Dumped, The Midterms, The Risks of Oz, Growing not shrinking, and more…

Last Night’s Markets
Wall Street Dumped
The Midterms
The Risks of Oz
Growing, not shrinking
Seniors Payment
Bank Results
BHP’s Runaway Train
Research and Diversions
Facebook Live
Next Week
Last Week


Last Night’s Markets


Wall Street Dumped

It was a tough session on the US market last night, with the Dow Jones ending one of the best weeks for the year by falling more than 200 points.

It seems to have been mainly caused by a combination of high inflation and the falling oil price, which you might think was a bit of a contradiction, but not so. Let me explain.

The US producer price index rose 0.6% in October versus expectations of 0.2%. That was a day after the Fed basically announced that rates would go up next month (while leaving them where they are this week).

The futures market is now giving a 34% chance on four rates hikes next year (to a 3% Fed funds rate), up from 3% in early August, which tells you that the market thinks the Fed is not taking much notice of the stock market movements.

That is, there’s not much of a “Powell Put” – which is where the Fed rescues investors with a rate cut if there’s a crash. There was definitely a Greenspan/Bernanke/Yellen Put, reinforced by a succession of Fed statements mentioning the health of the financial markets.

A view has now taken hold that the Powell Put is at a lower strike price than theirs and that two 10%+ corrections this year haven’t caused any wavering in the intention to normalise rates next year.

Meanwhile, oil has entered a bear market, falling another 1.1% last night to be down more than 20% since the start of October. Far from alleviating concerns about US inflation, this has raised concerns about the health of the global economy, although it’s mainly due increasing supply, with producers in the US and Russia going flat and a lot of countries now being let off the Iran sanctions.

Chinese auto sales fell (-12%) for the fourth month in a row and producer prices there were below expectations.

So all in all … strong US economy and more rate hikes there; weak economy everywhere else, and especially China.

And the US market rallied this week not because of the US midterm elections result, which was exactly as predicted, and certainly not because Trump expected to work with the Democrats to push through some infrastructure spending (as some are reporting) but because the market is still recovering from its oversold conditions after the October correction.

Last night reality bit after a 272-word Fed statement that was not only brief, but didn’t mince its few words and reinforced the expectation of December hike plus three, maybe four, next year. The predictions of more volatility are coming true and the Vix shorters are waking up screaming.


The Midterms

In the end, it was an utterly normal midterm Congressional election, an anticlimax even, despite the near-hysterical coverage.

Since the end of World War Two, the party of the sitting President has lost an average of 26 House of Reps seats in the first midterm election after the Presidential election. In this one, the Republicans lost 28.

In 2010, Obama’s Democrats lost 63, andin 1994 Bill Clinton’s Democrats lost 54. In 1982, the Republicans lost 26 two years after Ronald Reagan became President. So, on that basis, Trump did better than both Clinton and Obama, although they went on to win a second term.

The Democrats “took the House” but that was no surprise, and nor was the fact that the Republicans retained control of the Senate.

Both sides are claiming victory, and they’re probably both right. It was not the repudiation of Trump that many were hoping for, but the Democrats’ newly won control of the House means they have the power to subpoena disclosures, which could be a big deal – depends how they play it.

US stocks jumped 2% on the day because markets usually do slightly better with gridlock in Washington. The main reason for that seems to be that fewer new regulations get passed if both sides have to agree.

Although Trump’s company tax cut was the main win for corporate America under his Administration, this chart suggests a close second:

Markets are probably even a bit relieved that the Republicans didn’t keep control of both houses, since the next thing they want to do is cut individual income taxes, and that would likely be inflationary and push up interest rates.

So as I suggested last week, the midterms were no big deal and things still look generally positive for equity markets and US growth.

Trade war remains a risk, but that is unaffected by these elections, and it seems to me the big story from here is going to be Trump’s efforts to thwart judicial accountability, starting with his sacking of Attorney General Jeff Sessions.

He wouldn’t have done that if he wasn’t preparing to do something about the Mueller investigation. Whether a Democrat-controlled House can thwart his thwarting, as it were, remains to be seen and is a bit beyond the limits of my (limited) knowledge of US politics and law.

But Trump’s 30 rallies in 30 days leading up to the November 6 election, not to mention the unprecedented removal of Jim Acosta, CNN’s chief White House correspondent’s press pass, tells you he won’t go down without a very big fight.


The Risks of Oz

The main risks for Australian investors are home-grown, and can be simply stated: house prices are falling and there is record high household leverage.

I’m not suggesting we’re heading for a big increase in defaults and a domestic financial crisis – that would only happen if there was a big increase in unemployment and an income recession caused by a collapse on China’s economy.

Failing that, people tend to keep up their repayments even if their houses are worth less than the mortgage. One caveat is that a lot of property investors are moving from interest-only (IO) to principal and interest (P&I), but that’s more likely to curtail their spending on other things than lead to default, since they would also lose the house they live in.

But if Shane Oliver is right and house prices in Sydney and Melbourne fall 20%, and even if Tim Lawless is correct and it’s 15%, it seems likely that the negative wealth effect (on consumer spending) will be greater than usual, for the simple reason that the fall in prices would be greater than usual and households are more leveraged than ever before. That wealth effect will be exacerbated to some extent by the shift from IO to P&I.

So to be clear: the key risk of Oz is a collapse in consumer spending caused by an outsized fall in house prices combined with Australia’s world-record household debt.

Against that is one big offsetting factor: infrastructure spending.

The mining investment bust has now finished busting and at same time population-related investment in infrastructure is taking off. Gerard Minack produced a good chart of this during the week (as he usually does):

The result has been a sort of “whiplash” rebound in capital investment as the mining drag ends and infrastructure picks up:

Separate to this, GDP growth will be supported by LNG exports, although this won’t produce much employment or domestic consumer spending.

But Gerard says that without those offsets, it would be right to expect a recession in Australia.

