They’re Not Doing This for You

Tuesday, 5 April, 2016
Albert Park, Australia
By Kris Sayce

  • This will last longer than you think
  • The only way I buy blue-chip stocks

The Reserve Bank of Australia (RBA) has today voted to keep interest rates at a record low of 2%.

Unfortunately, they may not stay at 2% for much longer.

According to the latest futures contract prices, there is now a 29.4% chance the RBA will cut rates to 1.75% at its May meeting.

You can see from the chart below how expectations have started to turn towards a rate cut over the past couple of weeks. Take note of the light green and light pink lines:



Source: Bloomberg
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So, why the sudden about turn? This next chart explains why:



Source: Bloomberg
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The Aussie dollar is up 10.7% since mid-January.

In the world of currency wars, where weak currencies are de rigueur, that’s bad news. Central banks want currency values to stay low. They believe that’s the only way to boost a national economy.

To achieve this, they are racing to the bottom with interest rates.

Even the US, whose central bank raised interest rates last December, is mortally afraid of raising them too quickly and killing the recovery they think they’ve created.

The European Central Bank (ECB) is another case of low interest rates and currency wars. According to the latest futures prices, there is a 0% chance of a rate increase through the rest of 2016.

There is, however, a near 50% chance of a further rate cut before the end of the year.

Futures contract prices have priced in a 37.8% chance of the ECBs rate being at minus 0.5% by the end of the year, and a 9.9% chance of it being at minus 0.6%.

For those who are fiendishly bearish on interest rate yields, there is a 1.1% chance of ECB interest rates falling to minus 0.7% by the end of this year.

For the record, the ECB’s current interest rate is minus 0.4%.

More on low interest rates in a moment. First…

Markets

Overnight, the Dow Jones Industrial Average fell 55 points, or 0.3%.

The NASDAQ Composite index fell 0.5%.

Earlier, in Europe, the Euro Stoxx 50 index gained 0.3%, as did the FTSE 100.

The CAC 40 gained 0.5%, while Germany’s DAX closed the day up 0.3%.

In Asia, the Nikkei 225 index is currently down 2.1%. The Hang Sang is down 1.5%, while China’s Shanghai Composite index is up 1.1%.

In Australia, the S&P/ASX 200 index is down 81 points, or 1.6%.

On the commodities markets, West Texas Intermediate crude oil has dropped again, currently trading at US$35.50 per barrel. Gold is up, trading at US$1,226 per ounce.

On the foreign currency markets, the Aussie dollar has fallen nearly one US cent over the past 24 hours, due to prospects of another cut by the RBA.

This will last longer than you think

The subject of low interest rates came up over lunch today with one of my chief researchers.

We were discussing details of our 2016 investment conference, due to be held later this year.

(We plan to release full details of the dates, venue, and keynote speakers when we send invites in May. Look out for more details then.)

Our researcher asked, ‘So, why are central banks cutting interest rates so low?

There are several reasons, but our first and most important reply was this: ‘Well, whatever the reason, it’s not to help you. It’s not to help savers. It’s not to help the majority of the general public.

That just about sums it up.

We can blame it on the Currency Wars. We can blame it on the banks, on the elites, on politicians and governments.

Who is really to blame is all of them and some of them, at any given point in time.

But aside from casting blame, you just need to realise that the decision makers’ primary concern isn’t about making things better for you.

It’s about trying to make sure that their decades-long paper money Ponzi scheme doesn’t come crashing down on their watch.

They came close to it happening in 2008. But due to the suppression of interest rates, rampant money printing, and government bailouts, they managed to postpone the worst consequences for a later day.

The question now is, how long can they keep this going?

If you have a length of string handy, I’ll be glad to give you a clear answer.

That’s the most frustrating part. They know the system is rigged. We know the system is rigged. You know the system is rigged.

Everyone knows the system is rigged.

And yet, for all that, it still (for now) defies gravity.

Not only that, remember that bubbles and bull markets can last much longer than most think possible. So can recoveries from a crash. No doubt after the 1929 market crash, a band of bearish investors warned folks not to believe in the recovery.

And yet, it was a long time between drinks from the 1929 crash to the 1987 crash.



Source: Bloomberg
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Currently, we’re just over eight years on from the 2007 peak.

