Disclaimer: The content from The Daily Reckoning Australia’s global cast of characters is their own view and opinion. It is not to be taken as investment advice.
The problem inside Qantas
And so a new quarter begins in the financial world, just as my time here at The Daily Reckoning Australia winds down. One week to go!
This time next week, I’ll be penning the first official issue of my new service, Profit Watch.
You’ll not hear from me here again. I’m a bit wistful about that — I’ve been writing for the DR since 2012.
But the new gig is going to be fun, for both of us I hope.
It’s 100% free.
And hey, I get it right every now and again.
I’ve been pounding the table about oil going up all year, and it hit another high last week. We’re on track for now.
Analysing oil brings a bit of dilemma. It’s nice to make a correct forecast, but I wish it wasn’t so every time I fill up the car.
If you want a chance to get some of that expense back, scooping up a great junior oil stock right now could be a great way to go about it.
Oil is ‘only’ US$82.
That figure counts if you’re an American.
For us Aussies, oil is well over $100 a barrel now.
Go long oil stocks and avoid Qantas
A rising oil price is a cost to the economy. The only winners are stocks in the energy business and governments that live off oil cash.
However, it does show the point I’m trying to prove with the move to Profit Watch. Even when there’s bad news for the economy (high energy costs), there’s an opportunity to profit from it.
As above, look at oil stocks!
You can also consider shorting or avoiding businesses that are hurt by this situation.
On 1 June, I suggested oil could kill the Qantas rally.
I haven’t really checked in on this since.
Let’s take a look now.
At the close of business on 1 June, Qantas’s share price was $6.38.
It rallied to as high as $6.92 in August. It went on ex-dividend on 5 September.
It closed at $5.90 on Friday.
Nothing too dramatic so far.
My suggestion is to avoid Qantas, for now.
It’s not a short sale yet. Travel still looks okay as a sector, and Qantas is buying back stock.
That helps prop up the share price.
But it’s one to watch as the current oil dynamic plays out. If oil really surges, Qantas stock could get smoked!
And that’s only one idea.
Another is, of course, electric cars. I’ve said before that a higher oil price could incentivise people to switch away.
Every dollar rise in oil intensifies this dynamic.
This may not even be consumer-led. Governments in importing countries are going to push for this.
India is a case in point.
The fall in the currency over there is getting so bad that the government is throwing up tariffs.
India runs a trade deficit and a current account deficit. That puts the rupee in a very weak position when sentiment turns.
One of India’s biggest imports is oil.
This is exposing India’s underbelly right now.
The tariffs are designed to bring down the level of Indian imports and ease the pressure on the currency.
India needs to get rid of oil as much as it can over the long-term.
Tariffs are a short-term band-aid.
Reducing oil consumption is the real fix.
India makes for another interesting point right now.
Ride Aussie stocks as trade war subsides
The most notable thing about these Indian tariffs is the lack of interest.
Think about it.
When Trump suggested his American tariff policy, US stocks tanked.
When China retaliates, all we hear about is the ‘trade war’ and rebukes from all and sundry on the risk to the global economy.
India appears to get a free pass from the powers that be.
And just on the ‘trade war’, things have cooled down here, by the looks of it.
Reuters reports that China is now cutting tariffs. Average import tariffs on 1,500 products will be lowered from 10.5% to 7.8%.
China is appeasing the world here.
This suggests the Americans and Chinese are going to end up in a negotiated peace deal.
That’s good news for all of us.
This year, stock markets have been held back due to the fears surrounding this, especially here in Australia.
The dramatic rebound in BHP and Rio Tinto’s stock prices suggests the market is happy that the trade war is more rhetoric than a waiting calamity.
They’re up 11% and 13% respectively over the last month.
Don’t forget that BHP gets nearly a fifth of its earnings from its energy division. It’s another way to benefit from high oil prices.
Like I said, opportunities abound — all the time.