R-Day Nears

  • Concentrated debt
  • New ‘Gigastocks’
  • Double top
  • Falling down?
  • Our favourite short
  • In the mailbag

We’re closing in on R-Day. That is ‘Recession Day’.

The Australian Bureau of Statistics is due to release the latest gross domestic product (GDP) numbers at 11:30am on Wednesday, 1 March.

According to the latest survey by Bloomberg, economists predict quarterly GDP to be 0.7% for the fourth quarter of 2016.

If they’re right (And why wouldn’t they be right? They’re smart economists!) it will be a stunning turnaround. The third quarter GDP was -0.5%. That was worse than the forecast -0.1%.

Perhaps what makes things worse is that, historically, the surveyed economists have an awful track record. You’d think that over the past 15 years, they’d get it right every now and then.

But looking at the chart below, we can only find three occasions when the consensus of surveyed economists has gotten it right. Three. Three out of 60 isn’t a very good strike rate.

chart image

Source: Bloomberg
Click to enlarge

The white line denotes the actual quarterly GDP number. The yellow line denotes the surveyed number. As we say, only three times in 15 years has the analyst consensus picked the right number.

Our bet is that they’ll fail again. The consensus estimate is for 0.7% economic growth. But our bet is that they’re overly optimistic — to the extent that not only will the real number fall short of the estimate, but it will be a negative number, resulting in Australia’s first recession in 26 years.

Brace yourself. If Australia does fall into recession, next week the stock, bond, and foreign exchange markets could be their most volatile in years.


Overnight, the Dow Jones Industrial Average gained 34.72 points, or 0.17%.

The S&P 500 added 0.99 points, for a 0.04% gain.

In Europe, the Euro Stoxx 50 index fell 5.31 points, or 0.16%. Meanwhile, the FTSE 100 fell 0.42%, and Germany’s DAX index lost 0.42%.

In Asian markets, Japan’s Nikkei 225 index is down 30.78 points, or 0.16%. China’s CSI 300 is down 0.27%.

In Australia, the S&P/ASX 200 is down 45.26 points, or 0.78%.

On the commodities markets, West Texas Intermediate crude oil is US$54.34 per barrel. Brent crude is US$56.45 per barrel.

Gold is trading for US$1,249.85 (AU$1,620.63) per troy ounce. Silver is US$18.19 (AU$23.58) per troy ounce.

The Aussie dollar is worth 77.12 US cents.

Concentrated debt

The Reserve Bank of Australia governor speaks, the Aussie dollar climbs. Even when the governor, Philip Lowe, told parliament that ‘it would be better if it were lower still.

It seems the market doesn’t much care for opinion, even by the RBA governor. Not when that same governor tells parliament that lowering interest rates:

Would mainly work to get people to borrow more. And when they borrow more that will probably push up house prices even more, because they’ll mainly be borrowing for the purposes of housing, not to fund more consumption.

No more rate cuts, it would seem.

As you’d expect, the Aussie dollar responds by heading higher — to above 77 US cents. It’s now not far from what seems to be a level of resistance just above 78 US cents.

But whether the Aussie dollar is on the verge of bursting through to new highs, or merely flitting higher before a catastrophic fall, comes down to two things.

Two things that also happen to be among our favourite topics: an Aussie recession, and an Aussie house price crash.

On the matter of a house price crash, Mr Lowe didn’t explicitly sound the alarm bells…or did he? You be the judge. Here’s what he told parliament:

The issue we’re discussing, internally, is how much extra fragility would that mean in the economy with household debt already at a record high. Is it really in the national interest to get a little bit more employment growth in the short run at the expense of creating vulnerabilities which would become quite dangerous in the medium term?

Take that to mean whatever you like it to mean. But to us it’s clear: high Aussie household debt will only get worse, causing an even bigger housing bubble, if interest rates fall any lower.

Of course, the assumption seems to be that it’s not already ‘quite dangerous’, in terms of high house prices and high debt.

We’d argue that high debt levels have been ‘quite dangerous’ for quite some time.

To argue otherwise is foolish, as far as we’re concerned.

As you can see from the chart below, Australia’s household debt to GDP now stands at 104.93.

chart image

Source: Bloomberg
Click to enlarge

In other words, the size of Australia’s household debt exceeds the size of the Aussie economy!

Furthermore, when you consider that one-third of people own their home outright, and one-third rent, it means one-third of Aussies are carrying the burden of a debt pile larger than Australia’s GDP.

In that context, we’d say that the situation is ‘quite dangerous’ already.

If only we could get someone at the central bank to agree with us.

