Pete Wargent blogspot


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Thursday, 30 April 2015

US recovery stall?

GDP stinker

Well...US GDP was reported overnight and it was a stinker, far below even expectations of a weak result of 1 per cent growth.

It had seemed that the US economy was recovering nicely, with real GDP growth apparently picking up steadily over time.

Moreover, payrolls growth until lately had been recording some astonishing gains, which had been to some extent also supported the JOLTS survey and jobless claims.

GDP slows to crawl speed

Over the past three quarters, however, GDP appears at face value to have slowed from an annualised pace of 5 per cent in Q3 2014, to 2.2 per cent in Q4 2014, to just 0.2 per cent in Q1 2015.

Which is a crawl.

First quarter growth had been weak in 2014 too, blamed on bad weather, but this result was in no way encouraging, and was in any case propped up by inventories (which will thus act as a drag in the next quarter).

Hikes pushed out

In all likelihood, this soft result effectively rules out the chances of an imminent rate hike by the Federal Reserve.

Interestingly the United Kingdom has recently experienced a similar dynamic with record high employment and unemployment declining to just 5.6 per cent.

Yet "Cool Britannia" saw a very weak preliminary GDP result reported for Q1 2015, suggesting that productivity may be in the gutter.

The wrap

None of the above is particularly helpful to the Reserve Bank in Australia, which is on balance looking for a lower dollar at around US ~70 cents, yet instead now has a dollar at US ~80 cents.

Markets weren't quite sure what to make of the US GDP result, but the pressure seems to be on for another rate cut to be delivered in Australia. 

Failure to cut rates could see the dollar creeping back above US 80 cents.

Iron ore futures are getting walloped today too...

Lower north shore driving Sydney property boom

Sydney leads house price growth

Domain Group (formerly APM) released its March quarter house price figures.

Sydney leads the way in terms of house price growth at 3.6 per cent for the quarter and 16 per cent year-on-year, which as expected represents an acceleration in price growth.

House price growth elsewhere has been steady.

Also as we expected, the lower north shore leads the way in Sydney, with an extraordinary 10.5 per cent boost to median prices in the March quarter.

The inner west (+7 per cent) and city and east (+6.8 per cent) also recorded strong growth in the quarter.

Investors continue to power housing market

Housing credit leads

The Reserve Bank released its Financial Aggregates data for March 2015 which showed that housing credit growth picked up in the month of March to 0.6 percent to record a forceful 7.3 percent growth over the year.

However, business credit softened in the month to just 0.2 per cent, taking annual credit growth down to 5.3 per cent.

Business credit growth slows

The first chart below shows how business credit has endured a "start-stop-start" recovery from the recession-like conditions experienced by Australian businesses through the financial crisis.

Credit growth appeared to be recovering nicely enough, but then stumbled in mid-2012 in sympathy with a number of offshore shocks at that time.

And we appear to be at arriving at another crossroads for business credit growth right now. 

In annual terms, as noted business credit growth ticked back down to 5.3 per cent from 5.6 per cent, another signal perhaps that a further interest rate cut would be just the ticket.

Stepping away from the data momentarily, surveys have indicated that CFOs may be a littl more willing to take on risk than they were a year ago, but business sentiment seems decidedly undecided right now. 

With inflation well under control, a rate cut would be spiffing, but there may remain concerns about...

Investor credit surging

Housing credit recording another strong result, with owner-occupier credit rising by 5.7 per cent over the past year and investor credit soaring 10.4 per cent higher in seasonally adjusted terms.

The evident lack of slowdown in investor credit growth is a key argument against rates being cut further (in some quarters at least).

Smoothing the housing credit growth figures below on a rolling 12 monthly basis shows that investor credit continues to lead the way with very hearty growth. 

It had seemed that investor credit growth may be hitting a plateau, but the March figures revealed a burly result with investor credit rising in the month by $4.6 billion or 0.93 per cent in seasonally adjusted terms.

If you can "do" maths, you will of course note that this represents an annualised pace of well above 10 per cent, so the regulator has more work to do here.

Finally, the investor share of credit increased to 34.5 per cent, which is the highest level on record.

The way things are tracking, with ever more first homebuyers electing to buy investment properties as a first step onto the ladder, we can expect to see that share heading to above 35 per cent in due course.

The wrap

Following an abysmal print for US GDP and the Aussie dollar spiking back to 80 cents - in concert with an untimely reversal in the iron ore price "recovery" - the case seemed to be building for the Reserve Bank to cut the cash rate again in May.

This Financial Aggregates data tilts the other way suggesting that credit growth to housing investors is powering on unabashed.

10 per cent annual growth in credit may not sound too alarming, and indeed it is not in purely aggregate terms.

