Kohler’s Week: Gold, After Greece, Politics, ImpediMed, Reffind, ThinCats

Last Night

Dow Jones, down 0.92%
S&P 500, down 1.05%
Nasdaq, down 1.12%
Aust dollar, US72.8c


Bloomberg is reporting this morning that hedge funds are net short gold for the first time – that is, they are collectively betting that the gold price will fall further for the first time since data on this started being collected in 2006.

Here’s Bloomberg's chart of the gold net positions.

Goldman Sachs’ Jeffrey Currie is predicting that gold will now fall below $US1000 an ounce; others are saying it will be at $US1000 by December (which admittedly isn’t saying much since it’s currently under $US1,100). Hedge funds are putting their money, or rather other peoples’ money, where those analysts’ mouths are with a new short position of 11,345 contracts.   

It’s worth observing that investing in this substance is largely the province of pessimists; shorting it is the domain of optimists. Someone who goes long gold in a big way believes the world is going to hell in a handbasket, while someone who places a portion of their portfolio into gold, in one form or another, does so just in case the world might go to hell in a handbasket, so that at least something they own might retain some value. The fact that the net position has always been long is a demonstration that this market has always been the sandpit of pessimists.

On the other hand, an investor in equities, property, a currency or any other commodity is inherently an optimist, believing that all will be well and they will make some money.

Therefore any fall in the price of gold, you would think, is a good sign. Gold has now declined 42 per cent since its peak of more than $US1800 and earlier this week some very big short sellers in Shanghai sent it down another $US40 in minutes. 

Since then, a surprise: no one wanted to buy the dip. The losses have held, speculators have stuck to the sidelines and physical demand is showing no sign of picking up despite the sudden affordability of the product. As ANZ’s commodity strategist wrote: "Normally, we would expect a decline of such magnitude to elicit fresh demand from China but that seems to be lacking. We maintain our thinking that price risk remains skewed to the downside in the short term.”

As you might expect, Jim Grant of Grant’s Interest Rate Observer had some pithy things to say about gold this week, including a reminder of how wrong he has been on the subject. “Your editor cringes to re-read the 2012 essay he wrote to preview the monetary policy regime of Janet Yellen. ‘If Bernanke is good for, let's say, $3000 in the bullion price, Yellen is a force for $4000.’ Maybe Grant’s was the hubristic force for $1,100 an ounce.”

“The bears”, he went on (by which he meant gold bears) "– right as rain since 2011 – observe  that whatever else gold has to offer, it’s denominated in dollars and pays no interest, which qualities make it doubly vulnerable to the start of a now seemingly imminent Federal Reserve tightening cycle. They contend that yesterday’s credit problems are well and truly history. What’s in prospect, they say, is the continued liquidation of ETF investments that seemed to make sense only as long as the price of bullion was going up or – at least – not being kicked down flights of stairs in the middle of the night by mysterious short sellers in distant time zones.”

Jim quotes his friend Jason Zweig, who wrote in the Wall Street Journal this week: “It is time to call owning gold what it is: an act of faith. As the Epistle to the Hebrews defined it forevermore, ‘Faith is the substance of things hoped for, the evidence of things not seen.’ Own gold if you feel you must, but admit honestly you are relying on hope and imagination.”

Well, hope for the worst perhaps. 

And that’s the thing I’ve observed over the years about investment psychology: optimists and bulls often must confront their mistakes, swallow and move on; pessimists and bears rarely give up. Doom always remains just around the corner. Jim Grant is no exception, concluding this week's essay with the foreboding that everyone is now on “one side of the monetary boat”. 

But those predicting the death of fiat money five years ago thanks to its oversupply, and the rebirth of gold as a store of monetary wealth, need to reflect – and cringe – on this chart of gold (blue) and the US dollar index (red) since then. Maybe they will be correct one day. Who knows?

