Fasten seatbelts, Peak oil, Lend Lease, RCR Tomlinson, Coles, Bluescope and much more

Last Night’s Markets
Peak Oil
Fasten seatbelts
16 Rules for Investing Success
Lend Lease
RCR Tomlinson
Coles: down, down
Bluescope: red spot special
Buy, Buy, Buy
France: Sacre bleu
Catching up with BHP’s Runaway Train
Our Google Hack
Research and Diversions
Facebook Live
Next Week
Last Week


Last Night’s Markets


Peak Oil

Last night the Brent crude oil price fell below US$60 a barrel for the first time in more than 12 months. It was less than two months ago that it touched US$86, apparently on its way to US$100; now it looks like that was the cycle peak.

The oil market has been transformed in two months. The main reason for the spike up in price in August and September was the expectation of new US sanctions on Iran, which eventually were announced in early November. However they have turned out to be not all that severe, and in fact many of Iran’s customers were given waivers, for the specific purpose of keeping the oil price down.

But the main reason for the fall in price since the peak on October 3 was the disappearance of Washington Post columnist Jamal Khashoggi the day before.

It turned out he was murdered inside Saudi Arabia’s Turkish embassy and then dismembered. Investigations by the CIA and others have established that the killing was ordered by the Crown Prince of Saudi Arabia, Mohammed bin Salman (MBS).

This week President Trump basically let him off, having acknowledged earlier that he may have “known about it”. Trump tweeted: “It’s a mean & nasty world out there, the Middle East in particular. This is a long and historic commitment, & one that is absolutely vital to America’s national security.” @SecPompeo I agree 100%. In addition, many Billions of Dollars of purchases made in U.S., big Jobs & Oil!”

“& Oil”. It looks like Trump has used MBS’s obvious guilt for murder to get the oil price down. In October, as the price fell, the Saudis were talking about production cutbacks to get it back up. That talk soon stopped as the Khashoggi investigations went on, and tapes emerged implicating higher and higher levels of Saudi government.

I think it’s pretty clear Trump has done an actual deal, a plea bargain, if you will, except without the guilty plea: I’ll give you a pass on murder if you don’t cut oil production. And they haven’t.

Meanwhile, North American production continues to rise:

Source: RBC Capital Markets

At the same time, expectations of stronger demand have not come to pass – again, largely because of Donald Trump. The trade war between the US and China has lowered expectations of Chinese growth and therefore energy demand.

The result has been a huge shift in oil market sentiment, as shown by a halving of net long positions:

That chart tells you the market thinks US$86 in early October was the cycle peak for oil. The market is not always right of course, especially when it comes to geopolitics, and especially involving Donald Trump, but I think we can rule out US$100 for quite a while, and if anything, the price is likely to go lower.

That has an immediately depressing effect on sharemarkets because of the impact on energy stocks, but longer term, it’s great!

As discussed below, the one sure thing that prevents the recent volatility turning into a bear market is if the Fed paused its interest rate hikes, and it would only do that if inflation fell, which might happen if the oil price keeps falling.


Fasten seatbelts

There seems to be a reasonable chance that the August 30 peak for the ASX200 of 6373.5 was, in fact, the cycle peak.

That’s because the nine-year bull market has been supported by central bank liquidity and that is now being withdrawn and that, in turn, is the key factor influencing markets now.

A severe bear market requires an economic recession, which is hard – but not impossible – to see ahead right now, but if the Fed continues to increase interest rates as expected, and the RBA starts hiking next year, as intended, a slowdown is definitely on the cards.

So it’s hard to imagine the ASX200 regaining that August 30 level in the near future.

Here is a 10-year chart of the ASX200 accumulation index:

From trough to peak, the Australian bull market produced a nine-and-a-half-year compound annual return of 12.4%, broken by two significant corrections, in 2011 and 2015. That is not as spectacular a bull market as the US had, but still not shabby.

It has been a decade of “buy the dips” since the end of the GFC; now we may be entering a period of “sell the rallies”. That’s for those who trade the market. For those, like me, who invest in companies, it’s a time to focus on quality and value more than usual and to not rely on momentum.

Today I want to explore what’s happening in some detail because it’s important to understand the conditions in which we are now investing.

Most of the focus needs to be on the US, since we are taking their lead, adding a premium for the fact that we don’t have the same dominance of tech stocks, which are leading the correction there, and then discounting it for the particular Australian risk of housing and household debt.

The key issue for the American market is that liquidity and growth have diverged – up to this year, equity prices have been riding growth and earnings; this year liquidity, that is monetary policy, has taken over. That’s because markets price for the future, not the past, and rising interest rates mean lower growth, earnings and share prices later.

There are a few ways to measure this. Charles Gave of GaveKal uses proprietary indicators of growth and velocity. The growth measure is designed to telegraph the chance of the US economy slowing down, or sliding into recession. The velocity measure gauges risk appetite by market players and has been deeply negative since early 2018 (the message it sent was that making money would be hard).

Here’s Charles Gave’s chart of them:

Another way is more simple: dividend yield versus short-term interest rates.

Source: Gerard Minack

Although this comparison isn’t all that useful, it is true that this was the basis of the TINA trade (“there is no alternative”), otherwise known as the hunt for yield, which led to a lot of the bull market gains.

Charles Gave says the simple takeaway from his chart is that the US economy will keep booming and the Fed will keep raising interest rates. This implies that both real and nominal interest rates in the US will keep rising.

