Too much to lose…

  • This rally still doesn’t add up
  • ‘Tiny stocks’ still moving
  • In the mailbag

The pan-European statists must be getting a little antsy. As Bloomberg reports:

The U.K. referendum on whether to leave the EU remains too close to call, according to two opinion polls released late Monday.

The ORB poll for the Daily Telegraph, surveying people who say they will definitely vote in the June 23 referendum, showed Britons planning to vote to remain in the EU at 48 percent, compared with 47 percent intending to vote to leave the bloc. The ORB poll surveyed 800 people, without specifying how the survey was conducted.

An earlier poll conducted by the Times and YouGov, which also didn’t specify whether it was conducted online or by telephone, showed the “Remain” camp at 43 percent and those backing “Leave” at 42 percent.

Of course, as we’ve pointed out before, it doesn’t really matter. The vote is meaningless.

Because regardless of what happens, the British government and the European Union won’t allow Britain to leave.

Bureaucrats and politicians across Europe have too much to lose. These people aren’t a modern day Cincinnatus, willing to walk away at the peak of their power.

The bureaucracy has grown so much and the centralised power has become so immense, the bureaucrats simply couldn’t cope with going back to their mundane, provincial lives.

As part of the gigantic European Union, bureaucrats can control Europe-wide transport policy, defence issues, foreign policy, policing, and more.

If the EU no longer exists, then what will they do? Shuffle papers in the local planning department to approve (or not) a three story car park? Be judge, jury, and executioner for which suburban bus route gets the axe? What about that library renovation? Oh, the responsibilities!

Have no doubt, there is a lot at stake. And most of it revolves around the bureaucratic gravy train that is the European Union.

Britons can vote to ‘Remain’ or ‘Leave’, it doesn’t matter. The bureaucrats won’t let them leave


Overnight, the Dow Jones Industrial Average gained 113.27 points, or 0.64%.

The S&P 500 index added 10.28 points, or 0.49%.

In Europe, the Euro Stoxx 50 index climbed 4.35 points, for a 0.15% gain.

Meanwhile, the FTSE 100 index added 1.03%, and Germany’s DAX closed up by 0.04%.

In Asian markets, Japan’s Nikkei 225 index is up 94.26 points, or 0.58%. China’s CSI 300 index is down 0.15%.

In Australia, the S&P/ASX 200 index is up 23.88 points, or 0.45%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$49.56 per barrel. Brent crude is at US$50.39 per barrel.

Gold is currently trading for US$1,243 per ounce. Silver is US$16.43 per ounce.

The Aussie dollar is worth 73.66 US cents.

This rally still doesn’t add up

Yesterday, we showed you the wrong chart. We showed you a chart of the Australian government 10-year bond yield going back to early 2014.

The chart we meant to show you was a longer term chart going back to 1999. While the short term chart still made our point about record low interest rates, the long term chart better illustrates it.

So, here it is…

chart image

Source: Bloomberg
Click to enlarge

Of equal interest is the Aussie government’s two-year bonds. As the chart below shows, these too are trading at a record low — 1.579%:

chart image

Source: Bloomberg
Click to enlarge

And even after today’s interest rate decision (to keep the rate at 1.75%) by the Reserve Bank of Australia (RBA), we wouldn’t expect Aussie bond yields to rise much anytime soon.

The trend is in one direction, that’s clear from the charts — down.

And after all the talk about the US economic recovery and the prospect of further interest rate increases, even that isn’t such a certainty now.

As Bloomberg reported overnight:

June is out. July might be too soon. The Federal Reserve’s next interest-rate increase is coming, but even September isn’t a sure bet.

That’s the message investors and economists are taking from Chair Janet Yellen’s remarks Monday. Her comments were the last the public will hear from a Fed official before the central bank’s policy-setting meeting next week.

Most folks seem to think that Friday’s US jobs numbers put the kybosh on another interest rate rise. After the Fed raised interest rates last December, all the talk was about the Fed maybe raising rates two or three times this year.

But now time is running out. Unlike the RBA, which meets monthly (except for January each year), the US Federal Reserve’s Federal Open Market Committee (FOMC) only meets eight times each year.

If the Fed doesn’t raise rates in June, it then only has four more chances this year to do so. And if July is off the cards because that’s too soon, it only leaves three opportunities.

Time is running out. Of course, it makes you wonder: if the US economy really is as strong as you’re led to believe, why the hemming and hawing about raising rates?

If the recovery is so strong, why the heck won’t they just raise rates next week, and then again in July, and be done with it?

The answer (according to our sceptical eye) is that the US economy isn’t really as strong as the mainstream makes out.

One of our favourite measures of the strength (or otherwise) of the US economy remains the convergence or divergence between the Dow Jones Industrial Average and the Dow Jones Transportation Average.

This relationship is the central part of the ‘Dow Theory’. In simple terms, the argument goes that in order to justify high prices for industrial stocks, transport stocks should be high too.

That’s because, even in the digital age, goods bought still need to move from one location to another. So if industrial companies are doing well, transportation companies should be doing well too.

So, how is the relationship stacking up?

In truth, not great. Check out the chart below.

chart image

Source: Bloomberg
Click to enlarge

Even though the Dow Industrials (blue line) is only down 4.3% from its peak, the Dow Transports (white line) is down 15.6% from the peak.

