Why the Aussie stock market is late to the party

Thursday, 9 November 2017
Melbourne, Australia
By Bernd Struben

  • 6,000 points may be fleeting
  • Wait…there’s more
  • Dr Doom joins the fray

The ASX 200 looks set to continue its positive run today.

As at writing, the index is at 6,030 points, up 0.54% for the day. That brings the year-to-date gains to 6.74%. And the one-year gains to an impressive 17.28%…without including dividends.

On Tuesday the index closed above 6,000 points for the first time since January 2008. That’s a lengthy haul to claw back the losses from the global financial crisis. And it’s still 12% below the all-time high of 6,828, hit back in November of 2007.

But, as you can see in the one-year chart below, the trend looks good.



chart image

Source: Google Finance
Click to enlarge

The index has finally managed to break out of one of its longest and tightest trading ranges in history.

The question now is, how long can this continue?

Compared to US markets, the ASX is late to the party. Very late, as you can see from the one-year chart of the Dow Jones Industrial Average below.



chart image

Source: Google Finance
Click to enlarge

The Dow is up 31.73% over the past year. Along with the S&P 500 and NASDAQ, it didn’t waste months dithering around in a tight range. Nor were there any severe falls during the year.

While it’s better arriving late to the celebrations than never, the US-led party may be grinding to a halt. Not a crash, mind you. At least not yet. But there could be a significant correction on the cards.

Now, the ASX didn’t track the US markets up. Yet odds are that if US markets suffer a 10–15% correction, the recent gains on the ASX will be short-lived.

But the latest company reporting figures looked pretty good, I hear you say. Not to mention the strong employment numbers coming out of the US. Granted, a correction in US markets is historically overdue. But why make such a bleak call now?

I’ll answer that right after the markets.

(In the meantime, Sam Volkering is convinced he’s uncovered a stock that could shoot the lights out even if the wider market falls. This is one Aussie small-cap that’s eagerly awaiting Amazon’s arrival. Details here.)

Markets

Overnight, the Dow Jones Industrial Average closed up 6.13 points, or 0.03%.

The S&P 500 gained 3.74 points, or 0.14%.

In Europe, the Euro Stoxx 50 index finished down 3.73 points, or 0.10%. Meanwhile, the FTSE 100 climbed 0.22%, and Germany’s DAX rose 3.16 points, or 0.02%.

In Asian markets, Japan’s Nikkei 225 index is up 403.90 points, or 1.76%. And China’s CSI 300 is up 0.05%.

In Australia, the S&P/ASX 200 is up 32.24 points, or 0.54%.

On the commodities markets, West Texas Intermediate crude oil is US$56.87 per barrel. Brent crude is US$63.49 per barrel.

Gold is trading for US$1,281.92 (AU$1,669.60) per troy ounce. Silver is US$17.06 (AU$22.22) per troy ounce.

One bitcoin is worth US$7,342.82.

The Aussie dollar is worth 76.78 US cents.

6,000 points may be fleeting

An improved domestic and global economic outlook has been one factor driving US markets to record highs.

An expectation of sweeping corporate tax cuts has been another.

Donald Trump’s tax plan would see the US corporate tax rate slashed from its current 35% down to 20%.

Depending on where you stand on the Laffer Curve, this may or may not see more money flow into government coffers. As you may recall, Arthur Laffer’s theory on taxation states that there is an ideal level of taxation to maximise tax revenue. And when taxes go beyond this level, revenues actually fall.

But the point today isn’t whether government revenues will grow or fall. The point is that a 15% reduction in corporate taxes will certainly see more money stay with the companies that earn it.

Some of this money will go to R&D and other capital expenditure — both of which tend to be positive for a company’s share price over time. And with a 15% reduction in their tax burdens, you’ll also likely see an increase in share buybacks. Again, offering a boost to share prices.

All that’s good news for investors. And for some time now it appears the market has been pricing in a Trump corporate tax cut as a done deal.

But that deal appears to be unravelling.

As Brian Maher explains in the US Daily Reckoning, our international affiliate:

The GOP plans to pass the tax bill in the Senate with a simple majority vote through “reconciliation.” Reconciliation bills are filibuster-proof.

Since Republicans enjoy a Senate majority, the bill requires no Democrat support.

But four Republican senators — John McCain, Jeff Flake (both of Arizona), Susan Collins and Robert Corker — have already declared against any bill resembling the House version…

Now Ted Cruz has thrown in with the mutineers…                          

That’s five Republican noses likely voting against. Our agents report whispers of further defections.