New ‘Gigastocks’

Resource Speculator editor, Jason Stevenson, flashed the following chart before our eyes yesterday:

chart image

Source: Bloomberg
Click to enlarge

The chart shows the cobalt price, a little known element that plays a key part in the electric car industry.

Jason has been on this story since last June. Before the cobalt price soared 111.6%.

It’s all part of what he calls his ‘Gigastocks’ energy play. And yesterday, he released three new ‘Gigastocks’, which he says could rack up multi-digit percentage gains in the months and year ahead.

To check out the ‘Gigastocks’ story, go here.

Double top

Uh-oh! Your editor isn’t the only bear when it comes to the broad Aussie market.

Bloomberg reports:

Stocks in Australia are close to cementing a double top trading pattern that’s considered a bearish signal for technical analysts. The S&P/ASX 200 index formed its second top late last week and has gone on to fall five of the past six days.

Here you have it, in the chart below, marked by the red horizontal line:

chart image

Source: Bloomberg
Click to enlarge

A double top. What could it mean? Our (very) rudimentary charting analysis would say that if the market breaks downwards from this high, a fall in the region of 10%, at least, is in order.

Look out below.

Falling down?

Speaking of looking out below, more from Bloomberg:

Iron ore’s having a reality check as investors question whether the exuberance that lifted prices to the highest level since 2014 is entirely rational given concern about elevated stockpiles in China, rising supply and statements of caution from some of the world’s biggest miners.

According to the report, iron ore traded on China’s Dalian Commodity Exchange was down as much as 9% from Tuesday’s high.

US dollar priced iron ore, delivered to Qingdao, China, yesterday fell more than 3% from the previous day.

The rising iron ore price has been a boon for the big Aussie iron ore miners: BHP Billiton Ltd [ASX:BHP], Rio Tinto Ltd [ASX:RIO], and Fortescue Metals Group Ltd [ASX:FMG].

Fortescue has been the big beneficiary. It’s up 218% over the past year. Due to its size, and its leveraged balance sheet, it’s not surprising that it tends to be the most volatile of the three Aussie iron ore miners.

But just as it has outperformed BHP and Rio during the current iron ore bull market rally, you know the flipside with leverage. If the analysis and fears are right about a bubble in iron ore prices, a falling iron ore price would likely mean a big fall for the Fortescue share price.

Not that this is the first time anyone has predicted bad news for Fortescue…and it won’t be the last.

Our favourite short

Another favourite of ours to short sell is Tesla Inc [NASDAQ:TSLA]. We mentioned it in passing in yesterday’s Port Phillip Insider.

We mentioned how the market seemed rather bullish on the stock in after-hours trading.

But when the market opened for real early this morning, investors were anything but bullish. The stock closed the day down US$17.52, or 6.4%.

The problem?

The headline from Bloomberg says it all, ‘Tesla Capital Raise Seen Near as Musk Burns Through Cash’.

And as the article notes:

Elon Musk is burning through cash and may need to raise more soon to produce the mass-market electric sedan Tesla Inc. is banking on to reach the mainstream consumer.

A capital raise would provide more cushion to the smallest and youngest publicly held U.S. automaker, which has huge expenditures planned ahead of introducing the Model 3 sedan in July. Tesla burned through cash in the fourth quarter and expects to spend as much as $2.5 billion in the first half of the year before fielding its first mass-market car.

Capital raisings aren’t uncommon for Tesla. In 2010, the company had 94.9 million shares outstanding. At the end of the last financial year, it had 161.1 million shares outstanding.

Not only that, but net debt has soared. At the end of the 2010 financial year, it had net debt of US$27 million. In other words, cash and liquid assets exceeded debt.

At the end of 2016, net debt stood at US$3.7 billion.

For shareholders, it’s a double whammy. Not only is the company diluting shareholders’ interests by issuing new shares, but it’s going further and further into debt.

Shorting Tesla isn’t an easy play. The company has an army of fanboy investors who will buy on the merest positive utterance from the company. Despite that, we still see it as ripe for shorting.

Perhaps not today. But when there is some momentum behind the price fall, we’ll be sure to blow the horn to short sell.

In the mailbag

Subscriber, KA, has some advice for us on climate change:

If you are concerned about whether or not Climate change will kill us all, you have no need to worry. Radiation spilling into the ocean from the Fukushima nuclear facility will render the planet uninhabitable within the next few years.

You won’t read about this in the main stream media, but one of the reactors has just fallen into the ocean.

We guess our tradition of eating fish on a Friday will be on hold for a while!