Nobody Wins This War

Tuesday, 22 March, 2016
Albert Park, Australia
By Kris Sayce

  • Warning signs still flashing
  • Currency War III
  • A long wait to double your money

Sad news from Bloomberg:

The U.S. government said it may not need Apple Inc.’s help in unlocking a terrorist’s iPhone after all.

A court hearing set for Tuesday over a magistrate judge’s order requiring Apple Inc. to help the FBI unlock a phone was cancelled at the Justice Department’s request. The government said in a court filing Monday that it wanted to test a possible method for accessing data on the phone, which was used by one of the attackers who killed 14 and wounded 22 at a holiday party in San Bernardino, California, on Dec. 2.

The cancellation avoids a courtroom face-off with prosecutors at least for now. The Justice Department didn’t name who or what proposed a method for unlocking the phone. The government was ordered by the judge to file a report on the status of its efforts by April 5.

Governments are persistent. If they want something, they’ll get it…whatever it takes.

Now, on with the show…

Markets

Overnight, the US Dow Jones Industrial Average gained 21 points, or 0.1%.

The S&P 500 index gained two points, or 0.1%.

Earlier, in Europe, the FTSE 100 index fell five points, or 0.1%, while the French CAC 40 index fell 34 points, or 0.8%.

In the commodities markets, gold is trading at US$1,246 per ounce, while crude oil is trading for US$41.48 per barrel.

Incidentally, the Dow has now gained for seven consecutive days, the longest winning streak since October last year.

I’m not sure whether that says more about the strength of the US economy or more about the gullibility of investors.

Warning signs still flashing

Some folks would argue that there is a perpetual smell that hangs around the stock markets — and that it’s not a good smell either.

But, as it turns out, getting into the ‘smells’ business a year ago would have been a good idea for your portfolio.

As Bloomberg reports:

Inter Parfums Inc. gained for a fifth straight trading day after analysts gave a rosy outlook for the fragrance company, saying it could benefit from a pickup in growth and M&A activity.

The shares rose as much as 8.1 percent to $32.47 in New York on Monday, the biggest intraday increase in almost seven months.  Elizabeth Arden Inc., another seller of perfume and cosmetics, also has rallied in recent days. The stock jumped as much as 26 percent to $9.64 on Monday, its best performance in more than a decade.

We thought that would be worth playing around with. How have ‘smelly’ stocks (smelly in a good way) performed over the past year?

It turns out they’ve done pretty well.

We put together an index comprised of five major perfume stocks: Elizabeth Arden Inc [NYSE:RDEN], Estee Lauder Inc [NYSE:EL], Revlon Inc [NYSE:REV], Avon Products Inc [NYSE:AVP], and Inter Parfums Inc [NYSE:IPAR].

Here’s how this market capitalisation-weighted index has performed over the past year (white line) compared to the US S&P 500 index (yellow line):


Source: Bloomberg
click to open in a new window

The ‘Smell’ index is up 12.4%, compared to a 2.5% fall for the major index.

The outperformance has been even better over the past six months. The ‘Smell’ index is up 21.6%, compared to a mere 5.6% gain for the major index.

Is there any relevance to this?

Only that whenever we see the term ‘M&A’ bandied about as a reason for share price growth, it does send a little shiver down our spine.

That’s not to say that we dislike the idea of investing in takeover activity. We selected two of our recent Tactical Wealth stock picks on the prospects for consolidation in the Aussie media industry.

Even so, we also know that M&A (mergers and acquisitions) activity tends to peak in line with the stock market. The rapid growth in M&A deals was one of our big ‘crash warning signs’ that we issued in August last year.

And, based on what we see at the moment, there’s no reason to think that this warning sign is flashing any less brightly.

Here’s the latest update to a chart we first showed last year. It shows the total value of all M&A activity going back to 2005:


Source: Bloomberg
click to open in a new window

Last year, M&A deals hit an all-time high in terms of value, at US$5.7 trillion.

That was a big increase over the previous year’s US$4.5 trillion.

So, how are things stacking up this year? Looking at the raw numbers, not good. Total M&A deals this year are a touch under US$1 trillion — that’s barely US$4 trillion on an annualised basis.

However, historically, the big deals tend not to happen until the second and third quarters of the year. That means keeping close tabs on the M&A deal flow from 1 April through to the end of September.

In order to beat last year’s number, there will need to be bumper-sized deals during those months. If not, it could indicate that the market has indeed already hit the peak.

As a reference, check out when M&A deals peaked last time. That’s right, in 2007, at the peak of the stock market. Yet, it wasn’t really until we were well into 2008 that the trouble facing the market came to the fore.