After Greece

It’s now almost two weeks since the Greek Prime Minister Alexis Tsipras signed the deal with the EU and then the Parliament ratified it. This week Greek MPs passed another key bill with more reforms, and 230 out of 300 voted in favour. So despite the continuing unrest outside, and the fact that most of his own left-wing party voted against it, Tsipras still has the overwhelming support of the nation’s politicians. He can undoubtedly remain Prime Minister with the support of the Opposition, which would have been hard to predict a few months ago.

Surprisingly, bond yields have declined (that is, prices have gone up) since the deal was signed early last week, which is not what might have been expected since risks have decreased. This chart shows German bund yields.

The explanation is contained in the fact that commodity prices have also tipped over in the past couple of weeks and lost all of the ground that had been gained in April/May. The broad-based CRB index has fallen 20 per cent since the start of July, with oil and iron ore both down 20 per cent and gold falling from $1200 to $1090.

Bond yields and commodity prices are both reflecting the anticipation of a global growth slowdown, led by China and other emerging nations, as well as commodity producers like Australia, Canada, New Zealand and Brazil.

There seems no reason at this stage to expect this to have an impact on Europe and the United States, but it’s clear to markets, as I wrote last week, that China’s growth must slow and this is going to hurt us as well as other commodity producers and Asian countries, which will have a material impact on global growth averages. Thus bond yields decline.

However that hasn’t had the usual effect of lifting Australian bank share prices. Why not? For the obvious reason that the chances of a recession in Australia have increased with the collapse of the Chinese stock market bubble and the slowing of GDP growth there, and this outweighs the impact of a change in the global interest rate structure on their dividend yields. 

In addition to that, APRA announced new capital weightings for residential mortgages, which is going to crimp bank earnings -- not much, probably, but a bit.

At the moment the banks apply a risk weighting of just 16 per cent to home mortgages, on average, which means that only just over a sixth of any mortgage needs to be taken into account when calculating the bank’s risk-weighted capital under the Basel rules. Now that has to go up to 25 per cent (still not very much I reckon).

Ratings agency Fitch estimated this means the big four will need another $12 billion in capital; Moody’s said $10 billion. Either way, they might not need to raise capital but it will reduce their returns on equity (ROE) and could therefore have an impact on the share prices.

As for Greece itself … notice how fast the world has forgotten it? Leading up to the deal deadline and Parliamentary vote it was the only thing anyone wanted to talk about. Now the market and media caravan has moved on, to … what? China, I suppose. As well as GST.

Aussie Politics

And speaking of GST, it’s been a big week in politics, that’s for sure. A couple of things are worth focusing on.

NSW Premier Mike Baird and his department head, Blair Comley, changed the debate on GST as the week began by calling for an increase in the rate from 10 to 15 per cent and for the extra money to be applied to healthcare (after compensation and tax cuts). Here’s my article explaining the importance of this (republished on the ABC’s website, where it’s free).

At the same time as this was happening, Bronwyn Bishop’s helicopter was doing its Apocalypse Now impersonation over the Federal Coalition and drowning Tony Abbott etc out. But thanks partly to Mike Baird, by the end of the week and the COAG retreat, Tony Abbott was looking positively statesmanlike and even managed to say he wanted “a well-informed and civil national conversation rather than a scare campaign”.

Of course we’ll believe that when we see it, but the potential for getting the rate of GST up has enabled the Coalition to make a grab for the middle ground. With the possibility of some fiscal room to move, the communique from the retreat was able to credibly declare that they wanted to focus reform on health, education, infrastructure and housing – and not simply to cut them back, which was the position taken in the Abbott Government’s first budget last year, but to increase spending on them – traditionally Labor’s territory.

With Abbott calling for a civil conversation and threatening to put money into health and education, the ALP appears to have been knocked off course, with Bill Shorten going into this weekend’s national conference pushing an emissions trading scheme and turning back refugee boats. Laura Tingle in the Australian Financial Review says Shorten is not exactly calling for a new turn-back policy for Labor – he is proposing that the policy stay unchanged, with no mention of turn backs, but if a motion was moved to explicitly ban them, he would push for that to be voted down. That’s the only place I’ve read that, including the transcript of Shorten’s Sunrise interview in which he announced his approval of turn backs, where he didn’t spell that out and made it sound like he’s going to actually move a motion in favour of them (without actually saying that). Typical.  

