After the Trump Trade…

  • Signs
  • The Big Australian Short

We keep seeing headlines about ‘Trump Trades’ reversing course.

That may be true of some Trump Trades. But it’s not true of our Trump Trades.

In fact, as far as we can see, our Trump Trades are doing just about as well as we’d expect them to.

What were our Trump Trades? They were fairly uncomplicated: Buy gold; buy gold stocks.

Well, now another major trading opportunity presents itself. While the Trump Trades continue to hum along in the background, a new breed of trades emerges.

And if we’re right, these trades could be some of the most profitable trades for investors in 2017. Details below…

Markets

Overnight, the Dow Jones Industrial Average fell 27.4 points, or 0.14%.

The S&P 500 index fell 6.11 points, or 0.27%.

In Europe, the Euro Stoxx 50 index fell 26.4 points, for a 0.8% drop. Meanwhile, the FTSE 100 lost 0.66%, and Germany’s DAX index fell 0.73%.

In Asia, Japan’s Nikkei 225 index is down 20.29 points, or 0.11%. China’s CSI 300 is down 0.03%.

In Australia, the S&P/ASX 200 is up 40.63 points, or 0.72%.

On the commodities markets, West Texas Intermediate crude oil is US$52.96 per barrel. Brent crude is US$55.49 per barrel.

Gold is trading for US$1,216.03 (AU$1,605.26) per troy ounce. Silver is US$17.16 (AU$22.65) per troy ounce.

The Aussie dollar is worth 75.75 US cents.

Signs

Barely a day passes without your editor looking for some harbinger of doom.

Will we find it here? Will we find it there? Hark; is that the Grim Reaper scratching at the door?

Most of the time, our search is fruitless.

But, from time to time, a warning sign of potential and impending financial and economic disaster drops into our lap.

So it was yesterday, with this news from the Financial Times:

Shares in Australian supply-chain logistics group Brambles dropped as much as 16 per cent on Monday after the company said it expected sales revenue and profit growth for the current financial year to come in below its guidance ranges.

In a first-half trading update released on Monday morning Brambles said it expected first-half constant-currency sales revenue to grow around 5 per cent and 3 per cent growth in constant-currency underlying profit based on preliminary, unaudited financial accounts for the six months ending December.

The stock price fell from Friday’s close of $12.28 to finish yesterday at $10.34. As we write, it’s trading at $10.50.

So, what makes this a potential harbinger of bad — and worse — news to come? From the Australian Financial Review:

United States retailers have been reducing the amount of stock they’ve been ordering from a range of manufacturers across the consumer goods industries. This had also meant that Brambles had faced higher costs because of an increase in the number of pallets being returned, which bumps up transport costs, while other costs also increase because Brambles repairs those returned pallets as a matter of course.

Interesting. Read the mainstream, and you’ll hear that the US economy is slowly recovering, and further growth will be on the way, thanks to Donald Trump being in the White House.

But it doesn’t look that way if you look at Brambles Ltd’s [ASX:BXB] profit forecast.

And if you check out the Brambles stock chart going back to 2006, the last time the stock fell this sharply, it preceded the last US recession by a matter of weeks:



chart image

Source: Bloomberg
Click to enlarge


The red-shaded area denotes the official beginning and end of the last US economic downturn — from late 2007 to mid-2009.

Is it possible that the Brambles profit warning could be an indicator of trouble ahead?

Maybe.

But not if you listen to Wall Street. As you’d perhaps expect, Wall Street analysts are eyeing further economic growth.

Take FedEx Corporation [NYSE:FDX]. It’s trading at a share price of US$185.46, has a market capitalisation of US$49.4 billion, and a price-to-earnings (PE) ratio of 16.33.

It’s not excessively expensive. But neither was it excessively expensive in 2007, just as world markets topped out.

But what gives us even more reason for caution is the view of the analysts who watch the stock. According to Bloomberg, 17 of 26 analysts have a buy rating. Nine have a hold. None rate it a sell.

That in itself doesn’t necessarily mean the stock is set to drop. But when you look at the price targets, it does suggest that analysts may be overly bullish.

The analyst at JP Morgan, for instance, has a 12-month price target of US$230 on the stock. Getting there would require a 24% run-up in the price.

