later.
And then there’s the Greece question mark. Debts are coming due and the Greeks could default, if they can’t cut a deal with the IMF and its Euro zone buddies. Greece could leave the zone and this would generate stock market uncertainty, which could lead to a global correction.
I’m betting against this scenario. Even if the Greeks went back on the drachma, after all this time, if any bank is over-exposed to Greece, they deserve to fail! That said, it could still rock markets short term.
I did like the comment of the European Central Bank boss Mario Draghi, who virtually said the Euro zone is now in a better place to cope with any contagion that follows a Greek exit, or, as they calling it, “Grexit”.
That said, the very mention of a contagion, where others such as Portugal or Italy could try to do a ‘Greece’, could shock nervous stock markets. And they are jumpy, as Wall Street showed over the weekend and it will spread here as well.
In case you missed it, the Dow Jones Industrial Average lost 279.47 points (or 1.54%) to finish at 17,826.3. The index has been at 18,288.63, so even now it’s only off 462 points (or 2.5%), which means the market has to be poised for a sell off, if something big and scary comes along for investors.
Day by day
Right now, the Yanks are in earnings season. It’s a big week of US company revelations, which could hit or help stocks. On April 24 (when we’ll be remembering ANZAC day because we’re ahead of Europe), Greece’s fate will be determined by Euro zone finance ministers!
Reuters has summed up the US reporting season so far and it explains why some think a sell off can’t be ruled out: “Of the 59 companies in S&P 500 that have posted earnings to date, 74.6% have topped profit expectations, above the 70% beat rate for the past four quarters and 63% rate since 1994.”
And there is more: “Early returns on revenue have been disappointing, however, as 45.8 of companies have topped estimates, well short of the 58% rate for the past four quarters and 61% rate since 2002.”
And all this happens with May looming and there’s the old chestnut: “Sell in May and go away.” Morgan’s Michael Knox says there are some seasonal drivers on stocks that can take the market down. This does happen around April but its significance is only around 7%. It’s linked to the role of international capital, where the Brits and Europeans sell off, which is linked to the end of their financial years. His interesting paper concludes: “April is the seasonal peak, however, it might be worthwhile coming back and looking at the market as early as the end of June.”
But remember, its reliability is statistically low.
Week by week
On top of these many worrying issues, the Chinese spooked markets on Friday with changes to short selling and margin loan trading that sent stock futures plummeting. This has come along as the Shanghai Composite has recently steepened to Everest proportions!
Okay, there are plenty of reasons to be negative short-term, but if you believe the US economic recovery story, you should be comfortable enough to invest. By the way, the US leading index rose by 0.2% in March, just short of the 0.3% expected gain, while consumer confidence rose from 93 to 95.9 in April, ahead of forecasts for a result near 94. God bless those Yanks!
If you believe QE will work in Europe and Japan, and China is in stimulation mode, then your long-term play is based on a rising stock market over (at least) the next two years. The history of economies says the first few interest rate rises for an economy such as the US will hurt economic growth. Given the first rate rise might not be until even early next year, then I think it’s pretty safe to bet on rising stocks.
I want to see the next phase of the US growth cycle where the greenback is higher and smaller, non-exporting companies take the indexes higher. This is in contrast to us, where a lower dollar will help all the companies — big and small — that struggled when the miners were king and the dollar was stronger than the greenback.
The market (and we here at SSR have done this as well) has picked the big, currency-helped companies, such as CSL, but there are still smaller ones with potential over the next year or so.
What I’m doing
When I’m happy that a mid-year sell off is out of the way, I’ll be buying an ETF for the S&P/ASX 200. I’m toying with a speculator buy on Santos but I don’t know if I want exposure to the hard-to-work-out energy sector, although long-term it could be a smart play.
I’m looking at small cap Listed Investment Companies to rely on the expertise of those fund managers who specialise in smaller outfits and who actually go to the companies and kick the tyres. If you want to see some companies in this space, go to my interview with Investor Mutual’s Simon Conn. Also, in my interview with Ron Bewley we talked about what companies he is positioning his portfolio with and he liked Santos as well.
Professor Bewley can be hard to understand for normal people — he is so bright! Just remember, his research is driven by analysts he surveys so when the consensus goes for or against a stock or sector, Ron takes that on board.
Some of you might be thinking that I could miss the early part of another leg up if all the potential bad news actually turns out to be OK. That’s likely, but I’d rather get in on a rising trend, especially around the old “sell in May” period of time, even if it often starts in April!
As you can see, my investing is long-term oriented. That’s exactly how I play stocks. One day, when I have more time, I’ll play a shorter game but that time has not yet come.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
