Smoking for your financial health

  • Shout out to all the smokers out there
  • We’ve run out of sh*t to buy
  • Aussie dollar drops on CPI data
  • How to trade ‘earnings season’ from a foreign bank
  • Get ready for the melt-up

Drum roll please…the inflation data is in.

Yesterday the Australian Bureau of Statistics (ABS) released the consumer price index (CPI) for the June quarter. After a solid increase of 0.5% for March, the gauge showed an increase of only 0.2% for June.

This isn’t the sort of news central bankers like. The lacklustre number means year on year growth dropped to 1.9%, down from the 2.1% reading in March.

The good news is, over-leveraged Aussie home owners can rule out the RBA bumping up the cash rate. The bad news is, the RBA can pretty much halt any notion of bringing the cash rate back up anytime soon. How’d the Aussie dollar react? I’ll show you in a moment.

First, let’s look at the markets…

Markets 

Overnight, the Dow Jones Industrial Average was up 97.58 points, or 0.45%. 

The S&P 500 up 0.70 points, or a 0.03%. 

In Europe, the Euro Stoxx 50 was up 17.65 points, or 0.51%. Meanwhile, the FTSE 100 gained 0.24%, and Germany’s DAX index was higher by 0.33%. 

In Asian markets, Japan’s Nikkei 225 is up 26.61 points, 0.13%. China’s CSI 300 is down 0.32%. 

In Australia, the S&P/ASX 200 is up 18.47 points, or 0.32%. 

On the commodities markets, West Texas Intermediate crude oil is US$48.64 per barrel. Brent crude is US$50.84 per barrel. 

Gold is trading for US$1,263.80 (AU$1,563.50) per troy ounce. Silver is US$16.73 (AU$20.76) per troy ounce. 

The Aussie dollar is worth 80.58 cents. 

Shout out to all the smokers out there

When you walk past a smoker today, don’t cough as you inhale the ghastly smell. Thank them instead. Because they’ve possibly tied the RBA’s hand from fiddling any further with the economy — for now. Alcohol and tobacco contributed a 0.8% rise to the CPI reading for June. All those government tax hikes to sin products like booze and ciggies helped nudge inflation figures into the black.

However, the biggest rise came — unsurprisingly — from health care costs, increasing 2.7%. Medical insurance and private medical facilities are big business in this economy. If these companies weren’t bumping up their prices each year, consumer prices might just start falling.

Oh, and I guess we also have all those home renovations reality TV shows to thank while we’re here. Furnishings, household equipment and services rose 0.7%. Housing costs added a paltry 0.3% to the final figure.

Now, don’t get me wrong. I’m not fan of central bank driven inflation. I’d much prefer deflation. Why? I don’t like rising prices. In fact, I’m sure nobody does. The thing that irks me most about inflation is that it’s portrayed as being good for you, and good for the economy.

The only thing inflation does is distort asset prices and erode your purchasing power.

Think about it. The more prices rise, the less your dollars buy within the economy. The only thing inflation is good for is governments. Rising prices reduce the real value of debt, making massive government debt easier to repay, and other major debtors.

Australia’s Debt Clock says total state and federal debt is around the $732 billion mark. Total private debt is a whopping $2.7 trillion, and of that housing is a massive $1.6 trillion. Inside that housing debt, owner-occupier housing is $1.1 trillion.

These debt figures alone should remind you that the central bank — in cahoots with the government I’m sure — know that, if they don’t engineer inflation, all that debt will never get paid off. Imagine what an Australia-wide public and private debt default would look like? I’m thinking catastrophic…

We’ve run out of sh*t to buy

Outside smokers, rising health costs and modern home makeovers, everything else was bleak. At least for anyone hoping to see the value of their money fall.

Food, transport and communication costs all fell.

The retail sector continues to take a hit, with the clothing and footwear sector falling 0.3%. A report from Westpac suggested ‘the more significant observation was the lack of price pressure in some major retail sectors and in particular, clothing & footwear. Normally clothing & footwear prices rise in the June quarter post the New Year sales in Q1 (first quarter) as prices are reset before the post June 30 sales in Q3 (third quarter).

The poor performance of the retail sector doesn’t surprise anyone in the Port Phillip Publishing office.

In our editorial meeting on Monday, the retail doldrums were a hot topic. To us, people appear to be spending their discretionary income on things like travel. This is evident in travel related stocks such as Webjet [ASX:WEB] and Flight Centre [ASX:FLT] rising 7.58% and 32.62% respectively during the June quarter alone.

