Be on guard for a veritable invasion of economic data this week! Whether that data is already ‘priced in’ the market is a question I’ll take up in a second. But the data alone should be worth the wait. Today, for example, the Housing Industry Association will report on new home sales for June. May’s figures were down 4.3% from April. But ‘experts’ say June will be better. Stay tuned.
Building permits data and private sector credit data come out on Thursday. You can expect more confirmation that Australia is in the throes of a passionate — and frankly indiscrete and unbecoming — love affair with residential property. Throwing extravagant amounts of money (or mortgage credit) at houses is something the country excels at.
But let’s not forget digging holes. We’re good at that too. The Australian Bureau of Statistics will publish export prices for the June quarter on Thursday. Those prices were higher than expected in the first quarter. But the second quarter will have to include the troubling slump in iron ore prices. That is the nation’s export ‘bread winner’. Bring home the bacon, bread winner. Bring it home.
Is all of this pointless? ‘If it’s in the news, it’s in the price,’ goes the old phrase. Last week, I engaged in a friendly debate with Cycles, Trends, and Forecasts editor Phil Anderson over whether it’s really true that a security’s price represents all that is currently known by the market at any given time.
Phil’s contention — and he has a lot of company on this point — is that the chart of a stock price is the visual expression of everything the market knows. I’ll come back to that point at the end of today’s episode. But keep it in mind when you look at the chart below.
No Invasion in this price
click to enlarge
If Indonesia traded as a stock, it would look like the chart above. That’s the Market Vectors Indonesia Index Exchange Traded Fund (NYSEARCA:IDX). It’s an index of 53 companies that are either headquartered or earn 50% of their revenue in Indonesia. The fund has $242 million in assets. Its main holdings are what you’d expect from a country fund: banks, a large telecom, a basic materials stock (cement), and some conglomerates with exposure to retail stocks. But what about the chart?
Indonesia’s presidential elections took place on Wednesday, July 9th. The ‘reformer’ Joko Widodo (Jokowi) beat the ‘nationalist’ Prabowo Subianto. Jokowi is due to be sworn in October 20th. As the leader of the world’s fourth-most-populous country, let’s hope he builds a good working relationship with Tony Abbott. The last 10 months haven’t exactly been smooth sailing between the countries, with Aussie naval vessels breaching Indonesian territorial waters.
But yes, the chart. The index began a rally in late June. In early July — still before the election — the 10-day moving average crossed over the 35-day moving average. The technical momentum was bullish. You can also see that the relative strength index (RSI) dipped to nearly 30 in late June. A reading of 30 or below usually suggests a stock is ‘over sold’.
On that basis, the chart predicted the winner of the election before it even happened. The ‘price’ of Indonesia went up as the market expressed its collective vote of confidence in the reformer over the nationalist. Price action, then, does tell you something about what people are thinking.
Where I get off the boat, however, is the belief that every objective fact affects the price of every security and is instantly ‘priced in’ to every security. Not all facts matter equally. Or more to the point, not all facts (or news stories) affect the intrinsic value of a business or its ability to grow earnings for shareholders.
Figuring out which facts are more important than others is the job of a good analyst. Figuring out what those facts actually mean is the job of really good analyst. As a general rule, it’s probably true that if you’re reading about something in the news for the first time, it may already be too late to profit from it. Somebody else already knew. And that somebody has already done something with that information.
But what about objective facts that don’t have a clear meaning? How can you price in something you don’t fully understand? How can you price in something you can’t understand because the situation is still too fluid? Is it even possible?
Let’s take a concrete example. Take China’s live-fire naval exercises in the Gulf of Tonkin in the South China Sea this week. The People’s Liberation Army Navy is also holding naval drills in the East China Sea, near the disputed and uninhabited Senkaku Islands (the dispute is with Japan, but also, by extension, with the US and even Australia via treaty obligations). The drills have blocked off a large chunk of commercial air space in the region.