“This rise in both real and nominal US rates will have consequences—some prices are going to plummet and some markets will collapse,” he says.

That statement is at the extreme end of what could happen, but worth taking note of.

The things that could be bullish for equities are a big fall in the oil price lowering inflation and/or some other event that would cause the Fed to pause its rate hikes, such a political turmoil or what Charles Gave calls a “whale” – such as General Electric. I presume he means that it collapses.

The other possibility is that the Fed responds to sharemarket turmoil by pausing – the so-called “Fed put” – but it’s not clear that Jerome Powell is like his predecessors in that respect.

In a note this week, Gerard Minack wrote: “I think the Fed sees some volatility as a feature, not a bug, of its tightening program. In any case, it’s plausible that the Fed will see the spending-power boost from weaker oil prices as more important than the adverse wealth effect from what, for now, remains a vanilla equity decline.”

In general, Gerard agrees that the key to the market now is rising US interest rates and he concludes: “I don’t expect that valuation alone will be sufficient to put a floor under the market. While the biggest threat to equity returns through the early phase of a Fed tightening cycle is valuation, the biggest threat in the latter stage is earnings risk.

“Fed tightening more often than not – historically, 75% of the time – leads to recession. I don’t expect investors will be able to make a reasonable judgement on recession risk until mid-2019.

“Finally, it’s important to note that that the leaders of the equity bull market – US growth stocks – are now starting to under-perform (Exhibit 8). My guess is the September peak was the cycle peak.”

October has left investors nervous and unforgiving. We are seeing growth stocks punished but no big rally in so-called value stocks. Another leg down in the market is not difficult to see, followed by a period of sideways movement.

Whether that turns into a full-on bear market depends on what happens with growth and earnings, both here and, more importantly, in the US, and it’s too early to be definite about that.

It is definitely a time to look for quality and value and to stick to investing basics. On the question of asset allocation, allow cash to build and for those of a more conservative disposition, deliberating building cash might be preferable.


16 Rules for Investing Success

This might be a good time to replay the legendary Sir John Templeton’s 16 rules for investing success. As Marcus Tuck of Mason Stevens recalled this week, he was famous for being both a contrarian value investor and a global investor, looking for opportunities that others were too scared to touch or just didn’t know about. Price was always the most important consideration in any investment decision he made. 

“To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward,” the late Sir John would say. His advice was simple, but not easy to implement. He recommended that you initially take a small position in your investment ideas before rushing in. If it really is a great bargain, there is no need to hurry. 

In an interview with Forbes in 1988, Sir John said, “People are always asking me where the outlook is good, but that’s the wrong question. The right question is, ‘Where is the outlook most miserable?’ ” 

Where might that apply today? He would probably be looking for quality companies trading on low valuations because they have been heavily sold off.

Anyway, here are his 16 rules:

  1. Invest for maximum total real [after-inflation] return
  2. Invest – don’t trade or speculate
  3. Remain flexible and open-minded about types of investments
  4. Buy low
  5. When buying stocks, search for bargains among quality stocks
  6. Buy value, not market trends or the economic outlook
  7. Diversify. In stocks and bonds, as in much else, there is safety in numbers
  8. Do your homework or hire wise experts to help you
  9. Aggressively monitor your investments
  10. Don’t panic
  11. Learn from your mistakes
  12. Begin with a prayer
  13. Outperforming the market is a difficult task
  14. An investor who has all the answers doesn’t even understand all the questions
  15. There’s no free lunch
  16. Do not be too fearful or negative too often 

Lend Lease

This is a stock that has been “heavily sold off”, to quote Sir John Templeton, and in the Q&A session on Facebook on Thursday, Simon asked the following question:

“Having bought Lend Lease on the advice of a Goldman Sachs recommendation on CommSec several months ago they have since fallen disastrously by about 40%. What are your thoughts on their prospects over the next year or so?”

I promised Simon I would deal with this in today’s Overview, so here goes.

I don’t have the Goldman Sachs report that Simon refers to but I have found a Macquarie note from August that also had Lend Lease as a “outperform”, with a price target of $21.36. It was then $20.24.

Macquarie’s unnamed analyst wrote: “Whilst near-term concerns around a further potential slip in the Engineering business will remain, with NorthConnex tunnelling now complete we assign a low probability to material further losses. With a growing opportunity set and trading on ~14x EPS we retain our Outperform recommendation.”

Well that analyst, and obviously the one at Goldman Sachs, got it very wrong.

On November 9, the company announced that further underperformance in the engineering and services division would require a provision of $350 million.

“This underperformance predominantly relates to further deterioration in the small number of projects previously identified. This is attributed to a number of issues including lower productivity in the post tunnelling phases of NorthConnex; and excessive wet weather, access issues and remedial work arising from defective design on other projects.”

Three projects accounted for 90% of the provision, and at the AGM on November 16, CEO Steve McCann gave further details, but didn’t name the other two, apart from NorthConnex, citing “client confidentiality and commercial considerations” (they are probably the A$689m Gateway Upgrade North Project in Brisbane and the A$564m Caulfield to Dandenong level crossing removal project in Melbourne, given the size of the provision).

LLC’s share price fell from $17.45 on November 8 to less than $13 now. In August, when Macquarie and Goldman Sachs, along with other brokers were recommending it as “outperform”, it was above $20, so the fall in a few months is, as Simon says, close to 40%.

