We forgot the best part…

  • Debt rising
  • We wrote it…
  • Permanently temporary
  • In the mailbag

In all our excitement yesterday writing about the coming death of the mainstream media, we left out the best part.

It was this from Bloomberg:

Journalists from Sydney Morning Herald and Age newspapers vote to strike after [Fairfax Media] moves to cut editorial staff by 20%, Sky News reports.

It’s a wonderful example of trade union and dinosaur media self-harm.

We can imagine the scene. The trade union shop stewards meet with the embattled journalists.

‘So, the mainstream media industry is collapsing; newspaper sales, advertising revenue and market share are all falling. Fairfax is therefore going to get rid of one-fifth of its editorial staff. Well, we’re not going to stand for it. We’re going on strike.’

And so sales, ad revenue and market share fall further. We doubt if the trade union movement will ever ‘get it’.

Innovation and progress is already delivering a death-blow to the newspaper industry. By going on strike, we can only think that the unions and journalists are aiding and abetting their own demise.

As we write, the Fairfax Media Ltd [ASX:FXJ] share price is down another 2.5 cents, to $1.06, and has a market cap of $2.4 billion.

If you’re thinking of buying, our bet is the stock will get cheaper yet…


Overnight, the Dow Jones Industrial Average fell 6.43 points, or 0.03%.

The S&P 500 gained 1.39 points, or 0.06%.

In Europe, the Euro Stoxx 50 index closed up by 41.63 points, for a 1.16% gain. Meanwhile, the FTSE 100 gained 0.19%, and Germany’s DAX index climbed 0.96%.

In Asian markets, Japan’s market remains closed today in observance of the Children’s Day holiday. China’s CSI 300 is down 0.32%.

In Australia, the S&P/ASX 200 is down 26.27 points, or 0.45%.

On the commodities markets, West Texas Intermediate crude oil is US$45.62 per barrel. Brent crude is US$48.51 per barrel.

Gold is trading for US$1,228.42 (AU$1,661.31) per troy ounce. Silver is US$16.34 (AU$22.10) per troy ounce.

The Aussie dollar is worth 73.95 US cents.

Debt rising

We could shout and holler until we’re blue in the face, yet most folks just won’t listen.

They’ll either think we’re crackers…or they’ll think we’re doomy-gloomers, always fretting and worrying about a crash that hasn’t happened (not since the last one anyway, we hasten to add).

But if those folks won’t listen to us, maybe they’ll listen to Reserve Bank of Australia governor Philip Lowe. In a speech in Brisbane, Lowe said:

My overall assessment is that the recent increase in household debt relative to our incomes has made the economy less resilient to future shocks. Double-digit growth in debt owed by investors at a time of weak income growth cannot be strengthening the resilience of our economy.

Indeed, rising debt levels are weakening the Australian economy. The following chart shows how Australian household debt-to-income has increased since the late 1970s:

chart image

Source: Bloomberg
Click to enlarge

Household debt is now at 188% of household income.

As long as interest rates are low, the theory is that households will be able to cope. Assuming households that have debt don’t face other problems, such as job losses…for instance, if companies go out of business.

For now, that isn’t happening to the degree that would cause financial hardship. The reason? Low interest rates.

As James Grant notes in a recent issue of his Interest Rate Observer newsletter:

So it happened that, at the end of last year, 33.9% of the companies in the Russell 2000 index were loss-making on the basis of earnings before interest and taxes. It was near the highest proportion of such unprofitable businesses in any non-recession year reaching back at least to 1984. “Companies just didn’t go out of business,” said [Steve Lipper of Royce Funds]. “The capital-rationing function that we count on markets to fulfil was suspended… We were in a period of time where, if you lost money, your stock did better than if you made money.

As evidence for that claim, we submit Tesla Inc. [NASDAQ:TSLA] as Exhibit A. A company with a long history of losses and, in our view, a long future of losses too.

But enough (for now) of beating that dead horse.

Instead, we turn to the Aussie market and wonder how the profitability of Aussie stocks today compares to recent history.

According to Bloomberg, of the current stocks in the S&P/ASX 200, 172 of them have positive EBIT (earnings before interest and taxation).

That means only around 14% of stocks in that index are lossmaking.

For the same period over the previous year, only 163 stocks in the index at the time had positive EBIT. In other words, the profitability of stocks in the index has improved.

If we go back to 2009, 144 stocks in the index were profitable — a low point. Not surprising, though, given the environment at the time.

And going back further, to 2006, just 123 stocks were profitable, based on EBIT.

So, can we draw any conclusions?

The bull would say that the low number of lossmaking stocks among the top 200 stocks today is evidence of the strength of the market and the Aussie economy.

The bear (guilty as charged) would say that pride comes before a fall…so watch your step, bucko.

We would also say that this proves the influence of low interest rates. And to show this further, rather than looking at EBIT, we suggest looking at total debt for Australia’s top companies.

In 2008, according to Bloomberg, the companies that made up the S&P/ASX 200 had a combined market capitalisation of $1.5 trillion. Those companies had total debts of $958 billion.

In other words, those stocks had a debt-to-market capitalisation rate of 62%.