Markets have been pricing in the risks, without pricing in a recession at this stage. The AUD is down 11% since the Australia Day peak and the ASX200 index has underperformed the S&P 500 by 7% year to date.

There is probably more to come with both of those trades – falling A$ and ASX200 – confirmed by last Sunday’s “sell” from Percy Allan’s key MarketTiming signal.

The only thing to add is that as 2019 gets underway the RBA could start switching its bias from hike to cut – that is, it could start indicating that the next move is the cash rate is down, not up.

Whether a cut actually comes to pass will depend on the data, and in particular employment, but a softening of the “hawkish” bias would be a big event for the currency, and probably send it straight into the $0.60s against the USD.


Growing, not shrinking

In Thursday’s Facebook Q&A session, Dave made a reasonable request:

“Thanks for your Overview last Saturday. I note and I quote “Far better, I reckon, to go for companies that are doing the more conventional thing of growing to greatness rather than shrinking to it.

Can you give members a small list of companies in your opinion that are doing this job. I presume banks and Telstra are not in list.

Correct Dave, the banks and Telstra are not on the list, or any list of mine, for that matter.

But fair enough – it’s no good just saying what NOT to invest in. So here’s my list of growers, and please note: these are not specific buy recommendations from me, because I simply don’t know enough about them and most importantly whether they are good value at this price. But I do know they are decent companies trying to grow and where possible I have included a comment from a reputable analyst.

Probably best to start with a selection from my recent interviews.

 

Respiri

I interviewed the new CEO, Mario Gattino, this week and he’s getting ready to launch the product next year. I still like the business, although perhaps not quite as much as last year, when I interviewed Mario’s predecessor, and it needs to be tempered by the fact that it’s still pre-revenue and is almost out of cash.

Martin raised some questions about it in the Thursday Facebook Q&A, as follows: “Some question marks regarding Respiri – it appears that they are a single product company. Whilst you are concerned with their cash flow, I am concerned with their product – I simply don’t know anywhere near enough to recommend it. Then – its place in the market – there are many reliable, accurate flow meters available at a fraction of the cost. Google flow meters- $30 will get you a good one. Maybe theirs is a bit more high tech, but I believe could be inaccurate at low flow rates when there may not be enough air flow to create a wheezing sound – and this is when asthma is most dangerous. What about a technical review by an independent body – after all if the product is not all that good, and it is a single product company, the the future does not look bright – irrespective of their cash flow.”

I then spoke to Mario again and he reassured me that the device can pick up very faint sounds and that flow metres don’t work on kids under 12, which is his first target market.

Nearmap

I interviewed CEO Rob Newman for a second time on November 1.

RBC Capital Markets initiated coverage of Nearmap this week with the following comments:

“Best in Class Software, High Recurring Revenue, High Returns on Capital.

Australian Domination, worth ~$1.00/share. We forecast Australian subscription revenue of ~$50m in FY19 (~20% on pcp), assuming ~8,400 ending subscriptions at an average ~$6,500 revenue per subscription (ARPS). Our five year forecast is for Australia to generate +1.5x more sales, forecasting over $80m by 2023, (~15% CAGR). The Australian business alone is worth ~$1.00/share on our base case scenario.

US the Next Frontier, worth ~$1.10/share. The US market is 10x larger than Australia and is forecast to grow at higher growth rates. Although international markets have additional complexities, we are confident NEA can leverage its learnings in Australia and grow rapidly in the US. We forecast US subscription revenue of ~$20m in FY19 (+95% on pcp), assuming ~1,500 ending subscriptions at an average ~$16,500 ARPS. Our five year forecast is for the US to generate +3x more or generate over $75m revenue by 2023, (~50% CAGR). The US business, although at an earlier stage of market penetration, is worth ~$1.10/share on our base case scenario.

Material upside using DCF or SOTP. We initiate with a $2.10/share target price, noting that expansion into other geographies is not in our forecasts

 

NetComm Wireless

My interview with CEO Ken Sheridan was published on October 22. The key to this company’s growth is 5G mobile and fibre-to-the-curb NBN rollout.

The NBN has already decided to switch more than 400,000 homes to FTTC, rather than fibre to the node, and there is a strong chance that this will end up being a lot more – possibly millions.

Here’s Sheridan’s on what they sell: “We’re selling two things. We’re selling the black box, it’s called a distribution point unit, that sits in the pit, sometimes it will be up a telegraph pole, that takes the fibre in and takes the copper out.  Then we have another device that goes inside the person’s home that’s called an NCD, it’s as network connection device.”

NetComm is also selling fixed wireless devices which are becoming an increasingly important part of the NBN and all land-based networks, as well as the 5G mobile networks that everyone is getting excited about.

Here’s Sheridan on that: “In the urban environment though 5G as a signal in what they call millimetre waves, so this is above 20GHz. In that millimetre wave area the signal doesn’t go very far, maybe 200-300 metres, and it doesn’t penetrate anything. It wouldn’t go through paper, for example, it doesn’t go through windows, for example.  What it does provide is a huge amount of bandwidth so you can get a big data transfer rate, so you could get 10 gigabits per second and 4G is more like 100 going to 500 megabits per second, so quite an increase in speed.  It promises a lot and we’re working on how do you come up with a solution that overcomes the problems of this propagation and penetration, and deliver that in an urban environment.

“We have come up with a way that you can take an aerial, install it on the outside of a home or apartment block and do it yourself as a customer so you don’t need a professional installer to come around.  That is very attractive to the big telcos because every time you have to have a truck roll that costs you about $200 to $300.  If you can avoid that it is very helpful.”

Me: As long as you can get up on the roof?

“I’m not going to go into the specifics about what we’re doing, you’ve got to do it so it’s very safe.  You don’t have to go on the roof but we’re keeping that a bit close to our chest because it’s a competitive world out there and we’re going to showcase a solution in February, end of February 2019, at a big trade show called Mobile World Congress. That’s kind of our launch spot for the product.”