Qantas [ASX:QAN] shares were up an incredible 47.04%. Arguably lower oil costs are contributing to the profitability of the airline.

How much of this is driven by demographics is something I will be keen to watch over the next few years.

The Age Wave theory, put together by Ken Dychtwald, explains the massive global population and cultural shift that will affect consumption in the long term. It suggests that the ‘baby boomer’ demographic started retiring in 2008–09.

Because the right retirement age varies for everyone, we have another decade or two of baby boomers leaving the workforce permanently. How this generation spend their discretionary income during their twilight years may have a large impact in the services and retail sector.

An idea floated in our meeting was that perhaps consumers consider travel and leisure activities a more rewarding way to spend their money. In other words, people value experiences over things. 

Or, as one editor put it during the Monday meeting, ‘Perhaps we’ve just run out of sh*t to buy.’

Aussie dollar drops on CPI data

Now onto that pesky Aussie dollar, which threw a hissy fit last week.

The disappointing CPI data — only disappointing to the Reserve Bank of Australia, I might add — saw a few punters abandon the trade.

Aussie dollar / US Dollar five minute 20 hour chart



chart image

Source: CMC Markets
Click to enlarge

Yep, you can see the moment a bunch of traders screamed ‘Abort! Abort!’ and dived out of the Aussie dollar. The currency dropped from 79.34 to 78.93, a 0.51% fall in 10 minutes.

Fat lot of good that did, though.

Overnight the Federal Reserve Bank in the US held off on raising the cash rate. Chinese authorities made some noise about cracking down on low quality steel mills, which in turn saw the spot price of iron ore jump a smidge past US$70 per tonne.

Guess what? Those factors pushed the Aussie dollar all the way up to 80.58 US cents. Roughly half a percent higher than the hissy fit the market threw about the theorised ‘neutral’ cash rate from the Reserve Bank of Australia last week.

How to trade ‘earnings season’ from a foreign bank

Deutsche Bank analysts reckon they’ve found the secret to trading the Aussie earnings season. Play the shorts!

Bloomberg reported yesterday that the German bank noted a high correlation between the most short sold stocks on the Australian Securities Exchange compared to share price performance, writing:

‘That’s the conclusion reached by Deutsche Bank AG stragtegists whose data showed that the top ten percent of most heavily shorted stocks in Australia beat the market’s return some 80 percent of the time during results season. That outperformance typically disappears in the subsequent two months, according to [Deutsche Bank] analysis.

“The most shorted stocks are good to own during results, particularly if there is a conviction that earnings won’t disappoint,” Tim Baker and David Jennings, Sydney-based strategists at the German bank said in a July 24 report. “But it’s worth selling after results.”

The most shorted stocks on the ASX right now are a raggedy bunch.



chart image

Source: Bloomberg
Click to enlarge

The Aussie market has had a rough ride this year. Indices around the world have seen incredible gains for this year. Most notably is the is-it-or-isn’t-it a bubble American market, with the Dow Jones and S&P500 up 9.86% and 10.68% respectively. European indices have performed well, as the Footsie is up 4.33% and Germany’s Dax higher by 7.18%.

Our Asian neighbours are a mixed bag, as China’s CSI300 jumped 10.50%. Even the Japanese Nikkei 225 has crept higher by 2.4%.

All outpacing the XJO’s paltry 1.04% gain for the year to date. The lack of growth in stocks is causing investors to ask if the Aussie market bull is over… 

Get ready for the melt-up

Deutsche Bank may have the short term play for the Aussie market. Trade earnings seasons by buying unloved stocks.

But is that the answer for investors when a market crash might be a lot closer than people think?

Bloomberg yesterday claimed the bull market was going to end in May 2018.

However, this is an American view. With Australia’s stock market not following the insane highs reached in the States, there’s no guarantee that our market will melt down at the same time the US does. Or melt down in the same manner.

This means, using analysis for the American market isn’t going to automatically work for Aussie investors.

After all, if we haven’t seen the same sort of stock growth the US has, why on Earth would our market tumble the same way?

For this very reason, we have introduced a new service called Crash Market Investor. The key analyst on the project is Ryan Dinse, and it’s edited by Kris Sayce.

Ryan argues that simply short selling into the crash isn’t the answer. Nor is just buying up shares as they fall. Through his extensive research, Ryan reckons there’s a three step method to the ‘melt-up’, ‘meltdown’ and the crash phase.

Consider Ryan’s research your doomsday prepper’s guide to what could be the biggest market crash we’ve ever seen. Want to know more? Click here to see what he has to say.

Kind regards,
Shae Russell