Yesterday’s episode of Markets and Money left off with the idea that you may have to go outside Australia to find global blue chip companies that can deliver dependable earnings growth in the middle of a credit depression. How to find those companies is one question. But the first question is whether the strategy would even work.
Well, the S&P 500 made another all-time closing high yesterday. The US big cap index closed at 1594. All ten sectors in the index closed up. But over the last year, there have been some clear leaders (with tech stocks being the laggards). The leaders represent the global blue chip ‘fortress of wealth’ idea we wrote about yesterday.
For example, take Johnson and Johnson (NYSE:JNJ). The company makes lots of products you’d recognise, like Listerine mouthwash, Tylenol, Sudafed, and Pepcid AC. But it’s really a small country masquerading as a big company. It’s a post-modern nation state without entitlements or a standing army.
JNJ is made up of over 275 operating companies in sixty different countries. It has 146 manufacturing centres, dozens of products, $239 billion in revenues in 2012, and over 128,000 employees. Its shares have also doubled the performance of the S&P 500 in the last twelve months.
You’d have to look at the balance sheet and the cash-flow statement to determine if the share price performance was related to the strength of the business. But you could easily argue that companies like JNJ are the leading beneficiaries of quantitative easing. It doesn’t have a generous dividend yield. But for investors looking for ‘safe’ blue chips, it’s a good fit.
But as we wrote yesterday, this could be part of the kamikaze rally as well. Investors have come to believe that stocks will always be lifted by central bank bond purchases. In last week’s update for The Denning Report, we suggested this belief is similar to the Japanese belief that divine Providence favoured their island when confronted with foreign threats.
Two Mongol invasions — the first in 1274 and the second in 1281 — were repelled, in part, by typhoons which swept away Mongol invasion fleets. The ‘divine wind,’ or kamikaze, that whipped up the storms was, of course, the name given to the tactic of suicide bombing by airplane in the Second World War. In the battle of Okinawa in 1945, Japanese kamikaze attacks sunk at least 20 US naval vessels and damaged 157 others.
In today’s terms, the kamikaze rally is the rise in the stock market you get from currency depreciation/debasement. This kind of victory-through-weakness is every bit as destructive, in the end, as the kamikaze attacks. The ‘victory’ is the rise in stock prices and the temporary boost in exports from countries that debase first and fastest.
The weakness is the eventual currency crisis that results. Ordinary people lose purchasing power as imports cost more. Any temporary boon to stock prices is wiped out as low interest rates and inflation destroy middle class savings.
All of that is in the future, though. For now, the kamikaze rally could drive stocks even higher. They’re up at the open as we write. We asked Slipstream Trader Murray Dawes for the technical picture. He replied:
‘The current trends in the market are very strong and are showing no signs of letting up. Banks and safety are being bid up into the stratosphere (Look at ANZ up 4.5% today after their result) and resources and particularly gold stocks are well and truly on the nose. From here I need concrete signs of a trend shift in both to be interested in doing any trading. The Aussie dollar is showing signs of weakness but there is a strong support level around US$1.01-US$1.02. If that level can’t hold then we should see a pretty quick trip to US$0.98-US$1.00.’
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From the Archives…
Gold Demand: The Great Disconnect Between Paper and Bullion
26-04-13 – Greg Canavan
Lest We Forget
25-04-13 – Greg Canavan
Praying for Government Incompetence
24-04-13 – Bill Bonner
The Cracks in Solidarity at the Recent G20 Gabfest
23-04-13 – Greg Canavan
How Central Planners are Committed to Ruining the Economy
22-04-13 – Joel Bowman