Category: Australia & NZ

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ASX 200 tug-of-war

At times it pays to look at the big picture. A monthly chart shows the ASX 200 recovering from 2 months of uncertainty (February – March), when the index broke its new support level at 6000. Recovery is almost complete, with the index testing the last level of resistance at 6150. Breakout would signal a primary advance but bearish divergence on Twiggs Money Flow (13-week) warns of selling pressure. Another test of support at 6000 is likely.

ASX 200

The ASX faces a bi-polar medium-term outlook with its two largest sectors headed in opposite directions.

ASX 200
Source: S&P Dow Jones Indices

Mining is going gang-busters with the ASX 300 Metals & Mining Index offering a medium-term target of 4200 after breaking through 3800.

ASX 300 Banks

But the largest sector, Finance, is in trouble. The impact of the Royal Commission is likely to slow bank lending growth and APRA’s efforts to raise bank lending standards will also adversely affect declining housing growth. The ASX 300 Banks Index remains in a primary down-trend, having broken support at 8000. Retracement respected the new resistance level at 8000 and breach of support at 7700 would signal a test of the 2016 low at 7200.

ASX 300 Banks

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Gold stocks retreat

The Dollar rally continues, with the Dollar Index heading for a test of resistance at 95. Penetration of the long-term descending trendline suggests that a bottom is forming. Bullish divergence on the Trend Index indicates buying pressure.

Dollar Index

But rising crude prices still threaten to weaken the Dollar.

WTI Light Crude

Spot Gold broke support at $1300, warning of a test of primary support at $1250/ounce as the Dollar strengthens. The declining Trend Index indicates selling pressure.

Spot Gold

A weakening Australian Dollar continues to test support at 75 US cents as the greenback rallies. Breach would offer a long-term target of 69/70 US cents.

AUDUSD

The weaker Aussie Dollar offered some respite for local gold stocks but the All Ordinaries Gold Index is retracing to test its new support level at 4950/5000. Respect of the rising trendline would confirm a fresh advance and long-term target of 6000.

All Ordinaries Gold Index

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China sees red

From Darren Gray & Kirsty Needham at The Age:

Relations with China have taken another backward step after one of Australia’s biggest exporters, Treasury Wine Estates, was among several companies whose products were being stalled because of new customs rules targeting Australian companies and industries….

2018/2019 Budget Net Debt and Fiscal Deficit/Surplus

“Chinese officials have introduced new and different verification and certification processes and we’ve been working with the Chinese authorities and the officials, as well as with Australian authorities and officials, to ensure that we can meet these new and additional processes, which are not just applied to Treasury Wine Estates, it’s being applied to a number of other companies, across a number of different industries from Australia,” Treasury boss Michael Clarke said.

Australian Trade Minister Steven Ciobo said in Shanghai he had been informed of the situation by Treasury, the largest importer of foreign wine into China, in the past 24-36 hours.

“The questions being asked relate to certificates of origin. We will look at precisely what the situation is and if we can get to the bottom of it,” Mr Ciobo said.

….Amid a looming trade war between the US and China, and threatened punitive tariff packages worth hundreds of billions of dollars, American exporters have also reportedly encountered pre-emptive slow downs and extra scrutiny from Chinese customs in recent weeks.

China is attempting to use trade relationships to coerce trading partners into complying with their political demands, applying Lenin’s dictum “Probe with a bayonet. If you meet steel, stop. If you meet mush, then push.”

Australia faces a clear choice. Acquiesce and the trade issues will likely disappear…for a short time until China wants something else. Effectively we will become China’s southernmost province, responding to the will of the Central Committee in Beijing.

The alternative is a lot tougher: politely but firmly resist any pressure from Beijing and demand to be treated as an equal partner in international relations. The price is high but the rewards are far greater. Our freedom and independence.

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ASX 200: Bi-polar economy

A sign of the economy’s good health is the largess distributed in Treasurer Scott Morrison’s recent budget, without wrecking the fiscal balance sheet. Net Debt is projected to peak at 18.6 percent of GDP in 2017/2018, with the budget returning to surplus in 2019/2020.

2018/2019 Budget Net Debt and Fiscal Deficit/Surplus
Source: Budget.gov.au

The ASX 200 is testing resistance at 6100/6150 despite the weakening Australian Dollar and troubled banking sector. Breakout above 6150 would signal a primary advance.

ASX 200

Led by the ASX 300 Metals & Mining Index. Breakout above 3800 signals a fresh primary advance, with a medium-term target of 4200.

ASX 300 Banks

But the ASX 300 Banks Index is in a primary down-trend, having broken support at 8000. Retracement that respects the new resistance level at 8000/8100 is likely and would confirm a primary down-trend with a medium-term target of the 2016 low at 7200.

ASX 300 Banks

We have a bi-polar economy, with Resources exports surging, along with Services and Rural (agriculture). Manufacturing exports are the only flat spot.

Export Volumes

But the banking sector faces challenges from a threatened housing down-turn, with near zero house price growth, and a regulator racing to shore up bank balance sheets before the bubble bursts.

Housing Price Growth

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Aussie Gold stocks continue strong run

The Dollar rally is slowing, with the Dollar Index running into resistance at 93, ahead of the anticipated 95. Penetration of the descending trendline suggests that a bottom is forming. Bullish divergence on the Trend Index indicates buying pressure. Retracement that respects the new support level at 91 would be a bullish sign. Breach of 88.50 is unlikely but would warn of another primary decline.

Dollar Index

Rising crude prices weaken Dollar demand.

WTI Light Crude

Spot Gold continues to test support at $1300. The declining Trend Index indicates selling pressure and a peak below zero would warn of another test of primary support at $1250/ounce.

