Join our live stream tomorrow morning…
- Twitter or Facebook us
- Good debt or bad debt?
- Goldman’s big call
- We don’t see this happening
- Is the risk worth it?
The countdown really has begun.
In just three hours we’ll welcome up to 650 guests to the cocktail evening at our Great Repression investment conference, here at the Sheraton Mirage in Port Douglas.
It’s going to be an extraordinary evening. It’s the biggest event Port Phillip Publishing has held in our 11-year history.
For the past week, we’ve explained how you can get your hands on our ‘virtual conference’ package. For details, go here. (Note: The special ‘virtual conference’ package ends at midnight this Friday. Don’t miss out.)
But today I can also reveal another innovation for tomorrow’s event. We will be live streaming my opening remarks to the conference on Facebook. You’ll be able to follow along live here. (Technology permitting!)
The event kicks off at 8:45am local time; that’s 9:45am AEDT. My opening comments will only run for five minutes or so, but hopefully it will provide some flavour for what this event is all about.
I truly believe that it will be the biggest and best investment conference in Australia this year, and quite possibly the best investment conference that anyone has ever staged in Australia.
Overnight, the Dow Jones Industrial Average fell 53.76 points, or 0.3%.
The S&P 500 index fell 8.17 points, or 0.38%.
In Europe, the Euro Stoxx 50 index fell 6.45 points, or 0.21%. The FTSE 100 gained 0.45%, while Germany’s DAX index fell 0.04%.
In Asian markets, Japan’s Nikkei 225 index is down 65.46 points, or 0.38%. China’s CSI 300 index is down 0.21%.
In Australia, the S&P/ASX 200 index is down 78.73 points, or 1.45%.
On the commodities markets, West Texas Intermediate crude oil is trading for US$49.34 per barrel. Brent crude oil is US$50.26 per barrel.
Gold is US$1,274.45 (AU$1,658.43) per troy ounce. Silver is US$17.77 (AU$23.12) per troy ounce.
The Aussie dollar is worth 76.85 US cents.
Twitter or Facebook us
Aside from preparing for tonight’s welcome drinks, and the opening remarks for the conference, we’re also putting together a number of questions for our behind-closed-doors interview sessions with our key speakers.
This is where you come in. Aside from these interviews, we’re also holding a number of public Q&A sessions with our speakers…and you have the opportunity to submit your own questions.
Even better news is that the three best questions submitted will have the opportunity to win a Perth Mint silver coin.
But in order to be eligible, you must submit your questions through Twitter, using the hashtag #TGR16.
Good debt or bad debt?
For a world already awash with debt, it was wonderful [sarcasm alert] to see yesterday’s results from Visa Inc. [NYSE:V]. As Bloomberg reported:
‘Visa Inc., the world’s largest payments network, posted fiscal-fourth quarter profit that beat analysts’ estimates as card spending by consumers increased.’
The report continues:
‘Global credit- and debit-card spending, including Visa Europe and adjusted for currency fluctuations, rose 47 percent from a year earlier to $1.86 trillion, the company said. Cross-border volume, a measure of customer spending abroad, gained 149 percent from a year earlier.’
The bearish argument is that this is another worrying sign of increased indebtedness — that folks may not be able to meet their obligations with cash, and so have to resort to credit.
Another bearish argument is that even if the increased credit card use isn’t as a result of indebtedness, but rather choice, it highlights potential risks as individuals increase spending, even though, worldwide, economic problems persist.
The bullish argument is that it’s only natural that Visa would see increased revenue and profits. The more people move away from cash and towards debit and credit cards, the more fees Visa gets to charge.
The increase in cross-border transactions also indicates an increase in online retail sales. The easiest way to pay online is with a credit card.
Furthermore, bulls would take the bearish argument about consumers spending more, and say that it shows an increase in consumer confidence. That, they will say, is a positive, not a negative sign.