But in reality property investors are focussing very heavily on the Sydney market and another rate cut would in all likelihood send investor activity into orbit.


Next up, a look at the US GDP result, which was an absolute stinker, propped up be inventories...

Wednesday, 29 April 2015

Queensland - slower population growth?

Slower population growth for the Sunshine State

The latest round of ABS Demographic Statistics showed that population growth in aggregate in Queensland has slowed to an annual pace of +69,400 or 1.5 per cent.

The driver has clearly been a significant slowdown in net interstate migration.

However this figure disguises material variances between the various LGAs.

From 2011 to 2014 the ABS Regional Population Growth figures showed that population growth in the Brisbane LGA actually continued to increase to +56,908, up from +56,407 in the 3 year period from 2008 to 2011.

However, this strong growth in the Brisbane LGA has increasingly been offset at the state level by slowing growth across a range of regions.

Moreton Bay LGA, for example, has seen its 3 year population growth slow from a remarkably strong +32,552 to a still strong +27,086 as unemployment trends bite.

The pace of population growth has also slowed in the Gold Coast, Ipswich, Sunshine Coast and Cairns.

On the other hand, population growth increased in the period 2011 to 2014 in Logan and Gladstone.

The wrap

At the state level annual population growth has eased back to 1.5 per cent per annum in Queensland, although the slowing in net interstate migration to the Sunshine State now appears to have bottomed out.

The data shows that the slowing in population growth occurred in regional and outer suburban areas rather than in the Brisbane LGA.

Even then, in many cases, population growth rates remained strong, but simply less strong than had been the case previously through the mining boom.

It is still important to note that at the suburb level the strongest property price growth is often seen in specific suburbs with flat population growth.

New Farm has been a classic case in point with house prices rising very strongly due to an almost completely capped supply and massively increasing demand to live in a lifestyle suburb located so close to the Central Business District.

Genworth delinquencies favourable

Genworth releases 1Q 2015 results

Monoline lenders mortgage insurer (LMI) Genworth Mortgage Insurance Australia (ASX: GMA) released its 1Q 2015 earnings report before the open this morning, together with its associated investor presentation.

GMA has struggled to maintain market share seeing its gross written premiums off by 20 per cent from $159.7 million to $127.7 million since the prior comparative period (pcp) 1Q 2014.

Despite this material decline in revenues, relatively steady unemployment and benign inflation have helped to keep delinquency rates favourable for the post 2009 book years, allowing net profit after tax (NPAT) to rise substantially by 29 per cent, 

In truth, the increase in NPAT was almost entirely driven by a material pre-tax $28.3 million mark-to-market gain on GMA's investment portfolio, and underlying NPAT was stone dead flat (+0.0 per cent) despite the gross written premium dropping by a fifth from the pcp.

Delinquency rates favourable

More interestingly, deliquency developements - which are traditionally seasonally weak in Q1 - held up well.

Source: ASX: GMA

The portfolio delinquency rate has ticked up marginally to 0.36 per cent from 0.34 per cent in 1Q 2014, but more importantly post 2009 delinquency rates by book year have continued to perform very favourably relative to the preceding five book years.

Homeowners are clearly enjoying 40 year low borrowing rates, with fixed rate products for new borrowers in the past fortnight even surfacing with a incredibly appealing "3 handle".

Cabinet papers & negative gearing furphies

Rents from June 1985

The prevailing "negative gearing" tax legislation was amended in July 1985 so that interest expenses on rental property were quarantined and could only be claimed against rental income and no longer other income.

In the period thereafter rents in Sydney and Perth surged higher, until the old legislation was restored in September 1987.

The below chart shows what happened to rental indices from June 1985 to September 1988, being one year after the reversal of the rulings in September 1987 (since the impacts of tax legislation obviously tend to take a period of time to work their way through illiquid property markets).

Some like to argue that the growth in Sydney and Perth rents was due to pre-existing vacancy rates.

As you can see below, Cabinet Papers show that over the 12 months to June 1985 Perth had a vacancy rate of 2.4 percent, which is close to the "comfortable" 2.5 to 3.5 percent rule of thumb range as determined by the Real Estate Institute of Australia (REIA).

Sydney's average vacancy rate in the year to June 1985 was somewhat tighter, although not chronically so, at 1.4 per cent.

What the Cabinet Papers do clearly show is that in the 18 months following the tax legislation amendments in July 1985 vacancy rates then collapsed in these two cities to 0.9 per cent and 1.2 per cent respectively as rental supply was vaporised.

Vacancy rates also fell in Melbourne, but only marginally so by comparison, from 2.0 per cent to 1.9 per cent.

Unlike many other cities, Melbourne was in the midst of a massive boom in real house prices. 

In nominal terms house prices in Melbourne screamed higher from $65,000 in 1985 to $109,000 by 1988, an incredible jump of 68 per cent.

