Why the market upswing looks short-lived

Thursday, 21 June 2018
Melbourne, Australia
By Bernd Struben

  • Default alert
  • Abbott could lead revolt on energy guarantee

First the good news.

Yesterday, the ASX 200 closed at its highest level since January 2008. And it’s up again today. At the time of writing, the index is up 1.09% in intraday trading.

The rise is largely being driven by a reversal in the banks’ fortunes. All the major bank stocks took a tumble in the lead up to, and during, the early stages of the royal banking commission.

Regular readers may recall I recommended reducing your exposure to the banks back in November 2017. That was shortly before the royal commission was formalised.

Now investors are sensing that the worst news on the banks’ deceptive and fraudulent practices may have already been aired. And they’re seeing value.

National Australia Bank Ltd. [ASX:NAB], for example, is up 4.72% since last Friday’s market opening. Australia and New Zealand Banking Group [ASX:ANZ] is up 5.24% in that same time. That’s no small feat for a company with a market cap of $80.3 billion.

OK, that’s the good part. Now for the bad news.

The upswing may be short-lived.

Global events are stacking up to take the wind out of the long running bull market. We’ve looked at some of those in Port Phillip Insider throughout the week.

The biggest cause for concern is rising interest rates.

Record low interest rates fuelled the recovery from the 2008 financial meltdown. This enabled governments, corporations, and households to take on massive amounts of cheap new debt.

As interest rates go up, repaying that debt is going to become a lot more expensive. It’s also going to draw more cashed-up investors into bonds and term deposits. And it’s going to have a direct impact on stock prices.

Publisher Kris Sayce has been warning about the coming fallout for some time. Last week he dismissed investors’ — and your editor’s — concerns about the trade war as temporary noise, writing:

What really matters to markets is what always matters to markets: company earnings and interest rates…

The bottom line is that interest rates are rising. Not just the Fed Funds Rate, but interest rates in general. Over the past year, the yield on two-year US government bonds has increased from around 1.2% to 2.55%.

Meanwhile — quietly, and without too many taking notice — yields on corporate debt are rising too. The yield on Apple Inc’s [NASDAQ:AAPL] bonds, maturing in February 2019, has increased from a low of 1.37% in April last year to 2.44% today.’

Like market veteran Vern Gowdie, Kris is convinced the stock market is headed for an imminent crash. Almost certainly within the next 18 months. But rather than taking shelter in cash, Kris prefers to make money from stocks that are going down.

How?

By exploiting an advanced technique used by professional brokers all over the world.

It’s not a method everyone will be comfortable with. And it’s not without risk. But Kris believes this crucial technique will enable you to potentially make hefty gains in a crashing market.

And he’s going to share with you exactly how to do this.

Kris’ special four-part series masterclass, ‘How to Make Money from Shares That Are Going Down’, starts this Monday, 25 June. The masterclass is free to any paid subscriber.

All you need to do to attend what’s shaping up to be our most valuable webinar of the year is sign up. You can do so here.

More, after the markets…

Markets

Overnight the Dow Jones Industrial Average closed down 42.41 points, or 0.17%.

The S&P 500 gained 4.73 points, or 0.17%.

In Europe, the Euro Stoxx 50 index finished up 4.30 points, or 0.13%. Meanwhile, the FTSE 100 gained 0.31%, and Germany’s DAX rose 17.19 points, or 0.14%.

In Asian markets, Japan’s Nikkei 225 is up 142.51 points, or 0.63%. China’s CSI 300 is down 0.14%.

In Australia, the S&P/ASX 200 is up 67.22 points, or 1.09%.

On the commodities markets, West Texas Intermediate crude oil is US$65.63 per barrel. Brent crude is US$75.54 per barrel.

OPEC meets in Vienna tomorrow to hash out the thorny issue of raising production caps. We should know the outcome of that meeting on Saturday, Aussie time.

Turning to gold, the yellow metal is trading for US$1,269.61 (AU$1,723.38) per troy ounce. Silver is US$16.32 (AU$22.15) per troy ounce.

