How Crown’s New Skyscraper Explains the Market

How Crown’s New Skyscraper Explains the Market

It’s a big week for Aussie stocks.

I’m not much of a horse racing fan, but we’re basically coming around the bend and into the last straight for the earnings reporting season.

Things have gone smoothly until now. 48% of the companies that have reported earnings so far have beaten their estimates. What’s more, profits and dividends look strong.

One stock that caught my eye was Goodman Group [ASX:GMG]. The Age reported over the weekend that it plans to extend its warehouse to cater for booming logistics demand from e-commerce.

However, land values and rents are high in the areas they need to build. The solution? Go higher by building on top of the existing warehouse.

I’ve reported previously on the same thing happening in New York. It’s another example of how property values can keep rising where this type of development happens.

If you can draw more income from the same amount of land, that can only capitalise into the selling price.

In order to capitalise into the selling price, you need to be able to get financing for a development.

That’s not a problem for Goodman Group, but is proving somewhat harder for Crown Resorts Ltd [ASX:CWN].

It has plans in place to develop a luxury hotel and apartment complex in Melbourne. This is a major project — it would be the tallest tower in Melbourne if built.

However, Crown says that it is struggling to find a development partner around the residential component of the project. That’s presumably because of the fear of apartment oversupply in the city.

Crown is supposed to have the project underway by February. If the project gets pulled, we can assume the property and credit cycle is finally weakening. Conversely, if it goes ahead, perhaps we can all keep dancing a little while longer.

Or maybe the finance team at Crown could give financial services company ING a call. The Australian reports ING has raised $1 billion via an Aussie dollar-covered bond issue. The suggestion is that they’re going after the market share of the Big Four Aussie banks while they remain under pressure.

That’s a familiar theme if you’ve been reading The Daily Reckoning Australia for a while. But the suggestion of an Aussie property ‘credit crunch’, however much discussed, has yet to come to pass.

Much of what happens from here will, of course, depend on China. The Financial Times says Beijing continues to order its state-run banks to lend to infrastructure projects and exporters.

We’ll have to see how this shows up in the numbers. But they’re already looking good. New loans were up 75% in July from the same time last year.

One wonders how the market psychology will go if the China-US trade negotiations take a positive turn. We could have a firing US and resurging China on the cards.

However, we can’t base an investment plan on wishful thinking. We tread cautiously forward one step at a time.

Overall, nothing I’m seeing suggests changing the basic investment script I’ve advocated since last year: scooping up as many quality stocks as you can get your hands on.

In fact, we just received another bullish signal from the US. The US Bureau of Economic Analysis revised its data on American saving habits. It turns out Americans have been saving a lot more money than anyone previously thought.

This is important. It puts a skewer through the notion that the US consumer is weighed down with debts and largely tapped out. All told, consumer spending can still lift from here.

One reason given for the high savings rate is that the GFC scarred many. Its psychological effect is proving as big as the financial toll.

I read an article the other day that began by suggesting the GFC is still fresh on everyone’s mind. Maybe it is. But it was also 10 years ago. Factually speaking, big crashes are relatively rare in market history.

Perhaps this is one reason this bull market has gone on for so long. This whole time, investors have mistrusted it, holding back their money until they can’t stand it anymore and jump back in.

After all, anyone who’s held US stocks over this time should’ve made a killing. And human nature being what it is, they won’t be shy about telling everyone they know about it.

This should slowly draw the final remaining skeptics, doomsters and bears back into the market.

We’re not at that point yet. The positive message I put out (and the investment opportunities that spring from it) are not resonating with everyone.

In any case, I take comfort from this dynamic. If it was the other way around, I’d be worried that a market peak was closer than it appears to be right now.

Regards,

Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia