Running with the Bullish Stock Market

While Fed Chair Janet Yellen is laying the groundwork to increase short term interest rates in the United States, stocks are still moving up all over the world. The S&P/ASX 200 closed at its highest point since May 2008 yesterday. The London FTSE climbed to an all time new high. Not to be outdone, Japan’s Nikkei has held its fifteen-year high.

Stocks all around the world look bullish. That’s what we’re positioned for over at Cycles, Trends and Forecasts anyway. You can see why here.

Is fear keeping you on the sidelines still? I read some interesting analysis earlier in the week on why US stocks can keep running.

My US based colleague Steve Sjuggerud made the point that, two weeks ago, the dividend yield on US stocks was still better than the yield of bonds. Historically, that’s not only unusual, but it also caused US stocks to rally higher.

So long as long term rates stay low, investors will look to the stock market for income. We have Yellen preparing the market for higher rates. But the Fed funds rate is a short term interest rate.

There’s no guarantee that, if the Fed raises short term rates, longer term rates will rise as well. That’s important. If investors can’t get reliable and significant income from the long term bond market, they’ll have no choice but to keep looking to the stock market (and real estate).

An even more interesting idea that came across my desk was a suggestion that there’s a bullish 14 year bias to US stocks from demographics.

Wait a moment. The demographic argument usually runs something like this: the baby boomers were the largest generation in US history and will soon be retiring and selling off their assets.

The counter demographic argument, according to Palm Beach Daily, says that when the 35–49 age group is larger than the 20–34 age group, the US economy and the stock market experience a long period of above average growth.

That’s because people between 35–49 earn, spend and save more. When they save, they buy stocks. This is dubbed the ‘Golden Ratio’, and it’s preceded every bullish period in US stocks for the last 100 years.

Still, unless you buy an index, you’ll need to decide what sectors to target. Here’s a tip…steer clear of coal stocks.

The warning bell over fossil fuel divestment rang again yesterday. I wrote about this previously here.

Coal is the dirtiest fossil fuel. That’s the official reason why Norway’s sovereign wealth fund may steer clear of any future investments in coal. What’s clear from the reports on Norway’s debate is that this decision will mostly be about politics. It won’t be about economics.

Speaking of Norway, the Norwegian royals are actually in Australia on their first State visit. Alongside the pleasantries and Jarlsberg cheese came this, according to the Australian Financial Review:

The Norwegian Parliament may still instruct the nation’s massive $1 trillion sovereign wealth fund to stop investing in fossil fuels, despite an advisory panel saying the move could hurt the fund.

Adam Smith didn’t need to consider the environment in any way other than as one of the factors of production. Today’s investor does. This divestment debate is going to spread to other countries. In fact, it’s just getting started. The results will show up in the price of stocks first.

Holding coal stocks on a long term basis looks risky. But then natural resource stocks have always carried more risk than most companies. The debate over climate change merely adds to it.

The whole thing gets even trickier when you could easily argue that the world needs more energy investment than ever — that is, if the economy continues to run on the same level of fossil fuel consumption.

The Financial Times reported last week that discovery of new oil and gas reserves outside of North America hit a 20 year low in 2014. It may even turn out to be the worst year since 1952.

The low price of oil is slashing exploration budgets all over the world. Shale oil producers are allegedly the highest cost producers, though it really depends on the project. But the point is most analysts expected the pain of the low oil price to hurt these producers first.

That looks wrong, at least for now. It’s actually Britain’s North Sea oil industry that’s visibly suffering at the moment. A recent survey the FT cited this week says, with oil at $50 a barrel,

‘…a fifth of oil production on the UK continental shelf — and a third of fields — is lossmaking on a cash basis. The industry suffered negative cash flow of £5.3bn last year as soaring running costs outweighed revenues.

Capital spending on new fields is forecast to fall sharply to between £9.5bn and £11.3bn this year, from 2014’s £14.8bn, while investment in projects that have already been given the go-ahead is at risk of “collapse”, to £2.5bn, by 2018.

At least the UK has other industries and sources of revenue. You can’t really say the same about Azerbaijan, for example. Oil and gas represent 95% of exports and make up more than 70% of government revenues. The nation just devalued its currency by 34%.

The dynamics in the energy markets are fascinating. If you’re interested in hearing more, you might remember I spoke to energy analyst Byron King last month about all these issues and more. You can check it out here.

Callum Newman,
for Markets and Money

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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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