 

NextDC

This is the data centre builder and operator whose CEO, Craig Scroggie, I interviewed in September. It’s essentially high-growth real estate investment trust (REIT).

Here’s a little bit of what he said: “we are a digital infrastructure business and I tend to think about data centres just like the roads, rail and port of yesterday.  Where we are going tomorrow as a society is that we are extremely reliant on all of these digital technologies and those digital technologies, whether it’s ones we use at home like a Facebook for social media or Netflix for movie streaming right through to digital productivity tools in the workplace like Microsoft, or Amazon, or Google, those things are not changing.”

And here is a recent comment from Morgan Stanley analyst, James Bales:

“We see NXT as highgrowth and scalable, with strong earnings visibility, a growing track record, and leverage to a long-term structural driver – the growth in data generation and consumption. Add to the mix the established network effect and ability to invest in small increments within centres to manage risk, and we think NXT offers compelling long-term growth.”

The problem is that a lot of that growth is in the price. It has come back a fair bit since June, but still on a three-figure PE ratio with a market cap of $2.1 billion and James Bales forecasting cash flow for the current year (EBITDA, not profit) of $87 million, so you’re paying 24 times cash.

But this is definitely a high-growth stock, so perhaps that sort of multiple is justified.

Micro-X

One more recent interview before I get onto stocks that I haven’t spoken to lately. I’ve been a fan of its CEO Peter Rowland for a couple of years and really like the idea of the product – small, portable x-ray machines.

Rowland is still burning cash, but has a distribution deal with global hospital x-ray supplier, Carestream, and is now exploring other markets for the product, specifically bomb-detection.

Here’s Rowland on that subject:

“…We won a contract in the UK as part of a programme that they’ve got there called the Future of Airport Security Solutions and interestingly that reflects very much the thinking that we’ve experienced in the US because we’re very close to the Homeland Security and the transportation safety administration there.  Basically, there’s a growing realisation that the current security at airports is more of a deterrent than it is actually effective. There was an interesting piece of research that the TSA did two years ago where they got some of their own operatives to try and smuggle prohibited items onto airplanes and the good news is that only 92% of it got through and got onto the airplane. The idea that the current x-ray technology is effective at finding either explosives or weapons or knives is an illusion. There’s a push to try and do something very different. We won a contract for under a section of trying to find explosives hidden in electronic items, particularly things like hair dryers and computers.”

This is more a long-term prospect and clearly speculative, and like Respiri, a single-product business, so the product has to be good, but it does seem to be, and Carestream are keen to sell it.

Xero

The last time I spoke to CEO Rod Drury was May, and since then he’s been replaced by Steve Vamos, former MD of Microsoft Australia and director of Telstra, so that interview is no longer relevant.

But this company has achieved a market cap of $6 billion without making a profit, which is quite an achievement and makes it VERY EXPENSIVE on traditional valuation measures. It naturally copped a whack in the October correction but has since rallied about 10%.

The company has a lot of global growth in subscriptions still ahead of it, and Vamos is managing the business for cash flow break-even within existing cash balance, without further borrowings.

ResMed

Still a growth stock despite tripling in five years and now on a trailing PE of 50 times, and a prospective (2019) PE of 31.

The company is now building on it strengths and expanding beyond snoring solutions, and recently acquired a US software company, MatrixCare for US$750 million. The company provides long-term post-acute care business management software to US-based health organisations across four out-of-hospital segments; skilled nursing, life plan communities, senior living and private duty.

Credit Suisse analysts comment: “While the acquisition is separate from ResMed’s respiratory and sleep business, it further establishes its cloud-based connected care offering allowing healthcare providers to leverage data analytics to improve the quality of care, and it also expands the company’s Out-of-Hospital software as a service portfolio, having recently completed bought HealthCareFirst, a software platform for home healthcare providers, in July 2018. While few synergies are expected with RMD’s sleep business, the similarity of the MatrixCare and Brightree models provide the opportunity for economies of scale in the design of software solutions, and data analytics. There is also a longer-term opportunity to identify and refer patients in the long-term care settings who may likely suffer from OSA, COPD or another respiratory disease.”

Afterpay Touch

This is another company with a stratospheric valuation, but growing rapidly. It’s a bit like Xero, in my view, using Australia/NZ as a platform for a global subscription business.

The October correction brought its price back from $21 to below $14 now, so down by a third but it is still on a forward PE of above 300. Is that relevant? Probably not. It’s all about US expansion now, and on that score it’s moving quickly.

Here are some comments from an analyst at Bell Potter about a recent US sales update:

“We estimate that the U.S. sales for the September quarter was ~9% of the total, and we forecast it will finish FY19 with ~18% of total in the June quarter-19. This robust start in the U.S. market is ahead of our expectations, and shows broad growth with already 300,000 active users, with growth tracking around ~80,000 a month and accelerating. Our forecasts for the U.S. remain relatively subdued on a sales trajectory, however we remain cautious given the short-period of history provided, in addition to the limited data in the current update.

“Further, the company appears to be chasing growth, at lower margins than what is being experienced in the Aust. and as such we’ve accounted for this in our estimates. We continue to believe the APT share price will follow the customer and revenue growth, until greater scale is achieved.

U.S. Update Highlights

∙ Sales of A$115m YTD, which compares to the A$32.1m previously reported;

∙ US active clients up to over 300,000 as at 31 Oct 18, vs. 150,000 in Aug18;

∙ US Live Merchants up to over 900 vs. 400 Aug18, and

∙ Merchants signed and waiting to go live now at 1,300.”

Bell Potter’s target price is down a bit at $21.59 (which is ridiculously precise, I think, but anyway …)

That’s eight growers to start with, but obviously there are plenty more. I’ll keep discussing more in future Overviews.