Unsurprisingly the net result was a huge surge in net interstate migration from Victoria, more than quadrupling from just 3,340 in the year to June 1984 to a then near-record 14,423 in the year to June 1988.

Population growth in New South Wales was well over 50 per cent higher than that of Victoria in 1985, implying a very different dynamic in the respective rental markets of Sydney and Melbourne.

Brisbane had high vacancy rates in 1985 of above 4 per cent and although these declined a little rents were not unduly impacted, whilst population growth in all other cities was so slow by comparison that pressure on rentals was necessarily more muted.

With Australia having since embarked upon on a huge population growth programme since that time, the same dynamic is not true today, however, with ongoing population growth dramatically stronger that it was in 1985, in Victoria's case by a factor of an enormous 2.4 times.

Apples and oranges

Far more pertinently, comparing the property markets of 1985 with those of 2015 is akin to comparing chalk and cheese, leading to an arguments of a similarly sieve-like consistency.

The data shows that annual investor demand accounted for scarcely $2 billion of housing finance in 1985 (13 percent of the total) compared to a whopping $139 billion today (40 percent of the total).

For better or for worse, there exists a considerably greater concentration of investors in our largest capital cities today than ever was the case three decades ago.

If a prevailing 2.4 per cent vacancy rate in Perth in June 1985 was enough to send rents skyrocketing then logically there should be many regions today experiencing exactly the same dynamic.

But of course, with an evident surge of investor demand in response to low interest rates and the ensuing upwards pressure on prices leading to Australia's greatest ever building approvals boom, this is very far from being the case.

In fact rental growth is now tracking at its slowest level since September 2005, rents are already declining in nominal terms in Perth and Canberra, and will soon follow suit in Darwin and all probability elsewhere.

Concentration of investors

Extensive work by CoreLogic-RP Data has consistently shown that there is a very heavy concentration of investor-owned dwelling stock around the inner suburbs of our largest capital cities.

Naturally enough, therefore, these are also the very same suburbs which would see real rents explode higher were negative gearing rules to be tinkered with again.

Data from the Real Estate Institute of New South Wales (REINSW) shows that inner Sydney vacancy rates have been as low as 1.3 per cent within in the past 12 months.

In a large and relatively mature inner capital city market, with its many itinerants leading to frictional vacancies, vacancy rates simply will not fall much lower than that today.

Lately rising prices have led to a supply response and a burst of construction which has helped to ease apartment vacancy rates a little.

What the full REINSW data series does also imply is that rental pressures remain unlikely in, say, Coffs Harbour, or the Far West, or Orana. 

It's abundantly clear that any changes in negative gearing legislation would clearly have little or no impact in Walkabout Creek or woop woop, in the boondocks or beyond the black stump.

On the other hand in the inner suburbs of Sydney and our other large capitals, the simple laws of supply and demand dictate that a reduced demand for rental property would very quickly result in an sharp rise in rents.

To assume that an equivalent number of renters would =summons a deposit and mop up the ex-rental stock by electing to buy is naïve.

It is true that any resultant rental growth would be less dramatic in nominal terms today with inflation well under control and sitting comfortably within its target 2 to 3 per cent range, while rental affordability might also play a restricting role.

However, with rental growth nationally set to track below the rate of inflation for the foreseeable future, it is very easy to envisage that a scrapping of the prevailing negative gearing legislation would lead to a jump in inner suburban rents in real terms.

Tuesday, 28 April 2015

Blog readership stats (snowballing)

31,000 and up

To date, I haven't taken a great deal of note of my blog readership statistics here (actually, none at all).

When I first commenced this blog I posted somewhat infrequently and for the first 9 months it seems that I barely had any readers at all!

In 2012, average readership was under 5000 per month.

Always designed to be something of a "slow burn", the readership numbers gradually increased to an average of 12,000 per month in 2013.

In 2014, average readership increased to a shade under 20,000 per month.

Ramp up

Two months ago at the behest of a Twitter follower I began tweeting links to my posts, and have also shared more posts on LinkedIn and Facebook.

This has had a notable effect on readership, jumping from just 17,132 in January to more than 31,000 over April to date.

Cumulative blog hits are therefore snowballing nicely.

Standard measure

The standard measurement for blog readership, of course, is how many times over the grand 2769 seater concert hall at the Sydney Opera House could be filled. 

And the answer is that the concert hall could be filled 11 times over per month with more than enough folk left over to sell the interval ice creams.

I've also now added a "Subscribe by email" button over here somewhere ==>

Feel free to share any posts you like via social media. 

And thanks for reading! 

Next stop 50,000...

One for the ages...

House prices now the mining investment boom has gone

Interesting piece out from Propell which you can read here, charting the mining towns property bust.

