Morning Report Friday 27 February 2015
Interest Rates remain the key & five companies that reported yesterday
Over recent months, I have pointed out how cheap sustainable yield paying equities are compared to money in the bank, but there are always two sides to any story. Australian 3-year bonds are trading around 1.8%, but it’s what’s on the horizon that matters, with increasing talk of a “Bond Bubble” in the future.
• The volatility index of bonds has increased by 40% over the last 12 months as the market becomes concerned with defaults e.g. Energy companies have been hurt by oils recent plunge from $US107/barrel to under $50 and they have billions of dollars of debt.
The US stock market is up almost 6% in February, but company profits are estimated to drop 4.5% this quarter! The rally is being fuelled by “free money” and it will not be fun times when the music stops and its back to normal times and you have to pay for money. With stock valuations at multi year highs, it’s not surprising that large US Merchant banks like Goldman Sachs are forecasting the S&P500 at 2,100 by year’s end, not very optimistic when it’s at 2,110 today. We saw yesterday how easily Telstra (TLS) fell almost 2.5% a few days after going ex-dividend as the marginal, late to the party, buyers slowly diminish. I prefer slowly switching funds to sustainable growth stories, with lower yield, over pure high yield plays e.g. selling my overweight CBA position and switching to Challenger (CGF).
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