Anyway, the ALP's Left faction is up in arms and media reports yesterday suggested his job is on the line. Stranger things have happened and far be it from me to second guess Labor politics, but it promises to be a livelier ALP conference than the group hug of the COAG retreat earlier in the week. 

Eureka Interactive

I really enjoyed the three live CEO interviews this week. There were plenty of excellent questions from those watching at the time, and the subjects were fascinating. As always you can watch, and read, them now if you want.

1. ImpediMed – Richard Carreon, CEO

This is a US-based medical device company that’s listed in Australia because the product was invented here about 20 years ago. It was first listed in October 2007 and share prices drifted along at around 70c for four or five years, before collapsing to a low of 5c in 2013 because costs got out of control and sales were going nowhere. That’s when Rick Carreon was appointed, since when he has turned the company around and the price is now $1.06, having zoomed up 9 per cent on Thursday. 

By the way, it wasn’t our interview on the same day that did that. Rick was on Eureka Interactive from 2.35pm (I was five minutes late – sorry) to 3pm, by which time most of Thursday’s gains had already taken place. It was no doubt due to the fact that Rick Carreon is in town from San Diego, where he lives, and talking to a few institutional investors, who liked what they heard … damn it!

As to whether the stock is worth $1, it’s very hard to say. It’s still losing a lot of money, as spelt out by Rick in the interview, but revenue may be about to take off because from Monday American hospitals will be required to take action to measure and prevent lymphoedema in cancer patients.

ImpediMed’s product is a device that sends electrical impulses through the body and detects small changes in cell fluids, and is therefore able to detect lymphoedema very early. It’s a bit like Gillette, which sells the razors for not much and makes most of the money from the blades. ImpediMed’s device is $US5000 and is used over and over, but most of the money is made from the consumables – electrodes that need to be changed every time. Rick was surprisingly coy about the details of the revenue, but I did my best.

Watch or read the interview here.

2. Reffind – Jamie Pride, CEO

This rather simple Sydney-based business sells corporate subscriptions to a human resources mobile phone app. Employees download it for free and it allows firms to tell them about jobs in the company that might suit them or someone they know, and to communicate with them about what’s happening in the company – an alternative to email.

The subscriptions are either $1000 a month or $2000 and Jamie expects to break even early next year. The company listed two weeks ago at 20c and is now at 35c. Again, it’s hard to value a business that’s losing money and I wouldn’t try, but see what you think. You can see it here.

3. ThinCats – Sunil Aranha, CEO

This is the third in my series on peer-to-peer lenders as a possible source of yield for income-focused investors. ThinCats (the opposite of fat cats, geddit?) is the local licensee of a UK business of the same name. The UK company owns 25 per cent and the rest is owned by Sunil, staff and friends.

It lends to small business on a secured basis, although the security is not property mortgages as banks usually require, but fixed and floating charges over the business plus a directors guarantee, which may or may not be worth much if the business goes belly up.

It looks to me like a better proposition than Marketlend, the subject of an interview last week, because the fee/spread taken by ThinCats is smaller – the interest that the borrower pays is what the investor gets, minus a fee that the borrower pays. The structure is spelled out in detail in the interview and looks quite neat. The yields are high – 12 per cent and so far the default rate is very low. So far. As I said to Sunil and the others, a recession will test them.

Nevertheless I think these operations are here to stay and they are definitely disrupting the banks with better yields for investors and good deals for borrowers. You can watch or read the interview here

Also, our LIC analyst, Mitch Sneddon, interviewed George Boubouras of Contango Asset Management, James Kirby and Doug Turek talked about asset allocation and Clay Carter introduced his international model portfolio.