Seniors Payment

Bev asked in Thursday’s Q&A whether the Commonwealth Seniors payment of $69 every three months qualifies as a pension under Labor’s proposed exemption for pensioners from the franking credit cash refunds ban.

I eventually heard back from Shadow Treasurer Chris Bowen’s office yesterday, and it looks like it doesn’t qualify – it’s not a pension.

Here’s the response:

“If the query related to the pensioner guarantee and the $68.90 a quarter payment. We think it is a closed payment for the energy supplement for CSHC card holders so not a qualifying payment for the guarantee.

“New CHSC card holders don’t even get the supplement. The payment turns on access to the seniors health card. As you know, there’s a much easier eligibility test for the card than compared to other payments.”


Bank Results

KPMG has published its usual analysis of the big four banks’ full year results. Here are the highlights:

  • The majors reported a cash profit after tax from continuing operations of $29.5 billion for the full year, down 5.5 percent (compared to 2017), driven by lower non-interest income and higher restructuring and regulatory costs.
  • The major banks recorded an average net interest margin of 200 basis points (cash basis), down 1 basis point compared to 2017, primarily due to mortgage and deposit re-pricing offsetting lower earnings on capital, market’s income and the impact of the Major Bank Levy.
  • The majors recorded net interest income growth (cash basis), increasing by 2.2 percent to $62.7 billion for the full year; while non-interest income (cash basis) decreased by 3.7 percent to $22.4 billion, due to asset disposals, the removal of certain fees (e.g. ATMs), customer redress and other regulatory changes (e.g. inter-change fees). Housing credit recorded credit growth in the full year of 3.3 percent, compared to non-housing credit which grew by 2.9 percent.
  • The major banks’ aggregate charge for bad and doubtful debts decreased by $702 million to $3.3 billion (statutory basis) for the full year (down 17.7 percent on 2017), with lower individual credit impairment charges, partly offset by an increase in collective provisions for some of the major banks. 
  • The majors’ capital position continued to rise, with their average Common Equity Tier 1 (CET1) capital ratio rising by 25 basis points over the full year to an average of 10.6 percent of risk-weighted assets (RWAs), reflecting the impact of increased regulatory capital requirements.
  • Slowing revenue growth, rising operating expenses and regulatory capital requirements continue to compress industry returns. The majors’ returns on equity (ROE) decreased by 134 basis points to an average ROE of 12.5 percent for the full year.
  • The average cost-to-income ratio increased by 356 basis points across the majors to 46.6 percent, attributed to meeting rising regulatory compliance, legal and remediation requirements, as well as restructuring.

And here’s a comment on the banks from Citi’s bank analyst, Brendan Sproules that I thought was worth passing on:

“Underlying revenue growth slowed, but new pockets of strength arose – Weaker Retail Banking revenue growth as well as softer Markets and Treasury were anticipated. However, business and institutional banking (ex. Markets) improved as stronger lending growth and NIM improvements were evident.

However, cost management is now emerging as the key differentiator – With revenues expected to remain subdued for the foreseeable future, the Major Banks are set to differentiate their earnings trajectory through a sharper focus on costs.

Large scale restructuring is about the timing of the emerging benefits – ANZ & NAB are in the midst of large scale, multi-year restructuring programs. Both WBC & CBA are expected to take further steps in FY19. The shareholder benefits of these programs can vary quite significantly over the life of program.

….with NAB moving into the ‘sweet spot’ in FY19 – While not without execution risks, we see NAB entering the restructuring sweet spot in FY19 and consequently, we are forecasting the strongest core profit growth. ANZ is coming towards the end of its program with further benefits are expected in FY19, but they are expected to slow thereafter.

We see much more attractive valuations on offer for investors with forecast earnings improvements (albeit it small) across the Major Banks. Consequently, we are now more positive the sector. Our Major Bank order of preference (most to least) is NAB (Buy), ANZ (Buy), WBC (Buy), and CBA (Neutral).”


BHP’s runaway train

Prof Cara MacNish

(Cara has done it again – a nice piece for TCI subscribers!)

It couldn’t happen. And yet somehow it did.

The story so far, we are led to believe, is like a 2001 Space Odyssey set in the Pilbara. A 2-3km long, fully loaded, 268 carriage ore train – let’s call it HAL – was steaming across the outback on its 426km journey from Newman to Port Hedland. The train stopped at Hesta Siding and, perhaps prompted by a sensor reading in the cab, the driver – let’s call him Dave – got out to check on a wagon.

HAL then took off without Dave. We’re not sure yet whether Dave demanded that HAL open the cab door, and HAL said “I’m sorry Dave. I’m afraid I can’t do that.” 

What we do know is that any attempts by the control centre in Perth to stop the train were in vain as HAL motored through the desert scrub at around 110km/h to complete its mission. In desperation, the control centre destructively derailed the train by switching the track at Turner Siding, about 120km from the built up area of Port Headland.

Pictures of the mangled wreckage along the 1.5km of destroyed track have since been widely circulated. BHP initially played down the incident saying they would draw upon stockpiles of ore at Port Headland to maintain shipping rates while the track was cleared and repaired. Rail operations were expected to resume within a week, and the company reportedly didn’t inform the Australian Stock Exchange as it was not expected to have a material impact on finances.

More recent reports are that the stockpiles are not expected to cover the interruption in operations and that shipping contracts will be affected, with estimates that the costs could run into hundreds of millions in clean up and lost revenues.

BHP has yet to make an official news release on what caused the incident, with a spokeswoman saying they cannot speculate on the investigation. The Australian Transport Safety Bureau is investigating the incident and expects to report in the second quarter of 2019. 

CFMEU Mining and Energy Western Australia Secretary Greg Busson has stated that the events “are a reminder that automation should be approached with caution” and “until all system issues are ironed out, we should not be moving to driverless trains – the risks are too great”.

So, is this Arthur C Clarke and Stanley Kubrick’s dystopian future, or a yet to be revealed tale of human error?

Let’s start with a couple of pieces of background. First, it is inconceivable that the system would be designed without failsafes built it – ‘dead man switches’ (physical or software), remote overrides, transmitted track signalling. It is difficult to envisage a single point of failure that could cause this sequence of events. This is important because the probabilities of independent failures are multiplicative. For example, if each failure had a probability of one in a thousand, then two independent events occurring has a probability of one in a million.

Secondly we should clarify what we mean by automation, as the terms ‘automated’ and ‘driverless’ tend to be used (including by BHP) to mean different things in different contexts. 

There are three distinct, relevant levels of automation: 

  1. (fully) autonomous, where the train makes all the ‘decisions’ (a full ‘AI’ solution)
  2. semi-autonomous, where humans (locally or remotely) are in overall control but the train has capability for run-of-the-mill decisions, much like cruise control or autopilot
  3. remote control, where the train is driven by a human from a remote location, such as a control centre in Perth (requiring no AI)

The first case – an autonomous train – could almost (track signalling aside) explain why the train resumed operation, and why it didn’t stop itself. Putting to one side HAL’s self-awareness, the train would be carrying out its goal of delivering the ore to Port Hedland, and a fully autonomous driverless train would not require a ‘dead man’s switch’. This scenario might also give us some comfort that the train would have slowed down before it got to Port Hedland and parked obligingly at the port. If so, it seems BHP were not willing to take that risk.

BHP has not claimed, however, that it is running autonomous trains. Its stated pathway to automation began with new 4G communications systems and automated track signalling to reduce congestion. Their second step is said to be automated logistics in the port’s rail yards, with driverless long haul trains potentially coming later.

And were it trialling autonomous trains it seems inconceivable that there would not be a remote override. This means the train would have had to incorrectly start without waiting for its ‘driver’, followed by a communications failure or system lockout that prevented it from being stopped remotely. 

In a semi-autonomous or remote-controlled system, the train would normally be started by a local or remote human operator. If we assume a failure in automation it would require an unlikely fault that starts the train and drives it to operating speed, a communications or software failure that prevents it being stopped remotely or by signalling, and a failure of any built-in dead man’s switch, whether that registers local input from the driver, or remote input from the control centre. 

We should, of course, be cautious about speculation, but it is too easy to point the finger at driverless trains. BHP needs to reveal more, and not wait for the second quarter of 2019. With a 268 car train hurtling towards Port Hedland at over 100 km/h, there are not only financial implications but also a public interest in understanding as soon as possible what went wrong.


Research and Diversions

Research

The US midterm election night defied a single takeaway.

Nevertheless, here are twenty-five election highlights from NBC Newsseven takeaways from Reutersten midterm takeaways from WaPo, and four key takeaways from the NYT. (Maybe the big winner of the night was the word takeaways…)

And here’s a blow-by-blow account of Trump’s amazing post-election press conference.

The combined results reconfirmed the deep lines of division etched in Trump’s narrow 2016 victory over Hillary Clinton. The evening amounted to a simultaneous repudiation and reaffirmation of Trump from two very different Americas, and underscored the fundamental demographic, cultural, and economic changes reshaping America and its politics.

There will now be a massive check on this presidency that brings with it subpoena powers, the authority to compel the Trump administration to produce evidence, and the power to call witnesses to testify. This is precisely the outcome the White House was most dreading.

Brian Kemp ran for Governor of Georgia while also being the guy who oversees elections in that state. Under him, “Georgia purged more than 1.5 million voters from the rolls, eliminating 10.6 percent of voters from the state’s registered electorate from 2016 to 2018 alone. The state shut down 214 polling places, the bulk of them in minority and poor neighborhoods. From 2013 to 2016 it blocked the registration of nearly 35,000 Georgians, including newly naturalized citizens. If the Georgia governor’s race had taken place in another country, the State Department would have questioned its legitimacy.”

Daryl Wilson (of Affluence Funds) presents his form guide to Listed Investment Companies, based on the Melbourne Cup. It’s a good list.

Francis Fukuyama, who published The End Of History at the age of 37, has since seen his imagined triumph of Western liberalism outflanked by authoritarianism and populism, including in his own home country of America, with the election of Donald Trump. “As a citizen, I am horrified. As a political scientist, I am delighted.” 

Beyond Russia: Understanding the New Trump Campaign Collusion Story. This is a good primer on the pre-election “Grand Bargain” that has expanded Mueller’s probe from Trump-Russia collusion to Trump-Russia-UAE-Saudi Arabia-Qatar-Israel collusion.

All The President’s Lies: Donald Trump is spreading misinformation at a dizzying clip—even for him.

Trump says he wants to unite the country – eventually. In the meantime – “we’re driving them crazy – loco!” “And by the way, is there anything like a Trump rally?”

11 charts that take the temperature of Trump’s America.

The rise of floating solar. The World Bank expects that, like traditional solar 18 years ago, we’re likely to see an explosion of floating solar over the next two decades. That’s because floating solar is not simply “solar panels on water.”

Apple’s business model is changing. It used to be an inventor. Now it’s mainly a landlord.

Excellent piece by Katherine Murphy about climate change policy: Instead of ‘fair dinkum’ power, how about some ‘fair dinkum’ action?

Grattan Institute: State governments can transform Australia’s energy policy from major fail to reliable success. Here’s how.

A research paper published by Nature, into the energy costs of mining cryptocurrencies, finds, among other things, that Bitcoins are three times as expensive to mine than gold.

Der Spiegel has published the first of a four-part series on the Manchester City Football Club’s rule-bending, and breaking behaviour, led by its owner, the Sheik of Abu Dhabi.

Alex Pollack reflects on the October correction: “Global investors threw out some of the best companies in the market – companies which are set to play a significant role in the way business runs for decades”.