So, who’s right? (Assuming that bulls and bears really are making those arguments, and that your editor hasn’t just made this up!)
In the interests of keeping this e-letter going, we’ll assume we haven’t made it up. The truth is that, so far this US earnings season, it’s a veritable mixed bag of results.
As Bloomberg notes:
‘Proctor & Gamble Co. added 3.5 percent after the world’s largest consumer-products company’s earnings beat forecasts. Caterpillar Inc. slipped 1.3 percent after reporting lower-than-expected revenue. Merck & Co. was little changed and Visa Inc. fell 0.8 percent even as their profits exceeded estimates. Under Armour Inc. plunged 16 percent as its outlook renewed concerns that growth is slowing.’
You can add to that Apple Inc’s [NASDAQ:AAPL] earnings result after the US markets closed.
Apple’s fourth-quarter revenue and profits were both lower compared to the fourth-quarter of 2015. Revenue was US$46.9 billion, compared to US$51.5 billion last year. Profit was US$9 billion, compared to US$11.1 billion last year.
And for the full year, revenue fell to US$215.6 billion, from US$233.7 billion. And profit fell to US$45.9 billion, from US$53.4 billion.
That’s the first annual revenue decline for Apple since 2001, and the first annual profit decline since 2013.
The implosion of Samsung Electronics Co Ltd’s [KRX:005930] Galaxy Note 7 product didn’t appear to help much. Apple’s stock price fell nearly 3% in after-hours trading.
So whether we’re right or wrong on this, we’ll continue to sound a note of caution on the progress of US company earnings. The best light the market can seem to shed on this earnings season is that profit growth will be flat, ending five consecutive quarters of falls.
Perhaps that is something to cheer about. But regardless, we’ll still point out that, whatever these earnings show, most analysts have still factored in a near 20% increase in earnings over the next year.
At some point the market has to realise that just isn’t going to happen.
Goldman’s big call
Of more direct importance to Aussie investors are the expected earnings of the big banks.
Again, from Bloomberg:
‘It’s going to be a “tough” earnings season for Australia’s biggest banks, according to Goldman Sachs Group Inc.
‘Full-year results due from three of the lenders – starting with National Australian Bank Ltd. on Thursday – are poised to show that a record-breaking run of profits is coming to an end amid higher funding costs, lower interest margins and rising bad-debt figures.’
In anticipation of the upcoming bank results, the banks’ stock prices have begun to react.
As we write, the Big Four banks’ shares are performing thus:
- National Australia Bank Ltd [ASX:NAB], down 1.6%
- Australia & New Zealand Banking Group Ltd [ASX:ANZ], down 1.4%
- Westpac Banking Group Ltd [ASX:WBC], down 1.5%
- Commonwealth Bank of Australia [ASX:CBA], down 1.8%
In truth, it’s not a happy day for the Aussie market in general. BHP Billiton Ltd [ASX:BHP] is down 1.6%.
But the real action is among the banking stocks. Bank of Queensland Ltd [ASX:BOQ] is down 2.6%. Bendigo & Adelaide Bank Ltd [ASX:BEN] is down 1.8%.
And overall, as I write, the Aussie market is now down over 100 points. That’s a 1.84% drop.
But the outlook for bank earnings isn’t the only reason Aussie stocks are tumbling. There’s another reason. You got it. It’s to do with those meddling central banks.
As Bloomberg reports:
‘Australia’s headline inflation accelerated last quarter, sending the currency up half a U.S. cent and prompting money markets to pare bets on an interest-rate cut.’
Yesterday, the chance of the Reserve Bank of Australia (RBA) cutting rates next week to 1.25% was 16.6%. It wasn’t a big probability, but some thought it could happen.
Today, following the inflation news, the chances of a rate cut are just 4.1%.
You know the drill with this stuff. Higher inflation means it’s less likely the RBA will cut interest rates, which means less cheap money to boost stock prices.
It’s New Market Economics 101.
