The last successful invasion of England took place at the Battle of Hasting in 1066. William the Conqueror, a Norman, brought his French language and toppled the natives and their King. We only mention it because both the S&P 500 and gold closed at the same level after Monday trading in New York: 1066.
It probably means nothing. But then again, there is a nice historical resonance, isn’t there? Financial markets are making a lot of history with their volatility and excess. And the world’s currency landscape is changing fundamentally as gold is remonetised and debt backs the break of vulnerable nation states.
It’s quickly becoming a market where you’re worried more about the preservation of your capital rather than capital appreciation or even dividends. Late last night we read the latest monthly report from Australian Wealth Gameplan, edited by Kris Sayce. Kris has come up with a way to hedge against the falling Aussie dollar and listed all the collateral damage that would occur if the currency falls more.
Kris normally chases beaten down blue chips that pay dividends. If the market keeps going this way, there may be quite a few more beaten down stocks. But until recently, valuations were pretty rich. What’s more, companies are hoarding more cash and paying out less.
“Lean times for investors on dividends,” reports George Leonidis in today’s Australian Financial Review. Australian investors will lose $4 billion in dividend income this year, according to research from Macquarie Securities. Macquarie analyst Neale Morris says, “Company management are being very cautious. They have just come through a very cathartic event. They are trying to retain as much cash as possible just in case bank lending disappears again.”
Just in case.
Now one medical definition of ‘cathartic’, according to dictionary.com is “An agent for purging the bowels, especially a laxative.” This raises an interesting question. Have the bowels of the banking system been purged of bad debt or not? Or does the financial sector merely feel better without any fundamental improvement…in its bowels?
We’d say there is still a large debt overhang in the banking sector. Granted, according to official Aussie sources, residential and commercial real estate loan portfolios are performing well. But globally – and Australia was certainly not immune from global trouble last time around – there are plenty of private and public balance sheets that are pretty stuffed up.
Speaking of which, how about some news which should terrify anyone who owns a significant amount of U.S. dollar-denominated assets. The American Treasury Secretary Tim Geithner has said the U.S. government “will never” lose its triple A credit rating. As one of our friends back in the States wrote, “Never is a very long time.”
One thing we know for certain is that all paper currencies eventually reach their intrinsic worth. It’s also true that the more vocal monetary officials are about not devaluing or preserving the purchasing power of a currency, the closer they are to doing exactly the opposite.
The greenback is enjoying a nice flight-to-liquidity rally. Investors prefer liquidity now over return. But that doesn’t mean the buck is strong or safe. It’s neither. It’s notable that gold was up $13.20 in trading today and that North American listed-gold stocks are moving too.
Last week Slipstream Trader analyst Murray Dawes went “long” a couple of Aussie blue-chip gold stocks. He was worried he might be a bit early. But his signals fired and he pulled the trigger on the trades. This morning he sends this chart over of the Australian Gold Composite Index. It looks fairly bullish, although we’ll l leave the analysis to the traders.
Still, it’s hard for us to shake our concern that other commodities, especially base metals, have gone too far too fast on the easy money express. The rally since last March has been a huge boon for base metal prices and some base metal stocks. We expressed this worry to Diggers and Drillers editor Alex Cowie. He’d just recommended a copper stock in his latest report.
Alex replied that, “My view is that the resource sector is oversold after a very rough month. The key issue driving mining stocks down is risk aversion driven by fears of a European sovereign debt crisis. The anxiety in markets is that the Greek tragedy may lead to what I like to think of as ‘the Ouzo effect’.”
“This is where we see contagion pass across to the other European countries with bad balance sheets like Portugal, Italy and Spain, the so-called ‘PIGS’. If this situation plays out slowly, and investors get little reassurance from the ‘PIGS’, then high risk assets such as mining equities may offer even better buying opportunities in coming weeks. It all hangs off the European story at the moment.
“Mining stocks are doing well in the market today despite a flat Friday session in the US markets, so investors may be seeing opportunities in front of them already. Although the commodity markets are still getting a hiding with risk aversion driving the US dollar up, I believe that the supply and demand story should keep prices trucking higher over the year and take resource stocks along with them. This week or two looks like a crossroads in the market to me. Either the debt story passes like Dubai did, or it festers.”
Tomorrow? More on the festering and the reaction of resource stocks.
Dan Denning
for The Daily Reckoning Australia
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