Dear Reader, Aussie stocks bounced strongly yesterday. The ASX 200 finished up nearly 1%. And overnight, US stocks had another good session, rising around 1% on — what else — hopes of additional stimulus! That should translate into another day of green for our local market. How far could this rally go? Well, at a guess, I wouldn’t be surprised to see the market head back towards the 50-day moving average, which is the blue line in the chart below. Given the market is still technically in a bullish upward trend, there are plenty of traders and trading machines that will stay with that trend until it changes definitively. The fact that the market found support at the 200-day moving average (the red line) is a positive for the bulls. The other point to note is that the recent big corrections in the market resulted in widespread selling. The chart below shows the ‘advance-decline’ line for the ASX. It’s a messy looking chart. But it’s actually pretty straightforward to read. Those spike lows you see in August represent net daily declines on the ASX of around 900 stocks. This is an extreme reading. It suggests the market was very ‘oversold’ following both the early August sell-off, and last week’s plunge. Unless the market is extremely weak (suffering from poor fundamentals and poor investor sentiment), you nearly always see a bounce from such oversold levels. So I would expect this bounce to continue to relieve stocks of their oversold condition. But then it’s a case of ‘then what’. ..............................Advertisement.............................. An Australian Publishing Exclusive Zero Hour: Turn the Greatest Political and Financial Upheaval in Modern History to Your Advantage By renowned economic futurist Harry S Dent There are plenty of people — a growing chorus actually, who are now convinced the nine- year bull market in stocks is ending. And a bear market is coming. But virtually NO ONE sees what’s REALLY coming… According to a shocking new book by Harry Dent, there WILL be blood in the streets...in America AND Australia… That sounds like hyperbole. But it quite possibly isn’t… Which is why you need to click here and read this book as soon as possible. | .......................................................................... When in doubt, always look to the fundamental driver of markets: company earnings. And on that front, the trend is not your friend. Expectations for US corporate earnings have been declining steadily this year. The Wall Street Journal reports: ‘Investors counting on a corporate earnings rebound in the second half of the year are risking disappointment. ‘Wall Street analysts have cut their third-quarter profit estimates in recent weeks, painting a bleak picture for investors already grappling with a simmering trade war, pockets of economic weakness and ominous signs from the bond market. ‘Despite this week’s partial reprieve from the Trump administration, the latest round of tariffs on Chinese imports compound the problems already facing many companies and threaten to stifle their profit margins. Especially vulnerable are manufacturers, miners and retailers. ‘At best, earnings across the companies in the S&P 500 will grow 1.5% this year, FactSet projects, far short of estimates for growth of more than 6% that analysts initially forecast in January. Worse, a few analysts predict earnings could end up contracting for 2019 as a whole.’ Plummeting bond yields and an accommodating Fed have held the US market up this year. But if a slowing economy eventually hurts company earnings (and it will) the market will continue to sell off. That’s what I’m expecting, anyway. That is, a relief rally, then more selling. In Australia, I think the resources sector will lead the selling. The iron ore boom is over, and the big companies exposed to this, like Rio Tinto, are seeing their share prices roll over. Confirming this growing bearishness towards the resource sector, yesterday saw the broader ASX 300 Metals and Mining Index actually decline while the rest of the market rallied. That’s a bit of a worry. Oil prices are now trending down after peaking in October 2018. And that other economic bellwether, copper, recently traded at its lowest level since mid-2017. Copper’s chart (below) looks weak. I wouldn’t be surprised to see further significant falls in the months ahead. On the bullish side of the coin, you have interest rate/property sensitive sectors doing better. Yesterday, Lendlease Group [ASX:LLC] reported FY2019 earnings. The company reported a 41% fall in profits year-on-year, but the stock price jumped nearly 11% on the expectation that the worst is over. The company is also looking to offload its troubled engineering business. It reported a $337 million loss in FY19. The market is therefore beginning to price LLC as a standalone property development company with a pipeline of around $100 billion. With interest rates falling and set to stay low all around the world, companies like LLC have a better earnings profile right now than more economically sensitive stocks like resources. In other words, you can still make money in this market, but it won’t be as easy as it has been in recent years. For now, I’d suggest avoiding the resource sector in general. As trade war pressure continues to hurt China, it will have an effect on bulk and industrial commodities. The precious metals, on the other hand, look very strong here. Having said that, gold stocks are taking a much needed breather, after a very strong run. The gold stocks I recommended in this report have done well so far, but I expect further gains following a period of consolidation. As such, in my view, this is a good time to add on any weakness. The gold bull market is only just getting started… Regards, | Greg Canavan, Editor, The Rum Rebellion |
