Not another bubble!

Monday, 23 December 2019
Melbourne, Australia
By Bernd Struben

  • Markets
  • As Good as It Gets?
  • ASX 200 Looking Tired

The latest research from CoreLogic doesn’t bode well for prospective home buyers.

In fact, US futurist and economist Harry S Dent will tell you it doesn’t bode well for Australia at large.

The research in question is the renewed surge in property prices. We mostly have the RBA’s rate cutting binge to thank for that. One that’s seen the Aussie cash rate plunge to a record low 0.75%. And another rate cut…or two…could well be on the cards in 2020.

The biggest price rises are coming in the two biggest cities, where property prices already are among the world’s least affordable.

According to CoreLogic, average Melbourne homes are expected to go up 14% next year. Sydney comes in a close second, with 12% price rises forecast for 2020.

This could see Melbourne homes hit new record highs next month. And Sydney could be hitting record high levels by March. So much for the correction we had to have.

Over at Harry Dent’s Boom & Bust Letter, Harry Dent and analyst Selva Freigedo aren’t cheering the news.

Harry sees Australia’s nosebleed real estate prices as one of the core factors that will bring the economy to its knees. An event he believes will see the ASX and home prices slashed in half.

But the crisis won’t start here. Harry expects China to be the catalyst that brings valuations back to where they should be. And once the dust clears from the epic crash ahead, he believes Australia will be much stronger for it.

(You can get the full story in Harry’s book, Zero Hour, here.)

Below, Selva Freigedo takes a look at the latest positive economic news out of China. And the cracks appearing in the foundations below…

But first a look at the markets.

Markets

Over the weekend, the Dow Jones Industrial Average closed up 78.13 points, or 0.28%.

The S&P 500 closed up 15.85 points, or 0.49%.

In Europe the Euro Stoxx 50 index closed up 37.39 points, or 1.00%. Meanwhile, the FTSE 100 gained 0.11%, and Germany’s DAX closed up 106.94 points, or 0.81%.

In Asian markets Japan’s Nikkei 225 is up 42.23 points, or 0.18%. China’s CSI 300 is down 0.27%.

The S&P/ASX 200 is down 23.40 points, or 0.34%.

West Texas Intermediate crude oil is US$60.28 per barrel. Brent crude is US$65.97 per barrel.

Turning to gold, the yellow metal is trading for US$1,481.10 (AU$2,144.34) per troy ounce. Silver is US$17.24 (AU$24.97) per troy ounce.

One bitcoin is worth US$7,571.06.

The Aussie dollar is worth 69.04 US cents.

Now over to Selva…

Cheers,
Bernd


As Good as It Gets?
By Selva Freigedo, The Boom & Bust Letter

We are nearing the end of the year, the end of the decade. What will the New Year bring?

If recent events are any indication, next year could be somewhat of a rollercoaster.

On one hand, the three interest rate cuts this year by the Reserve Bank of Australia have revived Australia’s housing market. Auctions are firing up again.

Yet they haven’t done much to spur growth.

Last week the Treasury department lowered their forecast for surplus, gross domestic product and wage growth. While interest rates are lower, consumer spending is still bogged down by copious amounts of debt.

We are also seeing mixed data coming out of China, Australia’s top trading partner. 

On the other one hand there is the good news of a trade deal.

The US and China announced they have reached a phase one trade deal agreement. It means no more tariff hikes in December.

Chinese November data also came in better than expected with retail sales increasing by 8% and production 6.2% from the previous year, according to Bloomberg.

But we are also starting to see some cracks in the system.

Two weeks ago Chinese company Tewoo released the plan for their debt restructuring.

If you are not familiar with Tewoo, it is a material circulation company owned by the Tianjin government. With over 19,000 employees, they operate in areas like infrastructure, commodity trade, logistics, financial services and real estate development. They also have affiliates in the US, Germany, Japan and Singapore.

