Not much happening in the US overnight. The Dow finished down 0.22%, while the S&P 500 fell just 0.14%. Not going up; not going down. The major indices are just meandering at the moment.
Is it because of uncertainty around the election?
Perhaps…although markets expect Clinton to win, so I imagine that outcome is largely priced in.
After breaking out to a new 15-month high yesterday, oil gave back those gains last night, falling around 2.5%. Still, new long-term highs are a generally bullish development.
Maybe the 2014–16 bear market for oil had a big enough effect on capital expenditure decisions that the market is concerned about longer term supply?
That is, when prices fall, companies pull back on their exploration budgets. Finding new reserves of oil is a long game. It takes years from an investment decision for the oil (or gas) to finally reach the market and send the dollars flowing in.
So the 2014–16 bear market has more than likely taken a lot of future supply out of the market…or at least pushed its development and extraction back a few years.
Is the market now responding to this reality? I think it could be. I recently recommended three little-known Aussie energy plays to take advantage of this development. You can go here to check out these picks and my service, Crisis & Opportunity.
While the headline indices aren’t doing too much, there is one development in the Aussie market that is worth following. It’s related to the theme of rising bond yields, something that I’ve discussed a few times recently in the Markets and Money.
Rising bond yields affect stocks that investors primarily buy for yield. So property trusts and infrastructure plays are the main casualties. As an example, have a look at the chart of APA Group below.
In the past few months, it’s gone from around $9.75 to $8.00. That’s an 18% fall in three months. For a top 50 stock, it’s a significant move.
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APA is now sitting right on long term support at around $8.00. If it falls below here on a weekly basis, there is a risk that we’ll see further share price declines over the next few months.
Given the magnitude of the recent fall, though, I would expect prices to stabilise for now. But it’s worth watching.
There’s another area of the market going through a correction that may or may not be related to the recent rise in bond yields. But it’s worth having a look anyway.
I’m talking about real estate. Everyone knows that the market remains strong on the east coast, despite constant crash calls and warnings about market oversupply.
When you lower interest rates to below the rate of inflation, where else is cash going to go? Given the tax perks and ability to leverage property, it’s a no brainer.
I spoke to a mate yesterday who said he’s losing $30,000 a year on a negatively geared property (with an after tax loss of much less), but the land value has increased around $300,000 in a few years.
That’s the Australian way, folks…the path to prosperity.
While land values are still rising sharply (which is a little strange given market-valued yield plays are all correcting lower), the volume of sales is declining.
Have a look at the chart of REA Group Ltd [ASX:REA] to see what I mean. REA is the company behind realestate.com.au, the leading online real estate advertising company.
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Since peaking in August at around $65 a share, the stock has corrected around 20%. It’s now coming back into a long term support range. It will be interesting to see if the price holds around these levels in the coming months.
The rally into the August high coincided with the August interest rate cut, an always bullish development for real estate. Clearly, the market saw this as beneficial for REA. But as I said, sales volumes have been well down on last year, and REA makes its money from listings.
Fairfax [ASX:FXJ], which is a real estate advertising company masquerading as an independent media company, is following a similar path. Have a look at the chart below:
[Click to enlarge]
Its share price is down around 20% from the peak, too. And my guess is that it’s due to lower listings on Fairfax’s real estate portal, Domain.
For the final exhibit, let’s have a look at the only listed real estate agency on the ASX, McGrath Ltd [ASX:MEA].
[Click to enlarge]
McGrath had a horrid start as a listed entity. But having bottomed in late June, bargain hunters came in, hoping that another round of interest rate cuts would do the job in turning the business around…because lower interest rates create wealth, remember?
But recently, share price weakness has kicked in again, and the shares look like heading back toward the lows. Once again, I assume it’s due to the low levels of stock on the market.
High house prices mean high commissions, and they keep sales of BMWs and Mercedes humming along. But an agency needs sales volumes to prosper.
While prices might be high, the turnover that you saw in last year’s boom just isn’t there.
To be honest, I don’t know what this means. It might be just a lull in the market. Or it could be something more ominous. We’ll have to wait and see.
When it comes to the stock market, prices moving to new highs on low volumes are a sign to be wary of. I don’t know whether the property market operates in the same way.
If there are any experienced market watchers out there, I’d be eager to hear your ideas on the matter. Send me an email at firstname.lastname@example.org and tell me what you think.
Have a good weekend…
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