Life, extrapolated

I saw this chart of life expectancy from John Mauldin this week and it reminded me about what I wrote for the annual book club dinner a few weeks ago.

The deal was we each had to write, and then read out, the first 1000 words of our own novels, not that any of us have actually written any novels, or plan to do so, but if we did, how would it start?

Mine was just a bit of fun: what I called an extrapolation of technology, traffic, medicine and … life expectancy. After looking at Mauldin’s graph and thinking again about the implications of what it shows, I thought you may be interested to read what I wrote, so here it is:

Barry Bone slotted into the steadily moving stream of driverless traffic, of cars silently ferrying people peering into phones. The truck behind, with no one at all in it, and all the cars behind it, slowed seamlessly, as if joined together; the police drone overhead watched suspiciously for a few minutes and then moved on, satisfied that this idiot of a human driver hadn’t caused a pile up, not yet anyway. Barry just wants to drive himself, at 105 he still thinks he’s too young to be the only passenger in an empty car, but it’s getting harder and harder to justify the extra insurance premium and in any case none of his great great grand children or their friends drive any more, so it’s definitely not an age thing.

It was just after midnight, when the traffic is at least moving. That’s the thing about robot cars, they’re endlessly patient in the daytime queues, not like Barry, who has given up driving during daylight entirely. And now he’s braking hard and shouting pointlessly at the un-manned Uber car up ahead, as if there’s someone to shout at as it suddenly slowed to a crawl. He flicked on the DroneView panel to see what was going on – yep, some poor schmuck of a human driver had drifted off and run into the back of a driverless van and the scene was swarming with police drones metallically barking out orders to “STAY IN YOUR CAR, SIR”, while they lifted it to the side of the road.

Sigh. I’ll never get to mum’s place on time now. He took a photo of the sack of misery sitting in the banged-up car on the side of the road as he slowly crawled past and posted it on Facetweet. The receiver inside his ear dinged as 10 cents hit his bank account and then almost instantly it rang. The phone. His mum’s face appeared on the windscreen projection.

“Hi mum”

“So you’re going to be late are you?”

“Yes mum” – defensive, gritted. “How’s your tumour today?”

“What do you care? I hardly ever see you. You never call. Anyway, I can see that you looked at this morning’s scan of the cancer when I put it on Facetweet, so you know it’s down to 15ccs. The tumour will be gone soon, probably a bit sooner than the last one.”

“No, I mean how are you feeling, mum – I know the drug is shrinking the tumour and anyway, you’re only 125. You’ll be fine.”

“I won’t be fine. I just know there’s something wrong with left kidney. I did a full blood and urine test just before and it was negative, but I just know there’s something wrong so I sent it to the lab.”

Conversations with Barbara Bone always quickly arrived at her health. She’s as healthy as any 125-year-old these days, which is pretty damn healthy, although she has seen off a few cancers, but ever since Barry’s father killed himself 12 years ago, saying “I need to check out of this crazy planet. I’ve been here long enough” – Barbara had become more and more inward, and aware of mortality, as if it was 2015 again and she was lucky to make 90.

“Whoops, I gotta go mum, my name’s just come up.”

As he drew level with an alert board it said: “Barry Bone please take the next exit”. That’s the trouble with driving yourself – the insurance company always wants to check your blood, and he knew better than to disobey.

He pulled off the freeway into a side road with a booth beside it. “Hello Barry Bone,” said a friendly female robot voice. “Please place your finger in the hole for a random blood test.”

He extended his arm through the window and inserted his finger. There was a small, sharp pain. Instantly the results appeared on the screen. Everything looks normal, of course … but, wait a minute – what’s that?

Even as that question flashed into his head, the car was clamped and the door lock clicked. The friendly female robot voice said brightly: “Barry Bone please remain in your car. An officer will be with you shortly.”

Five minutes passed. All of his electronics had been disabled so he couldn’t even look at Facetweet. It felt like an eternity. “I haven’t gone this long without communicating for 50 years,” he thought.

At that moment a human being, could have been male or female, appeared, shuffling towards him in a hazmat suit: full mask, the works. “Hmm,” he thought. “This is not good.” He felt the car door unlock and the creature in white gestured to him to get out and pointed towards a small cabin. He/she/it walked behind him as he went in.

There was a chair and a screen. On the screen was a woman dressed in white, obviously a doctor.

“Hello Mr Bone,” she said. “I’m afraid we found something a little untoward in your blood.”

“What?” he asked, straight to the point.

“Well, we can’t be sure till we’ve finished the tests and 3D printed a working model of the virus from the scans, but it looks suspiciously like the flu. If so, it would be the first case in 106 years, and we are very interested in where you might have picked it up.”

Barry went into a reverie, wondering the same thing. He was lost in thought when the woman broke in:

“Mr Bone, we’ve now examined the DNA of the virus. We’ll need to check it again, but it seems to be one that hasn’t been seen for nearly 1000 years, during the Henry the Eighth’s time in England. It was called Sweating Sickness and killed a lot of people back then, although that was before virus vaccines.”

Barry Bone started sweating.

Readings & Viewings

Very funny video (14:23) of Stephen Colbert riffing about Pluto. e.g. - if Neptune was a Chevy Impala, what sort of car would Pluto be? A Matchbox car.

Paul Krugman had this as the “Friday Night Music” on his blog last week: Rachael Price singing “What I’m Doing Here”. She’s great!

I used to be a Tetris fiend, now I can’t stand it. Apparently some people never got over it, and actually became world champions or something. Amazing.

Terrific piece on gold: "gold always has been a sucker’s bet. It’s supposed to protect against inflation. It doesn’t. It’s supposed to retain its value. It doesn’t. (It) is supposed to be the ultimate currency. It’s not."

Donald Trump’s financial disclosure lists hundreds of deals and positions.

Incredible photos of Greece’s abandoned 2004 Olympic venues – another reason the country is in the poo.

Barry Eichengreen warns that Germany's effort to force a Grexit is paving a path to political and economic disaster.

Had to happen department: Eurozone's have-nots ask: why should Greece get more than us?

Proof that America’s middle class is shrinking.

The future of 3D-printed food. Masterchef with a bunch of printers?

Conspiracy theory is how idiots get to feel like intellectuals.

Massive piracy for Netflix etc.

Some funny autocorrect shockers (warning: this is not PC).

In America, women earn 81.9c for every dollar that a man earns.

The dangers of happiness.

Driverless cars shouldn’t just be legal, they should be mandatory.

Apparently some English soccer teams were in Australia last week. At Adelaide Oval the crowd sang “You’ll Never Walk Alone”, all together. It’s amazing.

Mark Steyn on the murder of four US Marines by what he calls “yet another member of the Amalgamated Union of Lone Wolves”.

Why are there so few women philosophers?

Annabel Crabb: Australia's main political parties seem to have a universe-warping power to avoid consensus even where it actually exists.

The Intergenerational Report, which forms the basis of a lot of Government policy, is actually misleading.

Google wants a piece of air traffic control for drones.

On this day in 1965 Bob Dylan appeared at the Newport Folk Festival with an electric guitar and changed the world (a little bit) (and was booed off the stage).

Next Week

By Craig James, Commsec

A mixed bag on the domestic front

In the coming week, various price indexes will take centre-stage on the domestic economic calendar. On Wednesday the Bureau of Statistics (ABS) will issue data on selected cost of living indices while import and export prices indexes for the June quarter will be released on Thursday. And on Friday the ABS issues the Producer Price indexes (measures of business inflation). In the US the focus will rest squarely on the Federal Reserve 2-day meeting on Tuesday and Wednesday (decision 4am Thursday, AEST).

