Tuesday, 12 November 2013

Surprised and robbed . . .

Surprised . . . Last Friday the US non-farm payrolls surprised observers by coming in at at positive 204,000. Surprisingly, given recent history, markets rallied by 1% giving this blogger pause for thought. When did good news become good news again? It seems that for the past few years good news was bad, because any good news was treated as a possible trigger for the Fed to ease their $85bn a month in asset purchases. The conviction of this blog remains that tapering is unlikely to happen before December 17, which readers will know was a crucial date to get the US budget crisis back on track. If the Fed sees another stalemate in these talks they are unlikely to withdraw stimulus. Having said that, the market is now leaping forward and suggesting that the political polls are now so skewed against the recent political wars that the various arms of the US government have little or no room to restart the shenanigans of the past and therefore will rollover on much that was disputed.

Where are we now then? Well there has to be a suggestion that markets are anticipating the coming normalcy in monetary policy and are reverting to a time when good news was indeed good news. The dollar should be investors flashlight in a dark tunnel. The recent rate cut by the ECB (also a surprise) will weaken the EURUSD and add to a strengthening trend. For stocks, we may have to rethink allocation in that if good news becomes "good news" again it is likely that the cyclicals will start to revalue in investors portfolios which are currently dominated by the financials and defensive dividend yield stocks.

Robbed . . .

On Saturday I took off for my usual early morning ride aboard the Evo and returned to a house that had been broken into. My car was missing and so were the keys. The thieves had gotten into the house and stolen my wife's bag. We found the car dumped not far away with the sunroof open and the glove box contents tipped out in the front seat. It would seem that the thieves had second thoughts about the car and instead were happy with 300 bucks in cash and some smaller items. Oh, they scratched the drivers side doors and kept the keys meaning we have to have the car locks all changed etc. The police were good about the whole thing and even dusted the house and car for finger prints. Thankfully my wife who was in the house at the time was untouched . . . and that's the most important thing. They could have taken a stack of other stuff for all I could care so long as they didn't hurt her. 

Surprised II . . . 

At the end of calendar year Q1 this blog posed the question: Is the Commonwealth Bank of Australia the best bank in the world? Last week CBA was the last of the Australian major banks to report and it once again surprised the market with its' result. The bank earned AUD2.1bn in the quarter,, which is up 14%. That's a massive number in such an economy as Australia's where there's very little to distinguish between the majors. The only thing that worries me is that loan loss charges for the quarter were significantly lower, down 22% to $228 million. Now the bulls suggest this is because much of the provisioning that went on in the 2008 - 10 period is now being written back via reclassification. That may or may not be valid. Rumours are flying that the banks of late have reduced their standards for new credit applicants. Given the heat in the Australian property market at the moment I hope that this remains just a rumour. I have no concrete numbers that backs this up except for the expansion in the banks loan books. 

The continuing reliance of the Australian economy on China is the biggest problem that the local banks face in ensuring their latest foray into the market for home loans doesn't go array. There must have been some nervousness in Aussie boardrooms when it started to leak that China will cut its growth target to 7% next year. The clearest sign that the government there means business came on Monday (as reported in the FT), when it was revealed that banks issued Rmb506bn ($83bn) in new loans in October, down from September’s Rmb787bn. New credit issuance, including China’s "shadow banks", was also much lower in October, falling to Rmb856bn from September’s Rmb1.4tn.
If this keeps up then China will indeed have to lower growth targets to 7% or even less. Then what will happen in Australia. Once again Investors need to watch the iron ore price.

Iron ore was trading at $136 a ton in China on Monday. Singapore based trading House Noble group expects that to fall to just under $100 a ton. If that happens the effect on the Aussie Dollar should be to push it down towards USD0.85, which has been my target since the start of the year. 

Putting all this together investors in Australian mining stocks as part of a broader cyclical switch will be hoping that US strength in the coming year will stabilise China and with it cushion any falls in commodities. Of course the one thing this blog knows for certain about commodities is that they over-shoot on both the upside and the downside, so expecting a non-non-volitile goldilocks scenario might be a little too much.


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