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by Peter Switzer

Usually my focus each morning is on what Wall Street has done overnight as a pointer for what the Australian market might do today, but more importantly I look for revelations that say something about the long-term outlook for stocks. And while the Dow was down a tick last night, the general US feelings about stocks are, at the moment, cautiously positive.

The Dow was down a mere 14.68 points to 13,213.63 while the S&P 500 was off 5.45 points or 0.39 per cent to 1397.91. Wall Street has been buoyed by great company earnings, but economic readings are a little mixed with the Chicago PMI coming in weaker than expected. And Europe is still holding back a lot of investors sitting on the sidelines with cash, but really the main game for us today is on the local front.

Rate cut needed

This afternoon the Reserve Bank (RBA) has to cut interest rates after being wrong about the economy for most of 2011 – that’s why they cut in November and December. They blew it, however, in February, March and April, failing to see how weak the overall economy is. Now they have to play catch up but it should not be ignored that the RBA's mistake has not only slowed up the economy but has helped create the $40 billion budget deficit. A slow economy reduces tax collections and increases the need for government spending.

Just yesterday we learnt that new home sales are at an 11-year low and housing credit's growth was the weakest in, wait for it, 34 years! Incidentally, the TD Securities inflation gauge out yesterday as well says inflation is 1.9 per cent, which adds credibility to calls for a 0.5 per cent cut today.

I don't think the Bank will play ball but it will give a 0.25 per cent rate reduction and then they will watch the banks' responses. If they don't pass on enough, they could cut again in June.

What’s really odd is that two US companies - Toolworks and Kellogg’s - have revealed in US conferences last week how weak the Aussie economy was. While it is understandable that US companies might have taken a while for the penny to drop about our economy, there’s no excuse for our central bank being so slow witted.

The old rule

Wilson Asset Management’s Geoff Wilson thinks the old “sell in May and go away” rule could apply again this year with all of the EU concerns but he thinks by October, the impacts of rate cuts and other positives will set stocks up for a nice rise. Chris Cuffe, one of the most rewarded fund managers in Australian history is seeing the same story as well.

To me all of this is consistent with my long held view that we should be wary of May to October and be prepared to buy the companies you want for the long-term when the market dips.

Today’s rate cut should lead to two others, if the economics team at Macquarie are right and that will take our dollar down and really help our stock market.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Tuesday, May 01, 2012

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