Has the world left Harvey Norman behind? Is the market’s ‘double top’ a bad omen?

This week James Kirby and I discuss the following:
  • James isn’t allowed pay tv!
  • The deadly “double top”, are markets headed for a crash?
  • Has the world left Harvey Norman behind?
  • Ag stocks seem to be finally hitting a boom.
  • History pointing to a 10% fall in capital cities.
  • Rental yields in cities are losing their lustre. 
  • More worries over investor only loans from James.
  • Even doomsday merchants aren’t going all in on a property crash.
  • The rebirth of the cab. James is looking for a comeback.
  • Some harsh fact checking from an astute feedback from a listener on what the best performing stock last year was.


Hello, I’m James Kirby, Wealth Editor at The Australian.

And I’m Alan Kohler, publisher of The Constant Investor.

And we are The Money Café.

The Money Café.

Welcome everybody this week, a very good interesting week, Alan.  We’re barely climbing out of this correction we had a few weeks ago and it’s like the whole market has come alive again.

And we’ve got another test match starting today, how good is that?

Yes, it is, especially if you have pay TV and you can watch it.

Haven’t you got pay TV?

No, I don’t have pay TV, not allowed because if I did I would be watching cricket all the time and we can’t have that.  So, I’m allowed to do that mid-summer but not all year round.  But it will be good, I’d love to see those South African bowlers coming in, they look fabulous, the whole quartet, they look really good.  Now, where will we start.  We’ve got Harvey Norman results, we’ve got agricultural stocks jumping out of their socks, interest only loans, we’ve got a new Fed Chairman.  Let’s start with the market.  Now, Alan, you have a theory perhaps afoot already about the market and what’s happened since the last correction and where we might be on the historical picture.

Well, it’s not a theory, James, it’s an absolute fact.

Alright, okay I’ll take your word for it.

So, we’re talking a double top here and it’s usually preceded by the world fabled, so it’s a fabled double top.

So, tell me of the double tops in the fable?

Well the double top just basically looks like an M expect the second peak of the M is a bit below the first.  So, what happens is the market hits a peak, corrects, then recovers almost back to the previous peak and down it goes.  It happened in 2007 preceding the GFC, it happened in the dotcom crash of 2000 preceding that.  It preceded the 1987 crash.

You’re scaring me now.

We have had another double top.

We’ve had a double top already?

Yeah.

You mean the market is back to where it was before it fell?

It’s come back down.  So, the market as we know, it peaked in late January, had a big correction in early February and we’re talking mainly America but also Australia, a big correction in early February, recovered during the rest of February and now last two days has come back again, fallen again, because of the new Fed Chair, Jerome Powell, doing his testimony to congress and being bullish about the economy which everyone goes well it’s going to be more interest rate hikes, so the markets fell.  So, basically the chart of the S&P 500 and the Dow both look like an M, a double top.

Yeah, a double top.  Which can, but, doesn’t necessarily mean it will precede a…

So there it is, it’s just like a PSA test for prostate cancer, which I know all about being 65, PSA test you can have a false negative or a false positive.  So, I say to my doctor what the hell is the use of that really, what’s the point, well it’s a bit of a guide.  Because, if you’ve got a high PSA then you’d better bend over essentially. 

I really don’t want to go down that path too far but the analogy is useful, Alan, thank you.

Because it is the case that your double top doesn’t necessarily precede a bear market/crash.

So, what you’re really saying is look folks, the chart suggests you could be scared at this time because perhaps we recovered a bit too quickly, is that the real thing, is that the underlying fear, that we recover just too fast to be believable?

It’s kind of the bear trap.  Another word for it is a bear trap where people buy after the correction as they were in the middle of February, after the correction.

Yeah, buy in the dips and bargain hunting.

Everyone has bought in and it turns out to be a bit of a trap because the market falls again.  So, I mean the truth is that the US market is quite overvalued, or at least it’s a bit stretched.  It’s not as fully valued as it was in 2000 but it’s a bit stretched.  The problem is that we’ve now got inflation rising and so what the market is pricing in is three or four rate hikes this year.  So, if it turns out to be five that they suddenly price in or maybe six over the next 18 months then that’s going to lead to volatility.