So many of these towns will be familiar names having been tipped by advisers as hot areas for buying property.

Unfortunately, the mining town fad is rapidly turning into a disaster, as prices continue to fall sharply in highly illiquid markets.

Source: Propell

It is projected that more pain lies ahead, and not only in these towns.

Source: Propell

The concerning point of note for resources regions is that the unwinding of the capital expenditure boom has barely even begun its decline. 

There is evidently much more pain to come.

Monday, 27 April 2015

Limit up

6000 here we come...

I've well and truly count of how many times Aussie stocks have flirted with the 6000 barrier in recent weeks.

Stock markets rose again on Monday to a 7 year high (again), recording a nifty 0.8 per cent gain.

The market is now clearly threatening 6000 (again) with the ASX 200 closing at 5982.7.

Today's market was partly driven higher by the rebound in the iron ore price, as well as merger action.

This should help to drive aggregate household wealth to new record highs in Q2 2015.

"Limit up"

Fortescue Metals Group (FMG) closed up by a rip-roaring 16.2 per cent at $2.57 on Monday, having lately rebounded from an utterly desperate 12 month of low of $1.75.

And there could be more to come for FMG as the week rolls on.

Futures markets in iron ore hit "limit up" on Monday, with contracts trading on China's Dalian Commodity Exchange once again soaring 5.21 per cent higher to 434 yuan/tonne.

We can therefore expect to see a spot price of closer to US$60/tonne on Tuesday 

This follows on from a 5.5 per cent jump in iron ore spot prices over the weekend.

The positive market action comes hard upon BHP Billiton's announcement that it would delay reconstruction work at Port Hedland, in turn impacting output targets.

Based on this latest news, there is every chance that the Aussie stock market could breach 6000 tomorrow.



What could possibly go wrong this time...?

NAB survey debunks first homebuyer strike

First time buyer strike

For much of the past two years we have seen a great deal of hand-wringing and uncritical reporting of ABS first homebuyer figures, with countless media articles noting the apparent disappearance of first time buyers due to their being crowded out of the market by greedy Baby Boomer speculators.

It has been a compelling narrative, to be sure, but has been shown either to be a partial misunderstanding of market dynamics by theorists, or a prolonged exercise in confirmation bias.

As documented here and elsewhere many times previously, first time buyers never really disappeared.

What can be said is that over recent times the marginal buyer of property in our largest capital cities has altered significantly.

Anyone who works in the Sydney property market would know that many of those so-termed "speculators" have in fact been first time buyers themselves, oftentimes choosing to buy an investment property as their first step on the housing market ladder.

I cannot realistically speak for the Melbourne market being an infrequent visitor south of the border, but can only imagine that similar trends have been playing out there.

If you want to reduce the argument to semantic debate, you might say that first time investors are not buying "homes", but, whatever, they never went on strike.

The most populous cities have also being our strongest property markets, so for those listening to the data then the conclusions should have been obvious enough.

Theorists schooled by NAB data

The latest NAB residential property survey for Q1 2015 was released last week.

It confirmed that more than a quarter of established properties continue to be purchased by a combination of first homebuyers (15.8 per cent in Q1 2015, down from 16.1 per cent in Q4 2014) and first time investors (making up 10 per cent of purchases).

Source: NAB

Trends in new residential property developments were once again broadly similar, with first timer buyers also accounting for around a quarter of sales.

Even more damningly a recent Domain survey found that 16 per cent of "Gen Y" folk own two or more properties, which is almost as high a share as the "Gen Xs" (17 per cent), or even the Baby Boomer generation who had apparently locked them out of the market (17 per cent).

So much for the greedy old farts "devouring their young"! 

It has rather more been a case of dog eat dog, or what is otherwise known as a "market".

This merely underscores the fallacy of dividing up Australia into convenient generational groups and stereotypes. 

In the real world there are at least two score and ten shades of grey, and markets are infinitely more complex and granular.

What this means...consequences?

There was also a theory doing the round some years ago that the disappearance of the first homebuyer could cause the property markets to collapse in upon themselves, as the base of the real estate pyramid dissipated.

This has not proven to be the case - at least, not yet - with many first time investors favouring lower priced property with its more affordable entry points and potentially stronger yields.

However, these shifts being seen in our capital city markets may yet have unforeseen consequences.

First and foremost, the increased roles of the investor and the first-time investor have the potential to amplify the property market cycles, both on the way up and on the way down.

Who and what drives prices?

It has long been argued that unemotional and calculating investors don't push up property prices, while emotion-driven homebuyers do.

There was probably an element of truth in this in times past.

Certainly it can be said that countries with high home ownership rates have also historically been more prone to boom-bust cycles, for where the status of home ownership is considered to be an essential, would-be buyers can on occasion stretch themselves to extreme lengths.

