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The Final Count – 30 Nov 2016
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Video Transcript: This is the Final Count with Carson Scott and Peter Switzer – 30 Nov 2016
Peter: Breaking news.
Carson: Breaking news on OPEC tonight. They bring their meeting forward one hour from the original scheduled time.
Peter: What gives with those guys? They cancelled a meeting on Sunday night.
Carson: This could be seen as a positive; longer at the table is better than not even turning up at all, right? So, let’s see it as glass half full. I know you like to do that. David Novac who’s with us from Wealthwise to add some insight to this, because I didn’t realize in the early hours of this morning we’ll get something quite important out of Vienna.
David: Yes, at 4:00 a.m.
Carson: A statement.
Peter: 4:00 a.m. So, when we wake up we’ll know by the direction of the stock market in Wall Street.
David: Of oil prices.
David: Yes. That’s going to be interesting, it’s preempting they might not cut production, or have a freeze at least and so, we’ve seen the oil price drop 4% overnight, but it’s still in that trending range between $46 and $50 U.S. a barrel. Where it breaks is going to be interesting following the statement.
Peter: David, the most important thing really is that his meeting doesn’t drive the oil price below $40 into the $30s. That would be the kind of scary scenario.
Peter: If there’s a little bit of stickiness in low $40s, that’s going to be okay, isn’t it?
David: Well you think there’s self-preservation there with the OPAC members and they wouldn’t want to spook the market and indicate that they’re going to increase production, so you think the rhetoric would be towards certainly be to maintain the levels and freeze at this level. Even cut would be interesting.
Peter: What about today, anyone who is coming home, whacking on the TV, tuning into the show, they want to know how come BHP copped it today and other miners. What was the set against the poor old miners today?
Carson: Yes, you get a sense of what we’ve seen now two sessions in particular of quite sizeable selling.
David: Well, the [inaudible 2:15] future’s market, you had coke and coal down 9% and iron ore down 8%, so there’s been some major wild swings in the commodities sector.
Carson: Those are markets that are getting really crowded in terms of open interest from a retail perspective and why is that happening, because t’s happening at a time when the Yuan, the Chinese currency, is weakening off. Now, if you’re a Chinese investor David, how much of this is down to them wanting to lock in U.S. dollar assets and lock in some sort of belief that these assets are pegged to an infrastructure story that they can understand? That there’s kind of a method in the madness?
Peter: You’ve got to get used to this, Carson will ask you questions not only from left field, this is from the stand behind the left field, some of these questions, but I like them.
Carson: This is underpinning for what’s been swinging the price.
Peter: Give us your best shot on that one David.
David: Well, I wish I could read the minds of Chinese investors, but what I can tell you is I think the U.S. Dollar up here is certainly destabilizing and that will be a big concern to the Fed. I wouldn’t be surprised if the statement by the Fed next month, or only in 14 days thereabouts, will try and bring the dollar down and interesting their forward-looking statements on interest rates. But, that has to be a major concern. A little on the Italian Referendum this weekend as well
Carson: Are you getting a chorus of observers, and these are seasoned people who – and we’ve just had Tim Rocks on the show from Rockanomics
Carson: Rockanomics, how about that.
Peter: Isn’t that a great name.
Carson: He would say and he is of the view that what we saw at the start of this year, [inaudible 3:59] if you just go back, because it’s hard to believe we’re almost into December, but at the start of the year there was quite –
Peter: You need to look at your watch to see what month it was?
Carson: No, this is just a metaphor to saying go back in time.
Peter: Okay, that’s fair.
Carson: You noticed that there’s a commitment to spend, spend, spend back on China. Remember the past few years –
Peter: Yes. There was an announcement today [inaudible 4:20] or something, wasn’t there?
Carson: One in a row of infrastructure led announcements, to kind of put the focus for Chinese investors, that’s why I was making a link and hoping to see that link between the open interest in those Deli and future contracts, okay, and what it says about the thinking behind the buyers. My view on it is if the Yuan weakens, you want a solid investment, a rock solid investment and you’ll get that by buying a U.S. Dollar investment, will you not? I mean, the U.S. oil is only going up not down?
David: Yes. I think personally, I would be waiting. I think the U.S. Dollar is due to have a bit of a fall back here, so it will be interesting to see. Look, I just think there’s a lot of speculation going on at the moment, particularly in the [base 5:07] mills.
Peter: It’s had such a strong run. Is there a bit of profit taking before OPEC, before the Italian Referendum, that’s probably going to be a theme as well. If you made 9% or 10% since Donald Trump surprisingly became President Elect, if you made some good money, why wouldn’t you take it off the table?