Earnings per share in FY18 was $1.33, so trailing PE is currently below 10. Consensus FY19 forecast for eps is $1.09, so a forward PE of 11.8. Dividend for the year was 69c, so yield (unfranked) is 5.35%.

With a massive boom in infrastructure construction underway in Australia at the moment, on the surface at least Lend Lease at this price looks a “hold” at worst, and maybe a rare opportunity.

It all depends on whether the engineering division can be fixed by the new bloke in charge.

Here’s what Steve McCann told the AGM: “We have learned lessons from these projects which we are applying in the Engineering business. We have become more selective and rigorous in our bid strategy and place greater focus on the set-up phase of new projects.

“We have also recruited a number of key people including Hans Dekker, our new Group Head of Engineering and Building, who was formerly the President of Infrastructure with the global engineering and construction company, Fluor Corporation.

“Hans has been conducting an operational review of the Engineering business, looking at all processes, methodologies, operating procedures, contract structures, risk profile and personnel from project set up right through to demobilisation when a project nears completion.

“As David already announced, we are also conducting a strategic review to assess all structural options.”

Not sure what he means by that last bit – “strategic review” is usually code for putting a business on the market.

I’ll try to get Steve McCann on the blower next week for an interview, but in the meantime, Simon, my advice is: DO NOT SELL at these prices, unless you could use the tax loss and you have a very good alternative use for the money.

But buying more at this point looks risky. Might be best to wait for my interview and/or another update on how Hans Dekker is going fixing the engineering division. He obviously has a decent CV, but we simply don’t know how bad it is.


RCR Tomlinson

This is clearly an extreme version of what went on at Lend Lease: its equity has now gone to zero.

As with Lend Lease they seem to have left insufficient margin in construction projects for when things go wrong, as they usually do. Anyone who has renovated a house knows that only too well.

But with RCR Tomlinson there is some icing on top: a $100 million equity raising at $1 a share just two months before the board called in the voluntary administrators. This must be a new record for how quickly new equity has been wiped out.

Mind you, the share price before the trading halt was $2.12, down from $3 in May, so $1 for the capital raising was on the cheap side and hinted that all was not well. Also the presentation for the share issue contained 12 pages headed “Key business risks”, which was pretty unusual.

Nevertheless, the presentations and statements made by management and investment bankers September while extracting that money from them need to be examined in minute detail by ASIC and compared against the findings of the McGrath Nicol administrators.

It’s hard to argue with Simon Mawhinney of Allan Gray’s statement to the Financial Review: “It is impossible to envisage a situation where this outcome is not the result of gross negligence, incompetence or fraud on the part of the board, management and/or its bankers.”

Negligence, incompetence, or fraud … which is it?


Coles: down, down

Coles returned to the market this week at $12.75 and a market cap of $17 billion, $2.3 billion less than Wesfarmers paid in 2007, and making it the 18th biggest ASX company. Analyst reviews were mixed, but most seem to be in favour, stamping it as “outperform” and “accumulate”.

I disagree. Coles is a pure play stock in a sector (food retail) that is stuck with low single-digit sales growth prospects, and with Kaufland opening its first store in 2019, Costco online also starting in the first quarter next year and Aldi expanding, margins will be flat, at best.

Growth will depend on cost reduction, investment in supply chain and absolute perfection of execution in marketing and brand strategies – there will be no room for mistakes. The downside risk, in my view, easily outweighs any upside potential.

Could it be a steady cash flow/dividend play? Maybe. The market is projecting a 2020 dividend yield of 5.1%, based on a payout ratio of 85% and a free cash flow yield of 5.5%, so not much room to move.

And in case we needed reminding, Lend Lease tells us that buy recommendations from broking analysts aren’t always worth the emails they are sent in.


Bluescope: red spot special

On a more positive note, and in line with the requests for me to come up with good value stocks, there is Bluescope Steel.

This stock has been well beaten up, falling from $18.50 to $12.50 since July, and is now on a trailing PE of 4.5 times and a prospective 2019 PE of 3.1.

At yesterday’s AGM previous earnings guidance was reaffirmed and CEO Mark Vassella gave a pretty upbeat update and the share price popped up 4.5%.

In fact, the guidance of 10% profit growth in 2019 first half looks conservative: a flash note from Macquarie yesterday suggested it’ll be more like 19%, and they have a price target of $21.40 (currently $12.70), so forecasting total return next year of approaching 80%.

Leaving aside such wild predictions, this is a fundamentally good company with exposure to the infrastructure boom selling for less than 5 times earnings. There is, as Warren Buffett would say, a margin for error.


Buy, Buy, Buy

Bearing in mind what happened with Lend Lease this year, as described above, here is a list of ASX200 stocks with three or more analyst buy recommendations, from Mason Stevens:

  • Aristocrat Leisure (4)
  • Amcor (3)
  • Alumina (4)
  • ANZ (6)
  • BHP (4)
  • Beach Petroleum (3)
  • Bluescope Steel (3)
  • Carsales (3)
  • CBA (3)
  • CSL (4)
  • Corporate Travel (3)
  • Caltex (4)
  • Emeco (3)
  • Evolution Mining (4)
  • Fortescue (5)
  • IAG (3)
  • Iluka (4)
  • Incitec Pivot (3)
  • Janus Henderson (3)
  • James Hardie (4)
  • Lend Lease (4)
  • Magellan (3)
  • NAB (4)
  • Nufarm (3)
  • Orecobre (4)
  • Origin (3)
  • Qantas (3)
  • QBE (4)
  • Rio Tinto (5)
  • Resmed (3)
  • Regis Resources (3)
  • Sims Metal (4)
  • Stockland (3)
  • Seven West (4)
  • Transurban (3)
  • Vicinity Centres (3)
  • Westac (3)
  • Whitehaven Coal (4)
  • Worley Parsons (3)
  • Woodside (4)
  • Western Areas (4)

France: Sacre bleu

It’s fascinating that while British conservatives tear themselves apart over Brexit, the formerly saintly Emmanuel Macron in France is copping some huge protests, apparently from both sides of the spectrum, left and right.

