Obsession…

  • Not cheap
  • Easy money
  • Australia’s ‘Tesla’
  • Tiny stocks roar and soar
  • Gold, the dollar, yen and US bonds…
  • How the gold price ‘works’

We admit it. It has become an obsession.

Our (least) favourite car company, Tesla Inc.’s [NASDAQ:TSLA] stock fell 3.85% in overnight trade.

It’s now trading for US$296.84 per share. Its market cap is US$48.41 billion. After a few days as North America’s biggest car company, it’s now relegated to second place, after General Motors Company [NYSE:GM], which has a market cap of US$50.8 billion.

It was nice while it lasted.

But things could get worse for Tesla. Some folks may consider Tesla to be the ‘cool’ electric car company, but that means nothing if it’s a bad ‘cool’ electric car company. By bad, we mean an electric car company that could soon be left behind in the battle for dominance.

Until now, most of the electric car focus has been on the likes of GM and BMW. But what about Volvo? As TheStreet.com reports:

Watch out Tesla and Elon Musk.

At the New York International Auto Show, Volvo unveiled a 400-hp plug-in electric hybrid SUV – the XC60.

“The Volvo XC60 is an important car for Volvo in the United States,” said Lex Kersemakers, Senior Vice President of the Americas; President and CEO of Volvo Car USA, “It provides a new and more athletic attitude to the design language that was first shown in the 90 series cars.”

The XC60 is critical for Volvo, representing 30% of sales. Some 1 million XC60s have been sold across the globe.

In another swipe at Tesla, the XC60 has a semi-autonomous driving feature, Pilot Assist, that works at speeds up to 80 mph.

The second last point could be key. Volvo has sold one million of its XC60s. To put that in perspective, the wonderfully, spectacularly and tremendously cool Tesla has sold…10,000 of its Model X SUVs in total.

That’s one million versus 10,000.

Tesla’s problem is that it has to steal customers away from bigger (by production numbers) companies, and can only offer those customers a limited product list.

Tesla: The end is near. We still like the short side.

Markets

Overnight, the Dow Jones Industrial Average fell 59.44 points, or 0.29%.

The S&P 500 lost 8.85 points, for a 0.38% fall.

In Europe, the Euro Stoxx 50 index closed down 1.53 points, or 0.04%. Meanwhile, the FTSE 100 fell 0.22%, and Germany’s DAX index gained 0.13%.

In Asian markets, Japan’s Nikkei 225 index is down 119.65 points, or 0.64%. China’s CSI 300 is down 0.02%.

In Australia, the S&P/ASX 200 is down 44.10 points, or 0.74%.

On the commodities markets, West Texas Intermediate crude oil is US$53.09 per barrel. Brent crude is US$55.88 per barrel.

Gold is trading for US$1,284.77 (AU$1,692.00) per troy ounce. Silver is US$18.49 (AU$24.36) per troy ounce.

The Aussie dollar is worth 75.94 US cents.

Not cheap

We’ll just come out and say it: When will this darn stock market crash happen?

US stocks are still within touching distance of a record high.

Tesla, the loss-making car company, is only slightly less valuable in terms of market capitalisation than General Motors, which sells a gazillion more cars per year than Tesla.

And Amazon.com Inc. [NASDAQ:AMZN] trades near its record high, has a market cap of US$428 billion, and a price-to-earnings ratio of 182-times earnings.

In dollar terms, Amazon.com made a profit of US$2.4 billion during the last financial year. By contrast, Apple Inc. [NASDAQ:AAPL], with a market cap of $743 billion, made a profit of US$45.2 billion.

Microsoft Corporation [NASDAQ:MSFT] has a market cap of US$504 billion. It made a profit last year of US$16.4 billion.

Now, we’re not saying that Apple and Microsoft aren’t overvalued — they probably are. But their valuations are nowhere near as extreme as Amazon.com and Tesla.

We’re holding our breath. The crash must surely be nigh. Hopefully we won’t have to hold our breath for long.

Easy money

What’s this? Cheap debt and easy money has manifested itself in stocks. We know that for sure. High stock prices tell us. But it has manifested itself in the US property market too. Extraordinary, when you consider what happened during the last crash.

Regardless, the Financial Times reports:

More than a million new apartments have sprung up across the US in a post-crisis construction surge. Now bankers who funded the boom are worried: have developers built too much?

[Takes sip of water. Gargles. Swallows. Clears throat…]

YES!

Of course developers have built too much.

We’ve seen that in the US, with the number of high rises going up, not just in Manhattan, but across the Hudson and East rivers, in Brooklyn and New Jersey.

We also saw it in Toronto. The quantity of high-rise buildings under construction appears to vastly outnumber anything you’ll see in Melbourne’s CBD, Docklands or Southbank.