Yeah, it will be dramatic.  I see Hamish Douglas coming out this morning and talking about that.  He said hang onto your chairs.  I suppose the worst thing about all of that is if the US tanks, drops and has its 20% correction which is looming, you have to say – and it’s going to come sooner or later – we’re going to have it too even though we are nothing as strong as them and as shareholders we haven’t made anything like the money they have in recent times.  Just looking at our own market this week was interesting, there was all sorts of – we had all the results, this is the middle of the results season now.

Well, Harvey Norman got whacked.

Harvey Norman got really whacked.

That was down 12.5%.

The worst drop in 24 years.  The result wasn’t that bad, their revenue was kind of flat and the property revaluations, which are really important to them, weren’t as good as previous time.  But, one of the things that would be comical if it wasn’t important was that Gerry Harvey had gone off and put an enormous amount of money into a dairy farm on the Harvey Norman books.  It’s a Harvey Norman diversification, not a Gerry Harvey diversification.  So, here’s this retailer that does furnishings, computers, and it’s buying into a dairy farm.  Everything that could go wrong has gone wrong down there and he did a $20 million write off yesterday.

I heard him on the radio, did you hear him?

I didn’t hear him but I’ve heard him…

Absolutely nothing to see here, it’s fine, we do this all the time, it’s absolutely nothing.

Actually, even Gerry Harvey doesn’t do this all the time, spend more than $20 million on a dairy farm.

I heard him clear as day, he said that’s what we do all the time, we’ve got hundreds of such investments, it’s absolutely nothing.  He is so emphatic he’s a bit like Donald Trump, you know.

Yeah, he is.

He is totally emphatic.

He has considerably more charm, though.  I mean, I know him, that is I’ve met him a few times, I wrote effectively his biography once upon a time.

You did.

I did about ten years ago so I used to deal with him quite a bit then. 

That must have been an amusing and entertaining period of your life, James.

It was, it was very entertaining and amusing, and he has a lot of charm and he had a great track record at that time.  But, I have to say the last ten years Harvey Norman – I mean, Harvey Norman’s share price basically is where it was in 2009.  So, the golden era, I think, has passed for Harvey Norman and the sort of things that Gerry used to have fun with and get away with, like buying a dairy farm, Harvey Norman buying a dairy farm, just won’t get away with it any longer.

I suppose if you look at Myer you’ve got to say having your share price where it was ten years ago is okay.

Sure, I know, but there’s people who can win.  Look at our friend Kogan or Noni B, a traditional retailer doing fine, JB Hi-Fi doing fine.  JB Hi-Fi is a good model, JB Hi-Fi is the nearest approximate really to Harvey Norman and they’re doing so much better.  One of the other things I thought talking about the dairy farm, the other funny thing about the dairy farm story with Harvey Norman was that it was almost counter intuitive because dairy has been a real winner in the results season.  A2 just fantastic, $8 billion stock now, shooting out the lights.

So, are we calling A2 an agricultural stock?

Well, it’s a milk, yeah absolutely, it’s a milk stock.  In fact this is our Mega Trend Moment, Alan, sponsored by the BT Financial Group.  The Mega Trend clearly I think is…

I’m excited now, this is great, it’s the Mega Trend.

For once at last it might really be happening, agricultural stocks.  I think there’s a lot of bold starts in this area but now you have companies like A2, even Bega…

I don’t think A2 is an ag stock, come on, it’s a consumer brand.  Goodness!  Heavens above…

It gets classified, all the milk stocks do.

Just because it sells…

Including Bubs, which we will deal with in a few minutes.

That’d be like calling Heinz an agricultural stock because it sells baked beans and you grow baked beans.

Well, yeah but it’s processed foods.

I got you there.

No, I don’t agree.  Milk is an agricultural product, so is cheese, Bega Group up 30% profit yesterday.  So, these ag stocks and food stocks, and food related stocks…

And, of course, it’s all about China.