We thus arrive at a mathematical impasse: Without any Democratic support, Senate Republicans can only afford two mutineers for the tax bill to pass.

President Trump must therefore seize at least three Republicans by the collar…or pry free some Senate Democrats to take their place. Babies will sprout beards before either happens…

“My guess is we are going to have a tough time getting it done,” says Ian Winer of Wedbush Securities.

“It’s something that would impact the domestic stocks in the U.S. and would be a setback for the market in general,” adds Francois Savary of Prime Partners.’

As news begins to spread that Trump’s tax cut may be dead in the water, I expect an end to Wall Street’s series of new record highs.

And once that news is verified, a 10–15% correction in US markets could unfold before year’s end.

This correction would almost certainly pull the ASX 200 back well below the much vaunted 6,000 points it only just breached on Tuesday.

Wait…there’s more

Though looking increasingly unlikely, it’s always possible that Trump will pull off a miracle. Something perhaps to put in the sequel to his book, The Art of the Deal.

But even if the Republicans do manage to slash the US corporate tax rate, Australia — and Aussie stocks — are still likely to suffer.

That’s because Australia’s own corporate tax rate stands at 30%. With Labor opposing the cut, Turnbull’s odds of seeing that reduced to 25% are even longer than Trump’s.

And this will leave Australia with some of the highest company tax rates in the world.

From The Australian:

With Labor and crossbenchers blocking the government’s plan to cut Australia’s rate to 25 per cent in a decade, the current 30 per cent rate would be exceeded only by Argentina and Brazil…

Treasury analysis shows business investment will suffer as global companies divert investment to take advantage of the US rate, which would move from being five percentage points higher than Australia’s current rate to 10 percentage points below it.’

To round this off, if Trump’s tax cuts go through (and Turnbull’s don’t), business investment is likely to suffer. It should be a gradual process, though. One that may see the ASX stuck in another lengthy trading range while US markets continue to hit fresh highs.

But if Trump’s tax cuts fail — as looks probable — the impact on US and global stock markets should be swift.

So, what now?

Well, a 10–15% stock market correction should be good news for gold…and gold stocks. If you haven’t checked out resource analyst Jason Stevenson’s top gold plays, you can do so here.

Dr Doom joins the fray

Do you remember when bitcoin breached US$2,000 on 20 May this year?

‘Bubble!’ cried the mainstream.

Three months later, on 13 August, bitcoin had doubled, exceeding $4,000.

‘Bubble!’ cried the doomsayers.

Three months later, on 8 November, bitcoin had almost doubled again, hitting $7,879.06 yesterday.

Wait for it…

‘Bubble!’ cries Nouriel Roubini, aka Dr Doom.

From CoinDesk:

In an interview with Business Insider Poland, Nouriel Roubini, an economics professor at New York University’s Stern School of Business, expressed bearish views on bitcoin and its brethren, calling the ongoing price gains “a gigantic speculative bubble.”

Roubini, who earned the nickname Dr. Doom for predicting the 2008 financial crisis, said that while blockchain technology is promising, bitcoin lacks “serious” payment and capital storage methods and that there is no fundamental reason for current price levels. Rather, bitcoin “feeds on itself,” he said…

Yet Roubini is not new to bashing the world’s first cryptocurrency. In 2014, he called bitcoin a Ponzi scheme and criticized its volatility and the infamous collapse of the Mt.Gox bitcoin exchange.’

In case you’re wondering, on 10 March 2014, when Roubini first labelled bitcoin a Ponzi scheme, one bitcoin was worth $630.

If it is a Ponzi scheme, it’s got some serious legs.

Our own in-house crypto experts — Sam Volkering and Ryan Dinse — are adamant that bitcoin is here for the long term.

They’re the first to caution that bitcoin remains volatile, as we witnessed yesterday. Following a surge to $7,882, the price fell 10.4%. At time of writing it’s trading for $7,342.82.

Bitcoin and other cryptocurrencies are clearly not for the fainthearted. But there’s money to be made here. Big money.

Sam maintains that we’ll see bitcoin trading for US$20,000 before stabilising. A gain of 172% from today’s price.

And some of the other cryptos he recommends in Sam Volkering’s Secret Crypto Network could dwarf those gains.

You can get all the details on Sam’s new service here.

Cheers,
Bernd