We’ll keep our eyes peeled on this one. The real crash, when it comes, won’t start in dramatic fashion. It will happen slowly and gradually, until the critical mass of exiting investors finally cause the market to collapse.

Currency War III

Speaking of collapse, Jim Rickards, the strategist behind our Currency Wars Trader service, wrote this last week:

History and common sense support the claim in our title. Currency wars do end eventually, but they never end well.

What I call Currency War I (1921–1936) ended in trade wars, the Great Depression and the Second World War.

Currency War II (1967–1987) ended with the creation of the King Dollar standard, but only after the collapse of the gold standard, borderline hyperinflation and three US recessions from 1974–1981.

Currency War III (2010–??) will end with the collapse of the international monetary system, a collapse that grows closer by the day.

History is clear. Nobody wins a currency war.

Folks would do well to remember Jim’s point.

Nobody wins a currency war. Some may argue with that point. The Currency Wars Trader service, from Jim Rickards and Shae Russell, is certainly doing its darnedest to help Aussie investors profit from the currency war.

At the very least, it’s helping investors protect as much of their wealth as possible from the currency war.

The biggest problem with combating a currency war is the duration of said war. As Jim also noted:

The reason currency wars don’t end quickly — or well — is that they have no logical conclusion. One country devalues its currency, and then their trading partners devalue their currencies in retaliation. The first country can devalue again, but the response is the same: tit-for-tat devaluations, until everyone is racing to the bottom.

That dynamic can go on for years.

Devaluations give short term relief to the country that devalues, but does nothing to fix the long term global structural problems. The structural problems cause too much debt and not enough growth. Currency devaluations are an attempt at a monetary solution to a structural problem. Monetary solutions cannot fix structural problems.

The way to fix structural problems is with structural solutions, such as fiscal policy, infrastructure investment, tax cuts, reduced regulation, education and technology.

But these structural solutions require political leadership and consensus. Right now, leadership and consensus are in short supply. It’s much easier for politicians to reach for a quick fix by devaluing their currencies.

Governments and politicians often criticise individuals and the private sector for what they claim is a lack of forward planning.

They claim that only governments can plan for the future and make big long term investment decisions, as individuals and businesses only think about the dollar going into, or leaving, their pockets today.

Obviously, that’s not true. Individuals and businesses plan for the short term and the long term all the time.

For the most part, it’s governments, politicians and central bankers that are incapable of sensible long term planning.

That’s why, with a single voice, they all threw trillions of dollars at their national economies in 2008 and 2009. The universal cry was that they couldn’t afford to wait and see the consequences of the economic crash. They had to act now, because they were certain the future would be bleak if they didn’t.

Since then, everything has been about the current, rather than the future. It’s why, out of the 14 countries in the Eurozone, 10 of them have two-year bonds yielding a negative interest rate.


Source: Bloomberg
click to open in a new window

By only planning for the current, rather than the future, as we explained last week, governments and central banks are ensuring the effects of the 2008 meltdown will linger for many more years.

Rather than the quick shock that would have jolted the market immediately in 2008 — if governments had allowed more banks to collapse — what we got instead was a global currency war.

And, like Jim says, no one wins when it comes to currency wars.

A long wait to double your money

To emphasise the point about the impact of currency wars, consider the interest rate for savings accounts.

Open up a NetBank Saver account with the Commonwealth Bank, and you’ll get a 3.1% introductory interest rate. After three months, the rate reverts to 1.8%.

As recently as eight years ago, savers could get 5%-plus for a similar online savings account. In other words, the income potential for savers has more than halved.

To put this in even more perspective, with an interest rate of 5%, it takes roughly 14 years to double your money.

But with an interest rate of 1.8%, it takes 40 years to double your money.

That’s why so many investors have felt the need to take bigger risks, and why consumers are reluctant to spend, as they know they’ll need to save more now in order to have enough savings to live from in retirement.

Who’s doing the long term thinking and planning? It’s not the governments and central banks, that’s for sure.

Cheers,

Kris

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End of day market data

If you have any ideas about what you would like us to include in our end of day market data drop us a line at letters@portphillipinsider.com.au, and type ‘Market data’ in the subject line.

52-week highs: 27 stocks, including Enero Group Ltd [ASX:EGG], Macquarie Telecom Group Ltd [ASX:MAQ], TPG Telecom Ltd [ASX:TPM], and St Barbara Ltd [ASX:SBM].

52-week lows: 12 stocks, including Brierty Ltd [ASX:BYL], Regional Express Holdings Ltd [ASX:REX], and Tabcorp Holdings Ltd [ASX:TAH].

Note: The stocks listed above are stocks that hit an intra-day 52-week high or low during today’s trading. The stocks didn’t necessarily close at the 52-week high or low.