The week kicks off on Tuesday when Roy Morgan and ANZ release their weekly reading on consumer confidence. Consumer confidence slumped 8 per cent from 18-month highs before rebounding by 4.5 per cent last week. In short, with Greece and Iran retreating from the headlines and both the Aussie dollar and iron ore prices stabilising, confidence has rebounded. A focus on solid fundamental domestic conditions may help confidence levels lift further in coming weeks.

On Wednesday the ABS issues some different living cost indexes for the June quarter, providing inflation perspectives for groups like pensioners and self-funded retirees.

On Thursday building approvals and import and export price indexes are released. The building approvals data will be of main focus – given it is a forward looking measure on housing activity - although the data can be volatile. The number of dwelling approvals is expected to have lifted by 1 per cent in June after a 2.4 per cent increase in May. Interestingly the value of approvals to build new homes was holding at a record high $57.1 billion in the year to May. Clearly home building will underpin growth of the economy over the coming year.

In the past, data on trade and producer prices (released Thursday and Friday respectively) were important, as they provided a guide to the more important estimates of consumer prices. But with the quarterly trade and producer price figures issued after the release of the Consumer Price Index, they are more of interest to economists divining future price pressures. And unfortunately there is no exact science that relates the trade and producer price data to broader economy-wide inflation. For the record we expect that producer prices rose by 0.6 per cent in the June quarter to be up around 1.4 per cent on a year ago.

Also on Friday, the Reserve Bank releases private sector credit (or data on loans outstanding) for June. In May, credit rose by 0.5 per cent to stand 6.2 per cent higher than a year ago – around the strongest growth in six years.

Overseas: The Federal Reserve meeting dominates interest

There is a bevy of ‘top shelf’ economic indicators for release in the US with a meeting of Federal Reserve policymakers thrown in for good measure. There is no data out of China after a couple of big weeks.

The week kicks off in the US with the durable goods orders and the Dallas Fed manufacturing index released on Monday. And on Tuesday, the consumer confidence index is issued together with the S&P/Case Shiller measure of home prices and the Markit Services index. Home prices may have edged up just 0.4 per cent in May.

Over Tuesday and Wednesday, the Federal Reserve Open Market Committee (FOMC) meets to decide monetary policy settings. The guessing game on when the Fed will lift rates won’t be resolved. However the text of the decision will be important in determining whether the Fed is on course to lift rates in the December quarter of this year.

Also on Wednesday, pending home sales data is released. Pending home sales are expected to have lifted by 1 per cent in June after a 0.9 per cent lift in May. The housing sector continues to be a source of strength for the US economy.

On Thursday the first reading (“advance” measure) of economic growth in the June quarter will be issued. Economists expect that gross domestic product (GDP) grew at an annualised rate of 2.5 per cent in the June quarter after contracting 0.2 per cent in the March quarter – signalling that the economy has rebounded following the influence of harsh winter weather early in the year.

Also on Thursday the usual weekly figures on jobless claims – new claims for unemployment insurance – are issued.

On Friday, the Chicago purchasing managers index – an influential regional survey – is released alongside the University of Michigan Consumer Sentiment index.

Sharemarket, interest rates, currencies & commodities

After hitting top gear last week the US earnings season continues along the same vein. And it’s a case of so far so good with Thomson Reuters estimating that 70 per cent of S&P 500 companies have reported earnings above analyst expectations, topping the 64 percent average beat rate since 1994. However a weaker 53 percent have topped revenue forecasts, below the 61 per cent average beat rate since 2002. No surprise that the stronger US dollar has borne the brunt of the blame.

On Monday, nine stocks from the S&P 500 index are expected to report including Gilead Sciences. On Tuesday there are another 38 companies listed to report including DR Horton, Merck, Pfizer and United Parcel Service.

On Wednesday earnings results are expected from another 49 companies including Goodyear, Facebook, MasterCard, and Garmin.

On Thursday 45 companies should issue profit results including Colgate-Palmolive, ConocoPhillips, Expedia, Iron Mountain, ResMed, Time Warner and Procter & Gamble.

And on Friday there are 8 companies listed including Chevron and Exxon Mobil.

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