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. 

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!

Ch, Ch, Changes . . .

A leadership change here in Australia by the ruling ALP (socialist) has had the Aussie Dollar under a little pressure as economists come to terms with the new populist leader Kevin Rudd. It's hard to believe but Rudd has managed to steady by force of personality a party that was staring election oblivion in the face only a week ago. The cost for election parity has been the inevitable ditching of the unpopular carbon tax. In Australia the green movement managed to have the minority government implement a two stage system  for the carbon pricing. Firstly there would be a period of fixed price stability that allowed industry some certainty for three years before moving to a floating emissions trading scheme in 2015. The problem was that the government fixed the price north of $20 per ton (with increases during the fixed period), while the rest of the world adopting ETS type structures saw a collapse in the carbon price to $6 ton, meaning that Australia was effectively making itself uncompetitive. The new PM wants to move to the floating price as a way of acknowledging the lack of competitiveness and to attempt to ease the burden on the populace who have seen power prices spiralling ever upward. Leaving aside the politics of the coming changes the biggest problem lies in the potential $4 - 5bn budget whole created in moving to the market price. It seems unlikely this hole could be closed easily and therefore the pressure on the AUD will continue to build. Stay short the Aussie Dollar.

An upturn in China would help Australia, but seems unlikely. The Chinese PMI came in at 48.2 disappointing the markets, no matter that as a data group global 28 PMI's have been released so far and of them 22 are up, 5 are down and 1 is unchanged. Currently it's fair to say that only two PMI's have the ability to shift global thinking significantly and they are the US and China. The US PMI came in at 50.9 and somewhat balances out the Chinese data, but leaves me to continue thinking that the world economy remains fragile at best. The pressure on the Fed to start to curb QE will remain and with that a continuation in the deflating of the bond bubble. My favourite quote  of the day comes from James Knightley at ING Bank in London:

“Given the Fed has made tapering of QE contingent on improvements in the labour market, today’s ISM report is possibly the best outcome for risk assets in the short term – better growth, but a still lacklustre job picture.”

Cold comfort for many in this low growth world.

Maybe the Japanese are changing? Previous bubbles usually encompass several Japanese corporates overpaying for trophy assets. The one that always brings a smile to my face is Rockefeller Center in NYC, which seems to change hands every bubble at the top of the market without fail. Rumours are that Japan's Government Pension Investment Fund (GPIF) may have it's remit changed to allow it to buy property (and thus the Rockefeller Center thinking), as has happened recently with the Norwegian sovereign wealth fund. Of course any change in asset allocation will probably see them selling JGB's into BoJ's own money printing debacle leaving observers such as myself wondering how this might end? In conformation that Japan's pension funds are all thinking in the same way (sell Japan and buy something else) the Japan Pension Association (assets of $100bn) partnered with several Japanese and a Canadian fund to buy a power generation plant in Michigan. While clearly the bet relies on  expanding manufacturing in the midwest it also could be the first of many such infrastructure plays. If the Japanese pension funds are smart they can get a lot of their cash offshore into expanding economies and leave the  unit holders something to cling on to when the current round of ponzu-like BoJ action leads to the inevitable hangover of deflation, which would be consistent with a falling population and external pricing pressure on a country with little by way of natural competitive advantage in the global economy.

Change of the day though comes from a Goldman Sachs note:

"Closing our recommendation to buy BRICs Sales basket...due to revised expectations for slower China growth"

That BRICs sales basket <GSTHBRIC> targeted US companies within the Russell 1000 across ten sectors with the highest sales exposure to the BRICs countries and regions. Essentially GS is saying they know longer want to be long growth in the (formerly) most dynamic countries on the planet . . . all change.

The first three days of the Tour de France had been a change in their own way in that the Tour has never previously visited Corsica. Leaving aside the debacle of the Orica GreenEdge getting stuck at the fish only 15mins before the arrival of the peloton during stage one, the racing has been exciting, the crashes have been horrible and the crowds have been enormous. This 100th edition of the TdF is shaping up nicely for all concerned. Stage three was another mass lunge for the line.


Notice I didn't say bunch sprint, because only stage one saw a rated sprinter cross in first place. The following stages have favoured all-rounders such as Peter Sagan. Sagan got his second, second place finish last night being edged out in the photo finish by GreenEdge's Simon Gerrans who specialises in stealth tactics. Luck has changed for Orica GreenEdge.

Man of the day had to be Sky rider and TT specialist Geriant Thomas who rode the stage despite having medical staff confirm that he had a broken pelvis. Anyone who thinks cycling isn't tough please take a number and wait to be made fun of . . . 

Ciao!