Open…

  • Agreeing with Pascoe
  • Thought balloon
  • Pricey coal
  • Best ever?
  • In the mailbag

Today we reveal ‘System Q’.

No prevaricating about the bush.

Check it out. It could turn out to be your best way to trade the markets. Those who already know about ‘System Q’ say it’s a revelation.

We think they’re right.

Details here.

After that, on with the show…

Markets

Overnight, the Dow Jones Industrial Average closed up by 15.68 points, or 0.08%.

The S&P 500 gained 2.41 points, or 0.1%.

In Europe, the Euro Stoxx 50 index added 5.21 points, for a 0.16% gain. Meanwhile, the FTSE 100 gained 0.13%, and Germany’s DAX index added 0.16%.

In Asian markets, Japan’s Nikkei 225 index is up 131.27 points, or 0.69%. China’s CSI 300 index is up 0.07%.

In Australia, the S&P/ASX 200 is up 21.92 points, or 0.38%.

On the commodities markets, West Texas Intermediate crude oil is US$54.15 per barrel. Brent crude is US$56.10 per barrel.

Gold is trading for US$1,252.85 (AU$1,630.84) per troy ounce. Silver is US$18.31 (AU$23.84) per troy ounce.

The Aussie dollar is worth 76.82 US cents.

Agreeing with Pascoe

It’s not often your editor agrees with Michael Pascoe of The Age, but we’re pleased to see that Pascoe has followed on after our bashing of the private health insurance sector last week.

Pascoe writes:

Little NIB was one of this reporting season’s star turns, the market applauding the 65 per cent surge in its first-half net profit to $71 million, and its chief executive afforded a lap of honour in the AFR, where he called for his industry to return to the good old days before Whitlam introduced Medicare, when 70 per cent of the population bought health insurance instead of the present 46-point-something per cent.

That’s the private health insurance industry that is one of Australian capitalism’s more galling sheltered workshops, where the government uses both sticks and carrots to push customers through insurers’ doors and rubber stamps annual premium increases that are multiples of the inflation rate.

Your editor bought shares in NIB Holdings Ltd [ASX:NHF] several years ago for this very reason.

There is an inbuilt price-rising mechanism in the way that private health insurers effectively bid for the price rise they’d like, which the government either approves or modifies.

The result is consistently-rising health insurance premiums.

Of course, we won’t give Pascoe a free pass entirely. As with all mainstream commentators, their response to a problem caused by government meddling is to encourage the government to meddle more.

Pascoe suggests that insurers should be forced to ‘enforce discipline on private hospitals’. We’re not quite sure what kind of discipline he advocates…but perhaps we’d like to see it.

The real solution to the problem of rising health insurance premiums is a solution that no mainstream commentator would ever support — free market healthcare.

And if you’re about to jump out of your seat and say that the ‘free market’ is the problem, then you’re completely wrong.

Remember, the free market is a market where there is an absence of government meddling. Just because private companies are involved in providing private health insurance doesn’t mean that it’s a free market.

The reality is that the Australian private health insurance industry is a crony-capitalist system, where the government outsources health insurance to approved insurers. The government then determines the price of the insurance.

That’s not the free market in action…not by a long shot.

But in order for the free market to work effectively, it requires the dismantling of the welfare state and government-supplied health services.

Only then can the free market achieve the kind of results that it successfully achieves elsewhere in the economy. Unfortunately, we doubt that any politician will ever have the guts to do it.

If the supposed standard-bearers of the free market — Ronald Reagan and Margaret Thatcher — were too cowardly to tear down the welfare state, there’s little chance that Australia’s political pygmies will go anywhere near such a controversial idea.

For that reason, NIB Holdings Ltd will remain as a shareholding in the Sayce family super fund. And long may the profits and dividends continue to grow!

Thought balloon

We’ve heard of politicians throwing a few ‘thought balloons’ out in the open to gauge public opinion, but we’re not sure we’ve seen it from publicly-listed companies.

