No stopping this crash…

  • No rescue for house prices
  • Short of perfection
  • Forget that
  • A cautionary tale
  • Nemesis

From ABC News:

Daniel Johnston, 35, bought an investment property in Mandurah, south of Perth, as a joint venture with relatives at the height of the boom in 2007 for $580,000.

But plans to develop the block fell through.

The family now owes about $500,000 on a property that has dropped in value to $350,000, and Mr Johnston is concerned he will lose his family home.

The report says the family ‘now owes’ half a million against the property. We’ll wager it was that when they bought the property.

That would be especially so if, like many property investors, they opted for an interest-only loan. Why repay the principal when they no doubt planned to resell the property at a higher price anyway.

Makes sense. Until it no longer makes sense.

The folks in Perth aren’t (and won’t be) the only ones to suffer this fate. When the same market dynamics hit Melbourne and Sydney, the losses here will be even worse.

And make no mistake: It’s only a matter of time…

Markets

Overnight, the Dow Jones Industrial Average gained 36.43 points, or 0.17%.

The S&P 500 added 2.84 points, or 0.12%.

In Europe, the Euro Stoxx 50 index closed up 18.62 points, for a 0.52% gain. Meanwhile, the FTSE 100 gained 0.64%, and Germany’s DAX index added 0.56%.

In Asian markets, Japan’s market is closed for the Constitution Memorial Day holiday. China’s CSI 300 is down 0.38%.

In Australia, the S&P/ASX 200 is down 64.76 points, or 1.09%.

On the commodities markets, West Texas Intermediate crude oil is US$48.07 per barrel. Brent crude is US$50.96 per barrel.

Gold is trading for US$1,256.45 (AU$1,672.17) per troy ounce. Silver is US$16.88 (AU$22.46) per troy ounce.

The Aussie dollar is worth 75.13 US cents.

No rescue for house prices

As always, the government thinks it can come to the rescue in any situation.

As The Age reports:

The Turnbull government is prepared to further intervene in the housing market, Treasurer Scott Morrison says, if the federal budget’s housing package fails to calm rising house prices.

Mr Morrison told Fairfax Media there would be significant measures to increase housing supply and put downward pressure on prices in next Tuesday’s budget, while confirming a reduction in the capital gains tax discount and negative gearing changes were off the table.

So, what will the government do?

Before even attempting to answer that, it’s important to understand the government’s real objective.

It’s not to help house prices fall. If the government really wanted to do that, it could implement any number of measures.

The real objective is to ensure house prices keep rising, so that it helps those whom already own a home…but not too fast either, lest they annoy those who haven’t yet bought a home.

Hence the fiddling here and fiddling there. They want to make it look as though they’re doing something…without actually doing much at all.

Heck. For the most part, it has worked for the past 30 years. Why shouldn’t it keep working?

For us, the reason is simple. We figure every market has a maximum point it can reach before it lunges into reverse. The housing market isn’t any different.

Sure, we understand that land is a finite resource. But as folks in Melbourne know, the sky is less finite. Take a look at Melbourne’s Southbank. The value of many of these apartments is below the original buy price.

Look at the trend of subdivisions in the suburbs. Yes, folks who own the land now are getting a boost by subdividing, but how long will that boost last?

Our bet: Not long. The supply of housing is already increasing, thanks to high-rise buildings and subdivisions. We’re now just waiting for that tipping point…the single thing that will cause the east coast housing market to collapse.

Just what will that be?

Short of perfection

Meanwhile, from Bloomberg:

Apple Inc. reported falling iPhone sales, highlighting the need to deliver blockbuster new features in the next edition of the flagship device if the company is to fend off rivals like Samsung Electronics Co.

Investor confidence has been mounting ahead of a major iPhone revamp due later this year. Yet competitors released new high-end smartphones recently, putting pressure on Apple to deliver a device that’s advanced enough to entice existing users to upgrade and lure new customers.

The stock, which ended the day at US$147.51, lost 1.84% in after-hours trading.

Apple Inc. [NASDAQ:AAPL] investors won’t be too worried just yet. The stock is up 55% over the past year.

The question is whether the stock has any further room to grow.

But we have to admit that its current growth levels have already surprised us. We (vaguely, of course) remember writing a handful of years ago that we didn’t see how Apple’s revenue could double.

Our guess is that revenue has doubled since then. We’re too proud to look back to exactly when we wrote our sceptical words…we just know we wrote them.

Elsewhere, the markets will cast a keen eye over Facebook Inc. [NASDAQ:FB]. It’s due to release its latest quarterly report tonight.

Like Apple, the Facebook stock has performed well over the past year. It’s up 30%.

However, as website Recode notes, ‘Facebook warned investors revenue growth would slow “meaningfully” in 2017. It’s now 2017.

Stocks like Facebook, Apple, Amazon.com [NASDAQ:AMZN], and Alphabet Inc. [NASDAQ:GOOG] (the owner of the Google search engine business) are priced for perfection…and, it seems, for perpetual growth.

Just as we’re not convinced that Aussie house prices can grow forever, we’re not convinced the darlings of the US tech sector can grow forever, either.

Forget that

Forgetting our bearishness, colleague Sam Volkering says to, well, forget being bearish. Instead, he says, look at the tremendous opportunities.

If you’ve spent any time around Sam, you’ll know he’s an excitable chap. And with good justification too.

Regardless of what we say about the market being ripe for a fall, Sam says it’s bursting to explode higher. He explains why here.

A cautionary tale

A stock that just seems to be exploding, or perhaps imploding, is Vocus Group Ltd [ASX:VOC].

It’s another cautionary tale for investors: Enjoy the gains while they happen…just remember that they can disappear in a flash.

From early 2012 to mid-2016, the stock price soared 484%. But from mid-2016 through to today, it has plummeted nearly 73%:



chart image

Source: Bloomberg
Click to enlarge


As the Australian Financial Review notes:

The spectacular 20 per cent profit downgrade at Vocus Communications about two months after it confirmed its full year profit guidance delivers a possibly fatal blow to the credibility of the management and board.

After hitting a peak above $9 in 2016, it’s now trading for $2.52. Its market capitalisation, which was $5.5 billion, today stands at $1.5 billion.

As our old pal Vern Gowdie likes to say, it’s always down to debt. Whenever we come across such wild share price moves, the first thing we look at is the company’s balance sheet.

We always figure that debt has to play a part somewhere. And sure enough, the company’s long-term debt, which was just $16.6 million in 2011, ballooned last year to $872 million.

And in a sign that the company has clearly overpaid for whatever it bought, we note that goodwill on the balance sheet has gone from $8.2 million in 2011 to a whopping $2.9 billion in 2016.

Remember, goodwill is the price a company paid for an asset above its current value. The goodwill indicates that the company believes it can do something to ‘release’ extra value from that asset that others couldn’t.

Sometimes they can. Sometimes they can’t.

In the highly commoditised business of voice and data networking, it’s hard for us to see quite how a company like Vocus can justify overpaying and overvaluing assets.

But what do we know? The folks in charge must know best. Or maybe not. Given the drubbing investors have handed out to the stock in recent weeks, the AFR could be right about the company’s credibility.

Nemesis

While we’re on the subject of false expectations, our nemesis, Tesla Inc. [NASDAQ:TSLA] is also due to report earnings tonight.

They may well continue to throw eggs in your editor’s general direction, by giving the punters what they want, and causing the share price to rise higher.

We still don’t expect the company to get anywhere near making a profit.

Have your eggs at the ready. We will present our face for you tomorrow to attack at will.

Cheers,
Kris