Stocks gone wild…

Wednesday, 28 March 2018
Melbourne, Australia
By Bernd Struben

  • FANG index sheds US$180 billion within hours
  • Do you still own the banks?

We start off today with two questions.

First up, do you remember 1930?

While many of our readers are on the older end of the scale, I’m guessing few were around in 1930. And even fewer — if any — would have been aware of what was going on with international trade back then.

If you know your history, though, you’ll know why this date is relevant.

17 June, 1930 saw The Tariff Act of 1930 signed into law in the US.

You may have heard this called the Smoot–Hawley Tariff act. It was named after the act’s sponsors, Senator Reed Smoot and Representative Willis Hawley. And it raised tariffs on over 20,000 import items.

It was an ill-fated effort to protect US jobs as the economy fell into a recession that would become the Great Depression.

How much the act contributed to the depression is debatable. There were many other factors dragging on the US and global economies following the First World War and the ensuing ‘roaring twenties’.

What’s not debatable is that other nations retaliated by slapping their own tariffs on US exports. And global trade plummeted. From 1929–1933 US exports fell over 60%. And imports fell more than 65%.

As for the Dow Jones?

The index fell from 3354 in June 1930 to 784 in June 1932. A 76.7% loss in just two years.

Now I’m not suggesting that the Dow, or ASX 200 for that matter, is looking at a fall of more than 75%. (Although this market veteran is.)

But clearly investors remain on tenterhooks over the prospect of the first full scale trade war in their lives.

Which brings us to our second question. Have you taken your Dramamine today?

As mentioned yesterday, that may not be a bad idea before tuning into the latest market moves. At least for readers who suffer from motion sickness.

Just have a look at the chart of the S&P 500 below:



chart image

Source: Bloomberg
Click to enlarge

Bloomberg notes that, ‘in 2016 and 2017 the S&P 500 went through several multi-month stretches without posting a single up or down day of more than 1 percent.’

So far this year — and it’s not yet April — the index has had three times as many single up or down days over 1% as it did in all of 2017.

And with uncertainty over global trade not going away any time soon, we can expect more of the same in the months ahead.

Now to the markets…

Markets

After soaring on Monday, US markets all fell heavily on Tuesday (overnight Aussie time). Driven by heavy losses among the FANG stocks, the Nasdaq led the way down, shedding 2.93%.

The Dow Jones Industrial Average closed down 344.99 points, or 1.43%.

The S&P 500 fell 45.93 points, or 1.73%.

That’s in sharp contrast to what index futures indicated at time of writing yesterday, by the way. Which prompted me to write to you that, ‘index futures point to gains in Europe and more gains ahead for US markets tomorrow. That’s good news.’

This is a good reminder not to put too much faith into the futures. These are just punters taking their best guess, after all. They guessed spectacularly wrong on US markets. Though the futures were pointing in the right direction for Europe.

In Europe the Euro Stoxx 50 index finished up 38.23 points, or 1.17%. Meanwhile, the FTSE 100 gained 1.62%, and Germany’s DAX climbed 183.57 points, or 1.56%.

In Asian markets, Japan’s Nikkei 225 is down 343.69 points, or 1.61%. China’s CSI 300 is down 1.61%.

In Australia, the S&P/ASX 200 is down 39.00 points, or 0.67%.

On the commodities markets, West Texas Intermediate crude oil is US$64.78 per barrel. Brent crude is US$70.11 per barrel.

Gold is trading for US$1,345.44 (AU$1,749.82) per troy ounce. Silver is US$16.54 (AU$21.51) per troy ounce.

One bitcoin is worth US$7,798.39.

The Aussie dollar is worth 76.89 US cents.

FANG index sheds US$180 billion within hours

The US market falls were led by heavy selling among the tech heavyweights.

With fears of a trade war simmering in the background, the FANG index lost a staggering US$180 billion in Tuesday’s trading.

That’s about AU$234 billion. Or enough to pay off more than a third of Australia’s $600 billion federal government debt.

Poof.

The FANG index is intended to mimic the performance of Facebook, Apple, Amazon, Netflix, Google (Alphabet) and a five other large-cap tech stocks, including Twitter.

And until peaking on 12 March, it delivered an annualised return of 67% since early 2016. As Bloomberg notes, this even outpaces the Nasdaq’s return in the final two years of the dot-com bubble.

Now the share price rout among the big 10 tech stocks isn’t all to do with trade war fears. While that added uncertainty likely pushed the selling to greater heights, there’s more to the story.

