The Market Wrap Monday 24-5-10

By Jason Fittler

Support is broken!

Last week we saw a massive dip in the market, an opportunity for the brave. Friday saw an extremely volatile day with the market dropping 3% before recovering later in the afternoon to close down 0.3%.

The question is:- Are we going to move lower from here? Answer is YES, but not in a straight line. We will see this volatility continue to gain pace and as such I do expect in the next 12 months we will see the market move below Friday’s lows.

Should you exit the market? NO. Australian companies are re-capitalised and now forecasting great income streams. Portfolio yields of high 7% up to 9% are now common place, along with this you can expect to get large gains of up to 20% in the coming 12 months. Now is the time to be buying into the market with a long term view.

What caused the drop?

1.    Super tax on mining companies
2.    UK Sovereign debt issues(Greece)
3.    Sovereign risk caused by the Super Tax

Item one is detailed below and the Greece issue is well on the way of being sorted out. Sovereign risk is something we have never had to deal with but is certainly the cause of the fall in the Aussie dollar.

Given the radical changes to the taxing of mining companies and the uncertainty if other large Australian companies will become subject to this tax, overseas investors are fleeing the country along with their money. The Australian dollar will continue to fall while this continues to happens.

What is also clear is Rudd and Swan are selling Australia up the river in a bid to get re-elected.

There is a old saying “You get what you pay for.” This holds true for the stocks market, buy quality, buy high yielding stocks and in 3 years sit back and count your profits. If you only focus on the short term then you can join the queue for people who will invest on the next dip.

After the March 2009 lows of 3100, many investors advise me that they would buy if they saw these levels again. Here they are and now is the time to buy.

Positives

1.    Australian companies re-capitalised.
2.    US Companies have improved earning forecast.
3.    US is holding interest rates low and Australia is on hold for now.
4.    The market is 22% below fair value, expect to see the market move above 5200 this year.
5.    Volatility is providing buying opportunities.
6.    You can achieve high dividend yields at the current prices.

PS. When you need professional advice call us, (07) 4771 4577.