If you haven’t already gotten used to it, what’s wrong with you? This stuff has played out for over eight years. And it’s not likely to change anytime soon.
We don’t see this happening
For the past year or so we’ve highlighted the disparity between the historical earnings trend of US stocks and analysts’ earnings forecasts.
We’re left wondering how the earnings trend could keep getting worse, while optimism continues to grow. It confounds us.
However, while we’ve shown you the chart for US earnings, we’ve neglected to show you a comparable chart for Aussie company earnings.
We’ll correct that glaring error today.
Below is a chart showing historical and forecast earnings for stocks in the S&P/ASX 200 index.
Click to enlarge
The white line to the left of the green line shows the past earnings per share of Aussie stocks. The white line to the right of the green line shows analysts’ forecasts for future earnings.
In the example we’ve shown you for US stocks, earnings need to rise around 19% over the next year in order to match forecasts.
That’s a big jump. And, historically (for at least the past 15 years anyway), such a rebound hasn’t happened outside of a recovery after a market crash.
But if you want to see a really big difference between actual and forecast earnings, look no further than the chart above.
In order to meet analysts’ forecasts, Aussie company earnings have to rise by a whopping 48%…in just one year.
Now, in recent years, the Aussie market does have a precedent of this happening. So could it happen again?
Unfortunately, we’d have to say the answer to that is ‘no’. The previous times it happened, the conditions were beneficial to the Aussie market’s two biggest sectors: banks and resources.
Bank stocks currently account for 28% of the main index. Resources stocks account for 16% of the main index.
In order for the Aussie index to record such a big jump in earnings, you would have to be confident that both sectors can churn out big profit growth.
As you’ve seen, the banks certainly aren’t about to do that. Goldman Sachs says the era of big bank profit growth is over.
As for the resources sector, sure, things have rebounded. But is it realistic to expect BHP Billiton and Rio Tinto Ltd [ASX:RIO] to knock up big double-digit earnings growth?
The market may surprise us, but we wouldn’t bet on it.
Is the risk worth it?
The words ‘hubris’ and ‘overconfidence’ spring to mind after checking out this report from Bloomberg:
‘Australia’s best-performing pension fund over the past five years wants to buy corporate bonds in emerging-market Asia for the first time ever.’
Or maybe it’s just desperation.
Anyway, who are we to criticise? Yet we can’t help but feel the only reason a pension fund is even looking at emerging market debt is because of low interest rates elsewhere.
This is what folks mean when they talk about moving along the ‘risk curve’. It means that, in the past, if investors wanted, say, a 5% yield, they could have bought Aussie government bonds.
But today, Aussie government bonds yield between 1.68% for a two-year bond, up to 2.6% for a 15-year bond.
Investors who want or need bigger returns have to look elsewhere.
The question is, just how much risk will an investor take for the sake of higher yields?
Investors could try 10-year Indonesian US dollar-denominated government bonds. For which reward they’ll get a 3.39% yield.
Not good enough?
How about Philippines 10-year bonds, paying a yield of 3.64%? If you think the presidency of the volatile Rodrigo Duterte isn’t a problem, then that could be just the market for you.
(Note: This is the same Duterte who reportedly called US president Barack Obama a ‘Son of a whore’!)
But if that isn’t good enough, perhaps the 6.77% 10-year Indian government bonds are more up your alley.
Although, bond aficionados will know that bond prices can move quickly when the prospect of risk rears its head. Those who invested in bonds during the Asian financial crisis will remember that all too well.
As a final note, it’s worth remembering that the yields on these bonds haven’t always been so low. In 2008, Indonesia’s US dollar 10-year bonds spiked above 14%.
Philippine bonds were above 20% as recently as 1999. And India’s 10-year bonds were above 12% during the same year – spiking to above 9% in 2008.
It seems clear to us that investors are desperate for yield — perhaps too desperate. As always, we shall watch with interest.