Monday, 8 July 2013

Switching into growth . . . ?

US employment is slowly but steadily growing. On Friday the non-farm payrolls report showed a net 195,000 jobs were created in June, beating forecasts by some 30,000. The result was another shift in the US yield curve to acknowledge the coming tightening of monetary policy.

 

We now know that the trend is positive in jobs and housing, therefore if you're sitting on bonds you have all the evidence you need to exit. The question of course is what do you jump into? Well equities are not as obvious as you might think. Consider that a lot of the performance of the S&P500 recently has come from the dividend paying stocks to help boost portfolio yields in this era of 0% deposit rates. The cyclical space is difficult because you need to be in the area most likely to develop from the economic recovery. The most obviously player for early movers has been Google (GOOG).


The reason why I mention Google is that it reports earnings on July 18. Currently the stock trades on about 23 times, but that might not be too bad if we see further earnings growth. On top of that there's a Google event scheduled next week announcing a new product (not the glasses). I'm more interested in the advertising numbers as it seems obvious that this is clearest health check on the switch into cyclical growth at this stage in the bull market. Investors should continue to be in USD and US generated earnings streams. 

Meanwhile where I live the ANZ Australia Internet Job Ads Fell 1.9% in June Vs May. This is the fourth month in a row and adds further weight to expectations that the RBA will cut rates again soon. The mining states are slowing the fastest as projects are put on hold in the wake of slowing Chinese demand. If as I suggested above that Google has direct leverage to US advertising spend (amongst others), then the Australian equivalent is Seek (SEK.AX). The stock trades (coincidently) on 23 times earning and generates around 60% of revenue and 80% of profits from the Australian jobs market. They have some exposure in Asia, but essentially it's all Australia. I'm prepared to believe that because of the earnings growth and the limited internet exposure offered within the Australian stock market that the company should trade at a premium, but how much is the question. If you are holding Seek surely you might prefer to at the very least take some profits and move into something better exposed to North America. Think about it . . . 


Normally I would have ranted about more falls to come in the AUD, but instead investors might want to consider the performance of the Renminbi. If the reason Australia is slowing is slowing Chinese demand for raw materials, why then has the Chinese currency performed so well? It may be too simplistic to say that the Renminbi is a controlled currency, but it's a good reason. I once postulated that the Chinese could lower the exchange rate in the face of US objections if it needed to. The Chinese should be amongst the beneficiaries to a US recovery, but remember that even their non-skilled manufacturing work force has competition from other low cost centres. A lower currency might be needed and then what would that do to the once flourishing market in so called "dim-sum" bonds?

The opening week of the Tour de France has been thrilling, but stage 9 topped everything that came before it because we saw the beginning of the end of the invincible Sky-train, but not necessarily the end of Chris Froome's chances to win the GC and with it the yellow jersey. 

video

Recently I was watching a special on the history of the TdF. What stood out to me was the individual personalities rather than the teams. I'm sure Eddy Merckx had great teams around him, but they weren't highlighted. And what about Greg Lemond? If Chris Froome loses a chunk of his team along the way a victory would in my mind rank him very highly in the history of the tour. 

Finally for some light hearted entertainment I suggest you watch the following "music video" from the team at Orica Green Edge. They may not have a genuine GC contender, but they held the yellow jersey for four days and have had a lot of fun . . . 




Ciao!






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