This dance is exhausting sometimes. In the face of so much uncertainty and so many headwinds our own market managed to push ahead ~1.5%. The ‘China is solved, get involved’ call last week paid off and everyone pinned their ears back and bought most of the market.
Now there’s strong talk about proper FOMO (Fear Of Missing Out) money really starting to get involved so any concerns of a correction have been placed on hold (v. temporarily). The sideline cash needs to find a home (temporarily) and has/will be buying up the banks to collect the dividend or to trade the pre-dividend rally.
Happy to cautiously participate as I have for the last few weeks and buy on weakness. Some things to beware of coming in loudly and quietly:
Loudly
George Soros has compared China to pre-GFC USA and reiterated earlier comments that a Chinese hard landing is inevitable. The counter to this argument is that the Chinese government is effectively the Chinese economy so in practice it’s near-impossible for it to fall over in such a way. That is, of course, until the Yuan is free floated in a year or two. After that it’s a different ball game. Obviously we know George knows all this so he’s not just throwing headlines around. He wouldn’t just go out and say it.
However the debt to GDP continues to be a concern. China’s Debt to GDP is now 237% and a new record. It’s the red line on the below chart, courtesy of the BIS & FT, and it is the scariest thing I’ve seen today.
Getting into more debt to fuel a slowing growth? Try explaining this to my 6 year old.
Quietly
The price of ‘things’ we count on are moving further away from reality.
Earlier in the year this was in Iron Ore Futures getting wildly out of control, being the new home of Shanghai Exchange Traders. The Shanghai Exchange traders came straight off the tables at Macau so we all know what they’re doing. It’s worrying and the disease is spreading. Over the weekend I heard or read the term ‘Rebar’ about 90 or so times. I pay attention to patterns, always have, ever since I was little. So what’s all this Rebar chat?
A Rebar future is a contract for 10 tons of reinforced steel used as rods in concrete. Simply put, more steel rods needed in China = more concrete to be ‘built’ as buildings = everything’s great. Front month Rebar is up ~52% YTD and ~23% MTD. Speculators, much?
Usually I shudder when people blame speculators for the increasing price of an asset because it’s a cheap shot by politicians which doesn’t explain true supply/demand in markets. It also ignores the fact that futures contracts actually help stabilise the price of a commodity when used by actual buyers or sellers to lock in the price of a purchase or sale.
However I really don’t think we’re in a true market based on these two stats off various corners of the market:
“Contracts on more than 223 million metric tons of rebar were traded on Thursday (21st), more than China’s full-year steel rebar production” Bloomberg here
“Last few days volume of IO futures about 2 thirds of IO Chinese imports over last 12 months. Nearly 4x average volume in 2015” Chris Weston at IG Markets
“So what? I don’t buy barrels of oil”
The above quote was what came back to me from my darling wife a year ago when I told her the price of WTI oil was at $35. It was a subtle dig that we often talk in jibberish and if you don’t relate it to what’s in your shopping trolly then what’s the point? She has a way about her that’s for sure.
Your Shopping Trolly
Deloitte’s analysis prior to the Budget hit wires this morning with predictions of an increased blowout (this year’s defecit expected at $41.7bn up from $37.9 last year)
Obvioiusly profit taxes are down (See BHP etc) so there’s less money to play with. However it will be interesting to note ScoMo’s comments next week regarding what on they’re basing expectations for Iron Ore prices. If they’re basing next year’s revenues on an obviously hyper-inflated and easily manipulated market that is currenlty trying to be cooled by Chinese Regulators then we’re headed for even more trouble next year. Their shopping trip will be, putting it bluntly, stuffed. So will yours.
But if polling predictions are anything to go by it might be someone else’s problem by then.
My dance card is full
The next few days and weeks are absulutely packed with Investor Days, Earenings results, production reports and AGMs. This is now the time when companies point to an ever increasing AUD to explain profit downgrades and/or negative forward guidance. First thing you should check on a new investment is whether they are detrimented by an increasing AUD, then check when they next have a presentation to investors. If they’re reporting something in 2 days, maybe just hold off until you hear their news.
To note in the leadup to bank earnings announcements next week with the following historical yields based on Tuesday’s opening prices:
WBC earnings result Monday 2nd May- Hist.Div Yield 5.92%
ANZ earnings result Tuesday 3rd May- Hist.Div Yield 7.43%
NAB earnings result Thursday 5th May- Hist.Div Yield 7.16%
MQG earnings result Friday 6th May- Hist.Div Yield 5.40%
All go ex dividend around the middle of May and all except Macquarie Bank are fully franked. Something to think about. Something else to think about is that the chat around the traps is that the banks will inevitably have to cut these dividends. Whether this happens now or later should be kept in mind when making your investment decisions.
The trade?
Funnily enough the way the market feels at the moment is to buy up the banks in the leadup to dividend, let everything cool down for the end of May/June and then pile back in to something else when dividends hit bank accounts in early July.
Stay safe and all the best,
James
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Very interesting James. With regards your mention of the banks will also be interesting to see what impact reduced loan growth has on ‘revenues’ (for lack of a better word. And what impact rising funding costs have on their net interest margins.
Thanks David I think we’re heading into some major times of change for our banks. The disruption to top and bottom lines will be one thing, now it looks like a breakup of their planning divisions will come next.
Seems I put the kiss of death on them this week. That CPI data took me a few tries to comprehend. Should be an interesting few weeks.