Maybe it’s a show of strength after the recent ‘Rim of the Pacific’ exercises hosted by the US near Hawaii. Maybe it’s intended for domestic consumption. Maybe it’s a routine drill. And maybe it’s a trial-run for naval operations to seize control of disputed waters and establish new ‘facts on the ground’.
Maybe it’s all of these things. Or none of them. My point is that, if a given set of facts is susceptible to different (and often quite different) interpretations, then it’s only reflected in the price as confusion. Not as a fact. In this case, the facts are pretty murky to being with.
Australian academics Alan Dupont and Christopher Baker have written an article on the matter to explain what’s at stake for Australia. It’s called East Asia’s Maritime Disputes: Fishing in Troubled Waters. As you might guess from the title, the authors conclude that China’s moves are as much about food security as they are national security.
Or put another way, because the Communist Party of China values political stability and social harmony, a well-fed populace is a matter of national security. They write that (emphasis added is mine):
‘In Chinese eyes, the rich fishing grounds of the East and South China Seas are as critical to China’s future food security as oil and gas are to its energy future. With wild fish stocks in decline and demand rising, fish has become a strategic commodity to be protected and defended, if necessary, by force … Beijing is using its fishing and paramilitary fleets for geopolitical purposes by pursuing a strategy of ‘fish, protect, contest, and occupy—designed to reinforce its sovereignty and resource claims over contested islands in the Western Pacific and coerce other claimants into compliance, and acceptance, of China’s position. If this policy does not reverse or moderate—and there are few signs that it will—the consequences could endanger regional stability and even China’s own long-term security.’
Whether its fish, fuel, or plain old geopolitical power, the stakes are rising in Asia Pacific. Tomorrow, when Australia’s Defence Department releases an interim discussion paper, we’ll know what the ‘establishment’ thinkers would like to do. The big issue is whether to build or buy the next generation of submarines to replace the fleet of six Collins-class boats.
But don’t rule out the F35-B! Finance Minister Mathias Cormann travelled to Fort Worth, Texas, last week to see Australia’s first two F35 Joint Strike Fighters (JSFs) roll off the assembly line at Lockheed Martin. They are the first of dozens.
However, the two planes the Minister saw in Texas last week were the F35-A version of the plane. That’s a plane designed to take off and land in a conventional way. Tony Abbott wants to look at the F35-B. THAT plane — operated in the US by the Marine Corps — is a short-take off and vertical landing variation of the F35-A.
Think of it as ‘jump jet’ and it makes more sense. It also, in theory, means that with a few expensive modifications, Australia’s Canberra-class Landing Helicopter Docks (LHDs) could be turned into aircraft carriers. Presto change-o. Force projection in South China Sea!
Now, before you get all excited, Australia only has two LHDs. The first, Canberra, is scheduled for commissioning later this year. The second, Adelaide, is still under construction. And although it’s theoretically possible to land an F35-B on either of the ships, the ships aren’t yet kitted out to store the fuel, munitions, and crews required for the permanent presence of ‘jump jets’.
What’s more, critics of the F35-B say that version of the JSF carries less fuel than the F35-A. For that reason, it can’t carry as many weapons, has a shorter range, and can spend less time over a target than the conventional version. As I noted in my newsletter on the plane, the whole point of the JSF is to identify and destroy a target from long-distance before they even know you’re coming. Shorter range doesn’t help with that goal.
In a future Daily Reckoning, I’ll delve into the upcoming defence White Paper and the debate over submarines. Should we spend billions of dollars and make them here? Or spend billions of dollars and buy them from Europe or Japan? Stay tuned.
For the rest of the week, I’ll hand over to Greg Canavan. He’ll have a close look at the deluge of data on its way and try to make out what it means for you. It might not mean anything. Traditional ‘fundamentals’ haven’t worried investors for a while now. Their only concern is what’s coming out of Janet Yellen’s mouth.
On that front, the Fed circus returns to town on Tuesday US time with a two day meeting to ‘decide’ what to do on interest rates. I can hardly wait…
For The Daily Reckoning Australia