But don’t worry, the FT goes on:

As concerns grow about a supply glut, financial watchdogs this month began scrutinising how the largest lenders would cope with a property market crash.

Officials at the Federal Reserve ordered banks to set out how they would fare if commercial real estate (CRE) prices dropped 35 per cent and rental apartment values collapsed by more.

Well, that’s OK then. As long as the folks at the US Federal Reserve are ‘scrutinising’ things, everything will be fine. In which case, we’ll say no more.

Australia’s ‘Tesla’

Since we’ve been away, we’ve taken our eye off one particular Aussie stock. It’s a stock we like to refer to as Australia’s ‘Tesla’. The stock in question is Fortescue Metals Group Ltd [ASX:FMG].

Check out the Fortescue price chart:



chart image

Source: CMC Markets Stockbroking
Click to enlarge


The stock has fallen from a recent peak above $7 to the current price (at the time of writing) of $5.47.

The fall doesn’t surprise us. We consider it to be Australia’s Tesla, due to the recent ‘PR over substance’ approach from the company.

We suspected something was up when the company revealed that it may consider diversifying into the coal business. Why would Fortescue go into coal, when supposedly the iron ore business was doing so great?

We just didn’t buy it. And we still don’t.

Check this out

Our colleagues at Currency Wars Trader didn’t buy Fortescue either. In fact, they shorted it.

Unfortunately, that trade didn’t pan out. They got in too early.

Fortunately, they also got out in timely fashion. That’s the benefit of having a comprehensive risk-management system.

In more fortunate news, other trades are working out — on the long and short side. If you haven’t yet checked out Currency Wars Trader, you can do so here.

Tiny stocks roar and soar

Look at the list of stocks below. This is a snapshot of the top 10 biggest-percentage movers on the Aussie market at 10:13am this morning:



chart image

Source: CMC Markets Stockbroking
Click to enlarge


Now look at this snapshot, from the same share trading platform, at the same time:



chart image

Source: CMC Markets Stockbroking


This morning, a select number of stocks were up big double-digit percentage amounts.

One stock was up 85%.

Five stocks were up 50%.

And another four stocks were up between 20–33%.

Meanwhile, the main Aussie stock index was down more than 47 points, nearly a 1% drop.

This is a key point. But we won’t go into it here. We’ll explain more in a special edition issue of Port Phillip Insider tomorrow. Look out for it.

Special guest contributor

Today, we hand you over to Port Phillip Publishing’s Head of Research, Greg Canavan. Greg also helms the Crisis & Opportunity investment advisory. There’s little doubt that Greg has the best fundamental analytical mind when it comes to looking at stocks and big-picture macroeconomics.

Make sure you check out what Greg has to say below…

Cheers,
Kris

…………………………………………………………………………………………..

Gold, the Dollar, Yen and US Bonds…
Greg Canavan

Not that it’s really ever any different, but in markets right now, it’s all about the US dollar. It’s the most important asset price in the world.

That’s thanks to Donald Trump becoming acutely aware of the realities of being the president. That is, what you say in the lead up (to win votes) and when you first get in (to keep those who voted for you happy) doesn’t work so well when you’re in the thick of it.

In the lead up to the election, Trump won a lot of support by calling China a currency manipulator, accusing it of running an unfair trade policy. He talked about slapping it with tariffs of up to 45%.

Last week, he met with Chinese leader Xi Jinping. The meetings were cordial. There was no sign of his pre-election bluster.

Trump also won support for his combative tone towards the US Federal Reserve. Janet Yellen would be forgiven for thinking she’d be out of a job if Trump won the election. Now he’s an advocate.

Here’s an excerpt from an interview Trump did with the Wall Street Journal yesterday:

‘[He is asked whether Yellen was “toast” when it came to being nominated to another term.] No, not toast. You know, I like her, I respect her. She’s been here, she’s been in that seat. I do like the low interest rate policy, but I must be honest with you, I think our dollar is getting to strong, and partially that’s my fault because people have confidence in me. But, you know, that’s hurting — that will hurt ultimately. Look there are some very good things about a strong dollar, but usually speaking the best thing about it is that it sounds good. You know, it’s very, very hard to compete when you have a strong dollar and the other guy — other countries are devaluing the currency. It’s very hard for our manufacturers to compete.

Those words had an immediate effect on the dollar, global currencies and interest rates, and gold. When the dollar moves, everything moves in relation to it. In today’s Insider, I’ll show you how all the pieces fit in together, with a particular emphasis on gold.

That’s because gold is on a roll. It’s trading around US$1,285 per ounce, the highest level since November last year. Will the rally continue, or is gold set to fall again soon? That’s the question I’ll attempt to answer today.

