How is YOUR day?

  • Absentee investors
  • If we could, we would
  • Boos aplenty

You know you’re in for a bad day when [fill in the blank].

In the case of Elon Musk, he must have known he was in for a bad day when the SpaceX Falcon 9 rocket blew up on the launch pad early in the morning east coast US time.

Things aren’t going well for the Silicon Valley pin-up boy. Controversy has swirled around Musk in recent months due to the takeover of SolarCity Corp [NASDAQ:SCTY] (an Elon Musk company) by Tesla Motors Inc [NASDAQ:TSLA] (another Elon Musk company).

The markets have rightly viewed the takeover as a bailout. If not for the takeover (bailout), some have argued that SolarCity wouldn’t be able to survive.

As a consequence of the rocket explosion, the Tesla stock price fell in sympathy. Tesla isn’t related to SpaceX — except that both are Elon Musk companies. It closed the day down US$11.24, at US$200.77.

Despite rising costs and rising losses, Tesla and Musk have so far been able to avoid pressure with a well-timed message on Twitter here and there…usually boasting how the company plans to increase production.

Each time, the stock has taken off as the Tesla fanboys have become euphoric at the news. But can that last? We’ll see. This isn’t the first time a SpaceX rocket has exploded. And maybe it won’t be the last.

Markets

Overnight, the Dow Jones Industrial Average gained 18.42 points, or 0.1%.

The S&P 500 index fell 0.09 points, for almost no percentage change.

In Europe, the Euro Stoxx 50 index fell 5.64 points, or 0.19%. Meanwhile, the FTSE 100 fell 0.52%, and Germany’s DAX index dropped 0.55%.

In Asian markets, Japan’s Nikkei 225 index is down 50.92 points, or 0.3%. China’s CSI 300 is up 0.28%.

In Australia, the S&P/ASX 200 is down 43.76 points, or 0.81%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$43.44 per barrel. Brent crude is US$45.75 per barrel.

Gold is US$1,313 (AU$1,737) per troy ounce. Silver is US$18.93 (AU$25.04) per troy ounce.

The Aussie dollar is worth 75.57 US cents.

Absentee investors

The Aussie market is down nearly 1% as we write. That’s what you call a meaningful fall.

But really, all markets are in a holding pattern. Indirectly, it’s all because of those scoundrels at the US Federal Reserve.

The markets and investors can’t and won’t do anything these days without first considering the likely actions of the Fed.

Although, as we say, the Fed is the indirect problem. The direct problem involves the US payroll numbers, which are due to be released this evening, before the US market opens for trade.

The issue here is that the market (rightly or wrongly) believes the payroll numbers will influence the Fed’s next decision on interest rates.

If the numbers show unemployment is falling, the Fed is more likely to raise interest rates. If the numbers show unemployment is rising (or falling less than expected), the Fed is less likely to raise interest rates.

Depending on which way the numbers fall, the market will try to guess which way the Fed will fall.

This is how the markets work. They’ve been taken over by macroeconomics and macro-economists. Don’t worry about individual company earnings…instead, spend your time deciphering the latest gobbledygook coming from the Fed.

It’s a wonder anyone even bothers to invest these days.

That’s the thing. Maybe they aren’t investing. The top part of this split chart below shows you the performance of the US S&P 500 index going back to 1990. The bottom part of the chart shows the traded volume of the stocks in the index:



chart image

Source: Bloomberg
Click to enlarge


Aside from a brief spell in 2014 when volume dropped, today’s trading volumes are the lowest since 1997. That’s nearly 20 years ago.

You could argue that back then, volumes were low because the market rally hadn’t taken off quite yet. You can see the volume increase starkly from 1998, through to the volume peaks in 2001 and 2002.

But since then, even as the stock market has rallied from the Dot-Com and Subprime crashes, trading volumes have been in decline.

It’s not just in the US where this is playing out. Check out the chart below. It’s the S&P/ASX 200 index in the top half of the chart, and the volume for stocks in that index in the bottom half of the chart:



chart image

Source: Bloomberg
Click to enlarge


The picture is the same. The mega-spike in volume in 2009 makes it harder to see the decline in traded volume, but it’s still perceptible.

The last time volume was consistently this low was in 2005. After volume (not surprisingly) peaked in 2009, the downward trend in trading volume is evident.

What’s to blame? It would be easy to blame it on the market itself. You could say that returns have been so bad, it’s just not enticing enough to drag investors back into the market.

That’s especially so when the Aussie property market continues to hold up so well, right?

We won’t deny that there could be something to that. But our bet is that the biggest reason trading volumes have dropped so much is due to the interference of central banks, the Fed especially.

The supposed aim of the Fed is to bring stability to the markets, by helping to keep a lid on booms and preventing major busts.

The reality is that all central banks, not just the Fed, only succeed in increasing instability in the markets.

An investor may buy a particular stock because they like its earnings prospects, or a new product it’s developing. They buy the stock because they believe it looks cheap.

But then, a member of the Federal Open Market Committee (the Fed’s interest rate committee) makes a statement somewhere about something, and the market falls — including the stock which the investor just bought.

The comment from the Fed member didn’t impact that company’s earnings. In fact, the Fed’s interest rate movements may not have any effect on the company whatsoever. Yet, a careful or misplaced word by a Fed board member here or there can send shockwaves through the market.

To the inexperienced investor, they can only ask themselves whether it’s worth all the hassle. Hand on heart, we’d have to say that we sympathise with that view.

Right now, the market has priced in a 34% chance of the Fed raising interest rates at its 21 September meeting. A month ago, it was just an 18% chance. Two months ago, the market had no more than a 2% chance of the Fed raising rates this month.

Oh, how things change. And depending on how the US payroll numbers pan out tonight, don’t bet against things changing again soon.

No wonder volumes are falling. And no wonder investors are staying away from the market.

If we could, we would

Getting back to Tesla. Short sellers must have cheered overnight as the Tesla stock price fell.

According to Bloomberg, 23.3% of Tesla’s stock has been short sold. That’s around 26.4 million out of 113 million shares.

That’s a big number. But the short sellers probably aren’t cheering yet. The stock price has tumbled several times over the past two years, only to rebound and reach a new high.

Our view is that Tesla, while a nice idea, is not a viable company. If we were so inclined, short selling the stock even after the overnight fall is an eminently sensible trade.

Boos aplenty

Just to follow on from the last two editions of Port Phillip Insider, this from espn.com:

Colin Kaepernick knelt during the singing of the national anthem Thursday night, continuing his protest before the San Francisco 49ers’ preseason finale at San Diego.

This time, he had company, as safety Eric Reid, who was not in [football] uniform, joined him in taking a knee just before the anthem began as boos rained down from the crowd.

When Kaepernick left the field following pregame warm-ups, he was greeted with profanity and obscene gestures from Leo Uzcategui, a 20-year Navy veteran in a military-green Chargers jersey with quarterback Philip Rivers’ No. 17 in camouflage numbering.

As we’ve said before, offend the military at your own risk. They just don’t like it when anyone questions their status.

Cheers,
Kris