You know what we’re talking about. A government has a policy idea. But it’s not sure how the public will respond. So it arranges a ‘leak’.

Someone will tell a well-placed journalist that the government has a proposal. The journalist will write about it. The feedback begins.

If there is outrage at the idea, the government will deny it has any such plans, or it will say that it’s one of many proposals up for consideration…and will then suddenly drop it.

If there is broad support for the idea, the government will feign disappointment about the leak, but will say that it’s still early days, and that more details will be available soon.

We remind you of the workings of politics before relating the following story regarding Fortescue Metals Group Ltd [ASX:FMG].

On 22 February, Bloomberg reported:

Fortescue Metals Group Ltd., the world’s fourth-biggest iron ore exporter, sees potential value in adding output of coking coal as it reviews expansions into other markets.

“Coking coal would be a very similar market to what we are already in,” Chief Executive Officer Nev Power said in a phone interview. “Being able to provide a better service, or a broader service, to customers is potentially a way of creating value.”

As the following chart shows, the stock price fell 9.4% from the close on 21 February, to a recent low during intra-day trading on 27 February:



chart image

Source: Bloomberg
Click to enlarge


It’s worth noting that BHP Billiton Ltd [ASX:BHP] and Rio Tinto Ltd [ASX:RIO] also fell during that time span.

But what interests us today is the following headline from Bloomberg: ‘Fortescue CEO Says “We’re Not Looking to Invest in Coal”’.

Why the sudden shift? Maybe it’s all a matter of context. And naturally, it’s possible the company may have changed its collective mind.

Or maybe, with an outstanding debt of US$6.7 billion, and an interest expense of US$619 million last year (leaving just US$984 million in profit), major investors have told Fortescue to focus on the one thing it appears to do reasonably well: mining and producing iron ore.

Pricey coal

We also wonder if the following chart may have something to do with the lukewarm plans for coking coal diversification. It’s the China Prime Coking Coal Yinchuan Price index:



chart image

Source: Bloomberg
Click to enlarge


We won’t pretend to be an expert when it comes to coking coal, or any other commodity. We leave that to our resources ace, Jason Stevenson.

(Incidentally, he has his eye on a sector that could soon develop the same chart pattern. Find out more here.)

According to this chart, the price has more than doubled in the space of a year.

Another chart, showing the SBB Premium Hard Coking Coal Australia Export price (USD per tonne), reveals prices having risen more than 300% from mid to late 2016, before halving.



chart image

Source: Bloomberg
Click to enlarge


Even so, the price is still more than double where it was at the start of 2016.

Given Fortescue’s leveraged position, a play in coal is probably best left to those who can pay in cash, rather than those who require debt.

Best ever?

But what is there to worry about? From Bloomberg:

The verdict is in: Australia’s earnings season was one of the best of the last decade, setting the stage for possible world-beating gains for the country’s stocks.

Commonwealth Bank of Australia, the country’s biggest lender, says a greater proportion of companies listed on the S&P/ASX 200 Index made a profit than at any time since at least 2010. This reinforces a view from Northern Trust Corp. that returns from Australian equities over the next five years will be higher than from any other market in the world.

What do the bears have to say in response to that?

You’ll excuse us if we trot out the trusted line commonly used by those in the financial advisory profession: Past performance is not an indicator of future results.

The current and three previous times that profitability among the S&P/ASX 200 companies has been at a comparable level are indicated by the red circles in the chart below:



chart image

Source: Bloomberg
Click to enlarge


In terms of how this translates into the future performance of the stocks market…well…you can decide for yourself.

But, to us, claiming that ‘returns from Australian equities over the next five years will be higher than from any other market in the world’ could also be translated to mean that Aussie stocks won’t fall as much as other markets.

Certainly, looking at the chart above, the prospect of a roaring bull market from here is no more than a 50/50 chance.

