Two Markets Doing 180 Degree Turns

Two Markets Doing 180 Degree Turns
  1. Oh my, would you believe this? Just as we all thought oil might head north of US$150 a barrel, part of the sector is doing a 180.

You might notice when you look out the side window of your car, petrol prices are retreating. There’s a reason for this. But is it supply or demand?

Well, it’s probably both. But I suspect it may be more demand softening than supply surging.

PK Verleger is an associate of mine and has covered this space for 50 years.

Data out of the US shows ‘gasoline’ use is down from its previous highs even before COVID. And this is in the peak summer driving period.

This is hitting the refiners between the legs, as Reuters reported the other week:

A sudden crash in global gasoline prices in the past two weeks has dented refiners’ profits, pushing up inventories in key trading hubs around the world while looming exports from China and India also add to pressure on growing stockpiles.

Unfortunately, I don’t have the data for Europe, but one analyst said natural gas prices there are trading for the equivalent of $600 a barrel.

That has to hit demand as discretionary income gets choked.

One wonders if gasoline use will ever breach those old highs in the EU and US.

Data out of California seems to imply a permanent decline because it’s the leading state in terms of electric vehicle (EV) adoption.

Just on that. Another early adopter of electric vehicles is Norway.

Last month, their statistical agency said, ‘electric vehicles now drive more miles annually on average than cars running purely on gasoline or diesel’.

I’m prepared to back the idea that more countries will turn like Norway and California than not in the next five years.

That’s why I view now as a perfect time to accumulate stocks related to the EV transition, like my favourite three.

We just got good news from one of them this morning…and it’s up in trade as I write. Don’t wait!

2) Another statistic release I like to follow is those from the banks each month.

We can see how much credit is going out, and into which sectors. We got the data from APRA last Friday.

The Australian Financial Review (AFR) covered it like this:

As banks prepare their earnings updates and the Reserve Bank prepares to once again increase interest rates, more evidence of a slowdown in new mortgage lending to owner-occupiers has emerged.

The latest Australian Prudential Regulatory Authority data for June showed lending growth moderated to 0.8 per cent to $10.5 billion for owner-occupiers and 0.7 per cent to $4.8 billion for investors in the last month of the financial year.

Hmm. Slowdown? OK…yes…0.8% to owner-occupiers may be slowing down, but that figure is much higher than the dog days of 2019.

And get this when it comes to the investors. The AFR says:

Investor loans, however, grew by 6.4 per cent month-on-month, the highest since November 2015, as cashed-up landlords get ready for the return of international students and other migrants.

Hmm. How does the strength in investor lending (and soaring rents) square with those calling for a 15–40% decline in house prices?

In my view, it doesn’t.

It would take a much more substantial subtraction in those credit statistics to have me worried.

But, hey, you don’t have to believe me. The share market can help out here.

For example, REA Group [ASX:REA], which runs realestate.com.au, has rallied more than 20% since June. This wouldn’t happen if the market was still fearful of a property crash.

I’m kind of kicking myself for not buying it for less than $100 when I had the chance. It wasn’t fear that held me back, it was greed. I wanted it cheaper!

Now I think the opportunity may have passed. That’s not to say the market will go up from here. But rarely do you get a second look when a unique opportunity presents.

Ah well! Every day another train leaves the station. To my mind, there’s plenty more bargains around property out there on the market. The previous hammering was prodigious.

But we can see the impetus for a potential rally another way. Interest rate expectations are moderating.

See here from the AFR:

Money markets have significantly wound back pricing on the expected peak Reserve Bank of Australia cash rate to 3 per cent, down from as much as 4.5 per cent tipped less than two months ago.

That doesn’t seem so scary, does it?

3% doesn’t even put the rate at equal to the current rate of inflation.

All in all, the current market weakness is a buying opportunity if you’re in for the long term. The short-term time frame is trickier.

Regards,


Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia