With Aussie Property, It’s Just Different

US markets were weak again overnight. The Dow fell 0.16%, while the S&P 500 lost 0.44%. Gold was up, while oil continued its retreat.

This looks like translating into further weakness in the Aussie market today. Overnight action in the futures market suggests a 25 point fall in the ASX 200.

While the recent market weakness is all Donald Trump’s fault (apparently), major US indices have broken long held support levels, which is a concern.

Sure, you might see a relief rally if Clinton manages to get her foot in the White House door, but the charts suggest financial markets might not take too kindly to another interest rate rise in December.

Yesterday I showed you a chart of the Dow Jones index and pointed out how it has broken through support at 18,000 points.

Well, the S&P 500 is now decisively through support as well, as you can see in the chart below…

Aussie propertySource: Optuma
[Click to enlarge]

According to Reuters, this is the eighth straight day of falls for the S&P 500 — the worst losing streak since 2008.

It means that a rally isn’t too far away. A Clinton win next week would be the likely catalyst. But it will be interesting to see whether the index can get back above the support lines I’ve drawn above. That’s because, when support lines break, they normally turn into resistance.

Let’s see what happens. The uncertainty around the election is leading to plenty of confusion.

Jim Rickards isn’t confused, though. He’s tipping a Trump win, and has a ‘Trump Trade’ idea that is set to profit handsomely from a Trump victory. You can go here to find out more.

But there’s no election in Australia, and our market looks like breaking support too. The chart below shows the ASX 200 closed at 5225 points yesterday. As you can see, support is at 5200.

aussie market
Source: Optuma
[Click to enlarge]

Keep an eye on this level today. If you’re bearish, you want to see a close below here. If you’re bullish, a close above support could set the stage for a rally next week.

Thankfully, large cap stocks like the banks and big miners are holding up. If they were under pressure too, the index would probably be close to making new lows.

Share price weakness across a large part of the market comes on the back of an uninspiring annual general meeting season. It suggests that earnings growth is just not coming through to justify higher prices.

That means we could be in the most difficult market of all. That is, neither bullish nor bearish. Instead, it’s a trendless market that can’t seem to make up its mind.

Speaking of uninspiring general meetings, yesterday, Fairfax Media [ASX:FXJ] provided an update on trading conditions to its shareholders.

I mentioned FXJ in The Markets and Money two weeks ago, in relation to declining sales volumes in the residential property market. I pointed out how share price weakness in some key real estate advertising stocks, like FXJ and REA Group Ltd [ASX:REA] (realestate.com.au), suggested weaker sales volumes were taking a toll.

Sure enough, FXJ confirmed this yesterday. It said its growth engine, Domain, is likely to report first-half operational earnings that are lower than they were this time last year.

The reason? ‘Listings softness’.

Sales volumes are down on last year, and businesses like Domain and REA suffer from lower volume growth.

Shareholders didn’t like the update from FXJ. Domain is (or was) the only part of the business generating decent growth. The traditional media business is in structural decline.

The share price plunged to a low of 72 cents on the news, before closing down around 5 cents. But have a look at the chart below. Can you see how the market knew what was coming?

aussie market
Source: Optuma
[Click to enlarge]

The share price has been weak for about a month. And weak enough that even I picked up on it two weeks ago. With the news out, the selling should subside for now. You might even see a short-term rally take place as the bottom pickers come in.

But if Domain doesn’t get back on a growth path soon, the FXJ is overvalued at this price. I’d be staying away from it.

REA group sold off in sympathy. It closed yesterday at $47.48, the lowest level since October last year. That’s another one to stay away from for now.

Given the ongoing strength of the east coast property market, it is surprising that sales volumes have dropped so sharply. I don’t have any decent explanation for that.

Maybe punters think the ‘pass the property parcel’ game is getting long in the tooth? As I mentioned last time I discussed this issue, when volumes dry up on higher stock prices, it’s time for concern.

Is the property market different?

What a stupid question. Of course it’s different! This is Australian real estate we’re talking about here. It’s different to everything.

But on a serious note, Chris Joye points out in today’s Financial Review that ongoing house price strength could, ironically, undermine prices by leading to a downgrade of the banks’ credit quality.

Standard & Poor’s downgrade of the credit outlook for every Australian bank and non-bank on the basis of concerns about unsustainably strong house price growth was a slap in the face for anyone who thinks maintaining the cheapest interest rates in history while the economy is growing above-trend poses no financial stability threats. (Yes, that would include my Martin Place mates!)

There was considerable nuance underlying S&P’s decision that has ramifications for equity and debt investors.

First, S&P has drawn a “hard line in the sand” on house price growth: if over the next year prices expand at more than 4 per cent annually above core inflation — or around 6 per cent in nominal terms — it will downgrade the entire financial system.

In contrast to a sovereign rating downgrade, which S&P is also threatening, a downgrade to bank ratings would have a direct impact on borrowing costs.

And here I was thinking that house price growth meant the economy was strong and we were all getting richer. It turns out that house price growth fuelled by low interest rates and debt accumulation is a risk to financial stability.

At least that is Standard and Poor’s view. But they clearly don’t understand Aussie real estate. It’s just different.

Cheers,

Greg Canavan,
For Markets and Money


Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

 


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