And it’s all about China.  But, if you want to see a hot area of the market right now have a look at that area.  One other pattern I saw during the week, just talking about retailing, was Amazon cutting its prices, you said, in Australia.

Yes, my attention was drawn to a report just put out yesterday by Morgan Stanley in which it’s gone and compared all the prices that Amazon is charging.  Because, you might remember when Amazon launched a few months ago…

Its prices, a lot of them were dearer than offline.

And now, I’ve got them in front of me now so here we go.  Sports products price differential on the 5th of December was 1%, Amazon was 1% below…

And differential with whom, with which?

With existing retailers on average.   So, they’ve done quite a lot of work here.  1% on the 5th of December, now 16% below.  Electronics on the 5th of December they were 13% above the rest of the market, that is to say Harvey Norman and JB Hi-Fi, and co, now they’re 11% below so that’s a 24% shift in a couple of months.

Yeah, so now they’re discounting.  Well, you wonder why are they doing it now.

Groceries, so they’ve actually lifted their prices of groceries.  In December they were 13% below and now they’re 1% below so I don’t know what’s going on there.  Apparel they were 3% above the prices on 5th of December and now they’re 17% below.  So, they’re coming after them, Amazon is coming everybody.

Yeah, they’re fine tuning their offering.  Why do you think they waited until now?

They’ve just got to get their systems right.  They’re in no hurry, they’re playing a long game here, Amazon, long game.

Interesting isn’t it.  Who did those numbers by the way?

Morgan Stanley.

Morgan Stanley, right.

I’m pretty sure, is that right.  My computer has frozen up now.

Why don’t we talk about not just results season but the whole home prices and home loan areas are pretty interesting.

Well, today is the 1st of March which means CoreLogic has come out with their February house price data.

Yes, have you had a look?

I have, and I spoke to Tim Lawless of CoreLogic this morning.  So, the national average house price in February fell 0.1% which was a bit less than it fell in January and December which is 0.3% in each of those months.  So, Tim is saying that the pace of decline looks like it’s slowing.

But, that’s a month on month figure, right, it’s a pretty narrow band.

I’m saying the difference between 0.1 and 0.3 is statistical noise, not that I’m a statistician but it’s not much.

Yeah, and also really it’s one month against the month before.

So, I don’t think we should take much notice of that.  I mean the decline in Sydney is continuing, that’s the main thing.

Is every city declining?

Except Hobart.

Except Hobart, yes, I was going to say that.

Hobart is up.

Right, well Hobart is the exception that proves the rule.

Well, everyone is going to Hobart because it’s cheap.

Catching up.

And Sydney house prices have fallen 4% from the peak.  Tim reckons that history would suggest that the decline will end up being 10% in the main capital cities.  Another interesting point is that capital cities are all falling apart from Hobart whereas regional areas of both New South Wales, Victoria and Queensland, are all rising still.

That could definitely be the resource towns.

Could be, yes.

I would think so, if you look at all those resource towns.

But, the best performing town in Australia is Geelong.

Right.

Which is kind of close enough almost to be a suburb really, of Melbourne.  But, the other thing about the regional areas is that their yields, their rental yields, are much stronger than the capital cities.

They always have been.

The reason that they get higher yields in regional areas is because those areas are seen to be less secure, there’s a higher risk element, but I actually think that’s rubbish, they’re not risky at all.

Well, they are risky if they’re linked with mining.

That’s true.

Pick a town in the interior of WA or Queensland and they really roll up and down.

But, I guess a lot of it also has to do with tourism because that includes the Sunshine Coast, Gold Coast, and they’re all getting a lot of Chinese tourists coming.