From Bloomberg:

Many of the big names in the industry had their own reasons for bad days: Twitter being targeted by short sellers, Facebook’s ongoing privacy scandal and Nvidia Corp.’s suspension of driving vehicle testing, for starters. Not to mention growing doubts over Tesla Inc.’s new models and a second probe into a car crash…

There is also a valuation case to be made for the intensified selling… At 65 times earnings in mid March, the group was valued almost three times as richly as the S&P 500 Index. That’s comparable with tech stocks in March 2000.’

An average valuation of 65 times earnings for the big 10 tech stocks. That means, without earnings growth, it would take 65 years to see the dollar you invested turn into two dollars.

Obviously, then, investors are pricing in massive growth potential for these stocks.

And obviously the companies making up the FANG index don’t like hearing comparisons to tech stocks in March 2000…or the dot-com bubble. I also imagine they’re hoping this time is different.

As are their shareholders.

And with US$180 billion of FANG index stock trading hands yesterday, there are a lot of new shareholders hoping they bought the dip.

I asked our in-house wealth preservation expert, Vern Gowdie, if he thought these stocks might now represent good value. Once he’d finished laughing, he explained why he’s convinced they have a lot further to fall. A lot…

If you haven’t checked out Vern’s survival guide for what he sees as an epic market crash on our horizon, you can get all the details here.

Do you still own the banks?

While none of the FANG index stocks list on the ASX, the Aussie market is also heading lower.

While the big four banks don’t have a snappy acronym like FANG, they make up roughly a third of the ASX 200 in terms of market cap. And they’re all well into the red today.

I recommended you reconsider your bank stocks back in November 2017. It didn’t take a crystal ball to make that call.

And like the FANG index, you should think carefully before stepping in to buy the dip.

At time of writing National Australia Bank Ltd. [ASX:NAB] is down 0.66% for the day, and 3.39% since last Thursday’s market open.

Commonwealth Bank of Australia [ASX:CBA] is down 0.68% today, and 4.57% since Thursday.

Westpac Banking Corp [ASX:WBC] is down 0.61% today, and 3.61% since Thursday.

And Australia and New Zealand Banking Group [ASX:ANZ] is down 1.04% today, and 3.66% since Thursday.

Part of the selloff is certainly linked to the broader falls in global markets, and a possible Trump-led trade war.

But the royal banking commission certainly hasn’t helped buoy their share price either. And as their own funding costs rise, they’re finding it will be more difficult to pass these costs onto their customers.

From Bloomberg:

A recent spike in funding costs is happening at the worst time for Australia’s big banks, as intense public scrutiny crimps their ability to pass on increases to customers.

At the same time [as the royal commission], the big four lenders — Commonwealth Bank of Australia, Westpac Banking Corp., Australia & New Zealand Banking Group Ltd. and National Australia Bank Ltd. — face a jump in their short-term financing costs both at home and offshore. The Libor-OIS differential, a key indicator of U.S. dollar borrowing costs, has more than doubled since the end of January, and domestic three-month bank bill rates have also surged.’

It’s hard to feel sorry for the faceless big four banks. Or for their highly remunerated top executives…who do have faces.

But at the end of the day it’s shareholders that are feeling the pain.

And if the big bank shares weren’t under enough pressure, competition is heating up. And not just from the fintech sector.

From The Sydney Morning Herald:

The big four banks are facing competition in the small business sector with the launch of Judo Capital, which is planning to tap into a $60 billion shortfall in lending to SMEs.

The SME focused challenger is on track to raise over $100 million and has applied to become a full bank under the Australian Prudential Regulation Authority’s regulatory framework.

SMEs, by the way, stands for small and medium–sized enterprises. Judo is targeting businesses with under $20 million turnover.

So with tech stocks crashing in the US and bank stocks sliding in Australia, where is an investor to go?

Aside from considering upping your allocation to cash, don’t overlook the value of gold in uncertain market conditions.

While gold slipped 0.53% in US dollars since this time yesterday, the yellow metal is up 0.34% in Aussie dollars, as the Aussie has dropped against the greenback.

Port Phillip Publishing’s head of research, Greg Canavan, is convinced gold is heading to new record highs in Aussie dollar terms.

He explains exactly why in his new report, ‘The Great Bullion Breakout’.

But Greg doesn’t recommend loading up on bullion. His analysis has identified what could be a far more profitable way to play gold’s rise. One he expects to see gains of 100% by October. And many times that over the next two to three years.

You can check out Greg’s full analysis here.

And finally…this from The Australian Tribune:

Is This How World War Three Starts?

While all eyes have been on North Korea and Russia, a far graver threat to world peace continues to simmer in the background.

And that’s the ongoing dispute over Taiwan’s right to sovereignty. A right China opposes at all costs.

In a frightening sign of just how quickly things could escalate, Taiwan sent aircraft…’

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.

And it’s absolutely free.

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