In one sense, if you’re pissing off both sides you must be doing something right, but the important thing is that as the UK tries to find a way to leave without leaving, things are far from settled and peaceful across the Channel.

Macron has always assumed that the far-right and the far-left would never co-operate so he would be able to do basically what he liked. That was also the assumption in Italy, but it was blown up in May when the Five Star Movement and Lega Nord formed a Coalition Government.

Something vaguely similar seems to be going on in the UK, with left and right, remainers and leavers, all agreeing on one thing: that Theresa May’s Brexit plan stinks and she has to go.

France is now also testing the assumption that the left and right can’t agree on anything. Last weekend there were spontaneous protests, with all ages, social classes and political preferences getting out in the cold November rain. Most protests in France take place in May, when the weather is better, so the fact they were in the streets in November shows more passion than usual.

In fact, people are complaining about many things, not just the fuel tax, which they saw as a naked cash grab: right-wingers were protesting about immigration, while left-wingers from the outskirts of Paris were vexed by cuts to pensions and social security.

And finally, the more bourgeois demonstrators in front of the Élysée Palace were exercised about a scandal—the Benalla affair—which involved one of Macron’s security officials beating up protesters at a May Day demonstration.

Meanwhile Macron himself holed up in Versailles, of all places, which was not a great look for a centrist man of the people.

And in echoes of what’s going on in Britain, both sides find him too “pro-European (when asked in 2005 whether they approved of the Lisbon treaty, which provided for greater European integration, 55% of voters said non, and got it anyway).

Next May, while Australians are probably voting in a Federal election, there will also be elections for the European Parliament.

The unification of the left and the right in France and Italy suggests Europe might have more in common with the UK than it thought.


Catching up with BHP’s Runaway Train

From Prof Cara MacNish.

The odyssey that is BHP’s runaway train in the Pilbara continued last week, with WA Iron Ore asset president Edgar Basto releasing a few snippets from their preliminary investigation.

Essentially we are told that the train stopped on a hill and the driver forgot to put on the handbrake! This left the 40,000 tonne train free to hurtle down the hill towards Port Hedland, reaching reported speeds of over 150km/h, before being derailed as a last resort.

Had the driver had the wherewithal of Jon Voight’s character Manny in the 1985 action classic Runaway Train, he presumably would have leapt onto the nearest wagon, scaled his way along to the engine, and pulled on the brakes. But alas it seems he could only watch in the dim morning light as the 3km long train rolled off towards its multimillion dollar fate.

To be fair BHP provided a little more detail although, perhaps unfairly, none that saved the hapless driver from becoming the headline. Basto stated that the train stopped after a braking system control cable became disconnected. The driver disembarked to carry out an inspection without engaging the emergency air brake as per operating procedures. After an hour, the electronic braking system that had stopped the train automatically released while the driver was still outside. (Lets not forget that it would take the driver the best part of an hour just to walk the length of the nearly 3km long train.) And due to an “integration failure” the backup braking system was not able to successfully deploy. 

BHP stated that the train became “what is termed a rollaway train”, presumably feeling that this sounds more benign than the alternative, a “runaway train”, that has been ubiquitous in the media. I’m not so sure I wouldn’t prefer to feel that the train had some control over its destiny – something I’ll come back to.

On Tuesday a Safety Alert issued to rail operators from the Office of the National Rail Safety Regulator (ONRSR) finally shed some light on the presumed reasons for this shocker. The Alert reveals problems with the effectiveness of Automatic Train Protection (ATP) systems with Electronically Controlled Pneumatic (ECP) braking. 

The alert doesn’t name BHP, but refers to “the runaway of a loaded freight train”. This train’s ECP brakes were automatically applied due to a disconnected electrical connector between two wagons. 

ECP systems that comply with American standards have a software ‘feature’ designed to preserve battery life on ECP fitted wagons. This releases the brakes after 60 minutes of no communication between the lead locomotive and the end of the train.

The backup ATP system is responsible for checking that the speed of the train matches that allowed by the track signalling and, if necessary, activating the emergency brakes. However it turns out that if the train is in ECP mode, the ATP system will attempt to apply ECP braking. So if a failure occurs within the ECP system, for example due to a disconnection, the ECP braking may not apply to the whole train. The ATP does not revert to the air braking system. 

After the accident, the CFMEU’s Mining and Energy WA Secretary Greg Busson was quick to point out the risks of moving to driverless trains. But as I argued in the 10th of November Overview, we should not be too quick to point the finger at autonomous trains – this was always going to be a tale of multiple failures and, ultimately, human error. In saying that I would not lay the blame with the driver, but rather with the system design. In this day and age there should be no situation where a single action can cause the loss of a 40,000 tonne train, millions of dollars, and a safety risk to the community.