The analyst at research firm Cowen has a US$240 price target. That would require a 30% run-up.

FedEx isn’t set to release its next quarterly results until March. Before that, we could look at United Parcel Service Inc. [NYSE:UPS] as a sign of what to expect from the sector as a whole.

It’s due to report its full-year earnings at the end of January. The market appears to be pricing in both an increase in revenue and profit.

Perhaps so. But Brambles saw its share price fall 16% for a reason. It could be that Brambles is seeing what the transport industry and analysts are yet to see.

We shall watch with interest.

The Big Australian Short

Ah, a recession. A whole generation of Australians have never truly experienced one.

And if a recent story from Business Insider is right, that generation of Australians will have to wait a little longer. The report states:

Australia recorded a surprise trade surplus in November, the first seen since March 2014.

While it was driven by surging prices for Australia’s key commodity exports, crucially, volumes also increased, something that bodes well for Australian economic growth should it be repeated in December.

Tapas Strickland, an economist at the National Australia Bank, explains.

“The increase in trade volumes in November (LNG up 5%, coking coal up 12%, and iron ore up 1%) if repeated in December, should see the trade balance add to Q4 GDP growth,” he says.

“This should eliminate fears out there that Australia was at risk of recording a ‘technical recession’ after the weak Q3 GDP figures.”

We admire the positive thinking. But we lament the harsh reality that postponing a recession for another quarter or more is unlikely to do Australia any good.

The muddled mainstream thinking is that recessions are inherently bad. It’s assumed that an economy must avoid a recession at all costs.

Unfortunately, that’s not true. A recession is simply the natural reaction to an economic boom. It means that an economy has grown too far, and that it needs to correct.

To draw an analogy, trying to avoid a recession is the equivalent of a drunk trying to avoid a hangover by continuously imbibing alcohol.

Yes, the glut of booze may forestall a recession, but we hardly think it is doing the body much long-term good.

In fact, if central bankers and those in government had any sense, they would realise that if they really wanted to avoid economic busts, they should work to prevent economic booms.

Not that we’re in favour of government intervention, you understand. Simply reverting to a gold standard would be the last policy move a government would have to undertake.

The truth is that excessive booms have much wider and far-reaching effects on an economy than most folks realise.

You can look at any major industrialised city for evidence. A city like New York is still dealing with the consequences of the extraordinary building boom of the Roaring 20s.

Walk along any two or three blocks and you’ll see buildings in disrepair…crumbling before your eyes. Yes, there are many impressive buildings, but the old dilapidated buildings far outnumber them.

This is because economic capital during the boom went into building structures that were unable to withstand the test of time. They were no doubt built from subpar materials, or were simply excess stock that no one really needed for their business.

They were just the result of a boom.

The consequence is that, each year now, millions and billions of dollars of private and public money pours into the upkeep and repair of these structures.

In many instances, it’s a waste of capital. And in many instances, the rate of decay exceeds the rate of repair, so that the capital cost of repair and replacement continues to rise, putting a handbrake on real economic growth.

This is a problem facing all industrialised cities. Not just New York.

Australia faces its own infrastructure problems. But not the kind of infrastructure problems you’ll likely read about in the press. The message there is that Australia needs more infrastructure.

The press falsely believes that if you build the infrastructure, the economic growth will follow. That’s wrong.

Infrastructure is the reward for economic growth. You must put the horse before the cart, and not the other way around.

But even then, problems arise. A manipulated economic boom can cause people and businesses to assume the growth will last forever, so they overexpand and overinvest.

The Australian resources industry is one example. The Aussie housing and construction industry is another.

To us, it all points to one thing: Sooner or later, a much-delayed recession will hit the Aussie economy. And, unfortunately, after 26 years of avoidance, most won’t understand what to do.

It will create shock. Shock among the public. Shock among businesses. Shock among governments.

But among all that, it stands to create opportunities, too. As an investor, you should see it as your duty to protect your investments from the potential ravages of a recession, and, where possible, you should look at it as a potential opportunity to profit, too.

Released

We’re releasing our ‘Big Australian Short’ trade idea tonight. Make sure you’re in on it. For details, go here.

Cheers,
Kris