Buy the Dip…Or Sell the Bounce?

Thursday, 5 March 2020
Adelaide, Australia
By Bernd Struben

  • Markets
  • Red hot…or frozen stiff?
  • In the mailbag…Editors roundtable

The World Health Organization has declared that the world is in ‘uncharted territory’.

The coronavirus continues its exponential spread. Slow at first…then ever faster.

The official mortality rate has — belatedly — been raised to 3.4%. But that’s based on deaths versus the overall infection numbers. With tens of thousands of patients yet to recover, that figure could well go higher.

For older folks the mortality rate is already far more dire.

While children under 10 may suffer nothing more than the sniffles.

As may your dog.

Uncertainty rules.

And investors are piling back into stocks.

In a delayed reaction to the US Fed’s 0.50% interest rate cut — and the RBA’s own 0.25% cut — the Dow closed up a whopping 4.5% yesterday (overnight our time). The rest of the major US and European indices also closed well into the green.

And at time of writing the ASX 200 is up 1.0%.

Even cruise line giant Carnival Corp [NYSE:CCL] saw its share price gain 2.0% by the closing bell. Though despite that bounce the stock is still down 36.7% since 2 January.

With tags like ‘floating petri dish’ still making the rounds, the company and the wider cruise industry are looking at a tough year ahead. Regardless of how low interest rates may go.

On that note the European Central Bank (ECB) is holding fire for the moment. But not the Bank of Canada.

More, after the markets…

Markets

Overnight, the Dow Jones Industrial Average closed up 1,173.45 points, or 4.53%.

The S&P 500 closed up 126.75 points, or 4.22%.

In Europe the Euro Stoxx 50 index closed up 48.59 points, or 1.44%. Meanwhile, the FTSE 100 gained 1.45%, and Germany’s DAX closed up 142.30 points, or 1.19%.

In Asian markets Japan’s Nikkei 225 is up 166.34 points, or 0.79%. China’s CSI 300 is up 1.59%.

The S&P/ASX 200 is up 64.90 points, or 1.03%.

West Texas Intermediate crude oil is US$47.26 per barrel. Brent crude is US$51.13 per barrel.

Turning to gold, the yellow metal is trading for US$1,636.14 (AU$2,470.76) per troy ounce. Silver is US$17.18 (AU$25.94 ) per troy ounce.

One bitcoin is worth US$8,760.80.

The Aussie dollar is worth 66.22 US cents.

Red hot…or frozen stiff?

The Bank of Canada cut its cash rate by 0.50% yesterday (overnight for you and me), bringing it down to 1.25%. The last time the BoC cut was in mid-2015.

In its statement the bank noted:

While Canada’s economy has been operating close to potential with inflation on target, the COVID-19 virus is a material negative shock to the Canadian and global outlooks.’

And as with the Fed, ECB, RBA, etc., more rate cuts are on the cards.

From the AFR:

Capital Economics’ Stephen Brown said he forecasts a further 25 basis points cut next month, though Canada’s “red hot” housing market will check additional cuts.

We’re all too familiar with the ‘red hot’ housing market here in Oz.

The 10–20% price falls from the correction we had to have largely been regained. And buyers are still lining up, driving house prices to new record highs.

Have a look at the chart below:


Port Phillip Insider

Source: CoreLogic

[Click to open in a new window]

The results for February are impressive. And arguably myopic.

With a pandemic brewing on the doorstep, Sydney dwelling values lifted 1.7% last month. Melbourne values gained 1.2%. That was enough to see national values gain 1.1% in February.

The RBA’s latest 0.25% rate cut — passed on in full by all the big banks — will likely entice more buyers into the market.

According to data from Finder and the RBA, the average mortgage stands at $489,251. And the average mortgage holder will save $847 per year from the latest 0.25% rate cut. Not a life altering amount. But certainly a fresh inducement.

Take the coronavirus out of the picture and it looks like blue skies ahead for Australia’s $7 trillion housing industry.

Drop the virus back into that picture and storm clouds abound.

Louis Christopher is the managing director of SQM Research. If a pandemic takes hold Down Under he says (as quoted by the AFR):

This is a scenario where the housing market freezes up because people will avoid going to places of congregation and that would include going to property inspections and auctions. This will have the potential to cut the housing boom short.

If the economy goes into recession as a result of the coronavirus, all bets are off. Recessions are bad for real estate because unemployment will rise and that would be a big negative for the housing market.’

Addressing the virus, AMP Capital chief economist Shane Oliver adds:

It is perhaps the biggest threat to the property market. If it can affect the share market like it has, then it can affect the property market at some point.’

With these ominous warnings in mind, I reached out to Aussie economist and real estate cycle expert Catherine Cashmore for her take.

Catherine is the editor of Cycles, Trends & Forecasts, published by our friends at Fat Tail Media. While her coronavirus crystal ball is as cloudy as the rest of ours, her outlook for the property market remains decidedly bullish.

It’s fair to say buyers in the market are feeling greater FOMO (fear of missing out) than the economic effects of the coronavirus. 

There are a few things underpinning it that will likely keep the trend going for some time yet. This includes a marked rebound in new mortgage growth.

Furthermore, Catherine says:

The key is that owner occupiers are mostly driving it, not investors. This demographic has access to the best deals on the market as borrowing rates continue to fall.’

Owner occupiers, as you’d expect, are far less likely to panic sell than investors if prices turn down. If the virus does spread, that could help cushion the property market from the kinds of steep falls we’re likely to see in the share market.

As I said up top, uncertainty rules…

In the mailbag…Editors roundtable

On Monday, Publisher James Woodburn sat down with three leading editors from Port Philp Publishing and Fat Tail Media. Namely Greg Canavan, Callum Newman, and Ryan Dinse.

In the 25-minute videotaped roundtable discussion that followed, they shared their thoughts on last week’s wild market action. And they donned their forecasting caps to explain how they see things playing out in the weeks ahead.

(If you missed that, you can watch it here.)

The feedback we received, to date, has been uniformly positive.

Like this short note, from subscriber Martin:

I enjoyed the discussion with the three editors and found it useful in settling nerves. Would welcome more of these.’

Thanks Martin. The plan is to offer you more videos like these…especially in times of turmoil.

Next is this mail from Glen:

Greg’s reasoned sober analysis has been invaluable over this period.

Too many international professionals expressing confidence in the ongoing bull market in gold and precious metals in general to be completely shaken out.

Indeed. You’ve got to dig deep to find analysts bearish on gold these days. Not that gold won’t dip lower here and there. But the midterm trend looks decidedly bullish.

We’ll leave off today with this email from reader Doug:

Just a note to say thank you for the heads up on a probable market correction.

I’m 61 years old and have worked as a public servant for 42 years. I remember reading the warning from Vern Gowdie in June 2019, however I procrastinated on the advice for approximately 6 months. I read Vern’s article again in January this year and the warning on PE ratios immediately spurred me into action. It was fortuitous that I transferred all of my superannuation to cash around 7-8 January 2020.

I’m not sure how much your Group’s advice has saved me at this stage, however estimate that it’s probably around $40,000 of my hard earned super. As you know I don’t have time on my side and rest better knowing that I can dip my toes back in market waters when the market becomes more settled.

Thank you again.

That’s great to hear Doug.

Our editors strive to save subscribers money with their defensive recommendations or make them money with their stock tips. They don’t always get it right. But every day they’re out there working for you.

If you’re worried about the state of the markets, and aren’t familiar with Vern Gowdie’s work, you can find out more here.

That’s a wrap for today.

Remember you can send your correspondence to letters@portphillipinsider.com.au.

Cheers,
Bernd