Why it’s not time to panic…yet

Wednesday, 31 January 2018
Melbourne, Australia
By Bernd Struben

  • Borrowers getting antsy
  • The bigger picture on cryptos

What a difference two days can make.

And not just in the world of cryptocurrencies.

When I wrote to you on Monday, global stock markets were almost unanimously soaring higher. Oil was up. And gold was poised to breach its four year highs.

Donald Trump’s massive corporate tax cuts, slashing the US rate from 35% to 21%, looked to be working their magic. And investors piled in.

Of course, that kind of exuberance should always come with a note of caution.

Take the S&P 500, for example.

It’s comprised of 500 of the largest US listed companies, with a combined market cap of US$25 trillion. Those companies are now trading at an average price to earnings (PE) ratio of 26.36 times. That compares to a historical average of 15.69 times, according to multpl.

Now the PE ratio is a lagging indicator. And a high PE alone shouldn’t send you heading for the exits. So long as the herd maintains its exuberance — and company earnings don’t disappoint — the markets could still climb higher. A lot higher.

And with Donald Trump delivering his State of the Union Address today — as I type — I expected that exuberance to last at least a few more weeks.

Which is why on Monday I wrote:

All this and Trump has yet to unveil the specifics of his US$1 trillion infrastructure spending plan. Rumour has it we should have more details when he delivers his State of the Union address tomorrow (US time).

If you’ve been thinking about shorting US markets, you may wish to hold off a few weeks.

Well, if you were thinking about going short the US market, I hope you ignored that advice. (Though it may well bounce back tomorrow.)

Have a look at the five day chart of the Dow Jones Industrial Average below.

chart image

Source: Google Finance
Click to enlarge

As you can see the Dow is down 2.04% in the first two days of trading this week.

Why the pullback?

We’ll get to that right after the markets…


Overnight, the Dow Jones Industrial Average closed down 362.59 points, or 1.37%.

The S&P 500 fell 31.10 points, or 1.09%.

In Europe, the Euro Stoxx 50 index finished down 36.29 points, or 1.00%. Meanwhile, the FTSE 100 fell 1.09%, and Germany’s DAX lost 126.77 points, or 0.95%.

In Asian markets, Japan’s Nikkei 225 is up 64.19 points, or 0.28%. China’s CSI 300 is up 0.68%.

In Australia, the S&P/ASX 200 is up 14.00 points, or 0.23%.

On the commodities markets, West Texas Intermediate crude oil is US$64.00 per barrel. Brent crude is US$69.02 per barrel.

Gold is trading for US$1,337.34 (AU$1,653.90) per troy ounce. Silver is US$17.11 (AU$21.37) per troy ounce.

One bitcoin is worth US$9.852.96.

The Aussie dollar is worth 80.86 US cents.

Borrowers getting antsy

The world has been awash with cheap money for almost a decade now.

Record low interest rates and bond purchases by central banks across the globe have enabled companies and individuals to borrow to the hilt. Not to mention seeing companies engage in generous share buybacks that have helped drive up share prices.

But now that party is slowly winding down. And the bond market — valued at some US$100 trillion — is getting the jitters.

From the AAP:

US and European bond yields both reached milestones as investors prepare for central banks to tighten monetary policy, and after a European Central Bank policymaker said the ECB should spell out it would end its bond purchases this year.

Dutch central bank chief Klaas Knot said on Sunday the ECB should make clear that it will end its asset purchases after the current bond buying program ends in September, adding: “There is no reason whatsoever to continue the programme.”

Borrowing costs for Germany, the euro zone’s biggest economy, rose, with the five-year bond yield briefly turning positive for the first time in more than three years to reach a high of 0.004 per cent. It was last trading at minus 0.01 per cent.’

Meanwhile the 10-year US Treasury yield hit 2.73%. That’s the highest it’s been since April 2014.

With the US Fed signalling its intent to follow through with three rate rises in 2018, the days of cheap money look numbered.

But that doesn’t mean it’s time to panic.

Even after the past two day’s falls, the Dow is still up 31.3% since 31 January 2017. It’s overdue for a correction. Not a crash, mind you.

If US markets correct, the ASX is likely to follow. But the ASX 200 hasn’t seen nearly the same gains. It’s only up 7.2% over the past year. Meaning any correction should also be more muted.

Not only that, but interest rate rises are far less likely in Australia than in the US and EU.

The latest inflation figures from the Australian Bureau of Statistics, released today, show the consumer price index (CPI) rose by 0.6%. That’s slightly below the predictions of 0.7%. This will likely see the RBA keep rates at the current record low 1.5% for at least another quarter.

As for the timing of the Big One…the market crash that could dwarf the losses of 2008–09…I’ll yield to our forecasting guru, Phil Anderson.

Phil has an uncanny track record in predicting market tops and bottoms. And he’s just put together a free tutorial that explains precisely what he sees happening with stocks and real estate…and when.

You can get all of that by clicking here.

The bigger picture on cryptos

2018 certainly hasn’t been kind to most cryptos.

Last week bitcoin took a drubbing from various billionaires at the World Economic Forum in Davos.

Then yesterday, US time, Mark Zuckerberg’s Facebook banned all advertising having to do with bitcoin or other cryptocurrencies.

Over at the Port Phillip Publishing office in Albert Park, there was some light-hearted talk of a conspiracy this morning. These self-important billionaires, after all, sat on the sidelines as bitcoin skyrocketed 2,100% last year. That’s got to stick in their collective craws.

And you’ve got to imagine that Zuckerberg was less than thrilled to have the Winklevoss twins, Cameron and Tyler, join him on the billionaires list through their bitcoin success. And that he may be secretly pleased they’ve since been bounced back off that list.

Farfetched conspiracy or no, that kind of negative publicity isn’t good for any asset class. And at time of writing bitcoin is trading for US$9.852.96. That’s its lowest level since 27 November, and down roughly 50% from its 16 December highs.

But while the mainstream is trumpeting the demise of cryptos, they’ve spent remarkably little time talking about ether.

With a market cap of US$105 billion, ether is second only to bitcoin, which has a current market cap of US$171 billion.

Have a look at the one year chart for ether below:

chart image

Source: CoinDesk
Click to enlarge

The chart hardly screams disaster.

It’s a bit hard to see, but ether first broke through the US$1,000 mark on 7 January this year.

It rocketed higher to hit US$1,384 on 14 January. But it hasn’t been immune to the broader crypto pullback since then. At its current price of US$1,072, ether is down 22% since 14 January.

But it’s up 43% since 1 January.

My point is that all this talk of cryptos crashing is myopic. Most investors are still sitting on outsized gains. Gains our own crypto experts, Sam Volkering and Ryan Dinse, expect to keep right on growing once the dust settles from this current storm.

If you subscribe to Secret Crypto Network you’ll know that Sam and Ryan recommended ether on the date they launched the service on 5 July, 2017.

(If you’re not a subscriber you can find the details here.)

At the time, one ether was trading for US$270. Today readers who bought on their recommendation are sitting on gains of 297%…and that’s after the recent crypto ‘crash’.

Ether is just one of nine cryptocurrencies they’ve recommended since launching the service. With more to come.

As with stocks, it’s important to diversify your crypto investments. And as with stocks, it’s critical to know what you’re investing in.

Don’t go it alone. And don’t take advice from your Uber driver or work mates. When it comes to cryptocurrencies, you can find out everything you need to know here.

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