Don’t underestimate the Levi Strauss indicator

Wednesday, 14 February 2018
Melbourne, Australia
By Bernd Struben

  • Certainly uncertain…
  • More bumps in the road
  • In the mailbag

We kick off today’s Port Phillip Insider with a chart.

Any guesses what it is?



chart image

Source: Google Finance
Click to enlarge


The dates tell you it’s a one-year chart. It goes back to 14 February last year.

Fortunately, it’s not a chart of the ASX 200. That would mean Australia’s biggest companies had lost an average of 57.86% in 12 months.

Now that could happen. But it hasn’t…yet.

If you know your retail stocks you may have guessed this is Myer Holdings Ltd’s [ASX:MYR] share price performance over the past 12 months.

The 57.86% drop brings the share price loss since 6 November, 2009 — when Myer re-listed on the ASX — to 81.9%.

I say re-listed, because for the previous three years the company was owned by US private equity firms, TPG Capital and Blum Capital Partners LP.

Its performance on the day of re-listing — plunging 8.5% — offered a good indication of things to come.

Not that there weren’t a few silver lining moments. From 29 June, 2012 to 26 April, 2013, for example, the share price rocketed up 96.92%. Since then, though, it’s been a pretty steady downhill slide.

Now this is a good time to remind you that when a stock falls by 50%, it needs to gain 100% to get back to where it was.

A little back of the napkin maths tells us that for investors to recoup the 81.9% share price loss since November 2009, Myer’s stock would need to soar 452.5% from today’s level.

It’s an important reminder of how difficult it can be to recover your investment capital from big losses. And why you should be sure to have measures in place, like stop losses, to help protect your downside.

Anyhow, the continuing troubles saw Myer’s CEO, Richard Umbers, fall on his sword yesterday. Myer announced Garry Hounsell as the newly appointed executive chairman.

Garry has his work cut out for him. Trust me. I was in the Myer at Westfield Southland in Melbourne on Sunday.

While the staff is friendly and the store appears well-stocked, it’s not.

At least not when it comes to Levi’s that fit your editor.

Apparently, my legs are too long or my waist is too thin…or both. But after going through the racks, the clerk had to admit they did not carry Levi’s in a 32 waist 34 leg. (That’s inches for the younger readers. Look it up.)

‘Would I like to try a different brand?’

Erm. No.

Levi Strauss began making patented work pants back in 1873. I’ve been wearing them since around 1973…though a decidedly smaller size back then. Call me a stickler (it’s OK, I am) but that’s the brand for me.

‘Have you tried our online store?’ the clerk asked.

Sigh.

Having left Myer empty handed I went home and checked their online offerings. And still no 32–34 Levi’s.

A quick search of the local online Levi’s store revealed my size does exist. And they shipped me two pairs, with free delivery, in two days.

As for Myer? Well that’s $240 of gross revenue out the window.

Markets

Overnight, the Dow Jones Industrial Average closed up 39.18 points, or 0.16%.

The S&P 500 gained 6.94 points, or 0.26%.

In Europe, the Euro Stoxx 50 index finished down 27.32 points, or 0.81%. Meanwhile, the FTSE 100 lost 0.13%, and Germany’s DAX fell 86.27 points, or 0.70%.

In Asian markets, Japan’s Nikkei 225 is down 292.48 points, or 1.38%. China’s CSI 300 is down 0.06%.

In Australia, the S&P/ASX 200 is down 12.90 points, or 0.22%.

On the commodities markets, West Texas Intermediate crude oil is US$58.97 per barrel. Brent crude is US$62.72 per barrel.

Gold is trading for US$1,331.80 (AU$1,693.76) per troy ounce. Silver is US$16.62 (AU$21.08) per troy ounce.

One bitcoin is worth US$8,715.78.

The Aussie dollar is worth 78.63 US cents.