How the gold price ‘works’

I’m a big fan of gold. But I’m not a gold bug. I used to be. I used to think gold ‘should’ be higher no matter what. I could always see a scenario where gold should be trading higher than what it was.

But then I woke up to myself. I realised that the price of gold — like everything else in financial markets…or the universe, as Einstein told us — is relative.

The relative relationships are not always the same. But there are always relative relationships to consider when looking at the prospects for gold.

Most big gold bugs have a problem with the US dollar. They believe it is a fraudulent currency and, on any particular day, on the brink of collapse.

And when it does collapse (which it surely will, the thinking goes), gold will soar in price and the holder will be rich.

That’s fine in theory. But…

The dollar will only collapse if enough people start believing it will. The strength of the dollar (or any currency for that matter) is based on a belief system — a belief that the dollar has value.

ISIS, the most aggressive enemy of the United States right now, believes in the value of the US dollar, while not believing in any of the institutions that the US dollar supports.

ISIS believes because everyone else believes.

Gold is a belief system too. It’s just that more people believe in the US dollar than they do in gold. That will probably change one day. But it takes a while for such entrenched beliefs to give way to something else.

In the meantime, we have to analyse markets rationally, and not superimpose our own marginal belief systems on them.

With this in mind, the most important assets to consider when it comes to gold are the US dollar, US bonds and the Japanese yen.

Let’s have a look…

The US dollar relationship is easy. When the dollar is strong, gold is usually weak. And vice versa. As you can see in the chart below, the dollar has been weak since December. Trump’s comments pushed it lower again overnight.



chart image

Source: Optuma
Click to enlarge


But it’s not as if the dollar is plunging. In fact, it’s trading above support (the green line) and is simply consolidating a big move from the 2016 lows.

Now compare the chart above to the one below, which shows the US dollar gold price:



chart image

Source: Optuma
Click to enlarge


It’s not a precise inverse correlation (there are times when gold and the US dollar show strength together) but, in general, you can see that when the US dollar is strong, gold is weak, and vice versa.

It’s interesting to note that gold is making new highs now while the US dollar is still trading above support. That is, it’s not making new lows. I’d be feeling more bullish for gold if the US dollar was below support.

Let’s take a look at gold’s relationship with US Treasury bonds. Rising bond yields indicate a stronger economy and rising official interest rates. Rising bonds yields then tend to be negative for gold.

As you can see in the chart below, the yield on 10-year US Treasuries bottomed in June/July 2016. This is exactly when the gold price peaked. And yields peaked in December 2016 at just over 2.6%, which coincided with the bottom in the gold price.



chart image

Source: Optuma
Click to enlarge


It’s interesting to note that bond yields dropped just below support (the green line) overnight and made a marginal new low. For the gold price to move higher, you’d probably need to see bond yields continue to drop.

Will that happen?

Trump’s comments about liking low interest rates will probably help. But he doesn’t control that outcome. If the US economy really is gaining momentum, it’s hard to see bond yields continuing to fall.

But if the US economy is weaker than most think, then there is room for further declines.

There is one other thing I’d like to point out about the chart above. The moving averages look healthy and still indicate that the trend for bond yields is rising. So yields could fall a little more (say, down to 2.2%) and it wouldn’t damage the upward trend.

Finally, let’s take a look at gold’s relationship with the Japanese yen. The chart below shows the yen/US dollar exchange rate. Go back up and have a look at the gold price chart again. It looks very similar to the one below, doesn’t it?



chart image

Source: Optuma
Click to enlarge


In other words, gold and the yen are very closely correlated.

The yen, like gold, has been strong since bottoming in December 2016. More recently, it’s benefited from rising tensions in Syria and North Korea. A slowdown in the US and paring back of interest rate expectations could keep pushing the yen (and with it, gold) higher, as traders recalculate interest rate differentials between the US and Japan.

The yen does look quite strong right now, but that may have more to do with geopolitics than economic fundamentals. We’ll know in the next few weeks.

What does all this mean for gold?

Well, as I told readers of Crisis & Opportunity this week, despite the impressive price action over the past few weeks, the outlook for gold is still indecisive.

The US economy certainly has its issues, but it doesn’t appear to be on the cusp of a major slowdown. For gold to keep rallying, you really need to see some negative surprises on the economic front.

After such a strong rally, I think the safer way to play it would be to take some profits and see how the correction unfolds. If you’re in it for the long haul, there’s no need to do anything.

Bond yields, the yen and gold have all rallied strongly so far in 2016. In my view, it’s time for a pullback. The extent of that pullback will be important to watch…

Regards,

Greg Canavan,
Editor, Crisis & Opportunity