Triple A Partners Is Back…With Some Thoughts On The Current Markets

We had a bit of a business re-structure, moved offices, and changed phone and fax numbers and email addresses. We also changed our web address which is now www.aaapartners.com.au.

We proudly represent and consult to Kapstream Capital, Fidante Partners, and Ramius Alternative Solutions. We look to be adding a number of other clients in the near future.

We are again producing our monthly newsletter so please feel free to recommend us or tell me to get lost by UNSUBSCRIBING!

There are some things that I am very clear about?

Yes, there are some things in the markets that I am quite clear about and others where I just don’t know. But everyone’s an expert these days, right? The funny thing about that is, that a lot of people miss the basics.

Take the Australian dollar. Currently sitting just under 1.04. It seems as if everybody wants it to drop from current levels. Exporters, tourist industry operators. So, one thing I am pretty clear on is that it isn’t going to decline in a meaningful way. In fact, more than likely, it’s going to get stronger. The RBA cash rate is 3.5% versus next-to-nothing in the rest of the developed world. Investors will take the currency-risk to get Aussie-based income. Westpac and ANZ are predicting two rate-cuts before the end of the year. If we are in a risk-on environment, i.e. a shift to buy assets, the level of confidence may make the RBA reluctant to cut. Irrespective, on two rate-cuts the official cash rate will be 3%, still significantly higher than most developed countries. The risk is rate rises in the US or Europe, which are unlikely to happen for some time.

I’m also an old chartist. One thing I have learnt over the years is that you form an opinion around fundamentals, and then look at the charts. First, looking at price-movement history puts your view in the frame. You visualise the price movement and get a feel for the momentum. Second, some simple indicators will confirm your fundamental view. Moving average crossovers, Relative Strength Indicators, and just simple downtrend lines. Recently, a leading chartist, Regina Meani, pointed out that the AUD had broken a very long downtrend line. This break was supporting a number of chartists whose upside projections are suggesting $1.30 and as high as $1.70. These are big calls but the charts support my fundamental interest-rate view. I can’t say if the market will get that high but I am convinced the trend is up and will stay that way.

My second clear thought is that Australian real estate will continue to decline but it won’t be a rout. We hear a lot about offshore hedge funds shorting Aussie banks off the back of a collapsing housing market. Yes, I believe that residential real estate will decline, but it will be a slow burn. Over the years I’ve seen quite a number of real estate booms. They are cheap money leveraged fueled. We obviously haven’t got that at the moment. Also there is a quite well set in negative sentiment. Eastern seaboard financial services are really in the doldrums and when you have financial institution layoffs, you see steady downward pressure on real estate.

I catch up with a few former colleagues who have been out of work for the first time in many years. A number of them are concerned enough to put their houses on the market. I also look at charts comparing our residential values with the US,UK, Europe and Asia. Where the developed world has seen significant declines, the Australian market looks to have some way to go. Yes, the comparison is tenuous, based on the fact that our lending was arguably more restrained than the US and to a lesser degree the UK.

Some years ago, I sat in a presentation with the ANZ Chief Strategist. He pointed out that the bank was not concerned with the housing market. One rationale being that 38% of homeowners did not have a mortgage. Another reason why I don’t think it will be a rout, is that every time a publication, and it is nearly daily, announces that property is down and it’s a great time to buy, punters come out of the woodwork and buy. I guess I find it strange because I work in the markets and we see price up, price down, price trends, price reverses, all in day-to-day timeframes. The man in the street seems to have a mentality that because I can buy it cheaper today versus yesterday, it must be good value. Of concern is the house-price to income ratio. The medium house-price to household income is over four times versus the average over the nineties at slightly over two times. This is used as a measure of affordability and clearly there is room to move. The flip side of this argument is interest rates being significantly lower. Our unemployment rate is still very low, hovering above 5%. I think this is somewhat false. In financial services, we all seem to adjust to lower profitability by accepting lower income. I believe this adds to the unaffordability of real estate. But again, a slow burn down. This whole process could take quite a few years. My message to my kids is don’t jump into home ownership straight away, wait awhile.

There’s a whole bunch of other things that I think about that I’m not so clear on. Why is the German stock market up 40% year to date? Is it too late to buy Apple? Would you short it? Will I buy an iPhone 5 day one? Stupid question. I am very clear on that last one.