In Amazon Go: I was dubious at best when I first heard about Amazon Go, and not just about the technology. The idea of walking into a store, taking an item or several off the shelves and strolling right back out again boggled my mind. Then: “Is this what it feels like to shop when you’re not black?” 

Why Trump will win in 2020. This is an audio conversation with Anthony Scaramucci – the “Mooch” – who used to work for him (for 10 or 11 days).

Horrifying piece about BHP’s Samarco mine disaster in Brazil by Scott Ludlum, the former Greens senator.

Slightly heavier than a toothpick, the first wireless insect-size robot takes flight.

Terrific, depressing piece: Senate Estimates confirmed last month that BG Group’s gas bonanza has delivered diddly-squat to Australia in tax – despite claims it would contribute “more than $1 billion”. 

This table puts house prices into perspective:

An introduction to SOLID, Tim Berners-Lee’s new, re-decentralized Web. Redecentralize? Back in the day, the vision for the web was a decentralized, collaborative read-write space. The first browser (called WorldWideWeb) was also an editor. However, as it progressed, the design of web applications began to centralize for a variety of reasons. User data became the source of power and income for Internet companies.

Diversions

Wonderful piece about Lee Child and his character, Jack Reacher. “(Child) has an industrial caffeine habit, and he smokes like a chimney. Heavy schedule, heavy fuel.” And… “Physically, Reacher is immensely skilled and powerful; mentally, he’s a kind of rogue vacancy, a fugue on legs, a field of glittering blank attention in which reality discovers itself, detail by detail.”

I did an interview the other day with an online magazine in Perth called Have A Go (“Lifestyle Options for the Mature West Australian”). It’s on page 3.

The future of photography is computational, not optical. This is a massive shift, and one that every company that makes or uses cameras is currently grappling with. Glass isn’t getting any clearer, and our vision isn’t getting any more acute. The way light moves through our devices and eyeballs isn’t likely to change much. What devices do with that light, however, is changing at an incredible rate.”

What Isaac Asimov taught us about predicting the future.

Julian Burnside: The modern relevance of the November 5 Gunpowder Plot.

Interesting (long) yarn about the double murder of Canadian billionaire couple, Barry and Honey Sherman.

This is quite useful: a primer (pardon the pun) on paint jargon.

Highlights from a wonderful conversation in 1958 between Ian Fleming and Raymond Chandler. For example:

Fleming: I don’t know if you do, but I find it extremely difficult to write about villains. Villains are extremely difficult people to put my finger on. You can often find heroes wandering around life. You meet them and come across them as well as plenty of heroines of course. But a really good solid villain is a very difficult person to build up, I think.

Chandler: In my own mind I don’t think I ever think anyone is a villain.”

This rendition of America’s national anthem by one of the footballers before a (gridiron) football match went viral. It’s quite something.

This is amazing: this woman is the best shot I have ever seen with what I used to call a shanghai and they call “catapulting” on this twitter video.

The de-civilising process. “In the 16th and 17th centuries people behaved like barbarians. They delighted in public hangings and torture. They stank to high heaven. Samuel Pepys defecated in a chimney. It took centuries of painstaking effort – sermons, etiquette manuals, stern lectures – to convert our forebears into civilised human beings. On a train recently I was gripped by a terrible realisation: everything recent generations worked so hard to achieve is now going into reverse.”

Half-naked Florida man caught on surveillance battling with a crocodile. The croc won.

Joni Mitchell turned 75 on Wednesday – I have loved her for 45 years, because of songs like these:

Hejira

The Last Time I Saw Richard

Blonde in the Bleachers

The Same Situation

And so many more…

Oh and how could I leave out A Case of You? (She wrote this about Leonard Cohen).

Happy Birthday Joni. She hasn’t been well lately, after a brain aneurysm in 2015, although in June she went to a James Taylor concert (he was one of her – many – great loves, although I think he loved her more than she loved him, as happened so often with her).

Scott Morrison’s three signatures in three years… culminating, of course, in Scomo.


Facebook Live

If you missed #AskAlan on our Facebook group this week (or if you don’t have access to Facebook) you can catch up here. And we’ve just given the Facebook Livestream its own page where you can also opt to just listen to the questions and answers.

If you’re not on Facebook and would like to #AskAlan a question, please email it to hello@theconstantinvestor.com then keep an eye out for the Facebook Live video in next week’s Overview.


Next Week

By Craig James, Chief Economist, CommSec

Australia: Job market in spotlight

The job market dominates proceedings in the coming week. The wage price index is released on Wednesday while the October monthly data on the labour force – employment and unemployment – is issued on Thursday.

  • The week kicks off on Monday in Australia when the Reserve Bank releases September data on credit and debit card lending. Unfortunately there have been revisions to data, making it more difficult to uncover trends. But the evidence still seems to show that credit and debit cards are being actively used although account holders are keen to pay off outstanding credit card debt by the due date.
  • On Tuesday, the National Australia Bank releases the October business survey. In September the index of business confidence lifted by 6.2 points while business conditions rose just under 1 point to a 3-month high. Notably the employment index posted a solid gain in the month.
  • The regular weekly reading on consumer confidence is published by ANZ and Roy Morgan also on Tuesday. The key issues at present are petrol and home prices together with the volatility on the sharemarket. Overall, Aussie consumers seem to be weathering the choppy conditions.
  • Also released on Tuesday is the broader array of lending figures. The data on home loans is provided, but together with business, lease and personal loans.
  • In August, total new lending commitments (housing, personal, commercial and lease finance) fell by 1.5 per cent to $69.3 billion. And commitments were down by 4.2 per cent on the year. In trend terms, lending rose for the fourth month, up by 0.4 per cent.
  • Of note, loans to buy new or used cars fell to 25-month lows in rolling annual terms in August.
  • On Wednesday, the main gauge of wages in Australia – the wage price index – is released. In the June quarter, wages rose by 0.6 per cent, lifting the annual rate from 2.0 per cent to 2.1 per cent. And including bonuses, wages were up 2.5 per cent on the year.
  • Overall we expect the tighter job market to show up in the September quarter with wages up 0.7 per cent in the quarter to stand 2.4 per cent higher for the year.
  • Also on Wednesday Westpac and the Melbourne Institute release the November monthly reading on consumer confidence. This indicator is more of a check on the weekly consumer confidence survey.
  • On Thursday, the October labour force data is released by the Australian Bureau of Statistics (ABS). In September, jobs rose by just 5,600 but the unemployment rate hit a 6-year low of 5.0 per cent. Based on an array of solid survey evidence, we tip a 25,000 lift in jobs in October, leaving the jobless rate unchanged at 5.0 per cent.
  • Also on Thursday Reserve Bank Deputy Governor Guy Debelle delivers a speech.
  • On Friday the ABS releases the State Accounts – data that reveals how fast the state and territory economies grew over the past financial year.