David: Absolutely. Plus, the margin requirement, they’re lifting as well so that will take a few of the speculators out of the market as well.
Carson: The fact is though, ahead of all of that still to come, you’ve got the Feds set to tighten in December. You’re still saying there’s still going to be U.S. Dollar pull back?
Carson: At what point in time, because if they’re going to tighten that’s surely going to lend support to the currency not less.
David: I think you’ve seen bond yields come up very sharply since July, by 14%. Yields have skyrocketed. In fact, what was it about 1.5% back in July and now it’s 2.35% or something. I think they’re going to be very concerned so I wouldn’t be surprised if they come out with some very dovish comments to try and pull back the dollar.
Peter: But, recently we’ve seen bond market yields spike, but they have come off a little bit haven’t they? It’s interesting that rates had a good day at the office today.
Peter: Everyone was writing them off. I think we’re probably in that period of overreaction and so this is some of the themes I’m looking for, what is actually speculative, profit taking themed, and what are the underlying ones. You can’t escape the fact that there’s a lot of belief that there’s a good reason to support commodities, even as they’re coming off the bull. My question is, is it driven by a positive economic outlook for 2017? David, what’s your view?
David: Look, again, I think it’s being driven by Trumpism. If you look at the extreme bearishness in the sector in February, I mean, we’re just talking February here where was [inaudible 7:12] was $1.50 and just hit what, $6.50 just recently.
Peter: But, a recession was coming in February.
David: That’s right.
Peter: According to all those dopes who were predicting it.
David: Well, one of them is Goldman Sachs, had their forecasts that iron ore would average about $35 U.S. and they’ve just revised it up to $62.
Peter: That’s right. I think they had oil under $22 I think as well.
David: That’s right. I always use that as a barometer, an indicator of a turning point, whenever Goldman gets too bullish or too bearish on anything, then I go the other way.
Peter: You might remember, also in 2008, they had oil going to $199 U.S. Dollars a barrel. It was at about $149 at the time they made that call. I remember, I was laying on a beach in Greece on the Isle of Sifnos when I was actually reading that and I thought, “Yeah,” we already had one leg down in the stock market and confidence was coming back and I thought, “This is a massive call.”
Carson: What happens to those people who made those calls?
Peter: They made CEO.
Carson: Are they working in PNG now or are they basically on the back burner?
Peter: We do tend to forget some of those big calls.
David: But, I think the resource sector has definitely gone pretty much ahead of itself. We saw some profit taking today.
Carson: David, you didn’t answer the question though which was, what’s the growth outlook going to be like, even here, next year? I get a sense that you’re not exactly full steam ahead.
David: Oh no, I think there’s a lot of problems next year, particularly with the U.S. economy and earnings growth. I think the Dollar is going to be a big problem.
Peter: Up or down?
Carson: The Dollar going up is going to be bad for corporate America.
David: If you’ve got inflationary pressures which are starting to emerge, how the interest rates –
Peter: Are we talking U.S.A. or Australia here?
Peter: Okay, U.S.A.
Carson: Okay, as that feeds through into Australia, what will the ripple effect be? What will the net impact on Australian companies be from that challenge that North America is bracing for?
Peter: Be aware, he’s hoping you’ve got some bad news for us. He likes a good dose of bad news for sensational headlines.
Carson: Oh no, it’s not sensational. David is the most measured of most guests.
Peter: He’s measured is he?
Carson: He’s not going to say there’s a sensational headline, if there isn’t.
Peter: That’s a compliment, you’re measured.
David: Thank you.
Peter: I never got called measured, but go on.
Carson: Carry on.
David: Well, I’d look at it like an elastic band. I think, look at the equity markets, I wish I could show you a chart I was looking at just yesterday on the market capitalization of U.S. equities to GDP as a percentage. This chart is amazing, because at the peak of the dot com bubble it was 202% as a percentage, prior to just at the peak of the GFC it was just about 186%, now we’re 198%.
Carson: Oh, right in the middle.
Peter: Can I ask you this question David, what was the growth rate at that point in time?
David: Well, it was higher.
Peter: Higher, yes.
David: Exactly, so that’s another concern. I think really, it comes back to what we’ve seen is the central bank intervention, I think the Feds losing its grip over the markets, the bond markets are reflecting that. I don’t think whatever the Fed says is going to matter that much, it’s really going to be earnings going forward, what Trump does in terms of bringing back the equilibrium beneficial to the U.S. in terms of the trade.