I see this as an argument for, rather than against, autonomous trains. An autonomous machine will have a ‘high level’ goal that it plans to achieve, using the full range of actions that are within its capability. It will actively seek to achieve a successful and safe outcome. Our rollaway train, on the other hand, stumbles on blindly as a result of ‘low level’ inputs from external ‘actors’ (mostly humans) and the forces of gravity.

I know which I’d rather be waiting for down the line.


Our Google Hack

Some of you have noticed that when you search The Constant Investor on Google, you get this:

Yes, we’ve been hacked – not the website itself, nor any of our subscriber data, but simply our Google presence.

It’s extremely annoying and apparently done by kids. It’s complicated to fix, but we’re on it and it shouldn’t take long. Rest assured that none of your personal details have been hacked or lost and the content is unharmed.


Research and Diversions

Research

Roger Montgomery: ETFs are “a transmission mechanism for a tech stock bubble”.

Matthew Kidman: “I’m not necessarily believing we’re in for a bear market, we might be, and I haven’t ruled that out. We’re definitely in for a change of what is going to lead the markets.”

The bears have the bulls on the run all over the world. All eyes are on what happens next.

Australian interest rates: the next move is probably down.

Debt: A Love Story. It’s about a well-educated, well-paid couple, in a brutal cycle of debt: “…when my son went to prom, we didn’t rent a tux because we didn’t have the cash, but we bought a suit because we have a Nordstrom card. You can’t believe how many credit card and loan solicitations we get in the mail. When they come, we research them and make sure it’s not something really crazy. Obviously they’d have to be slightly crazy to approach us with a loan. But then we ask them for it, and they give us money. It’s ridiculous.”

Are all tech companies doomed to irrelevance? “For every Netflix there is a Blockbuster. Every Facebook, a MySpace. Every iPod, a Walkman.”

China’s sweeping, data-driven “social credit” initiative is sounding alarms. In a speech on Oct. 4, U.S. Vice President Mike Pence described it as “an Orwellian system premised on controlling virtually every facet of human life.” But there’s a small problem. The system doesn’t actually exist—at least as it’s generally portrayed.

Why Britain needs its own Mueller: Britain and America, Brexit and Trump, are inextricably entwined. By Nigel Farage. By Cambridge Analytica. By Steve Bannon. The same questions that dog the US election dog the UK’s, too.

Saboteur in chief: “This is (Trump’s) strange, and in its own way brilliant, reversal: instead of distracting us from the lurid and the sensational, Trump is using them to distract us from the slow, boring, apparently mundane but deeply insidious sabotaging of government. He is the blaring noise that drowns out the low signal of subversion.”

Poor Stephen Rue. Having been handed the equivalent of a shit sandwich by his illustrious predecessor Bill Morrow, all that the new chief executive of NBN Co can is to pony up when the company’s quarterly results are due and go through the motions.

If you can’t be bothered reading all 6000 words of the New York Times’ investigation into Facebook (and who can?) here are the six key takeaways.

I agree with this: Paul Keating still has a great turn of phrase, but his thinking is out of date.

Andrew Milligan, Head of Global Strategy, outlines Aberdeen Standard Investments’ 2019 global markets outlook. Here are five key takeaways.

Michael Pascoe: Scott Morrison’s Australia resembles the 51st American state. “…in trying to understand this lurch into TrumpWorld, I can’t ignore that fundamentalist Christians are key Trump supporters in the US. At the extreme, they lobby for supporting Israel as a means of hurrying along Armageddon.”

The SEC is starting to build up actions against initial coin offerings (ICOs). People are saying it means the party really is over. Maybe. It usually takes more than a couple of SEC cases to stop a bubble.

The Facebook era is over. “The same viral loop that catapulted Facebook into every corner of Earth is now slowly turning the other way towards its unwinding. To be sure, Facebook isn’t going away tomorrow. But in the same way we grudgingly use Microsoft Word with a complete absence of joy, the days of Facebook’s growth and inevitability are behind it. So, what’s next? Here are three predictions.”

Trump’s Protectionist Quagmire: “US President Donald Trump’s tariffs on imported steel are a perfect example of how protectionism can raise costs for consumers and producers, destroy jobs, and undermine domestic competitiveness. Now that he is considering additional tariffs on imported automobiles, a wide range of US industries should be very worried.’

Meet the “heavy labour” humanoid robot set to revolutionise construction.

Over the past two years, initial coin offering (ICO) projects in the crypto market have raised more than $30 billion. And there’s nothing to show for it.

Stephen Koukoulas on why Labour’s negative gearing plan could work. But then again…

It’s a constant problem that, while the Right understands the morality of the Left, the Left cannot understand the morality of the Right, and confuse a different value system for an evil or amoral position.

If you fell asleep in 1945 and woke up in 2018 you would not recognise the world. The growth that took place during that period is virtually unprecedented. If you learned that there had been no nuclear attacks since 1945, you’d be shocked. If you saw the level of wealth in New York and San Francisco, you’d be shocked. If you compared it to the poverty of Detroit, you’d be shocked. If you saw the price of homes, college tuition, and health care, you’d be shocked. Our politics would blow your mind. And if you tried to think of a reasonable narrative of how it all happened, my guess is you’d be totally wrong”.

Trump and CNN: case history of an unhealthy co-dependency. “Sadly, Jim Acosta’s confrontation with President Trump at the post-election press conference seemed certain to heighten the divisions. For CNN, the encounter added to their star reporter’s visibility and the network’s image as a fighter for press freedom. To Trump and his supporters, Acosta’s grandstanding provided further evidence of the news media’s implacable hostility to them. Each side, in short, seemed to get from the encounter exactly what it wanted.

