What we liked

  • The Dow Jones Industrial Average pushed past the 26000 mark for the first time on Wednesday this week. The US powerhouse is blistering ahead. The index has now gained 1000 points in just eight trading days making it one of the quickest gains in history. What has caused the run? In part some of this week’s gains have been driven by the fear of missing out. Investors are jumping on board like lemmings to ensure they don’t miss out on the spectacular gains.
  • Australia to become a cashless society by 2020. An article in the AFR this week highlighted the radical change that is occurring tipped to change the way we bank. Blockchain technology, Apple Pay and Paypal are disrupting the status quo, which means one-two days for a bank transfer is well out-dated. The New Payments Platform (NPP) which is backed by the RBA and 12 financial institutions will not only connect all our banks but it will enable secure 24/7 instantaneous payments. That means no more waiting for 1-2 days for a cross-bank transfers. It works like this: A bank customer will receive a PayID which can be a mobile number, email address or ABN which links to their bank account. Payments can be made via this PayID through the respective banking app. The benefit? Payments are instantaneous. No delays. Public holidays and weekends aren’t an issue. Transfers can be done instantly. The Government also plans to abolish the $100 bill followed by the $50. By 2020 all physical cash will be gone. Everyone benefits, except tax avoiders, drug dealers and criminals. At the moment the Canada, Sweden and the UK are most cashless societies in the world. In Canada 57% of payments are made using cashless methods. A report from Visa puts Sydney and Canberra among a group of nine cities leading the charge in changing and embracing digital payments.
  • ASIC has granted licences to equity crowd funding platforms such as Big Start, Billfolda, Birchal Financial Services, Equitise, Global Funding Partners, IQX Investment Services and On-Market Bookbuilds. These platforms will now be able to raise funds from the general public in exchange for an equity stake in the business. See our article on equity crowd funding. Now unlisted companies can raise capital that have less than $25 million in assets. It will open the doors for start-up entrepreneurs who require access capital to help build their businesses.
  • The Bank of America Merrill Lynch has released a report saying fund managers are increasingly bullish. Why wouldn’t they be? The US market is powering ahead and the world’s central banks are tightening. The report found that the average cash balances in fund manager portfolio’s was down 4.4% this month as most expect markets to peak in 2019 onwards. Hedge funds have also increased equity allotments to the highest level since 2006. Fund managers are all in and riding this bull market to the end.
  • Australian consumers are more confident than ever as households become more confident that the economy will pick up this year. The Westpac-Melbourne Institute Index of Consumer Sentiment rose 1.8% to 105.1 points in January which means there has been a big uptick in confidence on the economic outlook. Despite wages still being low and CPI weak, a rise in confidence is a good sign that the Australian economy is doing OK following the end of the mining boom. The cash rate is still expected to stay on 1.50% for the remainder of the year.

Market Indicators

What we didn’t like 

  • China and South Korea have caused a Bitcoin collapse. Authorities have ordered the closure of Bitcoin miners and clamped down on exchanges for the trading of cryptocurrencies in both countries. China is going full steam ahead to rid the country of Bitcoin. This is a major blow to the crypto world. It shows the world how much of a threat cryptocurrencies are to the financial stability and social order in China. The PBOC has issued a notice announcing it would be issuing its own digital version of the renminbi. China is largely responsible for cryptocurrency’s success after the Government put stringent controls on the Yuan and exporting money overseas. Bitcoin is down 20% to well under US$11k after South Korea too said it would ban the cryptocurrency. Ripple is down 40%.
  • One fund manager isn’t so convinced this equity boom will last for much longer. Vanguard have put the chance of US stock market correction now at 70%. The fund manager says a narrowing of the bond yield curve and overcooked US equity valuations are signs of an impending correction. The probability is 30% more than what it typically would be. But Vanguard isn’t pushing the panic button just yet and isn’t selling. It’s merely preparing itself for a significant downturn.
  • According to Barclays, the iron ore price is set for a massive correction. The bank sees iron ore collapsing from US$76.59 a tonne to US$50. The price has already dipper a little this week following steep increases in Chinese inventories. The bank says the reason for the sell-off will be due to a reduction in profitability in Chinese steel mills’ which will lower demand for iron to unprecedented levels. Iron ore hit bull market territory last month boosting earnings in the big iron ore miners such as RIO, BHP and FMG. With China clamping down on steel production over winter, the pullback looks inevitable. It spells bad news for our iron ore miners and resources stocks in general.
  • Chinese property buyers and developers in the Australian property market have vanished as property taxes and lending restrictions are starting to bite. This can be seen as both a positive and negative. A positive for our overheated property market that is only now starting to cool. A positive also for first home buyers who have been locked out of the property market for the last decade. But a negative for our economy. We’ve pretty much shot ourselves in the foot. With Chinese money pulling out and developers deciding not to proceeding with massive building projects, foreign investment will start to dry up. Some developers are now trying to tap into other Asian markets such as Indonesia. The bottom line is, foreign buyers won’t invest where they don’t feel welcome. The message the Government has sent to Chinese buyers has made them feel unwelcome. Money is now moving to places like UK and the US where there are no penalties or taxes.