The stock market is on a high, and here is why it could go higher.
Four Reasons Why This Bull Market Will Continue
Reason #1 – There’s a veritable wall of money sloshing around the financial services industry. Every day, millions more compulsory superannuation dollars enter the stock market. The simple law of supply and demand dictates that this will naturally push stock prices higher.
Reason #2 - The insatiable private equity appetite for acquisitions, whatever the company, whatever the size. It seems no company is safe, even companies as big as Telstra or Rio Tinto. Forget footy tipping - picking the next takeover target is rapidly becoming the true national pastime. It may seem stranger than fiction, but a recent report suggested BHP Billiton could be bought by a private equity group, broken up into littler pieces, each of which would be re-sold back onto the stock market, and the whole kit and caboodle could be worth more than double the current BHP share price. If that’s correct, BHP and many other big companies are today severely under-valued.
Reason #3 - Some stocks, particularly some larger stocks, are just plain cheap. We mentioned BHP above in the context of take overpotential. But ignoring that, and despite the share price having risenby over 20% in the past 3 months, it still trades on a forward price toearnings ratio (P/E) of only about 10 times. The stock’s cheap because too many people think commodity prices are ripe for a fall. Over the medium to long-term, we think commodity prices will continue to rise, meaning BHP Billiton continues to be great value at today's prices.
Reason #4 - The resources boom is just beginning. Chinese demand for resources such as copper and oil is strong and growing. Middle Eastern political instability is sadly a fact of life these days, and since most of the proven oil reserves in the world are also in that region, oil prices are likely to stay high and go even higher. Uranium will account for a much greater share of world energy production overthe ensuing decades. Gold supply is short and demand is strong. If all that isn't enough, a recent report on Bloomberg quoted prominent investor Marc Faber as saying "the up wave of the (current commodities) cycle is likely to last another 15 to 20 years".
- Not every stock will rise in this bull market. In fact, we think many of the most popular companies quoted on the stock exchange are significantly over-valued.
- Following on from that, we firmly believe this is a stock picker's market. Blindly buying shares in the latest uranium float or because your great uncle's late milkman's son's best friend's sister's boyfriend has a hot tip for a tiny West Australian platinum miner isn’t going to set your portfolio alight.
- Stock markets do not go up in straight lines. Over time, they have and should continue to rise. But, from time to time, they’ll wobble and fall. When that happens, and it last happened just over 2 months ago, don't panic. We repeat... Do Not Panic. In fact, it's during those times when it usually pays to get greedy, buying more shares when everyone around you is selling in a mad panic. But, as ever, make sure you buy the right stocks!