FYI | Aug 08 2011
(This story was originally published on August 3, 2011. It has now been re-published to make it available to non-paying members at FNArena and to readers elsewhere).
By Rudi Filapek-Vandyck, Editor FNArena
A Special Reward goes out to Daniel Goulding, publisher of The Sextant Market Letter, a weekly newsletter focused on the Australian share market. Goulding, who's an avid technical analyst with keen interest in history, philosophy and Elliott Waves, has been on the opposite side of most market expert and commentator views for a while now, telling his readers the Australian share market remains in a bear market and all those predictions about the index targeting 5500 and beyond are best to be ignored.
Goulding has an end-of-the-year target of 4500 for the ASX200, which against current market developments, seems highly plausible. This is not why he deserves a special mention. Ever since the share market peaked in April last year, Goulding has been predicting a sideways pattern at best, and certainly nil, zero, zilch chances of breaking above 5000 on a sustainable basis.
Gosh, I sometimes receive complaints about showing a lack of enthusiasm for the upside potential in Australian equities, so I can only imagine what kind of emails on occasion must land in Goulding's inbox. Picture this: while about everyone with a voice in Australia was predicting an up-year for Australian equities at the start of the year, and most forecasts were for robust earnings growth and expanding PE multiples, thus 20%+ investment gains, Goulding stoically set his target at 4500.
Apart from Tim Rocks at BA Merrill Lynch, who happens to have a similar target, Goulding has been in a lonesome place all this time, until recently. The team at JP Morgan has now joined both with an equally sobering outlook and most other experts have been scaling back their projections recently, even though it has to be said: not everyone has as yet given up on the share market surging well above 5000 this year. (No, really).
I don't know where the share market will be at year's end and throughout the years I have steadfastily ignored all invitations from either media or subscribers to "give it a go". I think it's a mug's game and the observation that many experts were off by a solid 1000 points in 2010, and many are looking like they will be off a solid 1000 points this year, only proves my point. Back in 2008, when I was in a similar position as Goulding, warning everyone crude oil was not going to rise towards US$200/bbl, as widely predicted, and that investors jumping on the bandwagon were going to lose a lot of money, I did not predict crude oil prices were going to revert back to US$32/bbl on day one – all I knew, and I carried this with conviction, was that US$200/bbl was just silly.
Just as silly as the Deutsche Bank strategist (now at Citi) who predicted the ASX200 would be at 6000 by December 2010. This market is not going to rise anywhere near 6000 for a long time. Similar to Goulding and Rocks, I have remained skeptical as to whether the ASX200 could rise above 5000, and stay there. My rationale was as simple as can be: is earnings growth in Australia strong enough to sustain such a level? My analysis said "unlikely". Turns out my analysis was correct.
The ASX200, I believe, is going to remain within its trading range between 5000 and 4200, in place since August 2009, for a long time. Right now we're repeating the pattern of 2010 and the market is heading towards the bottom of the range.
There is a very good reason as to why this is happening. I have written multiple times in the past two years about the monthly PMI surveys, so I'll keep it short (with links to previous stories below), only one chart will suffice, I think, one chart that tells a tale of more than a thousand words:
More on the correlation between ISM surveys and equities:
– Cause For Optimism (July 4, 2011)
– Why It's A Tough Time For Equities (June 15, 2011)
– Why A Global Peak Could Be Near (March 10, 2010)
– Market Relativities (May 17, 2010)
– US ISM Manufacturing Index: The Charts (May 19, 2010)
My favourite comparison during recent investor presentations is: when you cross the street and there's a big truck coming around the corner, what do you do? You cross the street. But when the truck comes at high speed, your reflexes tell you to accelerate your pace. That's exactly how it works in financial markets as well. Observe the blue line on the ISM manufacturing chart for the US on the chart above: it's the steep fall that is truly amazing, and scary. This is why the US share market is now down for the calendar year. Before we move on to the Australian economy, here are a few observations from the many assessments I have read this week regarding July's global PMI (purchasing managers) surveys:
– global momentum has deteriorated quickly since what appeared a stabilisation in May, almost with the sole exception of China, where, on a seasonally adjusted basis, July actually appears to indicate renewed momentum for manufacturers
– several countries stand out in a negative sense and are likely to show more weakness ahead, including India, the UK, Singapore and… Australia
– the pressure from input costs is abating and this bodes well for the short term outlook for inflation, which is a good thing
– the appetite to hire new staff is equally abating and that is NOT a good thing, except in Australia where this might keep the Reserve Bank on hold for much longer
Now that we've mentioned Australia, the labour market and interest rates in one sentence… the following is a brief conversation I had when I ran into a friend of mine earlier this week:
"Hi Rudi, how's things at FNArena?"
"Good. Pretty Busy. Cannot complain, especially given how things are in the market."
"Tell me about it. We're seeing more money flowing out than in. It's a sad thing, but we're now looking at shedding staff. We simply have to."
My friend works for one of the larger financial institutions in Australia. His admission, which has not yet been officially announced, triggered my curiosity, so when I met another friend later, I cautiously queried business momentum and staffing levels. My second friend told me his employer had already started laying off staff. No huge numbers are involved, but regardless… Australians are starting to lose their job in industries that are overstaffed with no immediate prospects for improvement.
I do realise that two friends do not make a new trend, and they definitely are not representative for what is happening across Australia right now. Hence why the latest survey into business expectations by Dunn & Bradstreet caught my attention on Tuesday.
A few standout conclusions from D&B:
– sales expectations in Australia are now the lowest for 9 quarters and below the ten year average
– profit expectations remain reasonable, though, and the immediate reason for this is:
– the employment intentions have now turned negative for the second month in a row
(Note how on the chart below profit expectations (yellow) improve from May opening up a gap with employment intentions).
In other words, my two friends might well be more representative than we would credit them for. Corporate Australia, outside engineering firms and commodities producers, wants to see a return of profit growth and since this is not happening through increased sales, it will have to happen through lower costs. Exit staff, thus.
The chart below, from D&B, clearly shows "employees expected" (grey line) in negative territory, and weakening.
Ironically, this is a good thing for the share market as the lack of profit growth in general is one of the key factors as to why the ASX200 has been unable to break above 5000 and why the Australian share market has been underperforming most other markets since 2009. Note the anticipation of a weakening labour market is one of the pillars under Westpac's forecast that interest rates in Australia will be cut from late this year onwards. Again, I do not know what exactly the Reserve Bank is going to decide from here onwards, I was already of the view that the November rise was probably one step too far, but I tend to agree with the underlying line of thinking at Westpac: things are going to get a lot worse still, and that will change the dynamics in Australia as we've experienced them since 2009.
Ultimately, this will prove a good thing.
(Incidentally, the PMI surveys in China are indicating jobs growth is at the lowest pace for a long time, signaling, perhaps, manufacturers are seeing enough to be cautious there too?)
Here is another story on the Australian labour market that might as well be regarded as a prelude to today's update:
– Weak Labour Market Data, A New Trend? (29 June, 2011)
(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)
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P.S. II – If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.