When will useful quantum computers be constructed? Not in the foreseeable future. Having spent decades conducting research in quantum and condensed-matter physics, I’ve developed my very pessimistic view. It’s based on an understanding of the gargantuan technical challenges that would have to be overcome to ever make quantum computing work.” 

Brazil’s president-elect Jair Bolsonaro has chosen a new foreign minister who believes climate change is part of a plot by “cultural Marxists” to stifle western economies and promote the growth of China.

Don DeLillo on Trump’s America: I’m not sure the country is recoverable.

Productivity as a compounding factor. “If you get 10% more done and 1% better every day, the compounded difference is massive. It doesn’t matter how fast you move if it’s in a worthless direction. Picking the right thing to work on is the most important element of productivity and usually almost ignored.” 

Illuminating GDP: An exercise in estimating whether, and by how much, dictatorships exaggerate their economic growth rates to make their régimes look better, measuring claimed growth rates against changes in night-time light emissions observed by satellite — which, in democracies, is a reasonable proxy for growth. Thus South Korea has grown much brighter in recent decades while North Korea has stayed dark. “Dictators overstate their GDP growth by 15 to 30 per cent per year.

Diversions

Have you seen the John Lewis ad with Elton John? It’s pretty good – tear to the eye material.

My friend Jonathan Green did a special on Pellegrini’s Sisto Malaspina, who was killed by a terrorist in Melbourne recently. I know it’s a bit old now, but I haven’t really dealt with this properly, and I think Jonathan did.

An excellent video: Physicist Sabine Hossenfelder explains how little we know of ‘dark matter’, starting with our uncertainty as to whether it even exists.

Your brain is wired to suck the joy out of good news. Here’s how to break the cycle”. This is interesting, but I’m not sure I buy it. Maybe it rings true for you – if so, read it!

Why are young people having so little sex? We are in the midst of a sex recession, apparently, or at least America is, since this piece is in The Atlantic. It probably applies here as well – most things usually do. I don’t know.

Driving electric cars and scrapping your natural gas-fired boiler won’t make a dent in global carbon emissions, and may even increase pollution levels.

Brilliant and eccentric neuroscientist Karl Friston, who believes he has discovered the organising principle of life itself. He calls it “free energy”. It holds, roughly, that life is one long quest to minimise surprises; this rule accounts for the behaviour and the motivation of all living things from single cells up. 

For democracies to work well, there must be “common knowledge” among voters about how government functions, how political leaders are chosen, and who is competing for power. Autocracies, by contrast, work best when people know nothing for certain about politics except who is in charge. Thus disinformation can strengthen autocracies and weaken democracies. 

Oh dear. The Australian socialite and businesswoman Roxy Jacenko has had to pulp the first copies of her latest book after a quote on the cover mistakenly said she “never fails to disappoint”.

Tom Cruise is now out as Jack Reacher (thank goodness for that!). Who is tall enough to play him?

The future of ageing just might be in Margarativlle”. God help us all if that’s true. Sounds ghastly to me. It’s a “Jimmy Buffett branded community”.

If you think you should probably be reading more philosophy, here are some ideas about where to start.

This is amazing: “In September, 1974, Bob Dylan spent four days in the old Studio A, his favorite recording haunt in Manhattan, and emerged with the greatest, darkest album of his career. It is a ten-song study in romantic devastation, as beautiful as it is bleak, worthy of comparison with Schubert’s “Winterreise.” Yet the record in question— “Blood on the Tracks” —has never officially seen the light of day. The Columbia label released an album with that title in January, 1975, but Dylan had reworked five of the songs in last-minute sessions in Minnesota, resulting in a substantial change of tone. Mournfulness and wistfulness gave way to a feisty, festive air.”

Happy Birthday Baruch Spinoza, born November 24, 1632, one of the great and influential wiseguys. For example: “If you want the present to be different from the past, study the past.”

Also Happy Birthday Charles Theodore Pachelbel, best known for his Canon in D, but this is pretty good too: Forest Garden. Ahead of his time was Charlie Pachelbel.

And just in case you think I’ve gone all soppy, here’s a song from Mumford & Sons’ new album, Delta“Slip Away”. I’ve been listening to this album all week, and thanks to subscriber Vince for telling me about it (I hadn’t been paying attention so I missed it). It’s great!

 

 

        


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 Ryan Felsman, Senior Economist, CommSec

Australia: Reserve Bank in the spotlight

·         The Reserve Bank Board’s November monetary policy meeting minutes and a speech by Governor Philip Lowe at the CEDA annual dinner are the highlights in the coming week. Data releases are mostly second tier. Tourism, skilled internet job vacancies and the CBA’s ‘flash’ manufacturing and services’ gauges feature.

·         The week kicks off on Monday in Australia when CommSec releases the Home Size Trends Report. Changes in the size of homes has implications for builders, developers and retailers of home appliances. If bigger homes are built, this may result in fewer homes that are needed to be constructed to absorb increases in population.

·         Also on Monday, the Bureau of Statistics (ABS) releases the September overseas arrivals and departures data. The weaker Aussie dollar is supportive of overseas tourism demand. Over the year to August a record 1,435,700 tourists came to Australia from China, up by 7.7 per cent.