Spot Gold

Australian gold stocks continue their strong run. Retracement of the All Ordinaries Gold Index that respects the new support level at 5000/5100 would confirm a fresh advance and long-term target of 6000.

All Ordinaries Gold Index

A weakening Aussie Dollar, testing support at 75 US cents, is driving local gold prices. Breach of support would offer a long-term target of 69/70 US cents.

AUDUSD

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ASX 200 tests resistance

The ASX 200 is testing resistance at 6100/6150 despite a weakening Australian Dollar and a troubled banking sector. Breakout above 6150 would signal a welcome fresh advance.

ASX 200

ASX 200
Source: S&P Dow Jones Indices

But I remain skeptical because the largest sector, Financials — whose market cap is a third of the entire index — is in trouble. The ASX 300 Banks Index is in a primary down-trend, having broken support at 8000. Retracement that respects the new resistance level at 8000/8100 would confirm a primary down-trend, with a medium-term target of the 2016 low at 7200.

ASX 300 Banks

Miners, on the other hand, have recovered. Breakout above 3800 would signal a fresh advance, with medium-term a target of 4200.

ASX 300 Banks

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Aussie gold stocks breakout

The Dollar rally continues, with the Dollar Index headed for a test of resistance at 95. Penetration of the descending trendline suggests that a bottom is forming. Bullish divergence on the Trend Index indicates buying pressure.

Dollar Index

But rising crude prices weaken Dollar demand.

WTI Light Crude

Despite the Dollar rally, Spot Gold found support at $1300, with a long tail indicating buying pressure. Recovery of the Trend Index above zero would confirm.

Spot Gold

But Australian gold stocks are running ahead. Breakout of the All Ordinaries Gold Index above resistance at 5000/5100 signals a fresh advance with a long-term target of 6000.

All Ordinaries Gold Index

Helped by a weakening Aussie Dollar, testing support at 75 US cents. Breach of support would offer a long-term target of $0.69/$0.70.

AUDUSD

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Consumer behavior has indelibly changed

From David Uren at The Australian:

A research study by Commonwealth chief economist Michael Blythe, which draws on surveys of the bank’s customers, backs the Reserve Bank’s view that elevated housing debt is not an imminent threat to financial stability, with the largest debts held by those best able to afford them. But Blythe shows the build-up of debt is having a significant effect on consumer behaviour, which has responded to the growth in housing wealth very differently from the housing boom in the first half of the 2000s.

…The boom has greatly increased household wealth — ABS estimates show the value of the housing stock has risen by $2 trillion over the past 4½ years. Blythe says that traditionally, households spend about 4c out of every dollar of additional wealth, however this has not occurred during the boom. Instead, households have been making net equity injections into their housing, while consumer lending indicators show no appetite to tap into accumulated wealth.

The difference in consumer behavior after the DotCom bubble and the 2008 Financial Crisis is marked. When the bubble burst in 2001 the economy went into a recession. Before long investors found another asset, real estate, that promised them effortless wealth — just add debt. The ensuing 2008 crash, on the other hand, was not a normal recession. Labeling it the Great Recession is putting lipstick on the pig. The proper name for it is a Banking Panic, as in 1907 and 1930, when the banking system threatened to implode. Faith in the entire financial system was rocked and is likely to change consumer and investor behavior for a generation. Not just a 5-year cycle.

Hat tip to Macrobusiness.

We should be careful to get out of an experience only the wisdom that is in it — and stop there; lest we be like the cat that sits down on a hot stove-lid. She will never sit down on a hot stove-lid again — and that is well; but also she will never sit down on a cold one anymore. ~ Samuel Clemens as Mark Twain

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Avoiding the hubris trap

Great example of how even the most professional management teams can fall into the hubris trap.

Michael Chaney describes to The Age how Wesfarmers burnt a billion dollars on the highly successful Bunnings hardware chain’s expansion into the UK market:

S&P 500

Bunnings Warehouse by Bidgee – Own work, CC BY-SA 3.0, Link

Chaney was the chairman that signed off and despite everything contends he had never seen a more thorough investment analysis than had been undertaken on Bunnings UK.

They had a base case set of projections and a downside case and it all looked very positive at the time according to Chaney.

But a couple of fundamental mistakes were made subsequently after acquisition of Homebase home improvement network of stores including the removal of 150 senior managers.

“One was moving out the senior management and replacing it with our Australian experts and the second was getting rid of a lot of the products and the franchises because they didn’t suit the Bunnings model,” says Chaney.

By way of example the Australian interlopers jettisoned Laura Ashley from the home decorator product line up – and British women voted with their purses.

It was the success of the Australian model and its management that blinded the higher ups inside Wesfarmers to the fact that these guys didn’t know better what the UK customers wanted. Wesfarmers got caught in the hubris trap.

Some years earlier hardware giant Lowes fell into a similar trap in the US. Number-crunchers at head office worked out that they could save a bundle by replacing senior salespeople with more junior, inexperienced staff. The knowledge base of experienced floor staff was decimated. Customer service and sales plummeted. As one manager described it: “we became find-it-yourself instead of do-it-yourself.” Fortunately Lowes were able to correct their mistake and should have learned a valuable lesson but it seems they did not.

Investors should always be on the lookout for the hubris trap. The more successful the company, the more vulnerable they are. Expanding operations away from the home country or state is often a high risk venture, where management may be blind to cultural differences, regulatory pitfalls and an array of new competitors. Expanding into new product lines or services that are outside management’s traditional core expertise may also present traps for the unwary.

Ask Woolworths (Australia) about their Masters hardware venture, Commonwealth Bank about their expansion into financial advice, NAB about their expansion into UK markets, Centro Properties (now Vicinity) and Westfield about their foray into US shopping centers,….. I could go on. It’s a long list.

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