Bang the drums…

  • Programming change
  • This isn’t a good sign
  • Desperate New York
  • Hot in Annapolis
  • Excited in Port Douglas

Page one of today’s USA Today business page:

Corporate earnings growth is again flashing green after four quarters of drowning in red.

Profit reports that topped Wall Street forecasts at the start of the third-quarter reporting season nudged the Standard & Poor’s 500 stock index’s earnings growth rate into positive territory, raising hopes the earnings recession that began in the second half of 2015 is coming to an end.

Fabulous news. We can almost hear the upbeat toe-tapping patriotic tunes of a John Philip Sousa-inspired big band march.

But wait a moment. Page four of USA Today’s business page:

Corporate defaults are at levels not seen since 2009, which was during the throes of the financial crisis. That’s surprising because companies with debt have gotten a gift this year: Interest rates remain low.


Why the difference? The key is in the last quote: ‘Interest rates remain low.’ That’s it folks. Some company earnings are rising because they’ve borrowed money, which has helped them to increase revenues and profits.

But low interest rates result in mal-investments. That’s where companies can borrow money on the cheap in order to invest in their business. Unfortunately, it means that bad businesses can borrow money too, and prop up their failing businesses.

However, even a bad business can only go so far on cheap money. Eventually, the money runs out. That’s why corporate defaults are at the highest level since 2009.

We’ve warned for some time that both the US and world economy is in bad shape. Nothing we’ve seen anywhere causes us to change our view on that matter…


Overnight, the Dow Jones Industrial Average gained 40.68 points, or 0.22%.

The S&P 500 added 4.69 points, or 0.22%.

Meanwhile, the Euro Stoxx 50 closed up 8.95 points, or 0.29%. The FTSE 100 added 0.31%, while Germany’s DAX closed up 0.13%.

In Asian markets, Japan’s Nikkei 225 is up 154.03 points, or 0.9%. China’s CSI 300 is up 0.24%.

In Australia, the S&P/ASX 200 is up 11.14 points, or 0.2%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$51.44 per barrel. Brent crude is US$52.65 per barrel.

Gold is US$1,271.79 (AU$1,652.89) per troy ounce. Silver is US$17.72 (AU$23.04) per troy ounce.

The Aussie dollar is worth 76.94 US cents.

Programming change

One short note. Yesterday I told you to watch your inbox at noon today. However, there has been a change in programming. Watch your inbox at 6:00pm AEDT this evening.

Until then, check out the final two videos in the special series here and here.

This isn’t a good sign

Bad news. Bloomberg reports:

Australia cut jobs in September, led by the biggest plunge in full-time employment in more than five years. The currency fell.

Employment fell 9,800 from August; economists forecast 15,000 gain.

Jobless rate fell to 5.6% from a revised 5.7%; economists forecast 5.7%.

Full-time jobs slumped by 53,000; part-time employment advanced 43,200.

These days, the jobless rate is pretty much irrelevant. Anyone who works at least one hour per week is considered an employed person.

The important point to note is the fall in full-time jobs and increase in part-time jobs. That’s not good. We’re certainly not ready to believe that Aussies are voluntarily overlooking full-time jobs in favour of part-time jobs.

This news perhaps goes some way to supporting a story in today’s Age newspaper. We quote:

More Australian homeowners are set to fall behind on their mortgages, Moody’s predicts, due to the slump in the resources sector and the potential fallout from an apartment-building boom.

The credit ratings agency on Wednesday said the proportion of borrowers that were more than 30 days behind on their home loans climbed to a three-year high in May, of 1.5 per cent.

Be clear on that. Full-time jobs down; mortgage delinquencies up. We’ll agree that it’s still a small number.

But this could be the start of a dangerous trend. It’s something to watch. For now, the biggest delinquencies are in Western Australia. That’s not surprising, given the collapse of the mining boom.

Even if the mining sector recovers, will it reach the glory of the mining boom years? We doubt it. Although, BHP Billiton Ltd’s [ASX:BHP] top brass have gone on the record saying the sector is on the up again.

For that, we’ll have to wait and see. But regardless, the boom years are over. Folks in mining areas are beginning to migrate to the east coast. That includes those who hail from the west, and those who went there from the east, seeking their fortune.

We can only hoped they saved a few bob, and didn’t spend it all on expensive housing.

Migration from west to east could boost the east coast. Arguably, that’s already happening. After all, the mining boom didn’t just end last week. It could explain why Sydney and Melbourne house prices have skyrocketed.

