The False Feedback Loop for Australian Stocks

Well maybe the great revival has begun after all! Australian stocks were up 1.1% yesterday and they’re off and running again today. What gives? Why don’t you see what Slipstream Trader Murray Dawes has to say? Murray recorded his first stock market update of the year this morning. If you haven’t seen one before, click on this stock market update link and check it out. Murray’s brief version of the update is:

US markets are in short and intermediate uptrend but long term downtrend. They are quickly approaching large overhead resistance around 1300 in the S+P 500. How the market behaves near there is important. If it gets rejected once again and we see some weakness I can become aggressively bearish again.

If it busts up through 1330ish then I will have to reassess my strong bearish stance. The ASX 200 is also flirting with the key 4200 level again. If it can hold above there we may see a short term spike higher. Another rejection from 4200 and a close below the 10 day moving average will increase my bearish conviction.

Again, the full version is available over at YouTube by clicking on this stock market update link.

One of Murray’s more interesting insights from last year is that the ASX/200 takes its cues from the S&P 500. This is counter intuitive, or at least counter to the mainstream understanding that corporate earnings in Australia (and thus share price values) are determined by trade with Asia, especially China, Japan, and Korea.

Why would Australian indices track an American benchmark when Australian resource companies generate their profits mostly from Asian trade? Good question!

The capital markets are global and operate 24 hours a day. Cheap money in Europe and the U.S. finds its way into higher-yielding Australian assets. In the short term, stock and bond prices are driven by the price of credit overseas. For years it was the Yen carry trade (borrow in Japan, invest in Australia), then it was the Dollar carry trade (borrow in America, invest in Australia), and now it’s the Euro carry trade (borrow from the ECB and buy BHP!).

You’ll note China hasn’t figured in any of this process yet. But of course it does figure largely. The global credit bubble that popped in 2007 is what fed consumer demand in Europe and America. China met that demand (via exports) by gobbling vast amounts of natural resources from Australia and turning them into finished goods for sale in America and Europe (and also Australia).

If you’re still with us, that means China’s demand for Australian resources has always been a direct product of the global credit boom. Now that the boom is over, what will happen to Chinese demand? It should fall, that’s what should happen. And that would mean Australia has already over-invested in resource production capacity based on a boom that’s gone bust.

But don’t tell that to the Shanghai Exchange! Just a day after we rubbished its dismal performance in recent years (down 40% from its all-time high) the index is up almost 6% in two days. The idea that the People’s Bank of China may start encouraging the flow of credit again has caused a sharp reversal in the Shanghai Composite. Some of that goodwill has seeped into the Aussie market too.

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But wait! “Chinese imports rose at their weakest pace in more than two years in December, flashing a warning sign that growth might be slowing in the world’s second biggest economy”, reports the Financial Times. So which is it? A credit-fuelled reflationary boom or slower growth on the global credit bust?

All – or at least a lot – will be revealed at our “After America” conference in Sydney in mid-March. We’re meeting today to finalise the speaking order. Later this week, we’ll send out the complete list of speakers and topics to those who’ve expressed an interest in attending. You can express your own interest for more information by signing up for an official notification here.

Finally, a quick note about our insider trading comments yesterday. We’re NOT looking for people who want to profit from insider trading. That’s illegal, even though ASIC identified some 20,000 instances of suspicious trades on the ASX in a three-month period last year. We’re not trying to find a way to profit from that kind of information.

What we ARE trying to do is break down the doors of information that’s been effectively held hostage by the financial industry in Australia. Australia is one of the least transparent share markets in the world when it comes to regularly published and easy-to-find information on price sensitive announcements, director’s dealings, and unusual volume spikes.

That’s what we’re aiming to change. Access to information generally isn’t an advantage for most investors anymore. That’s because in most of the world’s share markets, all the trading data and information is free, accessible, and instantaneous. You aren’t able to hoard potentially valuable information from other traders. Everyone has the same information; it’s what they do with it that determines their investment successes or failures.

But in Australia, some information remains in the hands of people who simply know it before others do, or have access to it ahead of other investors. This informational advantage benefits “insiders” at the expense of the punters. That’s what we’re trying to change, to bring about some fair trading. If you’re interested, read the sidebar in today’s subscription version of this letter and send us an e-mail. If you’re not already a Markets and Money subscriber, you can subscribe for free here.

Dan Denning
for Markets and Money

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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