Before we get started, if you missed our conversation about gold stocks and gold speculations last week, have a read of Doug Casey’s thoughts on the subject last week, to which we referred in our article. Doug is a rich source of resource wisdom and was the source for some of our observations last week. A few readers wrote in suggesting we ripped Doug off without giving him credit. As Doug is a friend, we wouldn’t rip him off but should have linked back to his site last week.
And on to today…Shouldn’t this be an interesting week? “Markets have gone up too much, too soon, too fast,” says Nouriel Roubini. The ASX 200 fell nearly 100 points on Friday, or 2.11%. This echoed the previous day’s trading in New York.
Friday wasn’t so bad on the Dow. But the jobs report released by the U.S. Department of Labor showed 263,000 lost jobs in America and an official unemployment rate of 9.8%.
That rate is undoubtedly much higher, once you figure in people who’ve given up looking for work but are no longer included in the survey. In fact, the “U-6” figure kept by the Department measures labour “underutilisation” in the economy. And according to that figure, U.S. unemployment is at 17%, nearly twice the figure quoted on Friday.
There have been jobless recoveries from recession before. But you still have to wonder how there can be such a big difference between the stark news in the job market and the behaviour of the stock market. True, economists will tell you that jobs are the last thing to recover from a recession. Businesses don’t hire until they are sure everything is in the clear.
And we are often told that stocks lead the economy. The market has priced in a recovery which the labor market will confirm…eventually. At least that’s the conventional wisdom. It’s reassuring.
But the unconventional wisdom is probably more correct. The unconventional wisdom is that low interest rates (near zero in the U.S.) have driven people out of cash and forced them into higher-yielding and often speculative assets. The biggest obvious beneficiaries of low rates and credit facilities has been financial sector stocks themselves (and presumably their options-laden directors).
The question this week is whether there is any momentum left in that trade. Can easy central bank policies keep stocks going higher? Or has the trade exhausted itself? And if it has, what happens next?
Well, one answer is that you may again see a mini-rally in the U.S. dollar and a fall in common stocks and commodities (oil and gold especially). We’d expect this to a cyclical dollar rally. In the bigger picture (a secular trend) the dollar is toast. But markets do not move in linear fashion. They give and they take. And the dollar may be due.
If we do get a greenback rally, this may pave the way for a higher Aussie gold price. The strength of the Aussie dollar has capped the gold price here in Australia. But we reckon you may get a nice move in the Aussie gold price if the greenback rallies. The question is whether U.S. dollar strength takes gold down too, neutralising the benefit of the weaker Aussie.
How do you sort out the relationship between two currencies, one commodity, and many stocks? It all sounds complicated. That’s why we’ve added another mind to the trading desk here at Daily Reckoning Australia headquarters on Fitzroy Street. Murray Dawes is at the helm of the trading desk today. We’ll keep you posted on what he has to say.
One question we’ll have for him: what the heck should investors do with Woodside Petroleum (ASX:WPL)? Dow Jones newswires is reporting that over the weekend, Federal Resources and Energy Minister Martin Ferguson awarded permits to explore ten new off-shore oil and gas blocks in the Carnarvon Basin off the Northwest coast of Australia.
Woodside is one of the firms that won a permit. Ferguson said that, “The additional investment in Australia’s offshore petroleum exploration sector not only offers exciting potential for petroleum discovery but will ultimately help to further develop our petroleum resource and underpin our security of energy supply,”
The security of Australia’s energy supply is exactly the issue our special situations analyst Mike Graham took up in his research about Australia’s oil industry. You can find that complete report here. The findings may surprise you.
With respect to Woodside, there are not too many better blue-chip energy stocks in Australia. Unlike the smaller explorers though, the blue chips are valued differently. Adding to their reserves is crucial, so that the company is not inexorably depleting its assets. But the energy blue chips like Woodside are well known by analysts and they are well-traded by institutions.
This, in our mind, makes Woodside a perfect candidate for a Slipstream trade. That is, if we were a full time trader, we’d be looking for a pattern in the stock chart to see where key levels of support and resistance were. But since we don’t run the trading desk, we’ll ask Murray and see what he says.
Today’s thought of the day from John Robb at Global Guerrillas, “The American ‘kleptocracy’ has run out of steam due to too much debt and is already in the midst of a perpetual depression. Why? The US middle class — faithful to the cult religion of free markets even while being taken for all they are worth via a 35 year process of substituting debt accumulation for income gains — is financially broken. If this is even remotely true: is the US headed for Privatopia and the viral spread of Global Guerrillas?”
Substitute “Australia” for “America” and it makes just as much sense, doesn’t it?
for The Daily Reckoning Australia