However, the first hand evidence I have seen tells me that investors today can push home prices higher just as much as homebuyers can.

Why would a rational and calculating investor be prepared to bid high for a property?

Simply because within an illiquid market it may be another month or three before they have a further opportunity to buy, and in a hot or rising market environment they may fear paying $5,000 more for the privilege of so doing.

Downturn phases

A greater number of investors in the market could amplify the downturn phase of the property cycle too with some investors inclined to dash for the exits when prices are declining.

In reality, trading property frequently as is so often recommended by investment advisers and property writers is highly impractical due to prohibitive transaction costs, and a large number of investors instead look to adopt a long term buy and hold approach.

Greater volatility is most likely to be experienced in smaller property markets where volumes are thin, and indeed we have already seen some extreme examples in certain mining towns.

Experienced housing market economists have long recognised that the larger property markets can often be more stable and far less impacted by increases in supply - even dramatic increases in supply.

The property markets of Melbourne have been an excellent case in point, refusing to crash despite an oversupply of experts insisting that they must, due to overbuilding and an excess of high rise stock.

Another trend which we might expect to see is that of a shorter market cycles, particularly in this modern era of instant gratification.

Perhaps to a certain extent this is already true, with Australia having experienced a number of mini-cycles over the past decade.

That said, this is likely also in part illusory, with the ebbs and flows of property cycles in times past masked by an economy which was off to the inflationary races.

In today's era of low interest rates and low inflation we should expect to see property prices falling in nominal terms far more frequently than was ever the case in times of higher or even raging inflation.

Matusik Masterclass

Masterclass time

On 16 May I'll be attending the latest Matusik Masterclass event in Brisbane, which runs for 4 hours from 8.30am.

You can read more about it here.

Numbers for the masterclass event are limited to 10 per group.

However, Michael has offered my blog readers a special deal of $100 off per ticket, bringing the price down to $200 per ticket from the usual $300, which is a pretty good offer for a small group event with Matusik!

To redeem the offer jump on it here and use the code "WargentReader". 

First 5 people to use the code only will qualify.

Morning tea and lunch are included in the price, and anyone attending this class will also receive a full year's subscription to the Matusik Missives (valued at $150 - but psst, even if not attending the Masterclass if you use the code "WargentMissive" you can still snare a subscription for $100, I think...). 

See you there!


Disc: There are no financial incentive, kickbacks, commissions or whatever else for me in this offer. 

Property Observer: City land prices heading into orbit

Read my latest Property Observer piece here.



An electric 5.6 per cent bounce in the iron ore spot price to US$57/tonne brings a little more temporary respite to the beleaguered Fortescue Metals (FMG) and its ailing stock price.

FMG was up by 8.6 per cent at the open, briefly touching $2.42, before settling at $2.40 (last settled trade).

This will push Fortescue's market capitalisation back above $7 billion, although this is still less than the value of the group's total debt.

Still a pass for me - way too much debt and excessive exposure to a game of commodity price roulette - but best of luck to traders.

Preliminary auction clearances highest on record

Market pauses for ANZACs

A quiet weekend as Australia paused to reflect for ANZAC day.

Nevertheless, in the property sphere there were still 550 auctions held.

Of those reported, RP Data recorded the highest auction clearance rate on record at an incredibly high 84.3 per cent.

This is a remarkable result and a level not previously seen on this index.

These figures may be revised down in due course.

Source: RP Data

Clearance rates were extraordinarily high in Sydney (91.1 per cent), Melbourne (87.4 per cent) and Brisbane on low volumes (90.9 per cent). 

Adelaide mustered only a 55 per cent clearance rate, also from low volumes, down from 64.4 per cent on the same weekend last year.

Source: RP Data

Sydney's market remains the strongest in the nation with clearance rates dramatically higher than the same weekend a year ago (71.3 per cent).

Source: RP Data

A quieter week ahead for market news.

It will be a lively enough start to the weekend for iron ore stocks with the spot price leaping by 5.6 per cent from US$53.80/tonne to US$57/tonne.

Of particular interest this week will be the March 2015 private sector credit data, due to be released on Thursday morning.

The February data, which I looked at in detail here, showed housing credit surging driven forward by investors.

However, the Reserve Bank may now be expecting to see investor credit reaching a plateau.

The February data also showed business credit expanding by 5.6 per cent, the best result since February 2009.

Market forecasts tip total private sector credit to mirror the February result, expanding by 0.5 percent.

Sunday, 26 April 2015

Are Aussie stocks in a bubble?


Stimulus and easy monetary policy has led to stock market exuberance in a number of developed economies.

In the US, the NASDAQ has risen to record highs, while the Dow Jones (DJIA) has roared from just around 6500 in 2009 to above 18,000 today.