In the mailbag

Subscriber John H writes:

Your bias is starting to show. Five emails in a row “In the mailbag” from correspondents who are fossil fuel warming sceptics. And no counter arguments from the other side. This is really poor. I am sure that you are receiving emails such as mine sent to you last Tuesday and Wednesday. Be fair. I challenge you to find my argument unsound. Publish them, at least in part, and let’s see the reaction.

Only ‘starting to show’? My word, we must try harder to show our bias. Although, to be honest, we thought we were trying.

Anyway, we searched for John H’s previous letter. We couldn’t find it. Turns out it was in a different mailbag. Here it is:

Your mailbag yesterday is like a red rag to a wild bull! From Ross, Dorothea Mackella’s “My Country” droughts and flooding rains… “This says it all”. Sorry, but…pardon??? No logical person is denying events in the past, but we are talking here of a climate that is changing, not by a natural warming, but rather by an increase in lower level atmospheric temperature which, in turn, is causing climate change. As I said yesterday, the changing orbit of our planet earth and its “tilt”, together with a change in the Sun’s radiation level, causes “natural” changes in our temperature. So we experience ice ages and periods of warm and wet. Naturally as part of our place in the cosmos.

Now onto Ted’s contribution. “Young people and do –gooders” and “climate is warming since the last ice age”. Well, on the first point, no Ted. With great respect, I am neither young nor, I hope, just a do-gooder. On the second, it has obviously, and we would expect that coming out of the end of an ice age. What has changed is an increased global warming since the beginning of the Industrial Revolution and, most concerning, an exponential increase in the last 30 years.

Carbon dioxide in the atmosphere has increased by a THIRD since 1880.

If the increased temperature was caused by our Sun and/or a change in the Earth’s orbit, then we would expect to see warming in all layers of our atmosphere. In fact, there has been a cooling of the upper atmosphere. Radiation of heat from the earth is being trapped in the lower atmosphere which in turn increases land and sea temperatures. Now this increase does not need to be plus 5’s or 10’s. A small 0.8 percent centigrade increase requires a huge amount of transferred heat energy. And this seemingly small amount is enough to change our climate. Go to the “climate.nasa.gov” site. NASA is not a ratbag outfit. See what is happening to our planet. As well as the normal changes always mentioned (reductions in sea ice, glaciers) note that the sea itself has risen 17cms in the last century, its acidification has risen 30 percent since 1880 and decreased snow cover has been observed by NASA’s satellites over the past 5 decades and it is melting EARLIER. We may be alright for the moment, but talk to our Pacific ocean island neighbours. They are experiencing it NOW. Some on lower islands have already made plans to move. (A personal observation. Growing up in the eastern suburbs we always had frosts at the end of winter. I cannot remember the last frost in the past 20 years. As I say, just an observation).

Climate change IS A FACT. That it is caused by increased manmade greenhouse gases IS A THEORY. But it is supported by very strong evidence. Maybe the majority of us are wrong, to some degree. But if the vast majority of climate scientists are even half right we have a problem.

We could have this argument all day. Climate change is not a fact; it’s a theory. Nothing more.

The reason for it being a theory is that there is no evidence to support it being a fact. Simple.

But the climate change fanatics can have it their way for now.

The problem we have with data produced by the climate change fanatics is that it is invariably ‘cherry-picked’ and short-term. Take this chart from the CSIRO, via NASA:



chart image

Source: NASA, CSIRO
Click to enlarge


It purports to show sea-level changes from 1870 through to today.

The direction is clear. However, 146 years is a rather short time in the history of planet Earth. To show such a short window of sea levels would be the equivalent of us showing a chart of the Dow Jones Industrial Average from 2009 through to today, and asking you to believe that it means stock prices always go up:



chart image

Source: Bloomberg
Click to enlarge


Yet, if we take the chart back 10 years previously, a different pattern emerges:



chart image

Source: Bloomberg
Click to enlarge


Stocks don’t always go up.

Anyway, the climate change fanatics will believe what they want to believe, but we for one won’t fall for their propaganda.

Cheers,
Kris