I think those yields are higher because the prices are lower as well.  I mean, the rent as a percentage of the value of the property would be considerably higher, so they’re getting like 4% to 6% outside the cities but inside the cities it’s only say 2% to 4%, and in the very middle of the city this is gross now, you’re only getting 2% or 3% rentals.  It’s one of the reasons I have been looking at the interest only loans issue all week actually because the RBA have finally come out and said they are concerned about interest only loans and you could say about time.  They were running at 60%, a majority of all investor loans 2014 to 2016, basically ’17, were interest only.  20% of home loans, owner occupier loans.  And then a third of the investor loans were also fixed rate.  So, of course these are all going to start coming out onto the market and the RBA says from next year you’re going to get the first of the fixed rate loans coming due.  The thing is the banks aren’t going to re-sign them because the banks have – ANZ bank, they were running like the rest of the market at 30% to 40% on interest only, do you know what percentage of their book was interest only loans the last quarter?  14.  So, they’ve just stopped it.  So, all these people who were on interest only fixed rate arrangements, and not used to paying principal not to mention higher rates, they’re really going to get hit square in the jaw.

I guess this would be how the house price correction turns from 10% to 20%.

It could be because if you just can’t make the repayments you’ve got to sell.

You’ve got to sell.  So, the reason that the price kind of starts to accelerate the decline is because a lot of stock comes on the market. 

Yeah, like emergency sales.

Yeah.

I don’t think we’ve seen any yet but I was talking to several different people in the market.  One of them is Martin North at Digital Analytics, he was saying that typically often the interest only fixed rate customer was someone with multiple properties.  So, there’s like a chain reaction and they are actually the very people who are going to get crunched because the rental yields, as we were just saying, are hopeless.

So, there was a story in the Daily Telegraph this morning quoting Harry Dent, have you heard of him?

Yeah, he’s a doomsayer, he’s a professional doomsayer, isn’t he?

He is.

Harry Doom.

He is your absolute stop clock.

Yeah, he has forecast ten of the last two crashes.

So, the headline and the story this morning in the Telegraph says that Harry Dent reckons the Australian house prices are going to fall 50%.

Yeah, that’s so Harry Dent, this is like double everything.

So, I looked at the story and the quote is he doesn’t know what they’re going to fall but it could be 20%, 30%, 40% or 50%.  So, he quoted all of those numbers.

The reporter took the top one.

Of course, the headline goes with the 50.

So, it’s a range.  So, even Harry Dent is cautious about the extremity to which he’ll say there’s going to be a property fallout.  That’s worth thinking about.

Let’s face it, Harry Dent wouldn’t have a clue.  He’s flogging a book, is Harry, and fair enough.  The way to get attention to flog a book is to predict doom and gloom.

Yeah, say something extreme, it does work.  Before we do letters and correspondence, because there’s some very good questions this week, there was a few other things.  What else did we have here?

You’ve got the rebirth of the taxi here.

Yeah, I thought that was interesting.

I didn’t know they had to be reborn.

Yeah, because it’s all been Uber, Uber, Uber for years now.  If you want an indication of just how totally Uber came in and wiped the floor with everybody Cabcharge share price fell 80% top to bottom.  But, it came out with its results this week and its revenue was up 14% for the first time in a long time.  These are all half year results by the way, folks.  Its losses – it’s not totally in profit yet but its losses have really narrowed down, they’re nearly back around break even now.  I never thought I’d see the day but they’ve been taking in all the new payment system, Alipay and all the different payments that people like to use who use Uber and they don’t do surge pricing which I think is a really decent thing because surge pricing is nasty, I think, on Uber.  When you really need to go to the airport at Christmas Eve or something that’s when Uber is really going to hit you, taxis don’t adjust their fares, it is what it is.  So, I think there’s something of a return going on here and I wouldn’t be surprised to see taxis actually come back a bit.

There you go, folks.

You don’t agree?

I wouldn’t have a clue. 

You’re an Uber person and I’m an Uber and taxi person.

I use both.

I use both, yeah.

Well the thing is you can’t really hail an Uber, you can’t.  So, at least taxis are always going to have rank and hail.

Yes.

The booking of cars is going to become quite competitive clearly, and is already competitive.  It won’t be just Uber there’ll be tonnes of them probably.