In the Old Dart, the FTSE 100 has finally breached 7000 and hit new record highs.

Today, a short look at the Australian market, and, in particular, a consideration of whether we are in or are approaching bubble territory.

Australian stock market

On Friday the S&P/ASX 200 jumped by 88.5 points or 1.51 percent to 5933, once again taking the index tantalisingly close to the assumed "psychological barrier" at 6000.

Denoted by the stock code "XJO" this particular index was created at the end of March 2000 and commenced with an index value of 3133, which was equal to the value of the All Ordinaries index at that time.

In the 15 years since we have enjoyed the XJO experiencing a very sharp run-up prior to the financial crisis, running as high as 6828.7 on my birthday in the year 2007 - as indeed it is every year - 1 November.

By early March 2009 the index had slumped as low as 3145.5, an alarming crash of well over 50 per cent.

The story since that time has been one of a long but strong recovery, with a few blips and international debt crises along the way (just for good meaure).

Accumulated returns

When measuring average returns for investors, it is not enough to look at the index and note a "7 year high" or the market being "below where it was in 2007", because this is to overlook the income component of investment returns.

Since the financial crisis low of March 2009, the XJO has rebounded by 88 per cent, and on an "accumulation" basis (i.e. inclusive of dividends) returns are considerably stronger at an imperious 147 per cent.

Impressive stuff, and this has helped aggregate household wealth in Australia to hit record highs in 2014.


Concluding whether an index is fairly valued or overvalued simply by looking at its quoted numerical value is not a valid exercise, since the index is capitalization adjusted and float adjusted.

One measure we can look at is average price/earnings ratios, which divides market prices by annual earnings per share.

On a forward P/E measure valuations are threatening to move from the mid-teens to the high teens, a level which might be considered expensive on a historical basis, although valuations have previously run some way higher around the turn of the century.

Westpac (WBC), Commonwealth Bank (CBA), and ANZ Banking Group (ANZ) are all trading at PE ratios of above 15. 

So too is resources giant BHP Billiton (BHP). 

A diversified company such as Wesfarmers (WES) is trading at a PE of more than 20. 

AMP also has a PE ratio of above 20, while the successful Telstra (TLS) turnaround story has now justified a PE of above 18.

Not exactly cheap, one might say.

The wrap

The outlook for the economy remains somewhat subdued.

Futures markets are expecting to see another interest rate cut before the end of the financial year and there is every chance that the Reserve Bank will revise down its previously optimistic growth forecasts on May 8.

Low interest rates have helped to push share market valuations higher that might otherwise be warranted by the outlook for the economy.

This is one of the ways in which low interest rates can create a "wealth effect" and stimulate investor and consumer confidence.

Whether or not the market is in a "bubble", however, is a different question.

The expansion in valuations has not been particularly rapid, and nor are PE ratios wildly higher than historical averages.   

To some extent, however, the answer must be based upon and make reference to the underlying quality and sustainability of the earnings (E), and so in Australia the conundrum must be inextricably linked to the outlook for China, commodity prices and the demand for resources.

Others look to the outlook for our property markets given the exposure of the major banks to residential real estate, yet mortgage arrears are at their lowest level in 7 years, and indicators of financial stress are presently very low, with significant mortgage buffers having been acknowledged by the Reserve Bank.

What we can say is that value is now very difficult to find in the current stock market and the risk of a material correction is necessarily higher than it was. Not a concern for those averaging into the index, of course.

Saturday, 25 April 2015

Employment trends

Capital cities driving employment

A worthy inspection of the Detailed Labour Force figures for March 2015 shows that Australia's four largest capital cities have overwhelmingly driven employment growth over the past two years.

The month-to-month figures in this series are not seasonally adjusted; they are also unpredictable and volatile.

By way of an example, having added a seemingly thunderous +34,000 jobs in February, Greater Brisbane promptly gave 22,000 of them back again in March.

Over a more reliable two year time frame, job gains have been driven by Greater Sydney (+69,000), Greater Melbourne (+69,800), Greater Perth (+33,300) and Greater Brisbane (+23,800).

On the other hand, jobs growth has been negative in Greater Adelaide (-8,300) reflective of damaging trends in the manufacturing sector, with further job cuts for struggling Elizabeth announced in April.

Regional employment growth has also been generally weak, reflecting the shedding of nearly 50,000 resources positions over the past year.

Perhaps surprisingly the most significant contributor to regional employment growth was "rest of state" Western Australia (+28,600), where jobs have been steadily and consistently created.


A number of clear trends are beginning to emerge in Australia's employment markets.

Firstly, services employment has gradually picked up predominantly in the largest capital cities, but the manufacturing sector is hurting and aggregate mining employment is falling into disarray.

As shown in my chart packs previously, total resources capital investment in Australia is still being propped up by enormous and unprecedented spend in the Northern Territory related to the $34 billion Ichthys project, but as the construction phase winds up the capex decline is all set to gather a head of steam.

This will ultimately represent adverse news for Darwin, which has long played host to a curiously artificial labour market with resources, tourism, military and the public sector accounting for the bulk of employment.

The likely outcome nationally is that we will see low interest rates for a prolonged period of time - starting with an imminent cut to the cash rate to just 2 per cent - as the mining investment decline continues to act as a drag on growth.

Regional unemployment trends

The month-to-month capital city and regional unemployment rate figures by state and territory are wildly erratic, though I have charted them below for completeness.

As I considered here during the week, the smoothed data shows that regional unemployment is demonstrably rising in Australia.

The most notable divergence between city and regional unemployment is increasingly to be found in New South Wales.

The reported unemployment rate in thriving Greater Sydney has declined to just 5.1 per cent, while regional unemployment in the state is rising materially, now hitting 8.3 per cent, similarly echoing adverse shifts in mining employment.

Here is the smoothed rolling 12 monthly data for New South Wales, with the latest figures suggesting that the divergence will continue.

G'day Hobart!

Population growth and employment growth has been so underwhelming in Tasmania across an often dismal decade for the state that the figures have been excluded from the above charts since they would barely register a blip.

However, regular readers will recall that the economic data for Tassie has sporadically been throwing out mildly promising readings, with state final demand ticking along in moderately positive territory, and some occasionally decent retail figures to boot.

While the absolute numbers may be immaterial from a national perspective, Greater Hobart has seen its total employment increase steadily by more than +4,000 over the past two years to 105,500 (a modest improvement, but one which night be meaningful in the context of a labour force of fewer than 115,000).

Greater Hobart's unemployment rate has lately been consistently hitting with a much-improved "6 handle" after briefly dallying with the "ugly 8s" in early part of 2014.

Lower dollar helping the Apple Isle

Just as parts of the Tasmanian economy were punished by the persistent strength of the Australian currency through the latter stages of the mining investment boom, Hobart now appears to be benefiting from the ongoing weakening of the Aussie dollar.

It is true that some of Tasmania's industries may never recover from the fallout to their previous eminence.

The decline of the grand old forestry company Gunns Limited falling into voluntary liquidation in 2012 represented a sad decline for one of Australia's oldest companies, founded in 1875.

My chart packs of the latest and always fascinating international trade data implied that the resurgence of Tasmania is likely to piggy-back on a strong rebound of the tourism sector, particularly from record numbers (and record spend) of Chinese visitors.

Unemployment convergence

When smoothed on a rolling 12 monthly basis Australia's capital city employment rates appear to be converging.

The respective unemployment rates of Darwin and Perth remain relatively low at the present time, but realistically both are set to trend upwards as the mining investment boom withers.

Sydney's economy is benefitting from a construction and infrastructure boom, and looks to be the best placed of the capital cities. 

A prime beneficiary of low interest rates to date has been the services sector in the four largest capital cities, as well as strong growth in residential construction employment.

The links inserted to this post provide further detail.

Capital raisings

Market statistics

Let's take a superficial sideways glance at a few securities exchange market statistics, with some $4.8 billion of secondary capital raised on the ASX in March 2015.

This is the largest volume of secondary capital raised in the month of March since the glut of 2009 as a rush of listed companies hurriedly refinanced and recapitalised.

The rolling annual level of initial capital raised has been tracking at its highest level in well over a decade.

The volume of initial capital raised has been kicked ahead by the $6 billion Medibank float which became evident in the November figures, the largest privatisation since Telstra. 

In total $8.2 billion of initial capital was raised in the month of November 2014 alone.

Over the year to March 2015 $68.9 billion of capital raisings been recorded in the ASX market stats.


Such data is interesting but does need to be understood in the context of what is happening in the market.

Transactional activity in aggregate has picked up since a lull through 2012, and this tends to be a positive sign where businesses are raising capital for the purposes of investment or growth.

However, high levels of secondary raisings can also be an indication of refinancing under duress, as the huge swell of capital raised through 2008 and 2009 showed.

Between December 2008 and December 2009 more than $111 billion of secondary capital was raised as balance sheets were shored up.

If commodity prices remain under pressure then it is possible that we'll see further secondary capital raisings for capital restructuring or refinancing purposes, which is clearly a less positive signal.


On 25 April 1915 the ANZAC force landed at Gallipoli, the beginning of an 8 month campaign.

Today marks the 100th anniversary of that day.

A record 120,000 gathered for the dawn service at the Canberra War Memorial today. Lest we forget.

