Closed…

  • Increased warning signs
  • Giga
  • Perspective

The ‘Priority List’ for Jason McIntosh’s System Q is now closed.

More than 6,000 Aussie investors put their name down on the list. It’s one of the most popular and successful events we’ve ever held.

And today, those who managed to get on the ‘Priority List’ discovered exactly what System Q is all about.

If you joined the ‘Priority List’, make sure to check your inbox for details. Unfortunately, I can’t provide a link here, as access is only available for those on the ‘Priority List’.

Check your inbox now. Otherwise, if you didn’t join the ‘Priority List’, read on…

Markets

Overnight, the Dow Jones Industrial Average gained 32.6 points, or 0.16%.

The S&P 500 closed down 2.56 points, or 0.11%.

In Europe, the Euro Stoxx 50 index gain 0.06 points, for a small percentage gain. Meanwhile, the FTSE 100 gained 0.38%, and Germany’s DAX index climbed 0.26%.

In Asian markets, Japan’s Nikkei 225 index is up 78.91 points, or 0.41%. The CSI 300 is up 0.33%.

In Australia, the S&P/ASX 200 is down 12.9 points, or 0.22%.

On the commodities markets, West Texas Intermediate crude oil is US$54.05 per barrel. Brent crude oil is US$56.30 per barrel.

Gold is trading for US$1,236.86 (AU$1,611.53) per troy ounce. Silver is US$18.00 (AU$23.45) per troy ounce.

The Aussie dollar is worth 76.75 US cents.

Increased warning signs

Since late last year, we’ve warned about the possible onset of an Australian recession.

The technical definition of a recession is two consecutive quarters of contracting economic growth. Or, as the mainstream likes to ridiculously put it, ‘negative growth’.

Well, Australia has had one quarter of ‘negative growth’. We’re surprised the mainstream, with their hapless wordplay, doesn’t label it ‘one consecutive quarter’.

The issue now is whether a second quarter of contraction will follow the first.

If it does, a recession is the result — the first for Australia in 26 years.

So, could it happen? By our estimates, yes. It’s why we’ve highlighted what we like to call the ‘Big Australian Short’.

And the headlines don’t do anything to sway us otherwise.

Take these reports from Bloomberg:

Crown Resorts Ltd. Chief Executive Officer Rowen Craigie stepped down and the casino operator scrapped a proposed hotels listing in the latest fallout from a crackdown on its activities in China…

Crown shares climbed in Sydney trading on Thursday after the company announced a special dividend of 83 Australian cents a share. That soothed investors after high-roller betting at its Australian casino resorts almost halved in the first half and profit fell in the wake of the China detentions.

Interesting move. Profit falls from $743.8 million to $359.1 million, and so the company decides to pay out more of its cash to shareholders.

Given its debt position, rising ‘goodwill’, and a steep fall in ‘high-roller’ gamblers, we’d think Crown Resorts Ltd [ASX:CWN] would want to retain its stash of cash.

Clearly not.

More from Bloomberg:

Qantas Airways Ltd.’s first-half earnings dropped less than the company’s forecast amid a recovery in the domestic market, while competition on international routes weighed on air fares. Shares jumped the most in almost eight months.

Investors may choose to see the positive side of the fall in earnings being less than expected…but, nonetheless, it’s still a fall.

For the first half of the 2016 financial year, Qantas Airways Ltd’s [ASX:QAN] earnings were $688 million. A year later, earnings have fallen to $515 million.

What’s more, revenue is down too. From $8.46 billion to $8.18 billion.

Airline earnings can be hyper-volatile. Airlines have to make as much money during the good times as they can. Aussie investors appear joyful at the better-than-expected fall in earnings (if you get our drift), but we would encourage caution.

A small fall during one half could become a much bigger fall the following half, especially if a recession hits the Aussie economy.

Now check out this news update from Bloomberg:

The Australian dollar weakened after a government report showed capital expenditure fell more last quarter than economists forecast.

The Aussie slide against all its 16 major peers after the Bureau of Statistics said business investment slid 2.1 percent, worse than the estimate for a 0.5 percent drop.

Could this be an early warning sign for next week’s gross domestic product (GDP) number?

Remember, the third-quarter GDP fall was much bigger than economists expected. They did predict a drop, but only by 0.1%. That was way off the actual drop of 0.5%.

As for the capital expenditure number, ‘experts’ predicted a 0.5% fall…when it reality it was a 2.1% fall.

That’s not even close.

So what should we think about their guess for the fourth quarter of 2016? According to Bloomberg, ‘The Australian economy will expand 0.9% in 4Q, according to the latest results of a Bloomberg News survey of 36 economists…

Bloomberg conducted the survey in late January.

They were even more bullish than the same survey conducted a month before, where the prediction was for 0.8% quarterly economic growth.

Another warning sign? Maybe.

In one market at least, we see the signs of a ‘blow-off’ rally, before a painful crunch. Again, from Bloomberg:

Iron ore’s rally to the highest level since 2014 has been so strong even the industry’s champions are flagging the possibility of a pullback.

As prices soar toward $100 a metric ton, BHP Billiton Ltd. says the market is likely to come under pressure, Fortescue Metals Group Ltd. forecasts the raw material may moderate and Africa’s top supplier sees a deep retracement. At the same time, Macquarie Group Ltd. is warning of steep losses amid abundant supply, and Goldman Sachs Group Inc. has highlighted bulging stockpiles.

Warning signs. We see them…as far as the eye can see.

And yet the Aussie S&P/ASX 200 is up 18.8% over the past year. It’s nearing the recent 2015 high.

Investors appear happy.

Economists predict growth.

We remain fearful.

The ‘Big Australian Short’ is still in play.

Giga

Our favourite [cough] electric-car company, Tesla Inc. [NASDAQ:TSLA], released its latest results overnight.

Certainly not to your editor’s surprise, the result was a loss. Revenue came in at US$7 billion on the nose. The loss came in at US$674.9 million.

For the fourth quarter of the annual result, revenue was almost double the comparable period from a year earlier. Good news. Trouble is, while the loss was smaller, it was a still a loss — US$121.3 million.

Of course, the Tesla fanboys still can’t get enough. The stock was down US$3.88 in regular trading, but up US$4.16 in extended-hours trading.

What investor doesn’t love it when a company takes a huge loss?

And what investor doesn’t love it when a company misses targets…again? As Bloomberg notes:

Tesla has struggled to meet past production forecasts and has blamed a series of issues — including problematic seats in the Model X and too much hubris in designing the electric SUV — for missing previous quarterly and annual projections. The company delivered about 22,200 cars worldwide in the fourth quarter, bringing its total to 76,233 in 2016, less than an initial forecast for as much as 90,000.

Oh dear. As for the issues Tesla blames, we would remind Tesla that ‘problematic seats’ and ‘hubris’ are all in Tesla’s control.

We would also argue that Tesla relies solely on hubris for its seemingly ever-rising share price. We have no problem with the electric-car industry in general. We do have doubts about Tesla’s ability to meet its new targets.

Regardless, while some may consider Tesla to be a great investment, colleague Jason Stevenson says a direct investment in Tesla isn’t the only way to cash-in on the carmaker’s popularity and, dare we say it, the hubris surrounding the company.

You can find out all about it in Jason’s latest report, Gigastocks.

Perspective

Tesla’s market capitalisation is US$44.1 billion.

General Motors Company’s [NYSE:GM] market cap is US$56.7 billion.

Last year, Tesla produced 76,233 cars. In 2014, General Motors produced 6.64 million cars.

That’s all. Just thought we’d mention it.

Cheers,
Kris