Keystone Financial Market Update August 2016
Well there you have it. Apparently another .25% drop in rates is what the Aussie economy needs to keep it moving. If you read my last update you would know that I felt a rate decrease was a good possibility last week. But the result wasn’t quite what I expected to occur. A lower rate should have hit the AUD but it actually strengthened and remains elevated! This is very interesting and probably frustrating for the RBA.
Banks and lenders are NOT passing on the full decrease to borrowers. Why, you may be wondering? Put simply: a banks main source of income is ‘Interest’ on the money they loan out. Their margins have been under pressure for the last 7 yrs and by not passing on the full decrease they will effectively make more money. It will be interesting to see how they go with profits in the next reporting period. I reckon we will see bank profits plateauing in the next 12 months. As long as they preserve their dividends we are OK. If dividends start to waiver then look out below as the bank share prices will get hit.
We also had US Non Farm payrolls last Friday. According to the completely fabricated Labor statistics the US created 255,000 jobs in July. To that I say ‘Big Deal’! Firstly, the number is complete fiction as they use a ‘Births/Deaths’ model to estimate job creation (they don’t actually count them). In other words it is an utterly useless data point that investors hang on to. What’s even more bizarre (and I’ve commented on this before) is that the unemployment number in the US doesn’t include ‘long-term’ discouraged workers. You drop out of the calculation if you have been looking for work over 12 months. So the real unemployment rate in the US is north of 9%! In fact, there are over 93 million Americans out of work. This is staggering!
Anyway, as with all numbers they will matter when they matter.
The jobs report is often used a pre-cursor to smash the metals and this very thing happened last Friday. It happens with such regularity that it’s quite comical. One month of good job numbers (that are totally fictitious) and the market thinks the Fed will raise rates. Not gonna happen!
Today as I write this (and overnight) the metals were stronger and the mining shares have clawed back some of price declines over the last 48hrs. Not that I care about 1-2 days of market action as anything can happen on any given day. But what is interesting is that the sell offs are less violent and we are seeing a quick bounce back in share prices.
This my friends is further evidence of a strong bid for the metals (and miners) and further confirmation that we are in a Bull market. In bull markets they say to use sell offs to BUY (buy the dips) and I did that very thing yesterday in my SMSF account.
Here’s what I’m watching:
-Oil continues to bounce around the USD $40-$42 a barrel range. Not sure yet what the catalyst will be to take oil higher but at these levels I think it’s a good idea to initiate an energy position. In 5 yrs I think you’ll be laughing. I’ve got a new Energy related ETF in the model portfolio that is perfect for the energy exposure.
-Interest Rates – apparently worldwide there are 19 Trillion of gov’t bonds with a negative yield. That is an incredible number and very, very scary. It effectively means that investors are more worried about the return of their money and not a return on their money. As I’ve said before, we are in uncharted waters with this situation and it remains to be seen how it will effect us.
-Miners – steady as she goes. We are seeing very good bullish action and if you are set with your miner positions all you need to do is hold on and ride this bull market.
-Summer doldrums – there is an old saying in the US: Sell in May and go away. It’s because summer is usually quite a dull investing period. Towards the end of August and September things will probably start to move again. The last 4 months of this year may hold some surprises but who knows.
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photograph by Olu Eleto