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The more things change

An interest rate cut, political turmoil and commodity prices still plumbing levels that make the Australian currency less attractive. It’s all happening, so how should you position your portfolio?

Oil inventories in the US have risen to an 80-year high courtesy of the shale oil and gas drilling boom. Those watching the drilling rig count falling were falsely thinking the excess supply might finally be stabilising but that is not yet the case.

Instead, the US Energy Information Administration revealed that inventory levels at 6.3 million barrels as at 30 January had not seen that level since 1930.

Global oil companies are rapidly revising capital expenditure budgets which so far amount to cuts of around 28%, according to some good research from Deutsche Bank. That’s all helpful to bringing world supply more into line with limp demand, but it will take time.

The reality is that expenditure and development undertaken over the last couple of years, when oil prices were above US$100 a barrel, are now coming online and hence production in 2015 is heading higher by around 8% according to the same DB research.

OPEC looks incapable of reducing its own supply so the bottom line is that oil prices are set to remain under US$60 a barrel for some time to come.

That’s no bad thing for consumers of oil and its many related products.

Among the Australian listed oil companies, Santos looks the least attractive given question marks over its balance sheet (denied by the company), while Woodside Petroleum remains solid but fairly priced. Oil Search appears the most interesting with the resolution of its PNG litigation imminent and the significant boost to cash flow from the excellent PNG LNG project now on-stream.

Yield Shield

Investors continue to be besotted with bank stocks and Telstra and why not? Dividend yields are averaging 7.4% on a gross basis across the 4 major retail banks and 6.4% at Telstra which still looks more enticing than the miserable 3.0% being paid on 12 month term deposits.

Parking money in these stocks is an easy decision while commodity prices play havoc with commodity stocks. In the last 12 months, the ASX Financials Index has increased just over 20% while the Materials Index lags at -7%.

Finding reliable yield stocks is as important as ever given the latest snip to interest rates from the RBA. As an aside, how could so many market economists expect the RBA to keep rates on hold when the market itself was pricing in a cut? The commentary from the RBA holds the missing clue: weaker economic growth, low inflation and a bit of stick hanging over lending for investment housing.

The Canadian central bank had also recently lowered interest rates and the commodity parallel with Australia perhaps should have been noticed.

Get Real

REA Group provided another monster result today with its operating earnings climbing 35% to $144.5m in the first half year period. Most of that growth is due to the new listings depth products where revenue grew 60%.

The company lobbed out a 29.5cps interim dividend, up 34% on last year and although it is hardly a high yield stock at 2.2% gross, REA will eventually repeat the outstanding track record delivered by Seek in this regard. In the meantime, REA now has a $230m investment in Move alongside big brother News Corp in which to pump out some further growth.

I am keeping my eye on things at Fairfax as the Domain team packs up their boxes and moves out of the family home. Everything points to an IPO of Domain at some stage as FXJ looks to cash in on REA’s well-earned valuation premium. What will be left at FXJ headquarters will look quite forlorn and bedraggled.

Well packaged

This week, Amcor boss Ken MacKenzie said he would move on at the end of the year wrapping up 10 years in the role. His replacement is another Amcor long-termer, Ron Delia.

Amcor has progressed strongly under MacKenzie making some big bravely-timed acquisitions that have turned out to be huge winners. Having floated off the Australian operations last year (Orora), and re-based the company’s reporting in US dollars, MacKenzie has put Amcor in a very good position to pursue its global strategy in rigid plastics and flexible packaging.

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