·         On Tuesday, the regular weekly reading on consumer confidence is published by ANZ and Roy Morgan. And the Commonwealth Bank’s Business Sales Indicator for October is issued. Sales have lifted for 19 successive months.

·         Reserve Bank Governor Philip Lowe speaks about “Trust and Prosperity” at the CEDA Annual Dinner in Melbourne at 7.20pm AEDT on Tuesday.

·         Also on Tuesday the ABS releases the “National Accounts: Distribution of household income, consumption and wealth (2003/04-2017/18)” publication. Supplementary data on household income and wealth, access to goods and services, population, housing, government benefits and taxation will be of particular interest, given the impact on overall living standards.

·         On Wednesday, the Department of Jobs and Small Business issues its monthly skilled internet job vacancies data. The Internet Vacancy Index fell by 0.6 per cent in September, but is still 1.6 per cent higher than a year ago. Job vacancies are at 6½-year highs in Tasmania, up by 16 per cent from a year ago. 

·         On Thursday, the ABS releases its population projections for states, territories, capital cities and state regions. According to the ABS, “the projections are not predictions or forecasts, but are illustrations of the growth and change in population which would occur if certain assumptions about future levels of fertility, mortality, internal migration and overseas migration were to prevail over the projection period.”

·         On Friday the CBA releases the ‘flash’ manufacturing and services purchasing managers’ indexes for November. Business activity rose at the slowest pace in the survey’s short history in October.

US home building and durable goods orders data in focus

·         In a holiday-shortened week in the US, a raft of housing-related data are issued. Durable goods orders feature with the ‘flash’ purchasing managers’ manufacturing indexes from developed economies, such as the US, Japan, UK and Eurozone.

·         The week kicks off on Monday in the US, with the release of the National Association of Home Builders (NAHB) Housing Market Index. The index has held steady at around 70 points since June. NAHB Chief Economist Robert Dietz has said, “Favourable economic conditions and demographic tailwinds should continue to support demand, but housing affordability has become a challenge due to ongoing price and interest rate increases.”

·         The usual weekly data on US chain store sales is released on Tuesday along with October monthly housing starts and building permits figures. Housing starts fell by a greater-than-expected 5.3 per cent in September as construction activity in the South fell by the most in nearly three years (down 13.7 per cent) due to Hurricane Florence disruptions. But starts are forecast by economists to rebound by 1.6 per cent in October.

·         US building permits fell by 0.6 per cent in September – the second straight monthly decline – as permits for the construction of multi-family homes declined by 7.6 per cent to 390,000 units. Permits are tipped to fall by 0.8 per cent to 1.26 million units in October. 

·         On Wednesday in the US, the October consumer durable goods data will be issued. In September, the data was volatile, distorted by a 120 per cent surge in orders of defence aircraft. Business equipment investment rebounded in the September quarter, but economists don’t expect this to be sustained with a 2.5 per cent decline in orders tipped in the preliminary read for October.

·         Also on Wednesday, weekly MBA mortgage applications and monthly existing home sales data are issued. Sales of previously-owned homes fell to the weakest level (5.29 million) in almost three years in September – the sixth straight monthly decline. US mortgage rates have lifted to the highest level in almost eight years.

·         And the Conference Board’s Leading Index for October is also scheduled for Wednesday. The index, which takes into account building permits, the ISM index of new orders and sharemarket prices, has lifted for 12 consecutive months.

·         US markets are closed for the Thanksgiving Day public holiday on Thursday.

·         On Friday Markit’s ‘flash’ manufacturing purchasing managers’ indexes are issued for November across developed economies.


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 remained under pressure over the last week with many falling back to or below their late October lows on worries about trade, tech stocks and global growth. Despite the risk off tone bond yields were little changed but the oil price remained under pressure and the iron ore price fell a bit too. The $US rose slightly and this weighed on the $A.
  • Shares retesting October lows – double bottom or resumption of the slump? Share markets fell back to around their October lows over the last week. A retest of the lows is quite normal after the sort of fall we saw in October. Whether markets form a double bottom and head back up or break decisively lower to new lows is unclear. In favour of the former less stocks have made new lows into the latest fall and Asian and emerging markets are looking a lot healthier (having led this share slump and having had much deeper falls). But against this many of the triggers for the fall in markets remain in place. The bottom line is that I don’t know whether it will remain just a correction or maybe slide deeper into what I like to call a gummy bear market (where markets have a 20% top to bottom fall but are up a year after the initial 20% decline). But I remain of the view its unlikely we are sliding into a deep or grizzly bear market as the conditions are not in place for recession in the US, globally or Australia.
  • Potential triggers to watch for a rebound include a meeting at the G20 meeting between Presidents Xi and Trump in the week ahead, more signs of a possible Fed pause on interest rates and a stabilisation/improvement in growth indicators outside the US. In terms of the Trump/Xi G20 meeting, the APEC debacle between the US and China and a report by the US Trade Representative repeating criticism of China are driving low market confidence of a deal being reached between the US and China. However, against this Trump appears to want a deal knowing that further tariff hikes (which are really tax hikes) will start to offset his fiscal stimulus next year and may be starting to impact business confidence and hence capital spending. All of which may start to negatively impact Trump’s 2020 re-election prospects. Reports that White House trade adviser and protectionist Peter Navarro will not be attending the meeting is also a positive.
  • In Europe, Italy looks to be heading into what is called an Excessive Deficit Procedure – a process administered by the European Commission but approved by Eurozone finance ministers designed to get its expansionary budget deficit back on track with debt limits – but a major crisis still looks unlikely. More likely is some sort of fudge combining various delays in enforcing any deficit reduction and some compromises. The rest of Europe won’t want to put too much pressure on Italy for fear of fuelling anti-Euro sentiment and in any case by the time Italy has to respond to any requests under the EDP it won’t be till later next year by which time the 2019 budget will be largely history.

