Make Money When the RBA is Proved Wrong

Make Money When the RBA is Proved Wrong

Geez, even a massive hurricane can’t derail US stocks. They closed at record highs overnight (our time). That might shake the Aussie market out of its current funk and get it moving.

When I say ‘funk’, I’m talking about the big stocks. The small cap end of the market in Australia is ticking over very nicely.

Actually, I saw some numbers on the market yesterday that suggest US stocks are quite healthy, fundamentally speaking. Earnings per share for companies in the S&P 500 are still rising into new highs.

As my colleagues over at Stansberry Research point out, the bears like to state that US stocks trade at an ‘expensive’ 21-times earnings. However, the Stansberry guys also add that US stocks peaked in 1990 at 26-times earnings, and in 1999 at 29-times earnings.

To match those peaks, US stocks could still rise another 23% or 38%, respectively. And given that earnings are rising, they have every chance of doing it.

Buffett leads the way here

We can also add in the fact that investors that lend money to the US government for 10 years earn a measly 2.13%. Any timeframe less than that, and inflation is eating any ‘real’ return. Warren Buffett says the same thing.

That might explain why gold is doing very will this year. In yesterday’s US session, it hit its highest level in a year — US$1,330. It’s up 12% in the last six months.

It seems to have every chance of continuing if the AMEX Gold Bugs Index is any guide. This is a basket of US gold stocks that have strong upside from rising gold prices.

Here’s the chart showing good momentum recently…

Source: Optuma
That’s something to keep an eye on. There’s a lot of gold stocks on the ASX. With a bit of homework, you might get a trade or two away.

Here in Australia, we have a further variable to throw into the mix — the Aussie dollar. That’s because gold miners sell in US dollars, but have expenses in Aussie dollars. Ideally, if you’re holding Aussie gold stocks, the Aussie dollar goes down and gold goes up.

However, the Aussie is not behaving. It’s currenty still holding above 80 US cents. That probably has a lot to do with LNG.

No one seems to pay much attention to this, but Australia is racking up trade surpluses. It was $460 million in July. This could keep the Aussie dollar floating nice and high. There’s plenty more gas exports to come, and iron ore and coal are chugging along very nicely indeed.

At the start of the year, most people assumed the Aussie dollar would be a lot lower by now.

One academic who says the RBA is wrong

This is important for a key reason rarely linked to it. It may keep bank wholesale funding costs down — and therefore mortgage debt relatively cheap, as it is now.

The Reserve Bank of Australia likes to make a lot of noise about how the cash rate determines bank funding and lending rates.

One academic did a study on this, and said there’s no statistical relationship to back this up.

He found evidence to suggest that an appreciation of the exchange rate, however, lowers the spreads. Now this is something interesting to follow.

The RBA is beginning to make it known that the cash rate is unlikely to go lower. That will bring out the usual doomsters to call the property market down as borrowing costs rise.

But will they? I don’t know. But this study suggests most investors will be looking at the wrong variable.

I bet you’d sleep a lot better with your money in the stock market if this academic is right. Property is Australia’s perceived weakness. If it’s a lot stronger than people presuppose, a vicious bear market in Aussie stocks seems less likely.

After all, the average dividend yield in the Aussie market is still around 5%.

That’s a healthy yield with today’s low rates. But, presumably, fear is still keeping more money out of the market.

But you can see there’s latent potential for Aussie stocks to move higher from here. It’s not as if yields or valuations are stretched beyond reason.

And there are so many opportunities! One of the stocks from my Small Cap Alpha service is up 97% in a bit over three weeks. And why not? It has huge potential.

I see plenty more opportunities cross my desk too. Don’t let fear hold you back. Risks can be managed. There’s still upside to stocks — both here and in the US.

It won’t always be like this. Go here to take advantage of it while you can.


Callum Newman
Editor, The Daily Reckoning Australia