Up, down and all around the arguments for it and against it and the predictions of its continuation and its end continue to spin.

And once more the US Federal Reserve itself seems to turn, with the release of its meeting minutes for June suggest, alas, that the USD85 billion-a-month bond buying/monetary stimulus/money printing/equity market lifeblood-giving program will, in fact, endure, at least until there’s more evidence of recovery in the jobs market.

But the proverbial writing has been on the wall.

Mr. Bernanke, in a manner esoteric even for a central banker, may have been trying to untether equity markets from their connection to Fed action.

On the other hand, market participants aren’t paying close enough attention to what the chairman is saying or to the data underlying his statements.

The basic assumptions in the Fed’s June 19 statement that raised “tapering” speculation as well as fear of rising interest rate never reflected overwhelming confidence in the US economy’s growth trend.

For example, the Federal Open Market Committee (FOMC) essentially marked down its growth forecast by lowering the estimated expansion range published in March from 2.3 percent to 2.8 percent to 2.3 percent to 2.6 percent.

The new range reflects downward adjustments to forecasts made by the most optimistic members of the FOMC, hardly a ringing endorsement of US economic health.

Strangely, the FOMC’s base range for the unemployment rate at the end of 2013 is 7.2 percent to 7.3 percent, which is an improvement from the March forecast. But it’s still higher than the 6.5 percent rate Mr. Bernanke noted would signal the success and the conclusion of the Fed’s easing.

Confusing to markets must be the dual facts of a slower growth rate but a lower unemployment forecast. One estimate that incorporates forecasts of jobs added based on historical rates of growth indicates that not until well into the second quarter of 2015 would the 6.5 percent trigger be met.

Not confusing is Mr. Bernanke’s statement that tapering of bond purchases could begin with an unemployment rate of 7 percent. This spooked markets, but it wasn’t tied to any of the Fed’s forecasts.

Mr. Bernanke was clear in his statement that the decision to begin tapering the asset purchase program will depend upon incoming data.

And this decision will rest on conditions in labor markets and the inflation situation. This may accurately reflect the FOMC’s stance. But it wasn’t what markets wanted to hear.

Markets are back in a happy place now that the minutes of that June meeting have been made public. The notes show that members of the Federal Reserve Board want to see more evidence of a recovery in the US jobs market before it winds up its latest round of “quantitative easing.”

“Several members judged that a reduction in asset purchases would likely soon be warranted,” noted the minute-taker.

But the minute-taker added that “many members indicated that further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases.”

And “most” of the members said the Fed should stick to its ultra-low interest rate policy through to the end of 2015. Four members thought the benchmark rate could be increased this year or next year.

The reactions to Mr. Bernanke and Co over the past several weeks demonstrate the worst of investor emotionalism. Making investment decisions based on a timeframe of years and decades rather than minutes and days is the best way to build wealth.

A simple look at inflation-adjusted S&P 500 returns going back to 1871 relative to various holding periods–as conducted by Morgan Housel of The Motley Fool–demonstrates this fact.

Short-term moves are basically random. Over the long term odds move in your favor. And the very long term results in almost 100 percent positive returns, even accounting for inflation.

In fact there’s never been a 20-, 30- or 50-year period since 1871 when stocks produced an average annual loss. The worst over any 30-year period in history is a two-and-a-half-fold increase after inflation.

Following its most recent meeting, on July 2, the Reserve Bank of Australia kept its benchmark cash target rate at a record-low 2.75 percent. That’s the level it cut to after its May meeting, during which the persistently high Australian dollar was cited once again for its drag on key parts of the domestic economy. Governor Glenn Stevens, in his statement announcing the move, also noted that, inflation at bay, the likelihood of the peak in resource sector investment being reached this year also justified a more accommodative monetary policy.

That the spread between the RBA’s target and the Fed’s “zero bound” rate has narrowed is one factor pressuring the Australian dollar. That the RBA and other institutions continue to downgrade growth estimates for Australia is another.

And preliminary estimates for June indicate that the RBA’s Index of Commodity Prices slipped 4.1 percent on a monthly average basis after falling by 2 percent in May, driven by declines for iron ore, gold and coal prices. Prices for many rural commodities and base metals also declined.

Over the past year the index has fallen by 10.5 percent, due largely to softer prices for iron ore, gold and coking and thermal coal.

We’ve entered a period where emerging economies such as China are likely transitioning to domestic consumption-led as opposed to capital investment-led growth. And this will result in changes for an Australian economy that’s clearly benefitted from the Middle Kingdom’s two-decade-long build-out of infrastructure and manufacturing capacity.

But Australia has significant capacity to serve this new phase as well.

The Australian dollar has slumped from USD1.0545 as recently as April 11, 2013, to USD0.9060 as of this writing, a 14.1 percent decline that’s taken a big bite out of total returns for US-based investors with long positions in Australian equities.

But with a long run of bad news, reduced growth forecasts and further RBA cuts priced in, in other words, it appears a bottom is forming for the Australian dollar.

Our Australian focus is on dividend-paying companies with strong underlying businesses that generate solid cash flow. And it is long-term in nature.

Portfolio Update

The decline of the Australian dollar has exacerbated a selloff for the S&P/ASX 200 Index since a May 14, 2013, post-GFC peak of 5220.987 to 4655.960 on June 25.

In Australian dollar terms that’s a decline of 10.46 percent, including dividends. In US dollar terms, including dividends, the decline is 16.24 percent. The S&P/ASX 200 has actually recovered off that recent low, closing at 4965.700 on Thursday, July 11.

Aggressive Holding Oil Search Ltd (ASX: OSH, OTC: OISHF, ADR: OISHY) provides a god example of the currency effect. From July 9, 2012, through July 9, 2013, Oil Search generated a total return of 25.06 percent in Australian dollar terms. From July 9, 2012, through July 9, 2013, it generated a total return of 12.62 percent in US dollar terms.