This trend has played out for at least 18 months. Dow Industrial stocks rally strongly, and approach a new high…but Dow Transport stocks fail to follow suit.

There are disagreements even among adherents to the ‘Dow Theory’ about what signifies a significant alignment between Industrials and Transport stocks. So we won’t claim that the current divergence is proof of an impending crash.

That said, just as we’ve been cautious about stocks for over a year, the current set-up means we will continue to be so.

‘Tiny stocks’ still moving

As I write, the Aussie blue-chip index, the S&P/ASX 200, is up just 2.48 points, or 0.05%.

Meanwhile, that tepid move isn’t keeping down the market’s tiny stocks. As the following list of the top 20 biggest movers shows:

chart image

Source: Bloomberg
Click to enlarge

We’d wager that even the wisest of our Port Phillip Insider readers would struggle to identify more than three or four of the stocks on this list.

Yet four of them have produced triple-digit percentage gains today alone!

The ‘worst’ performer on this list goes by the stock code HXG. For your information, that stock is Hexagon Resources Ltd [ASX:HXG]. It’s a tiny $39.5 million market capitalised company.

What does it do? And why has it shot up so much today? No idea. But, it has moved, as many tiny stocks do. Of course, as an investor, hindsight is no good. You need foresight.

Stay tuned, and we’ll show you how you may be able to get hold of some ‘tiny stock’ foresight soon.

In the mailbag

The mailbag is full. You could fill a 10-gallon milk churn with the number of letters we’ve received about the plight of Australia’s dairy farmers.

  1. Maybe not that many, but we could at least fill an old pint bottle.

So, rather than print them all in one go, each day we’ll squirt the odd one or two in your general direction, as a milkmaid would the teats on a cow’s udder…[Reader’s voice: You are a qualified financial advisor, right?!]

Subscriber, Andrew, writes:

In reply to your Dairy farmer comment: I feel I need to reply. My uneducated response is below.

After suffering a 25% pay reduction due to roster changes and reduced hours along with an increased work load by my mining company employer (Yes one of the 2 big ones) because they could and supposedly in the interest of “maximising shareholder returns” I very much dislike the bad greedy corporate behaviour becoming the norm these days.

Re – “I know what I’m about to say won’t please farmers in general, but in response to Robin’s comment, our answer is simple, if somewhat short: tough.”

I might ask you what commodity do you produce to assist with our balance of trade?

When Australia faces serious financial challenges due to the cost of cheap imports amongst other influences that grossly exceed our export earnings, and international loans are called in or our currency is junk, there may be few primary producers remaining to feed our own people, let alone provide export earnings, you may find the shoe on the other foot. I suspect you may only have intellectual property to sell and no one to sell too, I guess the remaining primary producers would be within their rights to say to you, “Tough”.

I understand there are bad apples in agriculture (I know first hand) as there are in any industry. In the main most farmers are genuine hard working people who are only looking for a fair return on their time input and investment.

Immediately after Murray Goulburn retrospectively reduce its milk payment price to its suppliers, Fonterra also announced a retrospective milk payment reduction to its suppliers also. This was around the same time Fonterra announced “$406m Interim profit” and “Free cash flow for the six months to 31 January 2016 was $2.1 billion higher than the first half last year.”

In relation to the financial and corporate industry, I pose the question to you, “When is enough profit enough?” Is it when all the wealth is transferred to the greedy wealthy?

We are all in this greedy mess together, the last thing we need is cheap shots at each other within our own country, especially now we are participants in supposedly free trade agreements and the Global economy charade.

To answer Andrew’s question about our contribution to the balance of trade, we would say that we doubt our financial newsletters contribute a jot to it.

As our founder, Bill Bonner, often reminds us, ‘No one wakes up in the morning and says, “Say honey, we’re completely out of newsletters, we better get some more.”

Regardless, that doesn’t preclude us from having an opinion on the matter. If the qualification for commenting on Australia’s economy involved the necessity to be an exporter, it would be a rather dull conversation.

So, we’ll keep chirping away…if you don’t mind.

As for the charge that ‘We are all in this greedy mess together’, the implication is that the dairy farmers are ‘one of us’.

Afraid not. Australia’s dairy farmers are no different to the Wall Street, Collins Street, and Martin Place bankers who demanded a bail out after the 2008 crash.

Like the bankers, the dairy farmers were more than happy to squirrel away the profits during the good times…and then leverage up and borrow on the assumption the good times would last forever.

When they didn’t, and when the losses came, the dairy farmers showed that they were a right bunch of merchant bankers [Ed note: Know your cockney rhyming slang] too. They went cap-in-hand to the taxpayer, pleading for a bailout.

And like the bankers, they’ve succeeded. Of course, unlike the bankers, the farming industry has better PR. When the farmers gripe, the people (in general) fall over themselves to show pity.

We’ll go so far as to say that Aussie farmers have reached iconic status, perhaps on a par with the ANZACs. Who knows, maybe this time next year, the government will declare a public holiday.

City and country folks will rise at dawn, and solemnly watch the battling Aussie farmer (back pocket stuffed with taxpayer dollars) drive his cattle to market.

Banker. Farmer. They’re all the same to us. They’re happy to take the profits in the good times, but they want you to bail them out when things go wrong.

Unfortunately, gullible Aussies fall for it every time.