But don’t expect that to last. Australia has had a string of good luck in recent years. The strong immigration levels through to 2011 (along with a booming China) helped prevent a major house price crash when prices plummeted around the world.

And now, west to east migration is likely propping up east coast house prices again. But what happens when the migration stops, or slows to a trickle? What will save the Aussie housing market then?

We can’t know for sure. But here’s one guess: Don’t be surprised to see a sudden relaxation in foreign ownership rules of Aussie housing. Suddenly, the Aussie government won’t be able to help itself as it begs the Chinese to buy ‘gold plated’ Aussie housing.

It’s not just in Australia that things are looking bad. As we showed you at the top of this letter, the US economy is heading for trouble as well.

Desperate New York

What’s one sign of an economy in trouble? That’s easy: protectionism.

When a government needs to protect an industry from competitors, it’s because that industry is having a tough time of it.

As your editor is due to leave Annapolis tomorrow in order to head back up to New York, we noted the following story from the Financial Times with keen interest:

Airbnb faces a fight for its life in the Big Apple as Andrew Cuomo, New York’s governor, prepares to sign a bill that would in effect end the home-sharing company’s business in New York City.

How strong can the New York City economy really be if the huge hotel industry feels threatened by the likes of Ma and Pa Liebermann, letting out their pokey one-bedroom apartment in midtown Manhattan?

We’ll answer that rhetorical question for you. It’s not strong. That’s why the hotels and hotel workers’ unions are in such a stink about it.

Rather than trying to shut down Airbnb, the hoteliers should show tourists and businesspeople the benefits of staying in hotels, rather than staying in someone’s house.

Your editor will admit to not being a fan of Airbnb. We checked it out once, but just couldn’t cope with the way it worked. The faux community spirit was nauseating. The idea that you needed to create a profile and have the hosts rate the guests felt creepy.

As did the perception we got from reading comments for various properties about how the hosts were great, and so attentive. Frankly, that’s why we prefer hotels. We like to put the ‘Do Not Disturb’ sign on the door the second we get to our room, and, magically, the entire hotel staff know not to disturb us (unless we want to stuff our face with room service meals, of course).

But, more than that, hotels should see the benefits of competition and start to innovate, just as the taxi industry is belatedly innovating.

For instance, we don’t recall taxi services having a mobile app to book fares before the emergence of Uber. Now they do. In New York, we saw ads for the Curb app, which allows folks to book a taxi.

Yes, the taxi industry worldwide is still a monolithic and protected industry, and, yes, they’ve fought tooth and nail to kill Uber. But innovation for the taxi industry has come out of it.

The hotel industry should take the same steps. Perhaps the reason they’re not is because the industry is in such a dire mess; a dopey app is probably way down the list of priorities right now.

On its own, this doesn’t mean much at all. But as we see it, it’s another sign. It’s something for investors to watch closely, along with the rest of the signs emerging from the markets that point to dangerous times ahead.

Hot in Annapolis

This morning we took a stroll around downtown Annapolis. It’s a nice little town. The home of the US Naval Academy.

But to us, it felt more like walking through the set of a US television show. At any moment, we expected Angela Lansbury’s ‘Jessica Fletcher’ character from Murder, She Wrote to emerge from one of the neat weatherboard homes.

chart image

Source: Port Phillip Insider

We’re told the weather this week has been unseasonably hot. The 20 degree Celsius-plus temperature is certainly more than we expected for late October.

But we’ll take warm over cold any day.

Excited in Port Douglas

Unbelievably, the Port Phillip Publishing investment conference, ‘The Great Repression’, begins a week from now.

Stunning. We’re thrilled and excited about it, and can’t wait to get there. And if you’re attending, we can’t wait to see you there, too. It’s going to be a terrific event.

In fact, I believe it’s going to be the best investment conference we’ve ever held. I believe it’s going to be the best investment conference in Australia until we hold our next event two years from now.

But, we also understand that the conference is expensive. There are the conference tickets, the flights, accommodation, meals, the whole works (although, we understand, some of your costs may be tax deductible ­— be sure to check with your accountant).

Because of the costs, we know there will be plenty of folks who can’t afford to go, or who choose not to spend their money on a conference. The good news is that there’s an alternative. We’re giving you the chance to watch every second of every presentation (including the breakout sessions and closed-door one-on-one interviews I’ll conduct with our international speakers).

If you’re looking for a way to get all the same advice and insight, without the cost of a trip to Far North Queensland, here’s your opportunity. For details, just go here.