Interest rates

Unemployment, interest rates and the market

Australia’s unemployment rate has climbed to a post GFC high of 5.8 per cent, up by 0.1 per cent in August.  While the unemployment rate in Australia is rising this is a worldwide problem. During the global financial crisis many employers replaced full-time jobs with part-time roles, and they are yet to change them back

But what do the official unemployment rates mean?  The problem is that the unemployment data which are released are in fact an underestimate of the real unemployment figure.     The reason for this is that the long term unemployed lose hope, do not continue to seek work and so do not participate.  They are thus not included in the calculation so the unemployment data may significantly under estimate the actual rate.

For example in the United States where the official unemployment rate is 7.3% the actual unemployment rate according… Continue reading

The dangers of investing in high dividend shares

The recent RBA rate cut to 2.5% has put pressure on investors, particularly retirees and SMSF trustees. The yield from investing in term deposits is now very poor with the after inflation return now less than 2%. As a result most retirees are looking for an alternative but because they are unaware of alternative investments such as corporate bonds (which still return as much as 7% for highly rated senior debt), the share market remains the logical option.

With advisors and brokers promoting the high yields from shares, many investors are entering the share market and buying high yielding stocks without regard to the risks. While some of the conservative blue chip stocks which are core holdings in most investment portfolios are returning high yields, these are not without risk and this is not a good time for new investors to enter the market which is now overvalued. Notoriously the… Continue reading

Yield – big caps vs. small caps

It is understandable that with falling cash and term deposit rates that investors are attracted to the higher yields available in equities.  But most of this cash seems to be going into the big caps such as Telstra and the banks which have had a spectacular rise over the past 6 months.

But what is surprising is that the midcap and smaller stocks have been neglected.  The following chart of the All ords vs. the small ords shows that over this period the big cap stocks continue to significantly outperformed the small stocks. The small ords is shown in red.

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With many of these smaller stocks having ROEs greater than 30%, a strong record of dividend payment over at least 6 years with rising eps over this same period, what are investors missing?   Also most of these stocks have fully franked dividends in excess of 7%.… Continue reading

The Australian dollar and the economy

Yesterday the RBA lowered interest rates by 25 basis points to 3% and contrary to usual expectations the ASX200 lost ground and the AUD increased in value.

So let’s look at the Australian economy in the light of the recent rate reduction.

Despite comments to the contrary by the Australian Treasurer, the Australian economy is weakening.  Manufacturing has shrunk for the 9th straight month.  Job vacancies have declined sharply in recent weeks. Resources industries are contracting and there is now a slowdown in construction and education.  GDP figures for the last quarter were below expectations at 0.5%.  This points to an annual GDP growth of 2% which is way below the required rate for the Australian government to achieve higher budget forecast.  The RBA is looking for a GDP rate of 3 to 3.5% as long as inflation remains under control.

The strong Australian… Continue reading

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