Yeah, there probably will be tonnes of them but there’s a certain, dare I say, professionalism about taxis at their best.  At their best, not in the main.  Okay, now the first question I want to bring to your attention, Alan, is we were talking about milk stocks which some people don’t think are agricultural stocks, and we could talk about a goats milk stock which we got very excited about recently called Bubs.  Now, the question is from Paul and he says I love the podcast, always entertaining, I listen to Alan and Kirby each week talk about Bubs as the best performing stock of 2017.  But there’s quite a few…

I love that Alan and Kirby, I get a Christian name and you get a surname.

That’s right, yes.  I have compiled some graphs – yeah, Paul very kindly actually did graphs and other things to prove that…

I didn’t look at his PDF, six pages, heavens.

Six pages, basically Paul’s point is you guys are wrong, Bubs was not the best performing stock.

Well, what was the best performing stock?  Come on, Paul, what is it?

We’ll deal with one part at a time.  First of all, Paul, yes, apologies. 

Eric’s going to look it up for us on his trusty smart phone.

You are, of course, correct.  It wasn’t the best performing stock, it was probably one of them.  A2 Milk was in there, I think it was the second best performing stock of the year but I can’t remember what the best one was.  But, for what it’s worth Bubs did approximately fourfold, 400% lift in price which is pretty fab, but it wasn’t the best stock on the market.  So, thank you, Paul, for pointing that out.  Maybe by the end of the show our producer will have found what was the best one or maybe someone could send that into us.  Now, do you want to take the next question, Alan?

I’ve got a question from Gillian.  I have a question for The Money Café, which is one of my favourite podcasts.  What do you mean one of?  With regard to an ETF like HVST the share price has been dropping since I bought in but the yields are good.  Can an ETF ever go broke and if so what happens to our investment?  If not does that mean it’s a really good yield play?  Come on, James.

Okay, this is a very good question, Gillian.  It’s in three parts, so the first part was that you have HVST which I guessed was this dividend harvester ETF which was a great idea at the time, I’m sure, because it was an ETF that concentrated on the highest yielding stocks and on the basis that they were doing so well during the hunt for income that they will go and go.  But, they haven’t of course because the market has kind of turned against the high yielding stocks and I looked at the graph for HVST dividend harvester and it’s really bad, I mean it’s really been dropping.  It must be one of the weakest performing ETFs around.  So, that was tough luck, Gillian, only to say that that’s the nature of ETFs if you buy a theme-based ETF as that was, the theme being high yields.  If the market turns against the notion of high yields it’ll turn against the ETF.  Can an ETF ever go broke?  ETFs can be closed down, I’ve known that to happen.  I haven’t seen one actually go broke.

No, they can’t go broke because when people pull their money out of them they just close down.

Yeah, they close them, that’s right.  So, they don’t go broke.

But, it is the case that as the money gets pulled out they have to sell assets in order to pay the redemptions.

And everyone in the market would know that they’re selling so they wouldn’t be great in terms of their negotiation power, so they don’t go broke but they can kind of fizzle out basically and that has happened a few times in some of the more obscure ETFs around.  The other issue about ETFs is they can have poor liquidity, so some of our correspondents have mentioned that in the past on the show, that the small ones, the more obscure ones, can have very low liquidity which means you can’t actually sell them at the price that might be in the paper or on your screen.  Is it a good yield play?  Well, I’m sure it is a good yield play but probably for all the wrong reasons, Gillian.  Okay, a question from Steven, Alan…

It’s not a question, really.

Is it not?  Just a quick note to let you know – this is about Australia Post, why don’t you bring us up to speed?  I was very cynical last week and said Australia Post might just be being nice to Steven because you gave them a scare.  He says they’re doing better than that.

Well, Steven wrote into us complaining about how he got such a shocking service from Australia Post and so I rang him up to find out what was going on and he’s got a wallpaper store, or maybe more than one, I can’t remember.  If you’re out there, Steven, I’m sorry.  But, anyway I rang him up and he told me his story and then I rang up Australia Post and said you’ve got to look after this bloke.  Steven has written in to say we’ve received assurances both verbally and in writing that all has been resolved and things will return to the state they were in before all the policy changes for us.  I was further called twice by Ted Butler, Director of Sales for Australia Post to ensure resolution.  I made a dairy note in three months’ time to let you know how things have panned out.  Thanks for your facilitation.  So, there you are, folks.

