If Profits are Falling Why are Stocks Rising?

Some news about profits. ‘Company profits are now no higher than they were in 2008, ahead of the global financial crisis, and the September quarter was the first time total wages have dropped since September 2009 in the heart of the crisis,’ report Adam Creighton and David Uren in today’s Australian.

Hmm. If profits are at 2008 levels and wages are falling, why are stocks rising? Or are they about to fall? This view – that stocks are about to fall – is the one taken by our Slipstream Trader, Murray Dawes. We asked Murray to write a special feature for our latest issue of The Denning Report. In that article he wrote the following:

‘I can quite honestly tell you that I think we are getting very close to a sizeable correction. I may of course be completely wrong, because there is not one person alive or dead who can predict the future with 100% accuracy, but my charts are flashing enough warning signs at the moment that I am willing to stick my neck out and say that there is a good risk/reward opportunity in selling this market short over the next month or so.’

It’ll be interesting to see what happens to the market today if the Reserve Bank cuts interest rates like nearly everyone expects. Because everyone expects it, the most likely result is that stocks fall. If everyone knows something then it’s already figured into prices, right? Murray’s prediction could be spot on.

The rate cut would please the government though. The falling wages and profits figures are going to do damage to the chance of running a surplus this fiscal year. The government is counting on a 8.2.% increase in income tax takings and 9.4% increase in company tax takings to build a razor thin surplus. But tax takings don’t generally go up when income and profits are going down.

By the way, we fully acknowledge that Murray’s bearish stance is almost 100% at odds with the bullish ‘William Knox D’Arcy’ stance, taken by Kris Sayce. This apparent contradiction sometimes confuses readers who are new to Markets and Money. To quote Walt Whitman, our favourite American poet, ‘Do I contradict myself? Very well, then I contradict myself. I am large. I contain multitudes.’

The prose translation is that Markets and Money does not have a company line. We don’t hold a meeting every morning where we tell editors what stock to spruik or what position to take. We hire editors who have their own brains and their own investment ideas. It’s better if they don’t agree. What value is there if everyone takes the same position?

All we ask of our editors is that they aren’t lazy and that they refuse to be conventional. This is not a problem, as most of them have deliberately fled environments that reinforce conventional thinking. But we realise it can be confusing when you read diametrically opposed ideas in the same place. Which is right?

Ultimately, it’s the market that determines who is right. And in the end, they are trying to do the same thing: give you money-making investment ideas you can plug into your own investment plan, or the one you’ve developed with your partner, financial planner or tax attorney. We’d rather publish a lot of contradictory but well thought out and well researched investment ideas than the same safe but unimaginative crap you get from people who are afraid of being wrong.

Back to the markets now. The other bit of data that is good news for resource shares today comes from China. The official Purchasing Manager’s Index showed expansion! It came in at 50.6 according to the latest reading. Is China’s manufacturing engine beginning to hum to life? If so, it will need more coal and probably more iron ore.

We have some serious doubts about a budding Chinese boom. But let’s take the analytical route and look at the spot price of copper. You can see that it got up from year-to-date lows in August and has had a nice little run. But we like to keep our eye on the Relative Strength Index (RSI), the black line at the top. A reading above 70 usually indicates a position is overbought. And it usually precedes a correction. Copper’s RSI is nearing 70. And it’s been making lower highs since early 2011.


Source: StockCharts

But if we’re down on copper, we’re still up on natural gas. Did you see that Woodside Petroleum is ready to sink $1.3 billion into a gas field off the coast of Israel? Today’s Age reports that Woodside’s move would give it a 30% stake in the Leviathan gas field. The Leviathan field was discovered in 2010 and is estimated to hold at least 17 trillion cubic feet of gas.

Woodside is definitely taking on some political risk. The off-shore gas fields identified by Israel are also contested by Lebanon, mainly by Hezbollah. As if the Middle East needed another flash point. But in some ways, this is yet another of the unintended consequences of the Revolution in the Desert. The more unstable the Middle East is geopolitically, the more oil companies and energy importing countries are going to look for energy in other places.


Dan Denning
for Markets and Money

From the Archives…

William Knox D’Arcy: The Greatest Australian You’ve Never Heard Of
30-11-2012 – Callum Newman

Credit and Credibility
29-11-2012 – Greg Canavan

Nothing More than Feelings… For the Aussie Dollar
28-11-2012 – Dan Denning

The Thanksgiving Gift from the Feds
27-11-2012 – Bill Bonner

The Aussie Dollar Dilemma
16-11-2012 – Dan Denning

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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Macquarie Bank and CBA are leading the way. Our 1890’s Melbourne and Adelaide banking bubble knew no fundamentals either, it was driven by hot money from London.

truth and integrity

Stocks are rising to keep up with the supply of extra money.
The extent of additional money is far greater than the rise in stocks.
So in fact stocks are declining in real terms through deflation of money value.
Government incomes are not going down. This assists the +ve GDP.
Copper looks far more bullish than the $US

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