Activity data in focus in the US and China

In the US and China in the coming week, the ‘top shelf’ indicators of retail sales and industrial production are released.

  • The week kicks off on Monday in China, with the Association of Automobile Manufacturers scheduled to release October sales figures. Vehicle sales are down almost 12 per cent on a year ago.
  • And on Tuesday in China, the scheduled data are the lending and money supply indicators for October. Loans are growing at a solid 13.2 per cent annual rate.
  • In the US, the week begins on Tuesday. The National Federation of Independent Business releases the Small Business Optimism index. In September the index fell from a record high of 108.8 to 107.9. The usual weekly data on chain store sales is also released on Tuesday with the October monthly federal budget figures.
  • Also on Wednesday in the US, the October inflation data – the Consumer Price Index – will be issued. Inflation is creeping, not leaping higher. In fact the annual core rate (excludes food and energy) may have remained at 2.2 per cent in the month.
  • On Wednesday in China and on Thursday in the US, retail sales data for October will be issued. There is also additional data in China in the shape of industrial production and investment figures. In the US, retail sales is growing at a 4.7 per cent annual rate. In China, sales growth is almost double the US with sales up 9.2 per cent over the past year.
  • Also on Thursday in the US is data on export and import prices and two key manufacturing surveys – the Empire State and Philadelphia Federal Reserve surveys. The usual weekly data on claims for unemployment insurance is also expected.
  • Data on home prices is slated for release in China on Thursday.
  • On Friday in the US, data on industrial production is issued together with capital flows data. Economists expect a 0.2 per cent lift in October production.

Last Week

By Shane Oliver, Head of Investment Strategy and Chief Economist, AMP Capital.

Investment markets and key developments over the past week

  • Share markets mostly rose over the last week, helped in particular by a favourable reaction to the US midterm elections. Chinese shares remained under pressure though. Bond yields continued to rise reflecting the “risk on” tone from investors and as the Fed showed no signs of pausing its rate hikes. Commodity prices were mixed though with oil falling further and metal prices down but the iron ore price continuing its ascent. While the $US rose slightly the $A got a boost from the RBA upgrading its growth forecasts.
  • The big surprise from the US midterm election was that there was no surprise! Unlike with Brexit and Trump’s election in 2016 the polls and betting markets were spot on! So why did shares rally? There are basically three reasons. First, while the Democrats now control the House it wasn’t the “blue wave” some had talked about as the GOP also increased its Senate majority. Which means while another round of tax cuts is unlikely (which may be a good thing as it would only mean more pressure on US interest rates) the Democrats won’t be able to wind back Trump’s first round of tax cuts and it won’t be able to reregulate the US economy either. Similarly, while the Democrats will likely harass Trump with investigative committees and maybe even impeachment proceedings they won’t get the 67 Senate votes necessary to remove him from office. (Unless of course Mueller or others can show he has done something really bad – mind you Trump’s decision to sack Attorney General Jeff Sessions doesn’t inspire a lot of confidence on this front!). Second, just getting the midterms out of the way provides relief. Finally, US shares have rallied over the 12 months after each midterm since 1946 as the president refocuses on his own re-election. Trump is likely to do the same and this means doing nothing to weaken the economy and fixing the trade war with China sometime in the next six months.
  • In terms of the latter while Chinese President Xi Jinping in a speech in the last week made veiled criticism of Trump’s protectionism he also indicated ongoing tariff cuts on imports and a tightening in protection for intellectual property with China’s Vice Premier Wang indicating that China remains ready for negotiation on the trade issue. There is a long way to go here but I remain of the view that a deal will be made with China before the tariffs are allowed to cause too much damage to the US economy.
  • Global business conditions PMIs in October remained down from their highs earlier this year, but in aggregate they remain solid. No sign of a significant global economic downturn here. That said the global economy has become less synchronised with the rest of the world slowing relative to the US. A rising US dollar may help to reverse this a bit next year as its provides a competitiveness boost for the rest of the world relative to the US.

Source: Bloomberg, AMP Capital

  • US sanctions on Iran kicked in but the oil price is down 20% from its October high. So what happened? Basically a bunch of things happened: Iranian exports have already fallen as the sanctions were announced May; the US granted sanction waivers on eight countries including China, Japan, South Korea and India; US inventories have been rising; and the market got all geed up going into the sanctions and so has been cutting long oil positions. This is good news for Australian motorists with petrol prices plunging from an average over $1.6 a litre a few weeks ago to now falling back to around $1.45 and prices could still fall another 5 cents or so as the oil price fall flows through to the bowser with a lag. However, I wouldn’t get too excited as the world oil market is now getting very tight with the Iranian sanctions suggesting that the rising trend is at risk of resuming.