There you go, Steven.

Any problems you have ring us up or write to us and we’ll sort it out for you.

We’ll become an Esther Rantzen or Ralph Nader of Australia.

If you have any difficulties with anyone like Australia Post we’ll get the boys to go around and lean on them.

Do come back to us in three months, Steven, we will make sure that it wasn’t a stunt.  It doesn’t sound like a stunt to be fair, they really are trying.

Now, Adam has got two questions.

Yes, now here comes the issue of the great stocks of the last 12 months.  Wattle Health is actually also in the infant milk game, I’m pretty certain, and that was the best performing stock of the year.  So, thank you for that, and it did very well.

And AVZ Minerals 1053%.

It probably started at a tenth of a cent.

This is unbelievable, AVZ Minerals has got a possible lithium mine in the Congo.

Yes, there you go, they’re the ones that can really fly.  Okay, do you want to read out some more questions?

So, Adam has got two questions.  He says he wants our podcast to go a bit longer.

Yes.

Well, we could talk all day, Adam, fair dinkum.  Anyway, question one; I was wondering if there was a way that regular people can download a spreadsheet of current market information for the ASX 200, I mean like the same info you get in the newspaper but in digital form so I can filter the information.  I don’t know.

There’s lots of places you can go for that one, Adam.  I mean, you can go to the ASX itself for a start.

Can you get the whole ASX 200?  I don’t think you can.

You can get quite a lot.  You could also go to something like Google Finance or Yahoo Finance, surprisingly good and still give quite a lot away for free.  You can do quite a bit of work on those ones, especially Google Finance I have found over the years for what it’s worth.  So, that’s pretty easy.

There you are.

You’d certainly get more than you’re getting at the moment.  Okay, we’ve one last question.  It’s reporting season and Blackmores have reported, Blackmores being the vitamins and infant milk – so much infant milk.

So, an agricultural stock, James.

It is an agricultural stock, Alan, and so many of them today.  Earnings are up – this is from Adam – dividends are up but my portfolio is down a lot, why is this?  I have my own theories but would love to hear this discussed on the podcast.  Well, we don’t know what your portfolio is, Adam.

Adam, do you mean your portfolio of Blackmores shares?  I don’t know what you’re talking about.

They can’t be, if they’re up – no, maybe he is saying that.  Earnings are up and dividends are up but my portfolio is down.

I’ll take a look at what Blackmores has done, maybe he’s talking about Blackmores has fallen and why has it fallen.

I thought Blackmores had recovered fairly well in recent times.

My computer is playing up. 

We’re struggling with technology here, Adam, but we’ll just have a quick look for you.  Blackmores of course along with Bellamy’s had a fantastic run – yeah, so here we are, Blackmores is $128 and over the last year – we can just see where it is…

It’s down.

Yeah, it’s down a little over the last year.  So, yes it has, so that’s why your portfolio is down, Adam, the stock itself is down.  The dividends are up as you say and you might be puzzled why the earnings are up and the stock is down.  Well, there is a link obviously between profits and the price of the stock but it’s not umbilical, it can vary.  I think the issue with Blackmores is they were so highly rated and people had such high expectations of them that it was going to be very hard for that stock to stay up where it was. 

Okay, I think that’s more or less it for the week, Alan.  We will come back to you in a week’s time and of course don’t forget you can subscribe to The Money Café on Apple Podcasts or your app of choice.  While you’re there it’s really helpful if you could leave a review or rating, we’re delighted with the reviews and ratings we have there already but we’d love to see some more.  It would be really good for us if you did say what you wanted to say about the show on that site.  Also, send in a question, we’d love to have some more questions, you can see the questions are getting better every week.  Tweet us your thoughts, you can use the hash tag themoneycafe, all one word, or e-mail us and the e-mail is hello@theconstantinvestor.com.  Okay, until next week, I’m James Kirby, Wealth Editor at The Australian.

And I’m Alan Kohler, Publisher of The Constant Investor.

Talk to you soon.