Carson: Yes, that takes time. Time and again we hear people say that’s a two year play out story. Even if he wanted to bring in tariffs, the reality of it would be it’s not like China and a command economy, it just doesn’t happen overnight. He’s still got to realize the net impact on his own voting base, which sounded good on the hustings, whether it’s so good when you don’t have access to those goods and services again, is another question.
Peter: But. that’s the most longer term story. Where we have put David under a bit of pressure here is, your view on U.S. earnings. There are some good numbers out there, but I’ve got a feeling you’re not as optimistic about U.S. earnings.
David: No, definitely not. No.
Peter: This could be Goldman Sach’s moment. I hope not David.
David: I’d just say, have a look at the level of bullishness. I’ve been following the market for 30 years and one thing I have –
Peter: Only 30?
David: Only 30.
Peter: We’re [inaudible 11:48] hit on the show.
Carson: Someone the other night was 35.
Peter: We’re [inaudible 11:51] on the show. Go on.
David: I just think when you see the level of sentiment that’s extremely bullish right now. Although the GDP numbers were a little bit better than expected last night, but the earnings growth look at what is it, the last six or eight quarters in a row that actually earnings have been actually lower. They kept lowering their forecast –
Carson: That’s right, that’s right.
David: – and the analyst keep beating it.
Carson: The bar is so low you can walk over it.
Peter: It’s the oldest trick, they’ve been doing it for a long time.
Carson: It’s the oldest trick isn’t it? You can walk over the bar not jump over it.
David: I think the tech sector to me looks a little bit toppy at the moment.
Carson: Are you calling out a bubble? Are you calling out a bubble there?
David: I would dare not say bubble. That’s be calling the top.
Peter: You’re so programmed to look for the scariest thing. A bubble?
Carson: I mean, when he says toppy, what’s the next likely step of that?
Peter: Well, it could be a bubble but you might lose 10% or 15% from here.
Peter: I think you actually said toppy.
Carson: How far off from a bubble is that?
David: I think it’s due for a correction, put it that way. What type of correction is yet to be seen.
Peter: That’s not a bubble.
Carson: We’re back on banks from bubbles.
Peter: But David, when you do see a bubble, please ring us up and we’ll bring you on the show. He needs to see a bubble.
Carson: Before we go, before we go.
Peter: I’ll call him bubble boy before this year is up.
Carson: Before we go David, just a view on the banks, from bubbles to bank because there is a relationship there. We are seeing today, a good rally for both ANZ and CBA. Now, from an ANZ perspective, we did hear from Shayne Elliott, the CEO, on the same day that they cut their share bonus program to staff over Christmas, now they reminded the staff that it’s been a tough year. ANZ shares though are back in play, no question about it. Is this a stock that’s run ahead of reality?
David: Look, yes I think it’s had a fantastic run. I’d be certainly taking some profits up here in ANZ and certainly CBA is at the top of its range.
Peter: Where did it finish today?
Carson: It was up $78.65.
Peter: Yes, that’s fine.
Carson: Yes, so I’d say they’re at the top of that $70/$80 level. It’s been going through that trading range quite nicely the last six months, between $70 and $80. It’s at the top of that range right now so it’s interesting.
Peter: They’ve had a bit of a Trump lift, haven’t they as well?
Peter: The question is; will that be relevant to us going forward? If David is right, it’s not. If I’m right, it’s okay. I’m a little more positive about the Australia economy than you David.
Carson: To say though, as he did, Shayne Elliott today, prepare for mortgage rate rises.
Carson: Implicit in that is that the IBA will hike at the next move, not cut. I mean, that’s the way I read it.
Peter: Well, not at the next meeting.
Carson: No, the next move. Is the market ready for that? Is the economy ready for that?
David: Well, we shall wait and see.
Peter: If it’s going to be a rough ride it would be the end of 2017 or even 2018. I can’t see us picking up so quickly that Phil Lowe is going to risk it by going to early.
David: But, it comes back to inflationary expectations and reality.
Carson: One of the top performers today, as we go into the break, and again, into that quandary of no news but a rally. Do you kind of wince when you see that? I mean, you’d like to see something firm behind the buyings, proper news.
David: When you say no –
Carson: Well, there was no news around the best performer today, that I was aware of, just looking.
David: Was that Infogen?
Carson: It was Infogen.
David: That was interesting, yes. I noticed that 20 million shares went through the market on Infogen, and it’s not a particularly big cap stock, but there was no particular news. It is in the renewable sector, so I don’t know maybe somebody knows something I don’t. It’s one to watch.
Peter: That could be it.
Carson: It would be nice to keep the market informed. But anyway, David thank you very much.
David: My pleasure. Thank you for having me on the show.
David: Thank you.
Carson: Wealthwise Education’s David Novac talking with us.