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How the World Reaches Peak Weirdness By Bill Bonner Every week, we reach new heights of weirdness: …the worldwide total of debt trading at negative interest rates rose to $17 trillion… …nearly 15% of S&P 500 companies no longer earn enough money to even cover the interest on their loans… …the yield on US 30-year bonds fell below 2% — lower than the yield on 30-day treasury bills… …and Danish banks are offering fixed-rate mortgages at zero interest over 20 years. Thanks to negative rates, you can now take out a fixed-rate zero-interest mortgage for 20 years. You borrow the money. You buy the house. You sell the house 20 years later…and you give back the money. You would have enjoyed two decades of free housing. Normal weirdness But the human mind is nothing if not gullible and credulous. The weirder things get, the more people struggle to think they aren’t weird at all. Joe Weisenthal argues in Bloomberg that negative rates are perfectly normal: ‘If you want to hold gold and watches and sentimental things at a bank, you pay to rent a safe deposit box. If you want to hold oil or grain to use it or sell it next year, you can pay for storage in a tank or some other facility. And if there’s a surge in the supply of oil or a bumper crop of grain, and storage capacity is scarce, then you can expect to pay even more for warehousing capacity.’ Lincoln said you can’t fool all the people all of the time…but you can come damned close. There is a ‘glut’ of savings, Ben Bernanke explained. That is why interest rates are so low, he said, and it is also why consumer and business demand is so weak. Nobody wants to spend money; they want to save it. This narrative never squared with anything in the real world, where consumers struggled to make ends meet…and savings rates fell from 10% of national income in the last century to just 2.5% today. Meanwhile, debt levels — anti-savings — soared. In just the last 10 years, total US debt, public and private, rose 40%…or by about $20 trillion. And why would consumers borrow from credit cards at 15% if they had abundant savings earning only 2%? Why would students borrow at 6% to pay their tuition? Why would businesses borrow at 4% to buy their own stock? And how come world debt would rise to $250 trillion while everyone was supposedly stashing cash at record rates? Patriotic imbecility The story didn’t add up. But the battle against evil savings continues. And in the spirit of patriotic imbecility, we do our part…suggesting ways for businesses to ramp up borrowing, spending, and profits. We proposed, for example, that corporations simply give away their products — thereby getting market share much more rapidly. Since many companies — especially in the internet space — are judged on customer growth rather than sales or profits, this would surely be a winning strategy. This was, of course, a joke. But it’s looking more and more like prophecy. Banks used to give customers free toaster ovens for opening up new accounts. Now, at least in Denmark, they give them free houses. Or how about office space? WeWork has a twist on the same idea. Its financial disclosures show that the company loses more than $5,000 on each customer, providing services far beyond what they are willing to pay for. And why not? If it makes sense to lend money below zero, maybe negative pricing on what money buys makes sense too… And here we offer the company even more lunatic advice: It would do better to rent the space to itself. Then, it could turn down the heat, cut costs, and show a profit! Too much money Here’s Joe Weisenthal again, explaining why it all makes sense: ‘…there’s lots of money out there and a limited capacity to store it all. So increasingly, savers are going to have to pay for money storage services. […] whether it’s fees for oil tanks, safe deposit boxes, security guards, insurance, or wealth managers, there’s nothing unnatural about being forced to pay to preserve your wealth.’ Who is this guy, we wondered? Is he allowed out in public? A naif? A mental defective? If you want someone to store your Corvette, you will have to pay him for it. The warehouse renders you a service. You pay. But if you lend someone your Corvette, for him to use, it would make no sense at all for you to pay him. He should pay you. Likewise, you should pay someone to store your money. But if someone wants to use your money — such as when you deposit money in a bank or buy a corporate bond — the user should clearly pay, not the lender. There is a difference between storing and lending. In a capitalist economy, heirlooms are stored, but capital is lent out…so that it can be fructified by entrepreneurs and businesses. The lender knows he may never see his money again; he deserves to be compensated for the risk. More to come… Regards, | Bill Bonner, For The Rum Rebellion |
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