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Australian Banks: Floating on An Air of Invincibility

‘My biggest worry is that millions of Australians are expecting money to be waiting for them that won’t be there,’ says Nick Hubble, your weekend editor and man behind the new Money for Life Letter, which launched earlier this week. If you haven’t seen Nick’s new film yet, you can check it out here.

We’re in agreement with Nick about the current shambolic super system. We think it will let most Australian seniors down. We agree there’s more you can do for yourself outside of the system to live a more comfortable life when you retire. And none of it involves the kinds of sacrifices you think it might.

According to Nick, ‘You don’t have to rob a bank, pour your life savings into the next ‘hot’ stock, trade in and out of investments, or win the lotto… you don’t have to sell your assets or cash in your savings either. You can fund a long, luxury, retirement without selling your stocks or your house.’

That’s a big claim – but Nick’s a pretty bright guy. See for yourself here.

Speaking of superannuation, that pincer movement we discussed yesterday just ‘pinched’ a little more. The S&P500 fell sharply again last night, with the sell-off gaining pace into the close. The index closed on its low for the day, which is never a good sign.

Funnily enough, this is very different price action to what happened in the lead-up to the election. Usually, you would see some major buying coming in at the close to push the market up after earlier selling. But we guess with the elections out of the way, the market is free to go about its business and not detract from either candidate’s ramblings. Democracy in action.

Weak US markets are also putting pressure on the Aussie exchange, although the ASX200 is just managing to hold above the important technical level of 4448 that Murray identified yesterday. If it breaks decisively through there, look out below. It’s the market’s magic number. With some of the major Aussie banks trading ex-dividend (and therefore contributing to some of the index fall) the market is actually holding up pretty well.

It will be interesting to see how the Australian banks trade now they have passed on their bi-annual dividend. We reckon many people were purely hanging around for the dividend and will take the money and run for the time being. After all, the economy is slowing. Credit growth is at multi-decade lows. Up until now, the Australian banks have been almost bullet-proof. Up until now, that is…

We continue to marvel at the resiliency of the Australian banking system. Throughout the Annual General Meeting Season, the vibe was that things are tough out there. Margins, revenue and profit are all under pressure. But the Australian banks keep churning out record profits. Profitability, as measured by return on equity, is amongst the best in the world (when compared to other banking sectors).

While the Australian banks may be resilient, they are not immune. Aussie banks are at the core of the economy. And when the economy slows, capital moves from the periphery to the core, giving Aussie banks an air of invincibility. But if the slowdown becomes pronounced, it will eventually infect the core too. We’re not at that point yet, but we’re approaching it.

Australian Banks are priced for a benign outcome. There will be no ‘fat tail’ event to derail the banking profit machine. Australian banks are defensive AND offer some growth. Low risk, modest rewards…they’re the perfect investment and are at the core of nearly all professionally constructed portfolios.

That’s the conventional wisdom, anyway. From a contrarian perspective then, the Australian banks are a screaming sell. We’re sorry to say, but this financial crisis isn’t finished with us yet. At some point, it will attack the core of the system, and when it does, it will find all those investors hiding in the banks, and it will teach them a lesson.

Regards,

Greg Canavan
for The Daily Reckoning Australia

From the Archives…

A Deflationary Conclusion to China’s Bubble
2-11-2012 – Greg Canavan

When ‘Nanny State’ Deficits Becomes Unviable
1-11-2012 – Marc Faber

Why Economists Are Jackasses
31-10-2012 – Bill Bonner

Riding out the Storm
30-10-2012 – Dan Denning

What We Couldn’t Say on CNBC About Economic Stimulus and Other Things
29-10-2012 – Bill Bonner

Greg Canavan
Greg Canavan is a feature editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Sound Money. Sound Investments, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.
Greg Canavan

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4 Comments

  1. Luke says:

    As an X-Gen I find it funny that you keep talking about Super as if it is something you own and are garunteed when you retire.

    It’s a tax and the government, at the moment, nominally say it is yours when you retire.

    But its a tax, you don’t own your super and it’s not yours until you can withdraw it from the superannuation fund it’s in. It inherently fails identification as property – it’s not physical, I can’t use it anyway I please, it’s conditions of use are not determined by me.

    Anyway as an x-gen I expect it to be gone one way or another by the time I retire. It is only you baby boomers who have this hope you might be able to withdraw it before you die.

  2. tim says:

    “nick’s a pretty bright guy” i’m sorry but anyway who talks about dividend stocks for retirement like they’re some NEWSFLASH is…. not really that impressive. unless we’re meant to be wowed by how he’s stating the obvious but making it seem like a revelation. i mean once you reach retirement age most of yr portfolio should be in dividend stocks or bonds i.e income generating assets! this is how its always been!

  3. Lachlan says:

    “At some point, it will attack the core of the system, and when it does, it will find all those investors hiding in the banks, and it will teach them a lesson.”
    Yearning for the free market. In any event loss and suffering is the only thing that forces people to confront reality…eventually. It’s that nasty timing thing that gets in the way. The time the hour always unknown.

  4. truth and integrity says:

    Forget dividends. With 90% companies having negative growth and the remainder less than 10%; return on equity is not there anywhere. Once the debts become legal claims there will be no dividends. Companies need a better than 20% return on equity to give dividends or their capital diminishes constantly to liquidation.

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