To give you an idea of their size, Tewoo listed at 416 on the Fortune Global 500 list in 2012 and rose through the ranks to number 132 in 2018.

Tewoo is now the largest dollar bond default by a government owned company in the last 20 years.

Tewoo’s woes could have something to do with lower infrastructure spending in China.

As you can see below, China’s infrastructure investment growth has slowed down to about 4%, compared with the 25% plus we saw back in 2017.



chart image
Source: Bloomberg
Click to enlarge

Tewoo’s debt restructuring plan leaves investors with hefty losses. Yet what’s significant about Tewoo’s default is that it shows that China is now reluctant to bail out state companies.

As Bloomberg wrote recently:

Tewoo’s failure in the dollar bond market, the biggest for a Chinese SOE since the collapse of Guangdong International Trust and Investment Corp. in 1998, is a sign that the worst economic slowdown in three decades is limiting Beijing’s capacity to bail out its weaker state firms. As a result, the authorities appear increasingly willing to use a more market-oriented approach to clean up the mess.

As you can see below, defaults for Chinese state-owned companies have been increasing.



chart image
Source: Bloomberg
Click to enlarge

Yet it’s not just state-owned companies in trouble.

This week two reports surfaced that six private owned companies have defaulted with US$9.7 billion in outstanding debt in China’s wealthiest province, Shandong.

Shandong is an important economic centre, with a GDP of about US$1.13 trillion in 2018.

The big issue at stake is this, as Bloomberg reports:

The problem isn’t the defaults themselves — other provinces have seen more and worse. It’s the practice common among Shandong companies of guaranteeing each others’ debts. Firms don’t have to make public these liabilities, leaving investors to wonder who’s on the hook and for how much. With the once-strong industrial economy flagging, the murky ties between the province’s private companies threaten to drag them all down together.

With interconnected debt, more defaults could very well hit confidence.

We are seeing a lot of mixed signals. We are no longer in a growth story, but in a struggle to maintain what we have.

That is, this could be as good as it gets.

Regards,
Selva Freigedo


ASX 200 Looking Tired

 

[The S&P 500 is making new all-time highs daily but the ASX 200 is looking weak. Click on the picture to watch Murray outline how he is trading the divergence in his trading service Alpha Wave Trader.]

As US markets march relentlessly higher, there is some divergence developing with the ASX 200.

Our equity market is not keeping pace with the vertical rise of the S&P 500 and is looking tired as we head into the end of the year.

My trading model is based on analysing how markets change direction using buy and sell pivots across different time frames and then using mean reversion to get into free carried positions as quickly as possible.

The current set up on the weekly charts in the ASX 200 is a classic example of what I look for and I have taken advantage of the opportunity by sending out an alert to get short the ASX 200 as the market rallied last week.

The best trades are usually when you are trading against the crowd. It can be difficult to do because the market always looks great at the high or terrible at the bottom.

I don’t know whether this trade will work out or not, but it is a great case study for you to see so you can understand how to set up trades with compelling risk/reward using past price action as a guide.

The overall portfolio in Alpha Wave Trader remains long with 14 positions, so the short in the ASX 200 is really a partial hedge on the portfolio. If the trade is a loser we will just stop out of the trade and become 100% long again.

The S&P 500 is on the verge of confirming that the range of the last few years is over based on my model, so it is blue sky ahead. With an election in the US next year and a US Fed cheering the market on with further liquidity the rally could gather momentum from here.

Any correction in the ASX 200 would be reversed quickly if that is the case, so I will be taking part profit on this trade as soon as possible so that we are free carried from that point on.

Making decisions in the market is incredibly tricky when you don’t have a solid set of rules that outlines what the current state of the market is. My own model may not describe the market perfectly, but no model ever will. It is not about being perfect. It’s about creating a map so that you aren’t walking blind.

Regards,

Murray Dawes,
Editor, Alpha Wave Trader