Roll forward to today, and the stocks comprising the big blue-chip index have a market cap of $1.8 trillion. Debt amounts to $1.3 trillion.

In other words, those stocks have a debt-to-market capitalisation rate of 74%.

So much for the claim that the world has deleveraged since 2008. We knew that wasn’t true, and we’re sure you knew it wasn’t true.

Government debt is up — closing in on half a trillion dollars.

Corporate debt is up — by around 38% since 2008.

Household debt is up — according to International Monetary Fund (IMF) numbers, up 65% since 2008.

The RBA is worried. They should be.

Growth never goes on forever. The growth in Aussie debt will be no different, and the consequences will be severe.

We wrote it…

On 20 April, we wrote:

As the oil price goes up, more oil reserves come online. But as more reserves come online, it creates increased supply, which, without an increase in demand, can cause a supply glut, and therefore lead to falling prices.

According to the reports, an oil supply glut exists now. What will that mean? If the past is anything to go by, you can expect the glut to expand, as oil companies rush to produce as much oil as they can before the price falls.

Not to mention the prospect of slower than expected economic growth in the US, hence lower inflation expectations, and a lower probability of the US Federal Reserve raising interest rates.

The oil price has performed well since dropping to a 14-year low in early 2016. The price rebounded on prospects of a strong economic recovery.

But with the Fed seemingly determined to raise interest rates and cut back its bond-buying program, it’s hard to see exactly how the “fake growth” can continue.

If we had to place a bet, we’d put our money on even lower iron ore and oil prices. That won’t be good news for most of the Aussie market’s big oil and iron ore players.

Today, Bloomberg headlines, ‘Oil’s Plunge Accelerates Below $45 as U.S. Shale Confounds OPEC’.

The report continues:

Oil slid below $45 a barrel for the first time since OPEC agreed to cut output in November as U.S. shale confounds the producer group’s attempts to prop up prices.

This is what happens. OPEC can try to manipulate the market all they like, but if OPEC says it’s going to cut supply, non-OPEC producers will simply step in to fill any gaps.

And when they do, OPEC begins to lose control of the price. Higher-cost shale producers are the main problem for OPEC.

If they produce too much, it begins to push down prices, which causes the high-cost producers to churn out even more oil — before others do so.

Since we wrote on the oil and iron ore prices on 20 April, the iron ore price is roughly the same. The oil price is down over 12%.

Along with the markets in general, we expect both to fall further (much further) before going higher.

Permanently temporary

From the lossmaking Fairfax Media newspaper, the Sydney Morning Herald (presumably written by a non-striking journo):

Iron ore is in full-scale retreat, with futures in China plunging to end limit-down on investor concern about the outlook for demand in the world’s top user, fresh signs of burgeoning supply from Australia and the hostile backdrop of a broad-based sell-off in base metals.

The government was hoping for the iron ore price to stay high to help close its budget deficit.

That doesn’t seem likely, hence today’s report that the ‘temporary’ tax increase that has been in place since 2010 will remain in place…only under a different name.

From another of the lossmaking Fairfax Media’s stable of newspapers, the Australian Financial Review:

High-income earners could be hit with higher taxes through the health system to help the Turnbull government pay for the end of a four-year freeze on Medicare rebates for doctors’ visits and cover the cost of dumped welfare cuts, a leading economist has suggested.

Speculation surrounded the increases to either the Medicare levy or the Medicare Levy surcharge on Thursday after leading Westpac chief economist Bill Evans suggested the government could apply the Medicare levy surcharge to all high-income earners — regardless of whether they had private health insurance — to help pay for the Medicare retreat and $10 billion in junked “zombie” cuts to welfare and higher education.

Government sources were tight-lipped on Thursday. One said changing the surcharge had been discussed as part of budget deliberations but was unclear whether anything had been adopted.

From July 1 this year, high-income earners will no longer have to pay the two per cent temporary Deficit Levy which was imposed on incomes over $180,000 in the 2014 budget.

Of course, you’ll recall the ‘temporary’ deficit levy replaced the ‘temporary’ Queensland flood levy. The word ‘temporary’ is clearly a malleable word when it comes to politics.

Not to mention the fact that, rather than repairing the deficit, which it was supposedly intended to do, the deficit has barely budged, and government debt grows bigger.

As we say, it’s drawing ever closer to the half-a-trillion-dollar mark.

In the mailbag

Subscriber Paul writes:

I am a solar installer and from the latest advice, Tesla’s change of models for battery storage for the Australian market has hit a big Thud.

Tesla’s Powerwall 1 was DC coupled, however Powerwall 2 is AC coupled, and has fallen astray of newly minted Australian Regulations AS4777.

The Powerwall 2 has an inbuilt inverter of 5 Kw I believe.

AS 4777 states that you may only have 5 Kw of inverters for a single phase load, subject to distribution company approval.

If you have 5 Kw of solar and you add a Powerwall 2, you will have 10 Kw of distributable energy, especially on a single phase.

That doesn’t sound good. Although, to be honest, we barely understand a word of it.

All we know is this: If Paul is right, it spells trouble for Tesla’s battery business in Australia. If Paul is wrong…then don’t ask Paul to install your solar system!

But we believe in Paul.