Rate cut and securities yield

[Adhitya G.]

Numpang lewat... Please bear with more of blabber from today's event ...
 
Central bank cut their rates by another 75 basis point. Cash rate is now sitting at 5.25pct and the 90 days bank bill rates are expected to follow suit.
For mortgage holder this is a great news.
On the other hand, this also mean that the cent banks and gov (with their 21K 1st home owner grants) are pretty worry that the Australian housing market is heading in the direction of the UK's and the US's (both are now formally in recession and millions of home equity are now below their mortgage level)
 
For me, I dont have mortgage so it is not a worry.
On the other, my cash return are dwindling day by day (remember my real estate vs cash financial model)...  Return from my cash are coming down from 8 pct plus to now almost certainly become under 6 pct (as banks are pricing future rate cut in their online saving rate)...
Cash is quickly becoming an unacceptable investment class since its return will be surpassed by local inflation which currently sitting at an annual rate of 5%.
 
This brings shares as a reasonable alternative investment. Index (e.g. STW - ASX 200) maybe is pretty save bet... its average PE is 9 and its dividend yield is sitting at almost 9% plus 25% franking). Assume that the stock market went the way of great depression ... As long as the yield stay around that ballpark, I am happy to hold that for another 7 years (which is the lenght of great depression before stock market bounce back to pre-crisis). The risk premium (delta between risk free return and return of more risky assets) between cash and index is now around 5-6 percent which is acceptable in line with graham dodd principle).
 
A word of caution....
Australian household debt is sitting at 167% of the national GDP putting the country at the same risk as iceland, US, Hungary, Turkey, Spain
(Read:
http://www.rgemonitor.com/blog/roubini/122420
http://www.brisbanetimes.com.au/articles/2008/10/19/1224351113115.html
)
This explain the fall of Aust dollar from 98 cents to now 67 cents in USD term.
If any of these gloom and doom realised, I would expect that ASX will back down to 3500, even 2800.
So if you are thinking of another round of betting in the market...  get ready for the wild ride ala Melbourne cup (Did anyone back Viewed for 50$ odds?)
 
Regards,
Adhitya

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[Aji Widhiwijaya]

5.25% hmmmm.. one thing for sure, my rent will not increase! hehehe ;) my landlord is highly geared!

Agree, cash is no longer King..
That's why I started exploring the Index investing last week in trying to make sense of it..
Contemplating jumping back into the market... already missed the wave last week (back above 4000)
No worries.. mengasah kesabaran hehe..

However, in regards to some evident that house prices are falling down, I am somewhat skeptical that it represents the actual market figure. It's true that clearance rate is sitting at 53% at Melb (last week result) as compared to 80% during most of 2007..
But, I'm guessing that it's only the top end of the market (>800K ) that mostly contributed to this figure.. In other words, the figure may be skewed. I believe the bottom end of the market (<500K, which is the range for 1st home buyers ) could be a different story..
Although, I wish this bottom end of the market will be impacted somehow. Of course, there is the demand-vs-supply side of it, which we never know what the true state is (although some say clearance rate is the closest figure).. The only sure thing, I'll keep watching the Melb market..

Oh yeahh, came across the article by Redeker on Brisbane times..  eye-popping huhh? ;)
As always, after reading any analysis from Roubini.. it's kind of scary.. But, his last year prediction on US Financial Crisis is now happening.   Now, is he seeing what we're not seeing, on our own backyard ? ....