All good things must come to an end.
Overnight on Wall Street, U.S. stocks fell the most in three weeks as the World Bank cut its forecast for global growth.
The Dow sank over 100 points in a broad based sell-off, with one commentator on Reuters saying… "I think it's an excuse for some investors to take some money off the table."
What's this then? An orderly sell-off?
How things have changed.
I remember the good old days… when in November 2011 a warning from International Monetary Fund Managing Director Christine Lagarde of the risk of "a lost decade" contributed to Wall Street crashing 3.5% in a single trading day, and the VIX 'fear index' jumping 30% on that same day.
Since then, the S&P/ASX 200 is up 27%, Commonwealth Bank of Australia (ASX: CBA) shares are up 67%, Telstra Corporation (ASX: TLS) is up 68% and Woolworths Limited (ASX: WOW) is up 51%.
Some lost decade, huh?
With gains like that, no wonder the AFR reports a Boston Consulting Group report as finding surging equity markets created 43,000 new millionaire households in Australia during 2013, with one in 50 households having more than $1 million in liquid wealth.
If that's you, many congratulations!
You've worked hard for your money. You've saved well. You've invested well, wisely, and for the long-term… through the GFC and Ms Lagarde's alarmist comments, and you'll be investing long term way past the World Bank's latest forecast, and the tough federal budget.
For those traders whose bets hinge on the predictions of economists from establishments like the World Bank, I've got news for you.
The FT's Tim Harford recently wrote an article titled "An astonishing record – of complete failure" where, after assessing the damning evidence, he concludes… "… forecasts should not be taken seriously. There is not a lot of point asking an economist to tell you what will happen to the economy next year — nobody knows."
Despite its downgrade for this year, the World Bank left its estimate for world growth in 2015 unchanged at 3.4%.
Sorry World Bank. Your forecast will be wrong.
Next…
Here in Australia, the budget is having a somewhat longer than normal impact on consumer sentiment, and therefore consumer spending, than previous budgets.
Go figure.
Australians don't like retiring at 70. They don't like paying higher taxes. And they don't like paying more for their petrol.
Imagine the furore if negative gearing and superannuation had been impacted? We'll have to leave it to the paid parental scheme to save the day.
Couple the budget with the unseasonably warm weather, and you've got a recipe for disaster for the retail sector, with The Retail Shop (ASX: TRS) and Pacific Brands Limited (ASX: PBG), the company behind the Bonds brand, the most recent to downgrade profit expectations.
I'm not usually a fan of retail stocks. The sector is fickle, cyclical, beholden to consumer sentiment and the economy, profit margins are small, there is no recurring revenue, and most importantly, no sustainable competitive advantage.
Sheesh…
That said, I must admit I'm getting somewhat tempted by a couple of selected stocks in the retail sector.
The time to buy retailers is when sentiment, profit margins, and therefore valuations, are low. And some are moving into bargain basement territory.
Stating the obvious, the larger the margin of safety, the better. The downside potential is always more than you think.
Before wading in to the retail sector, investors should know…
- You'll never buy at the bottom. Be prepared for more pain before any gain.
- You won't sell at the top.
- You may lose money, permanently.
If you can think of better ways to make a buck, I don't blame you.
That said, as part of a diversified portfolio, the timing might be right to have a little nibble in the retail sector.
One retail stock I have got my eye on is RCG Group (ASX: RCG), the owner of Athlete's Foot. Last week the company warned earnings growth would be 10% to 12%, below earlier guidance of 15%.
Note the word growth. This is a growing company.
That relatively modest downgrade led to RCG Group shares taking a rather savage 12% haircut on the day of the warning, with the share price continuing to drift lower, now trading at 57 cents.
At that level, RCG Group shares trade on a forecast P/E of 13… which is neither expensive nor cheap. The tempting part is their forecast fully franked dividend yield of 7.8%, which is over 11% when grossed up for franking credits.
I'm not quite wading in just yet, greedily hoping for an even better price.
I may never get it, just like I missed BHP Billiton (ASX: BHP) because I was waiting for the shares to fall below $30. Around this time last year, they hit a low of $30.43, but I still didn't buy. Close, but no cigar.
Investing is a game of patience. Ask all those millionaires whether they made their fortune by rushing into and out of the market on the back of one tough budget, an economic prediction or indeed even the GFC.
I'll give you a clue. They didn't. They bought shares, they held them, and went off and played golf, bowls and bridge.
I couldn't resist closing without referencing International Monetary Fund figures saying Australian homes are among the most expensive in the world when household incomes and rents are taken into account.
High house prices are a drag on our economy… except if you're one of our banks, especially of the big four variety. No wonder their share prices have been on fire.
The Age quotes IMF deputy managing director Min Zhu as saying… "Our research indicates that boom-bust patterns in house prices preceded more than two-thirds of the recent 50 systemic banking crises."
Hmmm…
No house price crash prediction, or GFC-like prediction for our banks, but a pretty clear warning.
All of which leaves the RBA in a pickle.
On the one hand, we've just had the budget from hell and the Aussie dollar is uncomfortably high -> interest rates could be headed down.
On the other hand, house prices are booming -> interest rates could be headed higher.
And then there's all those newly minted millionaires, presumably not spending at the shops, but also presumably snapping up investment properties, when interest rates are at a generational low.