One bitcoin is worth US$6,745.75.

The Aussie dollar is worth 73.67 US cents.

Default alert

Now, where were we?

Oh yes, the growing dangers of the rising cost of debt. Particularly corporate debt which, as Kris Sayce noted, has been quietly rising without garnering much attention from investors.

That could be a big mistake.

The following comes from the McKinsey Global Institute discussion paper ‘Rising corporate debt: Peril or promise?’:

The total debt of nonfinancial corporations, including bonds and loans, has more than doubled over the past decade, growing by $37 trillion to reach $66 trillion in mid-2017, or 92 percent of global GDP. This growth is nearly equal to the increase in government debt, which has received far more attention. In a departure from the past, a large share of the growth in corporate debt has come from developing countries, and in particular China, which now has one of the highest ratios of corporate debt relative to GDP in the world.

US$37 trillion (AU$50.2 trillion) in new debt among nonfinancial corporations alone…and in only 10 years.

To put that staggering figure into some kind of perspective, that’s roughly 28 times Australia’s GDP. And a big chunk of that new debt comes from corporate China.

We looked at China’s increasingly shaky financials in Monday’s Port Phillip Insider.

Australia largely had China to thank for keeping its economy afloat during the GFC. Though that wasn’t reflected by the ASX 200. The index lost more than half its value in the aftermath.

When the next crash comes along — a crash Kris is convinced is less than 18 months away — China may well be part of the cause. But it almost certainly won’t be part of the solution.

The McKinsey paper continues:

Risks have increased in the corporate bond bull market. While the expansion and deepening of global corporate bond markets is good news, there are also signs that creditworthiness of borrowers has declined. This could prompt more defaults in the years ahead as a record amount of bonds come due and as future borrowing costs rise…

Moreover, rising interest rates could make it more difficult for many borrowers to refinance their debt. Globally, corporate defaults are already above the long-term average of 1.5 percent since 1981, and default rates could rise further as higher interest rates make debt burdens unsustainable. Some companies already are only barely covering their debt service costs, and the share of such companies will rise with higher interest rates.’

You can see why Kris has been sounding the alarm over rising interest rates.

Yet there’s no sign that the Fed is going to slow down its tightening policy any time soon.

The US unemployment rate is at 3.9%. And the trillion dollars in tax cuts, and ramped up spending pushed through by Donald Trump, are heating up the world’s largest economy. Inflation in the US is now at its highest level in six years. And trending upwards.

If anything, you should prepare for more rapid rate rises in the US.

From Bloomberg:

The Federal Reserve will probably have to raise interest rates in the years ahead above levels officials consider neutral for the U.S. economy because of how far the unemployment rate has fallen, outgoing New York Fed President William Dudley said.

Now Reserve Bank of Australia (RBA) Governor Philip Lowe has given no indication the RBA is going to lift rates from the current record low 1.5% anytime soon. He’s waiting for inflation to take off. And most pundits are now expecting rates to remain unchanged into 2019.

But the RBA — and Australia’s stock market — don’t exist in an isolated bubble. Like it or not, what the Fed does will have a ripple effects on rates across the globe.

And as we’ve seen today, a growing number of highly indebted corporations could be in for a nasty surprise as a record amount of bonds come due. That could send their share prices and the wider market into a tailspin.

If that happens, most investors will be left holding big losses. Which is why Kris Sayce’s four-part master class ‘How to Make Money from Shares That Are Going Down’ couldn’t come at a better time.

As mentioned above, that kicks off this Monday, 25 June. And it costs you nothing to attend. But you will need to sign up for it.

To do that, just click here.

Now before logging off, here’s the latest on the battle over your energy bills from The Australian Tribune:

Abbott Could Lead Revolt on Energy Guarantee’

There’s been a lot of chinwagging in Canberra and the state capitals about bringing Australia’s sky-high energy prices back to earth. But you only need to check your energy bill to see that Australia still has some of the most expensive prices in the world.

Tony Abbott and his backbench supporters believe they have the answer to delivering cheap, reliable energy. Coal. And they’re prepared to…’

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