Perth Mint Gold (PMGOLD)

Not to be confused with the ETF (AAAU) listed on NYSE Arca — which went by a similar name — Perth Mint Gold (PMGOLD) is a call option listed on the ASX that entitles the holder to delivery of 1/100th of a troy ounce of fine gold held at the Perth Mint.

Liabilities of Gold Corporation are guaranteed by the West Australian state government under section 22 of the Gold Corporation Act 1987, an Act of the WA Parliament.

Management fees of 0.15% p.a. are paid in physical gold.

Gold holdings of Gold Corporation are unallocated.

Further details regarding fees, custody and delivery are set out in their Product Disclosure Statement.

Beware of recency bias

Every the year the 2016 Russell Investments/ASX Long-term Investing Report provides an invaluable summary of before and after-tax returns on various asset classes for Australian investors, over 10 and 20 years.

Naive investors are likely to automatically pursue the asset classes that offer the highest yields. Recent performance is more likely to attract our attention than more stable longer-term performance. Josh Brown highlighted last year that mutual funds that attracted the most new investment tended to underperform funds that attracted the least new inflows. I suspect that the same applies to asset classes.

If we consider each of the asset classes highlighted, it is clear that performance over the next 10 years is likely to be substantially different from the last decade.

Australian Asset Classes 10-year Performance to 31 December 2015

Source: 2016 Russell Investments/ASX Long-term Investing Report

Australian Shares

Australian Shares endured a (hopefully) once-in-a-lifetime financial crisis in 2008. 10-Year performance is going to look a lot different in two years time (20-years is 8.7% p.a.). Prices of Defensive stocks, on the other hand, have since been inflated by record low interest rates.

Residential Property

Residential property prices boomed on the back of low interest rates and an influx of offshore investors. But growth is now slowing.

RBA: Australian Housing Growth

Listed Property

REITS were smashed in 2008 (20-years is 7.7% p.a.). But before contrarians leap into this sector they should consider the impact of low interest rates, with many trading at substantial premiums to net asset value.

Bonds & Cash

Low interest rates again are likely to impact future returns.

Global Shares

Global Shares also weathered the 2008 financial crisis (20-year performance (unhedged) is 6.4% p.a.). Subsequent low interest rates had the greatest impact on Defensives, while Growth & Cyclicals trade at more conservative PEs.

I won’t go through the rest of the classes, but there doesn’t seem to be many attractive alternatives. It may be a case of settling for the cleanest dirty shirt, and the least smelly pair of socks, in the laundry basket.

Who is/isn’t buying Australian stocks?

Two interesting charts from Tim Baker at Deutsche Bank. Foreign investment in ASX equities, avoiding banks and resources, has slowed to a 5-year low.

Foreign Investors in ASX

Super fund investors have lost their enthusiasm for bank deposits, as interest rates tumble, and are allocating more to equities.

Super Fund Investors

ASX equity shrinking

From Chris Pash:

Credit Suisse’s Equity Strategist Hasan Tevfik says the cost of debt is very low relative to the cost of equity….This means that few equities are being added to the Australian market because companies are using cheap debt, rather than going to their investors or shareholders, to raise cash for expansion or investment.

This is not a healthy sign — when companies use cheap debt, rather than equity, to fund acquisitions. Artificially low interest rates distorting companies’ WACC (weighted average cost of capital) could lead to poor investment decisions.

Read more at Credit Suisse: This Is Why The ASX Will Hit 6000 By The End Of The Year | Business Insider.

Australia: Stocks may be fully priced

Christopher Joye from the AFR suggests that Australia’s sharemarket may be “fully priced”:

New analysis from UBS poses an interesting puzzle: we have yet to see ASX earnings per share recover to pre-crisis levels. Top-rated UBS strategists Matthew Johnson and Andrew Lilley find that “aggregate equity market data shows declining earnings and weakening corporate balance sheets” in 2012…..

via Sting in inflation surprise.

ASX revenue from high frequency trading soars

A new data center, catering for high-speed trading, is becoming a major revenue-source for the ASX. My concern is that this could change the entire focus of the ASX, outweighing revenue from traditional stock market trading. Tom Steinert-Threlkeld at the Securities Technology Monitor writes:

The Australian Securities Exchange Group said Thursday that its revenue from Technical Services in its 2012 fiscal year topped the amount of revenue it received from stock market trading……

The growth in Technical Services revenue came as the company introduced different order types and execution services, and completed a state-of-the art data center. That data center operates at high speed and handles high volumes of trading orders, from computers belonging to trading firms that are located inside its walls. ASX said it was hosting 59 clients in the new data center as of June 30.

via Stock Trading Revenue Topped by Technology at Australia Exchange.


