Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

Invest in Sydney/Brisbane property markets, or for media/public speaking requests, email pete@allenwargent.com

Monday, 1 December 2014

Commodities Glut!

Supply!

Commodity prices have been having such a rough ride in recent weeks that it has been nigh on impossible to keep up!

In fact, I'm not even going to try.

Variously crude oil, coal iron ore, copper and silver have all been severely tested, with many other commodity prices facing Olympic standard headwinds (that said, there was at last a serious bounce in silver and gold, and to a lesser extent crude, iron ore and other commodity prices overnight).

The flip side to this is that Australian companies have been exporting unprecedented volumes of commodities, with export volumes rising and rising...and rising.

That's great, and indeed was the very object of the mining construction boom! There are no free lunches, however, a core idea of economics. 

The Reserve Bank (RBA) released its latest commodities prices index data today, and key commodities prices  continued to fall through November. 

Some possible consequences? Here are just a few...but there are more...

1 - Resources Stocks Smash-Up?

I haven't got the time or inclination to write too many words today, so a few pretty pictures instead!

Firstly, here are the Commodities Indices in SDR terms, an index which has been re-set so that "100" is the average level for the 2012/13 financial year.

The RBA's index is weighted towards the commodities there are of most importance to Australia.

Note the outrageous swings and fortunes of the key bulk commodities (iron ore and coal) in particular. Wow. The market has clearly been well oversupplied and the price index is continuing to dive.


The index was down by another 1.8 percent in November to be a rather dramatic 18.6 percent down over the past year, driven by the fall in Australia's key bulk commodity prices.

BHP's share price fell by 5.34 percent today alone to sit below $30. FMG fell by more than 10 percent. RIO was down by 4.13 percent. Others fared little better.

For the reasons explained in my book, you'll probably do better with diversified exposure to industrials and financials stocks in your Australian portfolio over the long haul than you will with resources companies.

In particular, those with a dollar exposure are likely to be faring reasonably well at the present time.

Here is the Metals and Mining index (XMM), which has lost approaching half of its value since 2011.

Some obvious challenges ahead for the share price valuations of the smaller and more marginal resources companies.



2 - Lower Aussie Dollar?

With Australia being a commodities exporting country, the dollar should in theory decline in response to falling commodity prices as the outlook for marginal producers dims.

Has this happened?

Hmm, yes, but only to some extent.

Below I have charted the commodities price index in Aussie dollar (AUD) terms, also indexed to 100 for the 2012/13 financial year.

There has been some stabilising effect via foreign exchange movements, but not really all that much, with the index still declining by a very significant 15.9 percent over the past year.


We might expect to see the Australian dollar heading towards the 70-80 cent range in time.

Certainly the Reserve Bank's rhetoric has suggested that a decline of that magnitude  may be in order, and desirable.

To date, the AUD has held up surprisingly well, now trading above 84.8 cents, but from a technical perspective there is now a clear run down to 84 cents, and It would certainly be a brave bet that was against it going lower over the medium term. 


3 - Lower Interest Rates

Most economists don't think so, but I've been suggesting here for a long old while now that 2015 may well see another interest rate cut in this easing cycle.

Low interest rates are having some impact, but it still seems unclear whether the cuts delivered to date will get enough traction.

What a change in futures markets in the last few days! The implied yield curve is now all but pricing in another cut in the cash rate to 2.25 percent by the third quarter of 2015...


4 - Slower Incomes Growth?

Yes. Indeed, this is already happening, as I considered from the State Accounts data here.

The mining boom drove wages higher quickly, but now we are likely to experience the drag as we come down the other side and there exists slack in the labour force.

There are other impacts to consider, of course.

In spite of all the above points, GDP for the third quarter may surprise to the upside. 

GDP numbers are always a crapshoot, of course, but the ABS Business Indicators told us to expect a strong contribution from inventories. while seasonally adjusted gross operating profits held up surprisingly well too.

I'll take a tentative stab at 0.7 percent GDP growth for Q3 and 3.1 percent over the year, but those surprise inventories figures could see the number being some way higher still.

GDP figures are retrospective, though, and as futures markets suggest, the economy might need a bit more of a push from lower interest rates yet.