What a fragile thing economic confidence is. Investors are just starting to get the feel of rising stock prices again, like putting on an old pair of comfortable jeans you’ve found in the bottom of the hamper. Perhaps they should be laundered first, though.
But this is a stock market rally you must handle with care. Last week’s close on the Dow saw that psychologically important index erase its losses for the year. After being down as much as 25% in mid-March, the Dow-led last week by soaring energy stocks-has lifted into the black again. So where to now?
Well, confidence cannot repair a balance sheet. Only reducing debt over time can do that. But there is a whole raft of data this week that will tell us if the economy truly has turned the corner. We reckon it has, but that there’s another sharper corner ahead. Buckle up. And maybe slow down.
In the U.S., manufacturing data comes out this week. Industrial production in the world’s largest economy has fallen sixteen out of the last seventeen months. Many economists will tell you it can’t get worse. Unless, that is, the U.S. (like a lot of the Western world) is in a long decline in which the entire economy becomes less productive. If that’d the case, what difference does a month make?
For financial markets-especially credit markets-the bigger number will probably be U.S. housing starts. For some odd reason, there are a lot of people who think builders are going to start building again even though U.S. housing inventories are ample (and mortgage rates are rising, reducing demand anyway.)
But it’s a wacky world out there. For instance, the Commonwealth Bank raised the interest rate on its variable rate mortgage loans over the weekend 5.74%. It says it may raise its fixed rate too. And other banks may well follow. This is probably not what the government expected when it engineered a 0.5% increase in first quarter GDP.
However there’s a growing gap between the RBA’s cash rate of 3% and what Aussie banks are paying to borrow in the whole sale market. In other words, whether its inflation fears or anticipating a recovery, interest rates are moving up. The banks are simply adjusting to what the futures markets are already predicting.
This unwelcome development for housing finance makes tomorrow’s release of the notes from the last RBA morning that much more interesting. If the RBA doesn’t show an easing bias-if instead it confirms the inflation fears-it’s going to be hard to blame the banks for hiking up rates now (even though unemployment is still rising and the rate rises are especially bad for the Aussie housing market).
When you add it all up-just the appearances and hunches and sentiment-we get the feeling that the momentum in stocks may carry indexes higher by another 3-5%, and then a correction. If you’re sitting on gains from the last few months, you may want to pay special attention to the analysis below from Swarm Trader Gabriel Andre.
In a Friday update, the Swarm Trader showed in a chart what we’d only suspected. Namely, to be on the watch for a correction. “There is very little doubt,” he wrote to subscribers, “that the Index will reach the level of 4,200 points soon, probably next week. This target is just a bit more than 3% higher than today’s closing price. Because of the technical resistance (valid since November 2007) and because of overbought indicators, a correction is likely to quickly follow. In a first time, the level of 3,900 points may be the first intermediary support.”
Technical Resistance on the ASX/200 at 4,200
What happens after that? Who knows? We’ll keep you posted on Gabriel’s research. He’s lately been applying it to finding entry and exit points for stocks listed on the ASX/200. Meanwhile, his technical indicators continue to producer shorter-term trading opportunities as well. He’s a busy man.
Did we really mean to say the government is trying to steal your superannuation savings by making a deal with the fund industry? Well, sort of. Super assets represent a huge pool of capital that manages to generate fee income for an entire industry. The government also sees that money as a source of funding for its infrastructure and other plans.
It’s important to remember that Super is a tax scheme too. Even though the contributions are compulsory, you don’t have to channel it all into stocks. In fact, based on some of the long-term trends we profiled last week, we think investors will have to start thinking about other ways to make, grow, and keep income in the coming years. The stock market will not be enough.
We asked Kris Sayce-who’s been leading up the research into more income and safety in your super-what he thought of last’ week’s news. His reply is below. Stay tuned for more on this subject in the coming weeks.
Kris writes that, “There will be a new ‘Super Govt Aged Pension’ that will allow you to give-up your existing super balance in return for defined benefit based on the existing balance plus any future super contributions you make. You’ll still pay the 9% super guarantee except it will have to go to a special government fund – perhaps they could call it the Future Fund… except that name’s already taken!
“The other level will be to make the ‘default’ funds for fund managers one which includes ‘infrastructure’ funds. This would be easy as all funds have a range of minimum and maximum levels for specific investments. Another way will be to increase the super guarantee from 9% to 15%… the unions and super industry are in favour of this, plus it wouldn’t be a tough sell to the electorate as very few people consider this as being a tax, which it would become, even more of as your ability to have control over your super is diminished.
Hmm. Higher compulsory contributions with less control of your money. Sounds like something you’d want to avoid or at least plan for, doesn’t it?
“Finally,” writes Kris, “the tax and regulatory rules for SMSF will be made so onerous that it will be unattractive for people to open an SMSF. I read something recently that stated SMSF investors needed more ‘education’ on how to run their fund, etc… In other words it will mean increased costs for accounting, auditing, training, reporting, and legal.
“Before and after these changes I expect an increase in the number of audits by the ATO on SMSF that will comprise a scare campaign -‘Look at these investors, they’ve been fined $X for not do this, or they’ve gone to jail for doing that – do you really want to risk it? Why not take out a Super Govt Aged Pension instead?’ There will be very little resistance to these changes especially now when the market is low and when the public is becoming more and more indoctrinated into receiving government support!”
O brave new world with such wealth-stealing in it. What should an investor or a free man do? More on that tomorrow.
for The Daily Reckoning Australia