Weekend reads

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Friday, 24 April 2015

Slight bounce in ore


A good deal of excitement around market commentary circles at the moment as the iron ore price has rebounded to $53.80/tonne.

It's a start, but also a figure which until relatively recently would have been viewed as disastrously low.

Iron ore producer and explorer Fortescue Metals Group (FMG) has seen its share price bounce from a recent 12 month low of $1.75 to $2.23 recording another 6.7 per cent gain today.

Speculators, traders and outright gamblers appear to love this stock, presumably due to it being a pure iron ore play and thus inherently volatile, effectively leveraged against the commodity price.

Perspective needed

Some perspective is needed, however. 

The intraday high is now being tested further thereby pushing the market cap back well above $6.5 billion (and the P/E up towards 9)

Nevertheless the share price still remains a world away from its 12 month high of $5.37.

Let's not even mention where the share price got to in the heady days of mid-2008.

The capital structure of the group has long been highly leveraged, and a crash in the commodity price has punished FMG's cash flow profile.

Fortescue raised US$2.3 billion of junk-rated high yield bonds this week.

It's a big bet on the future price of ore, and the price of debt offered in recent weeks has reflected that risk.

NASDAQ record close

Record gone

The NASDAQ set a closing record overnight at 5,056.

It has been a long, slow haul back from the crash which saw the index capitulate from 5,048 to a low of just 1,114 in 2002

During the trade the index fired as high as 5,073 as easy monetary policy continues to bolster stock valuations.

The preceding peak saw a number of tech start-ups trading at wild valuations of hundreds of times earnings.

Analysts are not seeing that so much this time around.

For one thing social media firms such as Facebook actually have an "E" (and not just a "P") which always tends to be a handy inclusion in the calculation of a P/E ratio.

Over in the Old Dart the FTSE is also partying like it's 1999, recently breaking through 7,000 to new record highs.


Lower north shore reawakens

In the summer 2013 edition of our Buyer's Eye we suggested that Sydney's lower north shore was a key sector of the property market which had lagged substantially post financial crisis and was set to experience a catch up.

Our clients will no doubt be delighted to see the blistering lower north market now taking off with a vengeance.

The lower north recorded a "staggering" 98 per cent auction clearance rate at the weekend with everything that is touched now turning to sold (50 from 51 auctions), for want of a better cliché.

Our former favourite of yesteryear the inner west continues to astound with a massive 92 per cent auction clearance rate last weekend.

It is clearly very difficult to buy into such markets, with a huge number of investors patrolling the streets.

Listed below are a few alternative suburbs standing to benefit from the new Sydney light rail project due for completion by the end of this decade which will open up the south-eastern corridor.

A number of south-eastern suburbs are presently served only by bus routes to the CBD employment hub.

I took the camera out and about on my travels yesterday to take a look - just for you...


Note the huge influence of Asian students in the area attending the University of New South Wales.


Formerly known perhaps somewhat ambitiously as "South Kensington" I think it would be fair to say that historically the suburb has lacked the panache of its London twin.

Now named for the famous aviator, all this is set to change with the introduction of a direct transport link to the city.

Partly due to its proximity to the University, the suburb has long had a high proportion of overseas born residents.

The suburb benefits from its wide streets giving the impression of space. 

The views from the top of the hill aren't too shabby either, all the way across to the Blue Mountains in the west.


Close to the beach at Coogee and close to the city, Randwick also has its own employment hubs (hospital, University, shopping centres) and is already a hugely popular suburb in its own right.

The one Achilles heel for Randwick has been that it is only served by bus routes from a public transport perspective.

"The Spot" is all set to become a hot one.


The proposed light rail route you can see here.

Regional unemployment rises

Unemployment rises in regional Australia

The ABS released its Detailed Labour Force figures for the month of March 2015 yesterday which showed that regional unemployment is rising in Australia.

The "Rest of State" figures have been suggesting for some time that the numbers seeking employment have been increasing.

Notably the rise in unemployment has been more substantial in regional New South Wales and Queensland than has been the case in Victoria.

Mining jobs in decline

Drilling down to the regional level suggests that one of the key drivers of this trend has been the collapse in coal prices through what has been a terribly tough time for the bulk commodities index.

As at March 2015 the survey recorded 17,000 unemployed in the Hunter Valley (ex-Newcastle) up from very low levels in 2012 for a regional unemployment rate of 12.8 per cent.

In Queensland a number of regions have also recorded rising unemployment.

Even in the larger centres such as Mackay (8,900 unemployed for an unemployment rate of 9 per cent) and Townsville (11,400 unemployed for an unemployment rate of 9.2 per cent) the trend is up considerably since the mining investment boom passed its peak.

Conversely Queensland's popular tourism regions appear to be thriving, the lower dollar helping to drive an impressive rebound in the sector.