Time for a payrise

Steady Eddie

Job ads were up +1.5 per cent again in November 2017, following on from a +1.5 per cent gain in October, according to ANZ Research. 

Total job ads are now +12.1 per cent higher than a year ago at 172,395, the highest level in nearly 6½ years.

Unemployment appears set to fall further back towards 5 per cent, although the official monthly statistics don't always get there in a straight line.

Businesses are just starting to report that it's harder to find labour, and Reserve Bank liaison has found that firms in certain pockets are beginning to bid up wages. 

Clear improvements, then, and the worm seems to be turning for wages growth.

Gross profits have soared by +27 per cent over the past year to a record high of $319 billion, following the fortunes of the mining sector, while business conditions are at the best level in 20 years. 

Wages and salaries rose by +1.1 per cent in the September quarter, and the June quarter's result was revised all the way up to +1.7 per cent, so there are signs of life there too. 

Inventories were mildly positive, so it looks as though the economy grew by about +3 per cent over the year to September, with the National Accounts due to be released on Wednesday.

The theme of steady improvement continues.

There's been much talk of mortgage stress, but if the labour market keeps tightening in this manner then lower unemployment and rising wages will probably reduce instances of arrears.

It will be very interesting to see tomorrow's retail figures, as there have been signs of downwards pressure on retail prices, with Amazon now waiting in the wings with discounts aplenty.

Nothing to lose

Low-hanging fruit

With the advent of home computers in the 1980s, I became extraordinarily excited by cassette computer games, both writing and playing them.

At junior school age we had an Amstrad PC at home, and countless hours were whiled away playing even the most obscure of games.

Except for one. 

There was a truly dire game named 'Fruit Machine' by Amsoft, which would surely have to be one of the most pointless computer games ever written (with the possible exception of a game I wrote years later to mimic the National Lottery - it turned out that the odds of winning the lotto, like the game itself, were really bad). 

'Fruit Machine' took seemingly forever to load, and essentially involved spinning three reels and hoping you got three symbols (bells, pound symbols, lemons, or some other ill-defined fruit sprite) the same in a row. 

In fairness, there were some other 'features' such as hold and nudge, which could help you to, erm, get three reels in a row the same, and if you wee successful the screen flashed and buzzed a bit. 

That, literally, was it! 

Oh, and if you got to the conclusion of the game without smashing the computer screen borne of abject frustration, you got to put your name - or more commonly a lewd word - up on a clunky scoreboard at the end. 

In later life, of course, I discovered that playing poker machines, or 'fruities' as we called them in England, could actually be quite exciting, but only if there was real money to be won or lost. 

It's a similar deal with electronic computer roulette on aircraft entertainment systems - even on the most tedious of long-haul flights I'd rather stare at the floor or scowl disapprovingly at the fractious parents of disobedient children than sit there aimlessly spinning an electronic wheel.

Unless, that is, there's an option to swipe a Mastercard, in which case...well, I still wouldn't, but I can at least understand why people would do it.

Actions speak louder than words

When it comes to financial markets, it can pay to watch what people do, rather than what they say.

The legendary fund manager Peter Lynch once said:

"There's no better tipoff to the probable success of a stock than that people in the company are putting their own money into it." 

Lynch implies here that you should watch Director share dealings closely, both buying and selling. 

For if insiders are buying enthusiastically with meaningful amounts of their own cash there's a fair chance that a company has better than average prospects, at least over the short to medium term (and vice-versa). 

In other words, follow the smart money, though director dealings should only ever form one piece of information in an investment decision.

Where are the customers' yachts?

Studies by Morningstar have found that many fund managers do not invest themselves in the funds that they manage for clients. 

Personally, I'd be extremely reluctant to invest in something that was being sold to me if the person doing the selling was not prepared to be heavily invested themselves. 

If the chef doesn't eat the cooking, maybe it's a restaurant you shouldn't eat at - after all, they should know better than anyone if the food is bad!

Advisors should have interests that are aligned with their clients; be very wary if they don't.

Running the risk

Epistemologist Nassim Nicholas Taleb said:

"If you do not take risks for your ideas, you are nothing. Nothing."

Taleb loves to be abrasive and is extremely critical of those with no 'skin in the game', seeking recognition, prizes, or honours for the views they air, but never actually acting on them.