Source: Bloomberg; AMP Capital

Major global economic events and implications

  • US economic data releases remained strong over the last week. The ISM non-manufacturing index remained very strong in October, job openings, hiring and quits remained solid in September and jobless claims remain ultra-low.
  • Meanwhile, the Fed made no changes to monetary policy but remains upbeat on the US outlook and continues to see gradual rate hikes as appropriate, which leaves it on track for another 0.25% rate hike next month. At this stage a December hike is only 74% priced in by the US money market and the market’s interest rate expectations over the next two years remain too dovish relative to the Fed’s dot plot expectations (by around 0.5%).
  • The US September quarter earnings reporting season has proven to be strong. 90% of S&P 500 companies have now reported September quarter earnings results with 82% beating on earnings against an average this decade of 75%, 60% beating on sales and earnings growth expectations for the quarter have now moved up to 27% which is 7 percentage points higher than expected going into the reporting season. Even excluding the impact of tax cuts profit growth is running around 18% in the US and compares to around 10% profit growth in the rest of the world – which partly explains why the US share market remains relatively strong.

Source: Bloomberg, AMP Capital

  • Japanese economic data was on the soft side with a fall in household spending in September, very weak machine orders and sluggish wage growth (despite a bit of excitement on this front a few months ago). The Ecowatchers sentiment index showed improved current conditions but a softer outlook.
  • Chinese growth in both exports and imports surprisingly accelerated to solid readings of 15.6% year on year and 21.4%yoy in October suggesting little impact from tariffs and solid growth in domestic demand despite fears to the contrary. Survey data and the tariffs suggests the strength in exports won’t be sustained, but stronger imports may be reflective of stimulus measures. Meanwhile, inflation remained benign in October with core CPI inflation of just 1.8%yoy, so inflation is no constraint to further policy stimulus in China.

Australian economic events and implications

  • As expected the RBA left interest rates on hold again at 1.5% at its November Board meeting. But its forecast upgrades indicate somewhat greater confidence in the outlook. We think it’s too optimistic. The RBA’s latest Statement on Monetary Policy saw it revise its growth forecasts for this year to 3.5% (up from 3.25% previously), it still sees growth of 3.25% next year, it now sees unemployment falling to around 4.75% in 2020 (from 5% previously) and it continues to see wages and inflation moving gradually higher. Our assessment is that the RBA is underestimating the threat posed by slowing growth in China, tightening credit conditions and a negative wealth effect as house prices continue to fall. As a result, in contrast to the RBA we see growth slowing to around 2.5-3% through 2019 which in turn will result in higher unemployment and keep wages growth and inflation lower for longer than the RBA is allowing. So, we remain of the view that a rate hike is unlikely until late 2020 at the earliest and that a rate cut later next year can’t be ruled out. Out of interest it’s doubtful that even the RBA’s more optimistic 2019 forecasts would justify a rate hike next year as they only see wages growth getting up to a still anaemic 2.5%yoy and inflation rising to just 2.25%.
  • Australian data released over the past week was soft with a continuing slide in housing finance commitments, particularly to owner occupiers, a continuing loss of momentum in ANZ job ads and the Melbourne Institute’s Inflation Gauge showing both headline and underlying inflation remaining very weak over the last month.

What to watch over the next week?

  • In the US, October data for inflation and retail sales will be main focus. Expect core CPI inflation (Wednesday) to remain stuck at 2.2% year on year and retail sales growth (Thursday) to remain strong at 0.5% month on month. The Philadelphia and New York regional manufacturing conditions surveys (Thursday) are likely to remain solid as is growth in industrial production (Friday). A speech by Fed Chair Powell (Thursday) will be watched closely for clues on the outlook for interest rates.
  • Japanese September quarter GDP growth (Wednesday) is expected to dip back into negative territory with a decline of 0.3% quarter on quarter resulting in annual growth of just 0.4% due to weakness in consumer spending.
  • Chinese activity data for October due for release Wednesday is likely to show a slight pick-up in retail sales growth to 9.3%yoy and investment growth to 5.5% but growth in industrial production unchanged at 5.8%. Data on bank lending and credit will also be released.
  • In Australia the focus will be on wages growth and jobs data. September quarter wages data due for release on Wednesday is expected to show wages growth of 0.6% quarter on quarter with a 3.5% rise in the minimum wage providing a boost but partly offset by a reduction in Sunday penalty rates. This should see annual wages growth rise to 2.3%yoy from 2.1%. Bear in mind though that were it not for the acceleration in the minimum wage, wages growth would be stuck at 2%yoy so underlying wages growth is likely still very weak. October jobs market data (Thursday) is expected to show a 15,000 gain in employment but unemployment remaining unchanged at 5%. The jobs report is always a bit statistically noisy but this one may be more so given the impact of a changing survey sample that seems to be resulting in more variation than normal. The NAB business conditions survey will be also be released Tuesday and consumer confidence data will be released Wednesday.

Outlook for markets

  • Shares remain at risk of further short-term weakness, but we continue to see the trend in shares remaining up as global growth remains solid helping drive good earnings growth and monetary policy remains easy.
  • Low but rising yields are likely to drive low returns from bonds, with Australian bonds outperforming global bonds as the RBA holds and the Fed continues to hike.
  • Unlisted commercial property and infrastructure are still likely to benefit from the search for yield, but it is waning.
  • National capital city residential property prices are expected to slow further with Sydney and Melbourne property prices likely to fall another 15% or so, but Perth and Darwin property prices at or close to bottoming, and Hobart, Adelaide, Canberra and Brisbane seeing moderate gains.
  • Cash and bank deposits are likely to continue to provide poor returns, with term deposit rates running around 2.2%.
  • Having fallen close to our target of $US0.70 the Australian dollar is at risk of a further short-term bounce as excessive short positions are unwound. However, beyond a near term bounce it likely still has more downside into the $US0.60s as the gap between the RBA’s cash rate and the US Fed Funds rate pushes further into negative territory as the US economy booms relative to Australia. Being short the $A remains a good hedge against things going wrong in the global economy.