Before kicking off today’s essay, just a quick heads up to let you know that Harry Dent will be in Australia in November. As you probably know, Harry is a world-renowned economist, forecaster and best-selling author.
Port Phillip Publishing (PPP) publishes Harry’s Boom & Bust Letter report here in Australia. It has a loyal following.
Harry’s on a speaking tour that takes in Sydney, Melbourne, Brisbane and Perth. While PPP isn’t involved in these events, Harry is offering readers of The Rum Rebellion a complimentary ticket.
If you’re interested in attending, go here.
Right then, let’s get into it…
A few things have changed since I wrote to you last week.
Trump took US troops out of Syria, much to the rage of war hawks and TDS sufferers everywhere.
More importantly, the local stock market fell towards the end of the week. You can blame the RBA for that. It’s now upbeat on the economy. It’s trying to hose down expectations of more rate cuts. The market wasn’t impressed.
From the Financial Review:
‘Financial markets quickly reduced the chance of a back-to-back 0.25 percentage point interest rate cut on Melbourne Cup day to just 16 per cent from almost 50 per cent last week.
‘A noticeably more upbeat Dr Lowe told a high-powered forum at the International Monetary Fund in Washington that while more cuts were a possibility, ‘‘I wouldn’t assume it’’.’
The RBA reckons a return to near 3% economic growth next year is ‘quite probable’.
You’d think that would be good news. But if you’re a stock investor, you might want to reconsider.
Well, I know this is a big assumption. Thinking rationally about central banking decision-making is dangerous…
But you’d have to assume the RBA would raise interest rates in a 3% economic growth environment, wouldn’t you? It’s a big call, I know.
But to this simpleton, 3% real growth, plus 2% inflation, gives a nominal growth rate of 5%. With this rate of nominal growth, a cash rate of 0.75% is horribly negligent.
Let’s not get too carried away though. Where does this 3% hope for growth rate come from?
The RBA reckons we could be in for a housing shortage. That’s thanks to the government keeping a foot on the immigration accelerator. It’s the easy way to boost economic growth. More people means greater demand for housing, goods and services.
The housing market has clearly picked up this year. But is it enough to boost housing construction again to boom time levels? Maybe in a few years, but probably not as soon as next year.
In my view, 3% growth next year is a low probability outcome.
Still, the market is a little nervous about it. Lower interest rates have provided a big boost for stocks this year. Yield plays, banks and speccy tech stocks have all run hard on the hope of easy money lasting for a long time.
It’s hard to say whether this is related or a coincidence, but tech high-flyer WiseTech Global [ASX:WTC] hit the wall at the same time as the interest rate re-think occurred. The catalyst was a report from a nasty short seller. From The Australian:
‘WiseTech Global has categorically rejected the attack on its business by short-selling hedge fund J Capital Research, with the logistics software maker’s founder and chief executive Richard White asking regulators to step in and take action.
‘WiseTech’s shares took a 13 per cent hit on Thursday, and were put in a trading halt after a scathing report from J Capital labelled the software maker a “clunker” and alleged the company’s reported profit could be blown out by as much as $116m, or 178 per cent, over the past three years.
‘In its rebuttal on Friday, Mr White said the allegations made in the report were untrue and highlighted the danger posed by overseas short sellers to ASX-listed companies.’
I recall something similar happening with Blue Sky Alternative Investments. A short sellers report sparked outrage from management. And panic from shareholders. The outcome? Blue Sky went into administration in May this year.
I’m not suggesting the same situation is unfolding here. But it’s worth watching. There’s usually a kernel of truth in these reports.
Have a look at the chart, below. That plunge below support is a worry.
WTC is in a trading halt. You’d be a tad nervous being a holder at this point.
The other tech darling, AfterPay Touch Group Ltd [ASX:APT] also copped it last week (see chart below). A change in view over interest rates is obviously the culprit here. APT’s still trending higher, but rapid price falls always make the ears prick up.
APT trades on a ridiculous 163x expected earnings in 2021. Its ‘buy now pay later’ business model is pretty sensitive to interest rates moves. So is the valuation.
WTC is on an equally ridiculous 81.6x expected earnings in 2021.
It’s too early to say whether the music has stopped for the Aussie tech sector. But at the very least, someone has turned it down. Last drinks?
To finish up for today, let me give you an idea for a stock that could do well in the event that interest rates do rise.
Falling interest rates have hurt Challenger Ltd [ASX:CGF] over the past few years. But note in the chart below how the stock rallied in the past few days as the rest of the market fell.
That’s interesting. It could be worthy of further research…
Editor, The Rum Rebellion
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