West Australian: Small investors getting burnt

Computer-based trading has meant that the market is no longer fair, writes David Tasker.

The Australian Securities Exchange is seen by many as one of the most transparent markets in the world, a place where everyone is informed at the same time and where investors big and small can trade shares on equal terms.
The ASX says of itself and its own standards:”By providing systems, processes and services needed for a fair, orderly and transparent market, ASX inspires confidence in the markets.” Unfortunately, the emergence of computer-based trading has meant that the market is no longer fair, orderly or transparent and therefore confidence in the market is at an all-time low. These online trading houses are making vast sums of money and the mum and dad investors, who are the lifeblood of the exchange, are being severely disadvantaged. In Australia, it is believed that computer-based trading accounts for up to 30 per cent of the total volume on the ASX and in the micro-cap/ mid-cap area of the market it may be as much as 50 per cent of trading volume.

High Frequency Trading

Computer-based trading is not new — it has existed in the US and other international markets for years — but we have only seen the emergence of this type of trading on the ASX in the past year. In essence, there are two types of computer-based trading platforms, algorithmic trading and high frequency trading. Both are managed by complex computer programs that have no interest in the core drivers of investment decisions, such as a company’s assets, its management or its prospects — only the ability to generate profit from trading. Algorithms create masses of small orders which can be observed being traded in certain patterns throughout the day and are used to acquire, or dispose of, large parcels of shares in a manner so as to not affect the market in those shares.

Here is where it becomes a problem. High-frequency trading participants also use algorithms to firstly detect another algorithm trying to orderly dispose or acquire shares, then preys on the big order it has found that is being executed into the market. The high-frequency trading algorithm will then begin to place orders into the market that are in front of the original algorithm, forcing the original algorithm to buy at higher and higher prices. Meanwhile, the HFT algorithm has been buying shares ahead of the original algorithm and then selling them at a higher price, all the while using the original algorithm to drive the price into its favour. This sets the original buyer at a disadvantage because it has created an unfair and false market.

The same situation can occur while pushing the price of the stock downwards. An HFT algorithm acts fast when it sees these orders. It “flashes” its offers and bids into the market in milliseconds so that they are almost impossible to transact except via other HFT orders. When they come against each other or find each other acting in unison, there is no manual override. Recently this was seen in the US where Knight Capital lost $US440 million and is also what is believed to have caused the 2010 flash crash when the US market dropped 1000 points and then recovered within minutes. Billions of dollars were wiped out, gone, investments destroyed, retirement funds wrecked, lives altered.

But where it really begins to turn nasty is when two or more HFT algorithms begin to work against one another, resulting in the share price being forced in a more extreme manner — either up or down. In unfavourable economic times, when normal market investors are thinner than usual, the direction is more than likely to be in the downwards direction.Which companies are most affected? High-volume, mining companies who make up almost half of those listed on the ASX (950 out of 2200 ASX listed companies) are particularly vulnerable. Some would say this is the market in action and liquidity is being created. The problem is genuine participants are being used as cannon fodder: Institutional brokers are also being affected, having to depend on HFT at micro commissions which offset their ability to run a traditional equities brokerage.

The winner is the professional trading houses and in a zero-sum game like the bad market we are in, retail investors are potentially the big losers — they can’t operate as fast and don’t have the huge computer power available and straight to market execution systems that these guys have. Up to 50 per cent of trading in smaller ASX-listed companies is being done by computers with no interest in the company, its assets, its people or its prospects and at a speed far superior to human trade. If an operator manually entered HFT-type trades, they would be penalised for manipulative trading — why should there be one rule for man and another for machines programmed by man?

David Tasker is the national director of Investor relations at Professional Public Relations

ASX value trap –

Merrill Lynch reckons growth forecasts for next financial year have now dropped to below 10%, down from 19% last May. That is a pretty sharp fall, suggesting that, amongst other things, the deleveraging of indebted Australian households is having a deep impact. Merrill also notes that resources stocks are yet to be re-rated for the impact of lower commodity prices.

via ASX value trap – |

Selling pressure on ASX 200

The ASX 200 is headed for another test of 4000. 21-Day Twiggs Money Flow holding below zero warns of strong medium-term selling pressure. Failure of support is likely and would offer a target of 3500*.

ASX 200 Index

* Target calculation: 4000 – ( 4500 – 4000 ) = 3500

ASX 200 support weakens

The ASX 200 Index is headed for another test of support at 4000. Volumes are far lower than the previous week, indicating a scarcity of buyers. Unless there is a significant upsurge on Tuesday, we are likely to see a downward breakout, offering a target of 3500*.

ASX 200 Index

* Target calculation: 4000 – ( 4500 – 4000 ) = 3500