The road back for the aussie versus the buck probably won’t be as quick as the one that’s caused a virtual halving of total returns for US investors who own Oil Search–at the end of April the Australian dollar was still worth USD1.0371; by early July it was down to USD0.9067.

But long-term fundamentals, including solid government finances and geographic fortune that places it in the sweet spot of global economic growth, argue well for its rise from these oversold levels.

Oil Search too provides a good example of the types of companies we like to focus on in AE as well as in Canadian Edge and Utility Forecaster–that is, well-run businesses with solid underlying assets that generate sustainable cash flows.

But part of achieving any sort of long-term success in this business of investing is acknowledging that mistakes will be made. The key is to limit their impact. And that means–to paraphrase the late, great Coach John Wooden–we must be quick but not hurry to admit them and move on.

Portfolio Update has what’s happening with our Conservative and Aggressive Holdings in early days of fiscal 2014 for many and dog days of 2013 for others.

In Focus

Strong domestic demographics support operations at home: A doubling in the proportion of Australians older than 65 is set to underpin earnings for health care companies in the longer term, as beyond that age people become a large consumer of health-care services.

Evolving policy in key developed markets such as the US promises short-term headwinds as companies adjust to efforts to reduce public spending. Over the longer term policies that increase the number of insured patients should result in rising volumes for companies that provide testing services or market pharmaceuticals.

And growing incomes and awareness in key emerging markets that neighbor Australia provide significant opportunities for growth, particularly in the private health sector, which is growing rapidly in emerging-market countries.

Across the developing world, population growth, increasing life expectancy, growing disease burdens and patients’ demand for treatment are driving reliance on private health care companies.

In Focus profiles four companies, including two Portfolio Holdings and one new addition to the How They Rate coverage universe, well placed to benefit from long-term growth in health care spending around the world.

Sector Spotlight

The share price of charter AE Portfolio Conservative Holding Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY) has fallen from a nearly eight-year high of AUD5.14 on May 22, 2013, to a close of AUD4.50 on June 24.

This decline of 12.5 percent mirrors the S&P/Australian Securities 200 Index’ 10.8 percent fall from 5220.987 on May 14 to 4655.960 on June 25. And both charts look a lot like that of the Australian dollar, which slid by 14 percent from USD1.0545 as of April 11 to as low as AUD0.9067 on July 5.

The decline in Telstra’s share price, although steep, and, coupled with the impact of the declining Australian dollar-US dollar exchange rate, to levels that make it attractive to US-based investors once again after it held above value levels for much of the time its’ been in the Portfolio, leaves it in the neighborhood of AUD4.75.

And that means Telstra’s stock is simply holding onto to levels it established before then lost during the Great Financial Crisis. It also means Telstra is trading below our buy-under target of USD4.60.

We have more on Telstra in this month’s first Sector Spotlight.

AE Portfolio Conservative Holding Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY) provides a great example of the two-sided story of the Australian dollar’s steep decline versus the US dollar.

The aussie has slumped 13.3 percent from a closing high of USD1.0545 as recently as April 11, 2013, to USD0.9146 as of this writing. From its 2013 closing high of USD1.0598, established Jan. 10, to its low of USD0.9067, set July 3, the slide is 14.4 percent.

That’s added about AUD7 billion (about USD6.3 billion) to ANZ’s balance sheet as its gets close to meeting its funding requirements for its current fiscal year, which ends Sept. 30, 2013.

This month’s second Sector Spotlight focuses on charter Portfolio Holding ANZ.

News & Notes

Australia Endures the Whims of the World’s Two Largest Economies: This week, the Fed sought to allay concerns about an imminent end to monetary easing, which prompted a rise in global markets. Meanwhile, China, which is Australia’s largest trading partner, has signaled its willingness to tolerate a further slowdown in its economy.

The Dividend Watch List: The Dividend Watch List includes updates on How They Rate companies that announced dividend cuts during fiscal 2013 first-half earnings reporting season Down Under as well as those that reduced earnings guidance in recent weeks. It also includes those that cut payouts during their most recent reporting period but that don’t report based on a July 1-to-June 30 fiscal year or a calendar-year basis.

The ADR List: Many Australia-based companies that list on the home Australian Securities Exchange (ASX) are also listed on the New York Stock Exchange (NYSE) or over-the-counter markets as “sponsored” or “unsponsored” American Depositary Receipts (ADR).

Here’s a list of those companies, along with an explanation of what these ADRs represent.

How They Rate

How They Rate includes 112 individual companies and four funds organized according to the following sectors/industries:

• Basic Materials
• Consumer Goods
• Consumer Services
• Financials, including A-REITs
• Health Care
• Industrials
• Oil & Gas
• Technology
• Telecommunications
• Utilities
• Funds

We provide updated commentary with every issue, financial data upon release by the company, and dividend dates of interest on a regular basis. The AE Safety Rating is based on financial criteria that impact the ability to sustain and grow dividends, including the amount of cash payable to shareholders relative to funds set aside to grow the business. We also consider the impact of companies’ debt burdens on their ability to fund dividends. And certain sectors and/or industries are more suited to paying dividends over the long term than others; we acknowledge this in the AE Safety Rating System as well. We update buy-under targets as warranted by operational developments and dividend growth.

In Closing

I’m notified almost instantly via e-mail when (or if) you post a comment after you read an article. I can provide nearly real-time answers to your questions, provided the subject matter can be disposed of in such manner.

Thank you for subscribing to Australian Edge. We look forward to hearing feedback about how we can improve the service.

David Dittman
Editor, Australian Edge

Follow @ddittman