At the other and most extreme end of the scale, some are even prepared to die for their views. 

The 17th Century philosopher John Locke said:

"I have always thought the actions of men to be the best interpreters of their thoughts".

Very true, even all these centuries later.

Seemingly everyone has opinions on financial markets. But many have no skin in the game, in which case they might just as well be spinning the three reels of Amsoft's 'Fruit Machine' (and I've got a cassette version going spare if anyone wants it!). 

Big day at the office

Office space

Allaying fears of a construction downturn in Australia, the value of building jobs approved has surged to its highest ever level. 

This has partly occurred because of an apparent soft landing for residential approvals. 

But it's also due to a record surge in non-residential building approved.

Huge numbers!

The boom has been driven by some major office projects, commercial buildings, factories, warehouses, and other industrial buildings.

Melbourne blitzing it

The building bonanza was initially driven by Sydney, but now Melbourne looks set to take over the mantle.

Across the past few months, Melbourne has seen a spate of major office projects approved as the population soars in the Victorian capital.

Despite the potential shortage of some types of office space, there have been notable concerns about unsustainable office asset values and significant yield compression.

But for the time being at least, prospective developers don't appear to be too bothered.  

With the state government's stamp duty coffers overflowing, Sydney could yet retake the lead in the non-residential building race, in the harbour city's quest for full employment.

It was announced in that past week that $2.3 billion would be earmarked for the demolition and rebuilding of two sports venues in Sydney, namely the footie stadium at Moore Park and the soon-to-be-former Olympic stadium at Homebush.

The Olympics was only held in Sydney in 2000, so it's not exactly been a long time between drinks for Homebush stadia.

Even the short-lived convention & exhibition centre at Darling Harbour lasted longer, from the 1988 bicentennial until its recent demolition and rebuild.

The nearby Sydney Entertainment Centre made it from 1983 to 2016 before it was demolished.

Erase/replace

An important point often overlooked in construction forecasts is how soon assets can be deemed obsolete, even in developed countries such as Australia.

It's one possible explanation for the resilience of the iron ore price, with the spot at the highest level in nearly 3 months, despite a massive ramp up in supply (today the price is above $70/tonne, up from just $38.30 in December 2015!).

As China urbanised, in addition to its new roads, bridges, ports, and other infrastructure, it built millions of new apartments (including most infamously the dozens of vast apartment towers at Ordos Kangbashi from 2003) leading to fears of an unquenchable oversupply.

But Ordos is filling up as planned, many of China's apartments are now approaching two decades old, and will soon need to be replaced.

Stock obsolescence is rarely well accounted for in predictions of housing oversupply in Australia too, for that matter. 

Sky's the limit

Limitless

The Reserve Bank of Australia (RBA) released its Financial Aggregates figures for October 2017, which showed housing credit expanding by +6.5 per cent over the past 12 months.

Investor credit is slowing, but total housing credit growth remained higher than a year earlier, when it was +6.4 per cent.

Total housing credit broke through $1.7 trillion on the strength in owner-occupier lending. 

$60 billion of loans have now been reclassified from investor to owner-occupier. 

Personal credit contracted by -0.9 per cent over the year, while annual business credit growth was steady at +4 per cent.

Know your limits

APRA also released its monthly banking statistics, which revealed a similar trend, with the monthly result showing considerably faster growth in owner-occupier loans (+0.6 per cent) than investment lending (+0.15 per cent). 

Comparing the aggregates suggests that non-banks continue to garner market share. 

Westpac has been offering discounted investor loans of late, and took the opportunity to grow its investment loans books further in the month (it already has the largest mortgage book pertaining to investors). 

Indeed, not only is new interest-only lending now well below the proposed regulatory cap, all of the major banks are now seeing investor credit growing at way below the 10 per cent annual speed limit. 

These statistics show that there is potentially plenty of scope for banks to incentivise faster investor lending in 2018, particularly Commonwealth Bank and ANZ Bank.

Oh, and there's a Royal Commission to follow!

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Perth bottoms out

Perth bottoms

Sydney unit values rose to an all-time high this month, up by +0.4 per cent over the November quarter to $781,528, to be +5 per cent higher than a year ago. 

Om the other hand, Sydney's median house price was -2.1 per cent lower over the quarter at $1,068,077. 

