Shares to Keep Firing in 2018

Shares to Keep Firing in 2018

The Dow broke 25,000 points in US trading over night (our time). That’s another record for the history books. 2018 is sure getting off to a nice start.

The USA isn’t alone here. Over in the UK, the FTSE 100 just hit an all time high, and Japanese stocks are at level not seen in 27 years.

It’s easy to say the Aussie market will be up today, too. But the US gave a strong lead in the previous session and the ASX did basically nothing yesterday once we got to the close.

So let’s see. Apparently January has been the third worst month over the last decade in Australia, and the worst for US stocks.

It’s very easy to buy when there’s good news everywhere. However, that can often bite back.

After all, we’ve had a bit of a run up into this already…

Banking royal commission doesn’t faze US investors

Back in early December I made the case for a Christmas rally in Aussie stocks.

That wasn’t going out on much of a limb – historically December has been a winner in Australia.

The good news is that largely played out. The Aussie market has continue to nudge up, if not exactly shooting the lights out.

Can the rally keep going? I’m not smart enough to tell you what’s going to happen next week, but over time, for sure.

It depends largely on the banks and big miners mostly. Both look to have potential upside.

One bit of news today shows why, and I doubt if anyone else will point it out to you.

The Commonwealth Bank has just raised US$1.25 billion in the American credit markets. It’s a 30 year bond with a very low spread above the US Treasury bond rate.

That sounds like a mouthful. Think of it like this: cheap money!

You might recall last month I pointed out fellow big four bank nab raised a similar mountain of cash in the US at cheap rates too toward the end of the year.

This lower cost of funds can be passed on to Australian borrowers. And it appears to be happening right in front of us. Home loan rates have fallen to their lowest level since 1956, according to one report.

That’s one cost front for the banks are getting a tailwind on.

Other expenses are getting the chop too…

Housing and commodity prices showing strength

Last Friday came the news that the banks have been aggressively shutting down branches in regional areas. Nothing looks likely to stop this trend. That’s another cost going down.

A third is this. Staff cuts could be as high as 20,000 jobs across the big four, according to the Australian Financial Review. There’s another.

Then yesterday there was a suggestion that 2018 will bring special dividends and share buybacks.

That’s because the banks have more capital than they need. That will be appealing to Australia’s army of retirees looking for income. But it shows the banks are, or at least consider themselves, in a strong position.

The wildcards, as ever, are credit growth and bad debts.

The banks are of course hostage to what happens in the housing market. But I don’t see much trouble there.

The Australian suggests this morning that inner city suburbs in Sydney and Melbourne are seeing sharp rises in rent. You always have to be careful where the data is coming from in stories like this.

But if so, rising rents suggests a healthy property market. The most leveraged borrowers are in NSW and Victoria.

Of course, the rate of growth in Sydney and Melbourne may cool. But Tasmania and Queensland are firing up. They look darn cheap compared to the big two states.

Western Australia might even really start to come out of doldrums if commodity prices continue to run. You would think that’s more than likely looking at the share prices of BHP and Rio Tinto. Both are hitting 52 week highs.

The outlook for commodities is very bullish over the long term. Copper, oil and gold are all showing strength, especially in Australian dollars.

For my money, it means staying long stocks, and taking the inevitable dips along the way.

The top part of the market isn’t moving much. But the small cap index is really firing.

Just yesterday, cannabis stocks got a big lift on news. The gains ranged from 54% to 35% and 40% in a day.

I don’t have any of those on my buy list in Small Cap Alpha. But that’s the kind of moves small caps can deliver.

Now’s the time to be hunting moves like this down.


Callum Newman
Editor, The Daily Reckoning Australia

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