Many are surprised that the so-called recovery has lasted this long. But what’s to say that it won’t last another eight years…or 15 years, 20 years, or 60 years?

It doesn’t seem credible that the current period of low and negative interest rates could possibly go on for year after year and decade after decade.

But then again, we do have some evidence that such a thing is possible. That’s right, Japan.



Source: Bloomberg
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The chart above shows the Bank of Japan’s overnight call rate going back to 1993. The red line marks 0%. The highest the rate has been since 1995 is 0.72%, which it achieved in 1997.

After so long, and so many false starts, the clear trend is down. Yields are negative, and appear to be staying that way.

So, Japan has kept interest rates close to zero for 20 years. The US Federal Reserve and ECB have barely started their period of near-zero percent interest rates.

Just when you thought they couldn’t go any lower, they go lower. And just when you thought they couldn’t stay low any longer, they stay low.

Interest rates must surely rise again. But based on the evidence, it doesn’t look as though they’ll rise anytime soon.

The only way I buy blue-chip stocks

With all this talk about low interest rates, you may be thinking about how you can boost your income.

If you’re not thinking about that, you should be.

Interest rates on savings accounts are resting at a measly level. You’re lucky if you can get 2%.

A Commonwealth Bank NetBank Saver account pays out a ‘whopping’ 1.8% interest rate.

But before you criticise it, you should probably be grateful for it. If the RBA goes ahead and cuts interest rates at its next meeting, odds are the retail banks will cut interest rates on savings accounts too.

But what about dividends, especially bank dividends?

Our advice is to make the most of it. It can only be a matter of time before the banks begin cutting dividend payouts. The rate of dividend increases has already come to a screeching halt.

And the price action of the banks certainly suggests that investors have priced in a cut to dividends.

Check out the price chart of any of the four major banks. Each is down significantly from where they were one year ago.

Commonwealth Bank of Australia [ASX:CBA] is down 25.7% from last year’s high. Any technical analyst looking at the chart below would say the share price is trading around a key support level. If it breaks through that and continues to fall, $65 and below is the next port of call.



Source: Bloomberg
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With lower savings rates and potentially lower dividends, it makes sense that investors have to look elsewhere to boost their income.

That’s why I asked my colleague, Matt Hibbard, to develop a system that could help investors give their income an extra boost.

Like any investment, it’s not risk free. And if you haven’t used a system such as Matt’s before, it will take a bit of time to get used to it. It involves trading options.

And because we know that the options market is new for many investors, we’re doing something with Options Trader that we’ve never done before, for this or any other of our investment advisories. More details later this week.

But until then, I’d like you to become more familiar with the art of using options in an overall investment strategy.

For that reason, we’re re-releasing a special three-part interview series that I conducted with Matt late last year. But to bring things up to date, the week before last I caught up with Matt to discuss how things had gone since we launched Options Trader six months ago.

What’s more, aside from Matt sharing some of the trades he’s recommended, I even revealed details of the options trades I’ve made over the past eight months.

It’s safe to say that since Matt introduced this options trading technique to me, and since I’ve started using it in my own portfolio, I can now say that I’ll never buy another blue-chip share in the traditional way again.

Now, when I want to add shares to my portfolio, I don’t place an order to buy a stock. I now place an order to trade a specific type of options contract.

For more insight on what I’m talking about, watch this brand new video here.

Cheers,

Kris

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End of day market data

If you have any ideas about what you would like us to include in our end of day market data drop us a line at letters@portphillipinsider.com.au, and type ‘Market data’ in the subject line.

52-week highs: 18 stocks, including APN Outdoor Group Ltd [ASX:APO], Easton Investments Ltd [ASX:EAS], and Sigma Pharmaceuticals Ltd [ASX:SIP].

52-week lows: 28 stocks, including 1-Page Ltd [ASX:1PG], Karoon Gas Australia Ltd [ASX:KAR], Pacific Current Group Ltd [ASX:PAC], Regis Healthcare Ltd [ASX:REG], and Woodside Petroleum Ltd [ASX:WPL].

Note: The stocks listed above are stocks that hit an intra-day 52-week high or low during today’s trading. The stocks didn’t necessarily close at the 52-week high or low.