Certainly uncertain…

Like the Aussie market, European markets often take their lead from the US. By the time US markets close, the Europeans still have most of their trading day ahead of them.

But as you can see above, the significant gains in US stocks on Tuesday (the Dow rose 1.70%) weren’t enough to buoy European stocks. Every major European index closed in the red.

At time of writing, most Asian stocks — including the ASX 200 — are also down.

While US markets closed in the black again yesterday, the gains were smaller.

That doesn’t necessarily mean Europe and Asia will sink again tomorrow. In fact, the only certain thing right now is the prevailing climate of uncertainty.

More bumps on the road

The Aussie economy looks to be in good shape. Or so the official statistics tell us. Most of the rest of the world, too, is chugging along nicely.

But that doesn’t mean there aren’t plenty of potential pitfalls ahead.

To start with, the weekly ANZ-Roy Morgan consumer confidence gauge fell 2.9%, as expected. Consumers, not surprisingly, had their confidence shaken by the share market action last week. Consumers are responsible for some 59% of Australia’s GDP.  Meaning any reduction in confidence and spending could quickly impact the stock market…and further dent confidence.

Then there’s our reliably unreliable wildcard, Donald Trump.

Leaving a potential hot war with North Korea out of the picture for now, the tit for tat tariffs with China looks increasingly likely.

From The Straits Times:

US President Donald Trump threatened retaliatory action against two major Asian trading partners Tuesday (Feb 13), warning of sanctions against China while vowing to revise or scrap a free trade deal with South Korea.

Accusing Beijing of decimating American steel and aluminum industries, Trump said he was “considering all options,” including tariffs and quotas.

Trump recently received two Commerce Department reports concerning alleged Chinese subsidies for steel and aluminum exports – materials that are vital for industries from construction to autos.’

China is still miffed over Trump’s recent tariffs on imported washing machines and solar panels. And the Chinese are working on plans to retaliate.

From Bloomberg:

China is the biggest buyer of American soybeans, picking up about a third of the entire U.S. crop, which it uses largely to feed 400 million or so pigs. President Xi Jinping’s administration is studying the impact of restricting soybean imports in retaliation for U.S. tariffs on washing machines and solar panels, people familiar with the situation told Bloomberg last week.

Any China soybean curbs would directly hit farmers in Midwestern U.S. states that President Donald Trump needs to win re-election in 2020. Yet they would also pose a big risk for Xi: His nation is the world’s largest pork producer and consumer, and higher costs for pig farmers could increase prices of meat for his nation’s 1.3 billion citizens.’

You can see how there are few winners, and many losers, in the event of a trade war.

Australia’s trade ties with China and the US may remain strong. But if the Chinese steel industry takes a hit from US tariffs, it could directly impact Chinese demand for Aussie iron ore…Australia’s largest export.

That would easily eclipse any potential gains seen by Australian soybean farmers.

The takeaway?

Hope for the best…prepare for the worst. You can find your step by step survival guide for the latter here.

In the mailbag

With the Dow Jones shedding 10% last week, and the ASX 200 down 5%, it’s a good time to reflect on the risks of investing in stocks.

Both indices are comprised of multi-billion dollar companies. A timely reminder that big falls aren’t limited to small-caps.

If you believe that last week’s losses are just a hint of far nastier times to come, you’ve likely sold off at least some of your stocks and increased your cash holdings.

Market veteran Vern Gowdie would applaud that move. Vern’s long advocated a move to cash. A move that will see you well positioned to scoop up stocks at bargain basement prices after the big collapse he sees coming.

Vern stresses the importance of spreading your cash holdings among banks backed by the Government Deposit Guarantee.

But a reader wrote in to question the value of that guarantee.

This, from reader Tom:

It is refreshing that PPP has a bunch of analysts with diverse opinions that provoke subscribers to think for themselves.

I think it highly unlikely that you would print this letter as it attempts to address the current market and sovereign risks.

