I’m going to talk about Aussie stocks today. But before I do, I want to show you some interesting numbers that came out of China this week.
The Middle Kingdom dropped a bunch of economic data on Monday, that on the surface, was neither good nor bad. Economic growth for the June quarter was bang on target (as it always is) at 6.2% annualised.
The market did get momentarily excited about a 9.8% jump in June retail sales, the fastest annualised pace in more than a year. But a 17.2% increase in car sales (versus 2.1% in May) to take advantage of inventory clearing discounts inflated that number.
What wasn’t widely reported was China’s continuing debt explosion. From the Financial Times:
‘Total debt in China stands at over $40tn, or close to 310 per cent of GDP, according to the Institute of International Finance. This represents an explosion from levels of just over 150 per cent in 2008, revealing that much of China’s golden decade was borrowed rather than bought.
‘The frailty has forced Beijing to temper its ambitions. Officials routinely warn over the risks that could erupt from a vast, unregulated shadow finance system. Local governments, meanwhile, are navigating what S&P analysts Gloria Lu and Laura Li call a “debt iceberg with titanic credit risks”. Households are also increasingly maxed out.
‘The upshot of all this is that Beijing no longer enjoys the luxury of being able to buy growth by deploying credit to spur unchecked asset price inflation. Such limitations help explain why Beijing appears set against a return to the go-go policies of 2009 and 2015. Several analysts think that if a stimulus is launched to stem ebbing growth later this year, it will be a limited, piecemeal affair.’
The total debt ratio is up from 297% of GDP at the start of 2018. Who have been the beneficiaries of this ongoing (and seemingly never ending) debt growth? BHP and Rio Tinto come to mind.
Since the start of 2018 both stocks are up nearly 40%, thanks to China’s voracious appetite for iron ore. As you can see in the chart below, they have both strongly outperformed the broader index over that timeframe.
Note the share price jump of these two in January of this year. That was in response to a swathe of Chinese stimulus announcements. If the effects of this stimulus start to wane, you’ll see it in these share prices first.
Right now though, both stocks remain in strong upward trends. Apart from the obvious risks of BHP and RIO being plays on Chinese debt growth, the market doesn’t seem overly concerned.
Which is fair enough. The reward for concern right now is a cash account yielding SFA. But when the narrative turns from bullish to bearish (which it assuredly will) that cash account will shift to yielding a different kind of SFA — significant financial advantage.
Maybe we’re in the early stages of that shift? I could well be wrong of course — I thought the US market was topping out, but it recently broke to new highs — but this development bears watching.
Check out the chart below. It shows the ASX 200 bumping up against the roof of the all-time high in late 2007.
It’s as good a place as any for the market to have a much needed correction. It’s been all one-way traffic for the Aussie stock market this year. But we know this is unusual. Even the strongest bull markets have corrections.
The next one is simply a matter of time, which is why I’m not too excited by stocks in general at these levels. That’s not to say there aren’t opportunities. But they aren’t your BHP’s and RIO’s, the stocks that have materially outperformed over the past year or so.
Which brings me to another point. Here’s a tip that could save you thousands of dollars…
One of the biggest mistakes investors make is buying a fallen blue chip. They think it’s a momentary problem and that they’re getting a bargain.
Sometimes it will work out. But any success doing this is due to dumb luck, not sound thinking. That’s dangerous because when you don’t know the difference, you’re likely to do it again.
But then along comes an AMP Ltd [ASX:AMP]. It’s been a disaster. From March 2018 to the low reached earlier this week, the share price has lost nearly 70% of its value. Buying on the way down, thinking you’re picking up a bargain, has been a money loser.
The simple rule to use here, not just with AMP, but with any stock, is not to buy into a downtrend.
Based on the system I use to buy and sell stocks (the one that just gave buy signals for all five of the stocks in my gold bull market strategy) AMP was a SELL as soon as it broke down to new lows in April 2018 (see the break below the green line). For traders, it was a short sell (which means you make money from a falling stock price).
And the easy thing is, you don’t go near it again until the trend starts to turn higher. That’s clearly not happening here. The fact that AMP just broke down to fresh new lows is very bearish indeed.
It’s a simple rule that so many people ignore. If you invest with the trend, and get out when it turns against you, at the very least you’ll avoid getting stuck in big losers like AMP.
Editor, The Rum Rebellion
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