–If you want to know when to sell bank shares, just pay attention to who’s retiring. In March of 2007, Executive Chairman David Clarke and Deputy Chairman Mark Johnson announced their respective retirements from Macquarie Group. Johnson was also the Chairman of Macquarie Infrastructure Group—a business model requiring enormous amounts of leverage.
–And after making a tidy $33 million in 2007, Macquarie’s Chief Executive Officer Allan Moss announced his retirement in May 2009. It Australian banks, retirement, stocks, market, US, debt, debt ceiling, was a great trade for him. You can see from the chart below that once the price of credit went up around the world in 2008, Macquarie Group struggled. The insider retirements were a sell signal.
–We also recall that long-time CEO John McFarlane pulled the pin on his career at ANZ in June 2007, as did David Morgan at Westpac. There are plenty of good reasons for calling it quits. One very good reason is to not be around when a share price falls by 50%. The job of explaining how that happened, and why ANZ would be okay, fell to the new CEO Mike Smith.
–Keeping the last two charts in mind, take a look at the next one. It’s a five-year price chart of the Commonwealth Bank (ASX:CBA). CBA’s shares fell just as hard as its peers during the GFC. But under CEO Ralph Norris, the bank is trading at around $50 now. And Norris announced his retirement last week.
–Under Norris, Commonwealth Bank expanded its share of the Aussie mortgage market from 19.9% to 25.9%. It kept lending while the smaller, non-traditional lenders ran out of money. Norris even increased the return on equity (ROE) from 14% when he took over to 19.2% today. Today the bank has a mortgage book of $250 billion, $82 billion of which has been lent out to investors instead of owner occupiers.
–Is the retirement of Ralph Norris another sell signal on the Aussie banks? Is it a harbinger of doom for the housing market? Or is just business as usual? We’ll find out soon enough. But it sure looks like a good trade for Norris. Expanding the balance sheet generates growth, and that growth has been profitable for shareholders. The question now is whether the assets on the balance sheet will hold up over time.
–Of course the big fuss this week is the hand-wringing over the approaching August 2nd deadline for a US-debt-ceiling agreement. The Congress must pass a law and the President must sign it. But right now, the parties can hardly stand the sight of each other.
–Now they know what the rest of us feel like all the time.
–The intricacies and details of any such deal are completely irrelevant. Congress will just move the goal posts later. This is all about politicians thinking they need to do something superficial to calm markets. And in a strict sense, to prevent a default, they DO need to do something. So they will.
–But it is a truly gullible investor who believes a US or European debt deal will resolve any of the underlying problems. What are the underlying problems? The Western Welfare States are borrowing billions of dollars to subsidise the most unproductive elements of society. The productive elements are paying higher taxes to pay the interest on the borrowed money.
–The trouble is, in the world of globalisation—where average wage levels in the West must go down—the Welfare State is fundamentally unaffordable. As good as it feels to give away other people’s money on the things you think matter, that money has to come from somewhere. And right now, the Welfare State is broke.
–Financial markets know this already, more or less. The gold price was up as high as US$1625 in early trading today. Precious metals will be the easiest, most liquid way to duck and cover from the debt drama. Paradoxically, short-term government bonds will probably be alright too, inasmuch as they’re a near-cash instrument and very liquid.
–On the stock market side of things, our mate Dr. Alex Cowie has laid out the case for why precious metals shares give you a leveraged play on the moves in gold and silver. Silver has touched $40 in recent days and is up almost 20% in the last month. Alex has already told Diggers and Drillers readers the two shares he reckons will benefit from strong silver.
–What happens in the Aussie share market (and to house prices) will depend on what the Reserve Bank of Australia (RBA) tells us later this week. With the cash rate at 4.75%, the RBA has plenty of room to cut Aussie rates if there’s any big overseas credit calamity. This reassures housing investors. It also makes the case for a move in the Aussie gold price in the second half of the year.
–If you’re wondering where interest rates are headed, keep an eye out for a couple of figures due out this week. First, on Wednesday the June consumer price index numbers come up. If they reflect normal life, they’ll show that prices for most things (except consumer electronics and milk) are rising. Then on Friday, the export/import figures will reveal how much rising commodity prices have contributed to Australia’s national income.
–If the terms of trade continue at record highs and the CPI numbers show what we think they’ll show, it’s going to be very hard for the RBA to cut interest rates in the face of rising prices. Yet cutting interest rates is the only real monetary response to a global “credit event”. Rock, meet hard place.
–And finally, congratulations to Cadel Evans on winning the Tour de France. He becomes the first Australian to win what is definitely the world’s toughest sporting event. The physical challenge of the Tour is ridiculous. But cycling is a mental challenge too. If you’re tired or weak, all you have to do is quit. It’s easy to quit. The will to keep working is all in the head, and the heart.
Markets and Money Australia