How's the interest rate hangover?
It might depend on whether you're in cash or in shares.
For share market investors, the RBA's interest rate cut is already working. The ASX is on a major roll.
For shareholders in BHP Billiton Limited (ASX: BHP), it's working over-time. Shares in the Big Australian are up a big 4.4% today, now trading at $32.
What was it I was saying about buying BHP when the shares were around $28? I'm in. I hope you took advantage too. That 5% fully franked dividend yield was just too good to pass up.
Yesterday's decision by the RBA means Australia has now officially entered the global currency wars. En garde Europe, USA, Canada and Japan.
The global race to the bottom on interest rates, and on currency, has a new player. Aussie, Aussie, Aussie…
The purpose of all this monetary easing is to push up asset prices — property, shares and bonds — making us all feel richer. Wealthy individuals and businesses feel confident about the future, spend more money, employ more people, and voila, economic growth returns.
One day into the RBA's brand new monetary easing, and the first part is working — I already feel wealthier, courtesy of a surging share market and a plunging Aussie dollar.
Yesterday the S&P/ASX 200 Index jumped above 5,700, a 7-year high. Overnight, the Americans re-joined the party, the Dow jumping over 300 points. Today the ASX is up another 1%.
Welcome to the great bull market of 2015.
I'm partying on two fronts — rising share prices and a falling Aussie dollar, the latter making my investments in high quality US-quoted shares like Google, Apple and Ford worth even more when converted to Aussie dollars.
That said, the race to the bottom is not all sunshine and roses.
Retirees hoping to live off the income generated by term deposits have been dealt one heck of a mighty blow. Whereas not too many years ago $200,000 in a term deposit would generate around $14,000 in annual interest income, today that number has slumped to around $6,000. In the meantime, the cost of living has only gone up.
And there's more bad news ahead. The AFR reports the futures market has priced in a 1.75% cash rate by Christmas.
Like a London bus, with interest rate moves, you can wait forever for the first one to arrive, but when it does, expect the next one to be right behind.
Westpac's respected economist Bill Evans was one of the few who called yesterday's RBA rate cut correctly. In the AFR, he's quoted as saying he expects another move, "with March being the best timing."
The buses are lining up…
No wonder then that Equity Trustees head of asset management Paul Kaisan said in the AFR…
"With more cuts forecast, the sharemarket is the only play to get income now."
Tell me something new.
As ever, the sharemarket is ahead of the game. How else do you explain the Commonwealth Bank of Australia (ASX: CBA) share price above $90, with many predicting it's just a matter of time before it hits $100 per share?
Never mind the premium valuation. Never mind that the AFR quotes Morgan Stanley analysts as saying CBA's stock is valued 23% higher than its peers, well above a historical premium of 8%.
It's all about the yield. Commonwealth Bank shares trade on a forecast fully franked dividend yield of 4.6%, or 6.6% when grossed up for franking credits.
Compared to term deposits, Blind Freddy can see the attraction.
The same goes with the other yield darling, Telstra Corporation (ASX: TLS). With the shares now swapping hands for around $6.70, never mind the premium valuation and the 13-year high for the shares.
It too is all about the yield — 4.45% fully franked, or 6.4% grossed up.
Like many Australian investors, I already have my fill of those two companies. Unlike many Australian investors, I am cognisant to the risks of those two market darlings.
The obvious risk is valuation. Banks historically trade on price to earnings ratios (P/E) of around 10-12, not the P/E of 16 CBA shares are trading at today.
Throw in our slowing economy, rising unemployment, sky-high property prices and an undoubted slowdown in China, and there isn't a lot of downside protection for CBA shares.
Speaking of China, Motley Fool Pro Chief Investment Advisor Joe Magyer is just wrapping up a trip to the Middle Kingdom.
Joe Magyer eating scorpions on a stick, China 2015
While Joe has identified one huge Chinese investment opportunity for Australian investors — including one small ASX tech stock he thinks could be set to benefit — his research trip has confirmed one thing — the mining boom is well and truly dead. More so than you might think…
And with iron ore being Australia's biggest export, it doesn't bode well for a recovery in our economy any time soon. Buyers of Commonwealth Bank shares at today's prices — let alone at $100 — should take note.
To get more details of Joe's trip to China, and about Motley Fool Pro — our most exciting and ambitious project yet — click here to register your interest. It's totally FREE.
As for Telstra, it's a utility stock, selling commoditised services in a very competitive market. Slow-growing utilities typically trade on P/E ratios of around 10-12 and on dividend yields of around 7%… a far cry from today's elevated valuation and relatively modest dividend yield.
Still, unusual times — like interest rates at 2.25% — mean unusual things happen.
Don't get me wrong — I'm not suggesting for one minute you sell out of CBA or Telstra. What I am suggesting is it might be a good idea to look elsewhere for your growth and income kicks.
Like the five ASX stocks Scott Phillips recently recommended to Motley Fool Share Advisor subscribers in the popular "Income Extra" feature.
As it so happens, I already own four of the five stocks (and it should be noted, I had no input or influence into which companies made the list), so I'm riding this one right alongside Motley Fool Share Advisor members.
One of the companies on Scott's list was Flight Centre Travel Group (ASX: FLT), a recent addition to the Jackson Portfolio.
Either by luck or skill (or both), I bought shares in Flight Centre on the very first day of this huge 10-day ASX sharemarket rally — January 21st 2015 — paying $33.90 per share.
Today, Flight Centre shares are trading above $38, up close to 12% on my buy price. The 4% fully franked dividend yield (5.7% gross) is the icing on the cake.
Even with the nice jump in the share price, Flight Centre is not my biggest position out of Scott's "Income Extra" stocks.
That's reserved for one small "under the radar" ASX stock that's not only dirt cheap, but trading on a forecast fully franked dividend yield of 4.2%.
In the coming days the company reports its final results. Although I never take anything for granted, I am hopeful the news will be good, on both earnings growth and the dividend. Motley Fool Share Advisor members should watch their in-box.
Capital growth PLUS a strong, growing fully franked dividend EQUALS investing nirvana.
Whichever way you look at it, it beats Glenn Stevens and his low interest rates, hands down.