Major global economic events and implications

  • US economic data was on the soft side. Home building conditions fell sharply in October, albeit catching down to other housing related indicators, housing starts and existing home sales rose but are trending sideways, underlying capital goods orders were soft and leading indicators were weak in October with the falling share market acting as a drag. Naturally the weakness in housing indicators raises memories of the GFC but note that housing investment is running at a relatively modest 3.9% of GDP and has not kept up with demographic demand in contrast to prior to the GFC when it reached 6.7% of GDP and was way ahead of demographic demand. While you can get hurt falling out of high rise you are less likely to get hurt falling out of the ground floor.
  • Japanese headline inflation rose to 1.4% year on year in October, but this will fall back with the oil price in November and meanwhile core inflation is stuck at 0.4%yoy so the BoJ is no closer to being able to tighten monetary policy.

Australian economic events and implications

  • Australia was a bit quiet on the data over the last week with a rise in the CBA’s business conditions PMI for November, albeit it remains well down on last year’s high, but skilled vacancies fell again in October and the trend is now down for seven months in a row pointing to a slowing in employment growth.  Comments by RBA Governor Lowe and PM Scott Morrison provided more interest though.
  • RBA Governor Lowe’s comments in the past week were particularly significant for two reasons. Firstly, he looks to be becoming more concerned about credit tightening in saying that “a few years ago credit standards were way too loose, there has been a correction of that, but I am starting to be a bit concerned the pendulum might be swinging a bit too far the other way.” Second, he also acknowledged the risks around wages remaining weak even if unemployment falls further: “I suspect nationally we could sit at [an unemployment rate] around 4.5 per cent without seeing wage growth pick up by too much”. He is clearly aware that estimates putting the so-called NAIRU at 5% are rubbery. Perhaps he is starting to question the RBA’s own mantra that the next move in rates as more likely up than down.
  • Lower immigration levels on the way? There is always a debate going on about the appropriate level of immigration in Australia, but this has been mainly outside the major political parties or on the fringe of them. PM Scott Morrison changed all that in the last week flagging a cut to the annual immigration cap of 190,000 by 30,000. At present this sounds like just affirming the actual level of immigration which has already slowed by about 30,000. So, no big deal. But having brought the debate into the centre of politics risks seeing immigration getting cut further given angst about the issue particularly in Melbourne and Sydney. This is particularly relevant to the property market as it was the surge in population growth from around mid-last decade without a housing supply pick up (until around 2015) that has played a big role in the surge in house prices relative to incomes. Yeah, yeah, yeah, the surge in credit, speculation, foreign demand, etc, also played roles too. But the point is that if immigration starts to fall back at a time of rising supply it will be one more factor sending property prices south in Sydney and Melbourne (which take something like 60% of immigrants) – along with tighter credit, rising supply, a significant pool of borrowers having to switch from interest only to principle and interest mortgages, reduced foreign demand, fears around tax changes reducing future investor demand, etc. Our view remains that these two cities will see 20% top to bottom price declines out to 2020 but there are clearly some risks on the downside to this.

Source: ABS, AMP Capital

What to watch over the next week?

  • The big event in the week ahead will be the meeting between Presidents Trump and Xi on the sidelines of the G20 meeting (Friday & Saturday) in Buenos Aires to discuss trade.
  • In the US, the focus is likely to be on the Fed. While the minutes from the last Fed meeting (Thursday) will likely confirm that it remains upbeat and on track to raise rates again in December another speech by Fed Chair Powell (Wednesday) is likely to repeat that he is aware of the various headwinds to the US economy leaving the impression that the Fed is open to a pause on interest rates next year. Of particular, interest will be what if anything he has to say about continuing share market volatility and recent softness in housing and business investment indicators. On the data front expect home price data (Tuesday) to show continuing modest gains, consumer confidence for November (also Tuesday) to show a slight fall from 18 year highs, new home sales (Wednesday) to show a bounce, September quarter GDP growth (also Wednesday) to be revised up slightly to 3.6% from 3.5%, personal spending growth (Thursday) to have remained solid but with core private consumption deflator inflation falling back to 1.9% year on year.
  • Eurozone economic confidence for November (Wednesday) will be watched for any stabilisation after several months of softness, unemployment for October (Friday) is likely to be unchanged at 8.1% and core inflation for November (also due Friday) is likely to be unchanged at 1.1% year on year.
  • Japanese data to be released Friday is likely to show continuing labour market strength helped by a falling population but industrial production is likely to show a bounce.
  • Chinese business conditions PMIs for November will be released Friday with the focus likely to be on the manufacturing PMI which has been slowing lately.
  • In Australia, speeches by RBA Governor Lowe and Assistant Governor Kent on Monday will be watched for any clues on rates. On the data front expect to see a 1% gain in construction data for the September quarter (Wednesday), a 1.5% gain in September quarter business investment (Thursday) and continuing moderate credit growth (Friday) with ongoing weakness in lending to investors. A key focus will be whether investment intentions data points to further improvement.

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 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 (albeit they may slow down a bit).
  • 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. Being short the $A remains a good hedge against things going wrong in globally.