I am in Vern’s camp with the DOW increasing over 300% from 2007/8 highs and being fed on sugar hits from the Fed, a significant correction is overdue, although the ASX will as always follow it doesn’t deserve to correct to the same extent, as compared to US and EU, Australian corporates (EXCEPT FINANCIAL SERVICES SECTOR) are a picture of prudent management and some have even given consideration to shareholders.

The problem I have with Vern’s conservative idea of holding cash is the looming disaster that is about to be passed by the senate committee — of course I am referring to the “bail-in bill” which will give APRA powers to not only convert bank bonds (that have been sold to 50,000  unsophisticated SMSF trustees) to worthless shares but to confiscate deposits without compensation, it is little use to trot out the “Federal Government Deposit Guarantee” as the big four banks are holding high risk loans and derivatives mostly supported by grossly overvalued real estate to the extent of more than $400 billion each with the so called government guarantee holding a measly $20 billion, probably less than 5% of the big fours potential loss with a housing crash that is already starting.

Although reading the proposed act does not define what deposits will be “bailed-in”(stolen) business and charities will essentially be exempted to avoid a total nationwide collapse, so this leaves personal wealth and the real target-super funds. It was always unrealistic to expect that government and banks would NOT find a way to raid this piggy bank of $3Trillion, particularly when both are bankrupt, through their own fault.

Finally I respect the fact that PPP is not a political commentator but RISK is RISK and I think you owe it to your loyal subscribers (many of which are SMSF trustee’s) sitting on cash, waiting for a market correction, to be alerted to the unprecedented and true RISK of holding cash.’

Thanks for writing in Tom. And you make some good points. Rather than try to muddle an answer for you myself, I sent this on to Vern Gowdie.

Here’s what he wrote back this morning:

Technically, Tom is 100% correct. We just don’t know what’s possible until the impossible happens.

The only response to the question is “trust’’

Now I know it’s laughable to put “trust” in the same sentence with “government and banks”. However, I am trusting both of them to do what’s in their best interest…to maintain (at best as they can) public confidence.

The average person in the street thinks that anything under $250k is protected. They do not know the intricacies of the legislation. If there is a whiff of panic with the banks, the media will be used to reassure the masses that all deposits under $250k are safe.

You can trust politicians to respond to public anxiety with taking the line of least resistance…we’ll backstop all deposits under $250k.

When push comes to shove the big four will survive one way or the other. They hold the majority of deposits. We may see government approval for four to become three or even two.

While it is cold comfort I am ‘trusting’ them to save themselves which in turn means they’ll look after the smaller deposit holders.

Also, the one thing people tend to discount is the ability for the RBA to print dollars to back the deposit guarantee. This idea was once considered radical, these days it’s par for the course.

Hope this helps.

Cheers

Vern

There you have it. If push comes to shove we may see the printing presses heat up. Either way, Vern is convinced that government officials will do whatever it takes to save themselves. And to do that, they’ll need to stand behind the deposit guarantees.

As Vern also mentions, the average person in the streets has no clue about the intricacies of all these legislations.

That’s just one of the areas he explains in simple terms in his must-read book, The End of Australia.

To find out how to get your copy, along with Vern’s five step recession survival plan, go here.

Now before you sign off…

In Today’s Australian Tribune: ‘Gay Marriage Postal Survey May be the Last

Australia joined the rest of the English speaking world in legalising gay marriage following a contentious postal survey.

The outcome was celebrated by the majority, and bemoaned by a conservative minority. While it’s still early days, the fabric of Australian society does not seem to have been weakened by same-sex marriage after all.

Resorting to a postal survey to reach this decision, however…’

If you’re fed up with sanitised, politically correct dogma cut and pasted from one mainstream source to another then The Australian Tribune is for you.

Sign up here to get The Australian Tribune delivered free to your inbox five days per week.

You can visit our website at https://www.theaustraliantribune.com.au/ to read the complete article above now.

Cheers,
Bernd