Research from Cameron Kusher of CoreLogic showed that the decline the median house price was driven by the premium sector of the Sydney market, as the heat came out of buying, roughly from the end of July.

CoreLogic reported that rental yields have started to lift in Sydney, with rents rising nationally by +2.8 per cent over the past year.

Source: CoreLogic

CoreLogic expects rental yields to drift higher forthwith.

In Melbourne house and unit prices are at all-time highs, and are still rising at a fair lick.

Brisbane's market has been patchy.

The median house price in the Queensland capital was +3.2 per cent higher over the year, with unit values down modestly by -1.2 per cent. 

After years of flat prices, Hobart saw +11.5 per cent growth in its dwelling prices over the year.

And with approvals only just beginning to respond, price gains look set to continue for a while yet.

Finally, the bottom is in for Perth. 

Having dropped by about -10.8 per cent from the peak in 2014, dwelling values in Perth have now recorded three consecutive monthly increases.

Moreover, Tim Lawless of CoreLogic noted a range of indicators moving into positive territory for Perth, from shorter time on market, to rising settlement volumes, to declining stock on market. 

In Darwin, however, prices are now down by -21 per cent from the peak, and with prices down over the past month, quarter, and year, there is no sign of the market levelling out.

Finally, around the traps price growth was relatively weaker across regional Australia, but Geelong (+11 per cent) and Newcastle (+13 per cent) have been two obvious standouts over the past year, with the Hunter Valley (+7 per cent) also recovering nicely.

Great expectations

Thumbs up for capex

Excellent news as actual capital investment increased to an estimated $29.4 billion in the third quarter, higher than in the June quarter and +2.3 per cent higher than a year ago.

Mining investment continues to decline, but the bottom is now almost in, and the drag on the economy will soon be no longer after half a decade.

Manufacturing investment remains fairly flat, but importantly capex in the much larger range of other selected industries (services etc.) is now up by 28 per cent since the 2013 nadir and is rising fast.

That's hugely significant for the economy, and will put a smile on Governor Lowe's face.

The result was especially positive for Queensland, with rising investment driven by retail, telcos, utilities, transport, and warehousing, as we finally emerge from the resources downturn.

But the best aspect of all in this release was the expected investment for 2017-18, with the estimate rising to $108.9 billion, up by +5.6 per cent from the preceding quarter. 

Investment in services industries is now clearly cranking up, with the expected investment in 'other selected industries' some +13.3 per cent higher than a year ago at $66.5 billion.

Even manufacturing investment is expected to increase solidly going forward. 

The Reserve Bank will quietly be very pleased with these figures, with increasing investment in services businesses set to more than offset any downturn in housing construction. 

Bagholder

Investors holding the bag

Oh dear, another so-termed "A1" business of yesteryear goes into voluntary administration, with Deloitte called in to deliver the administrator services. 

Bag business Oroton has become the next in a growing conga line of Australian retailers to collapse, and to be suspended from official quotation.

The group reported a loss of more than $14 million for the last financial year, so it probably doesn't come as a great surprise to the market.

This is sad news.

Oroton is one of Australia's most established retail brands, being founded nearly 80 years ago. 

Stock pickers were strongly recommending investing in these businesses about 7 or 8 years ago, but $1 million invested even after the financial crisis stock market crash would today be worth...

Incredible to think that "A1" businesses - by definition the best investments money can buy, according to the experts - can see investors lose all of their money. 

It boggles the mind to think how risky some of the lower conviction plays must be.

Unfortunately so many retail stocks face the same outcome over the years ahead.

We've already recently seen a range of retail collapses, from Pumpkin Patch to Rhodes & Beckett, Marcs, David Lawrence, Oroton, and Herringbone.

And that's just in the fashion sector.

Elsewhere Foot Locker recently saw it's share price cratering on an epic earnings miss. 

And now Amazon's arrival in Australia will sound the death knell for even more retail stocks. 

Stock market investors in the retail sector are facing absolute carnage, with the retailer now deflator turning negative. 

Bizarrely, to me at least, some commentators are calling for mythical rate hikes!

Yes, you read that right: retail prices are falling, but we're apparently going to see hikes.

No financial advice is ever to be given on a blog site of course, but those wanting to keep that free spending money rolling in over the festive period and beyond will just keep on fading those rate hike calls!