Another Week Another High

Another week, another high for the stock market. That’s how things have been going lately, at least. Why should this week be any different?

Over in the American homeland, there is growing concern that corporations will have trouble growing earnings at the same torrid pace of the last few years. Then you have a rising interest rates. That’s a one two punch that could smack U.S. stock prices.

But what about the earnings of Australian companies? Have those peaked out for this cycle, too? Does the strong local dollar cap the growth in export earnings, even with increased export volumes? Can you make up declining margins with greater volume?

Lots of questions this Monday, and none greater than the future of interest rates. Wednesday’s CPI date should give us a clue about whether the RBA intends to hike rates again. We have no special insight into the bank’s collective brain. The bank’s decision will come down to its own internal measures of which prices are rising at what rate in the economy.

Seems like a tough job these days, picking just the right price of money in an economy growing at two speeds, with millions of debtors. The tight labour market seems like wage inflation waiting to happen, inflation that would quickly spill into all sorts of prices. Yet rising rates don’t seem to be alleviating the housing crunch by bringing down prices. On the contrary. Rental prices are soaring even as credit conditions lock would-be home-buyers out of the market.

Something’s gotta give. But we have no idea what it will be. The ‘goldilocks’ scenario in which everything has been ‘just right’ for everyone has gone on far longer than anyone expected. But there are signs it might be ending.

“OPEC dumps treasuries at fastest pace since 2003 on oil slide,” reports today’s Bloomberg. “Exporters including Indonesia, Saudi Arabia and Venezuela, sold 9.4 per cent, or US$10.1 billion , of their U.S. government debt securities in the three months ended in November,” according to official U.S. data. Are the oil producers buying fewer dollar-denominated assets because they have fewer dollars? Are they tired of ordering the same old thing off the assets menu? Or are falling Treasury prices encouraging oil exporters to look for something else to buy with their petro-fortunes?

“Gold may rise on demand for dollar alternative,” reports Bloomberg. The story reported on a survey of traders. Nineteen traders were bullish on gold, four were bearish, and there were seven fence sitters too scared to commit. We’re with the bulls on this one. But buying gold instead of Treasury bonds is not as easy as…well…as buying Treasury bonds. You can buy bullion, or gold stocks, or gold-backed exchange traded funds.

Any of those decisions is likely to drive gold up quite quickly, as nearly all of those investment vehicles are small compared to the amount of petro-dollar liquidity that may soon be directed their way.

For our money, we’d take a look at oil stocks, at least from a trading perspective. Fickle traders are now fretting that colder U.S. weather will boost U.S. crude demand and lead to a turn around in oil’s fortunes. Crude demand, last we checked, was pretty solid all around the globe, seasonal temperatures not withstanding. Meanwhile, crude stocks are trading at some of the most reasonable valuations in what is a pretty pricey market.

Dan Denning

Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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