Investor Sign posts, week beginning 21 July, 2013

Upcoming economic and financial market events

Australia

July 22: State of the States – CommSec’s quarterly assessment of state/territory economies

July 24: Consumer Price Index (June Qtr) – We expect that prices rose 0.4% to be up 2.4% over the year

Overseas

July 22: US Existing home sales (June) – A modest lift in sales is tipped

July 23: US Home prices (May) – Data from the Federal Housing Finance Agency

July 23: US Richmond Fed index (July) – A key regional survey

July 24: “Flash” manufacturing gauges – Released in US, China and Europe

July 24: US New home sales (June) – Sales are tipped to have lifted by 1.9%

July 25: US Durable goods orders (June) – A modest 0.5% increase is expected

The big picture

• We know that the Aussie dollar has lost altitude in the past couple of months, but how far has it fallen, and how does the decline compare with corrections in the past?
• According to data from Thomson Reuters, the Aussie dollar peaked in April at US105.82c – the highest rate in three months. But in the following three months the Aussie has fallen by 15 per cent, touching US89.98c on July 12 according to the financial newswire.
• That three-month drop was the biggest in almost two years, just short of the 15.3 per cent decline recorded in October 2011 when the currency fell from US110.8c to US93.86c over a same three-month period. To find a larger drop, you actually have to go back to the midst of the Global Financial Crisis in January 2009 when the Aussie slumped almost US17 cents over a three-month period.
• The Reserve Bank believes the latest fall in the Aussie dollar is well over-due. As the chart shows, for the better part of a year the Aussie dollar had broadly trended sideways, holding between US101-106c. But over the same period commodity prices gradually trended lower.
• The break in the traditional link between the Aussie dollar and commodity prices was unusual. The Aussie dollar has always been regarded as a “commodity currency” given Australia’s high reliance on commodities or raw materials for export income.
• In part the Aussie dollar’s relative strength up to April 2013 was due to Australia’s economic out-performance. But in mid April that out-performance was re-assessed as stronger US economic data called into question the need for super-stimulatory US monetary policy settings.
• Interestingly it now appears that the Aussie dollar has fallen too far. If the Reserve Bank agrees and next week’s inflation data is on the high side of expectations, then interest rates will be kept steady at the August Board meeting.
  • In Australia, a quiet week is in prospect for new economic data. However it is a different story in the US with key indicators of housing activity to be released over the week. Also “flash” updates on the health of manufacturing sectors are expected across a raft of countries including China, the US, France and Germany.
  • In Australia, the week kicks off on Monday when CommSec releases its quarterly State of the States report, assessing the relative health of state and territory economies. Overall there are reasons to be encouraged with stronger housing activity occurring in many regions, pointing to a “passing of the baton” from mining investment and engineering construction to home building. The purchase of existing homes and building of new homes both generate significant multiplier effects across the economy.
  • On Tuesday the Bureau of Statistics (ABS) issues a report called Migrant Data Matrices, a report that attempts to pull together in one place “demographic, geographic, socio-economic and collection specific data items.” The information is useful for businesses to try to identify new marketing opportunities.
  • On Wednesday the ABS issues the quarterly inflation report – the Consumer Price index for the June quarter. Given that the economy has been generally treading water over 2013, it would be surprising if the report was to flag any inflationary pressures. Many consumers are reluctant to spend, so businesses are choosing to trim margins to lift sales, rather than adopt a strategy of lifting prices to boost profits and thus compensate for weak sales.
  • Overall we expect that the CPI rose by 0.4 per cent in the June quarter, cutting the annual rate of inflation to 2.4 per cent. And while the underlying price measures probably grew on average by 0.5 per cent in the quarter, up from 0.4 per cent, the annual rate of growth is expected to have eased from 2.4 per cent to 2.3 per cent.
  • The main seasonal boost to the inflation rate will come from the Health group, reflecting increases in private health insurance. But working to push the inflation rate in the other direction will be seasonal declines in domestic holiday travel costs.
  • Also on Wednesday the ABS issues a publication entitled Innovation and Technology Update, June 2013
  • On Thursday the ABS issues its Australian Social Trends report while its Spotlight on National Accountspublication is issued on Friday.
  • In the US, the week kicks off on Monday with data on existing home sales while the Chicago Federal Reserve also releases an activity gauge the same day. Economists tip a small 0.4 per cent lift in sales taking them to an annual rate of 5.2 million.
  • On Tuesday the customary weekly report on chain store sales is issued alongside the home price report from the Federal Housing Finance Agency, and the influential regional activity gauge – the Richmond Fed index. The FHFA calculated that prices rose for the 15^th straight month in April, up 0.7 per cent.
  • On Wednesday in the US, data on new home sales is scheduled for release. In May, sales rose for the third straight month, up by 2.1 per cent to a 476,000 annual rate. Economists are tipping a similar gain in June to a 485,000 annual rate. The weekly data on home loans will also be issued.
  • Also on Wednesday, the Markit organisation issues its “flash” July readings on manufacturing activity across a raft of countries including the US, China and Germany.
  • And on Thursday the weekly estimates of claims for unemployment insurance (jobless claims) are issued together with data on durable goods orders and a gauge on activity in Kansas City published by the district Federal Reserve office. Orders for durable goods (goods lasting three years or more) are expected to have edged 0.5 per cent higher in June.
  • The US profit-reporting season rolls on in the coming week. Around 40 companies are expected to report earnings on Monday with eight of these from the S&P 500 index including Kimberly-Clark, McDonalds and Texas Instruments. On Tuesday around 33 companies from the S&P 500 index are slated to report earnings including Apple, AT&T, United Parcel Service and Freeport McMoRan Copper & Gold. Amongst major companies reporting earnings on Wednesday are Boeing, Caterpillar, E*Trade, Ford, Eli Lilly and PepsiCo. On Thursday Amazon.com is one of the bellwether firms to report earnings together with General Motors, 3M, and Colgate-Palmolive.
  • The Australian profit reporting season kicks off with Australand, Petsec Energy and Aquarius Platinum (Wednesday), OceanaGold (Thursday) and GUD Holdings and Korvest (Friday).
  • There is one event that could define whether the Reserve Bank cuts rates again in August – the Consumer Price Index. So ahead of that event, it is useful to assess market pricing of another rate cut. Before the Reserve Bank Board minutes were released, financial markets assessed that there was a 70 per cent chance of a rate cut. Now that estimate stands at 54 per cent. However looking out over the next six months, the belief is that the Reserve Bank will cut rates again, but just once.

The week ahead

In Australia, a quiet week is in prospect for new economic data. However it is a different story in the US with key indicators of housing activity to be released over the week. Also “flash” updates on the health of manufacturing sectors are expected across a raft of countries including China, the US, France and Germany.

• In Australia, the week kicks off on Monday when CommSec releases its quarterly State of the States report, assessing the relative health of state and territory economies. Overall there are reasons to be encouraged with stronger housing activity occurring in many regions, pointing to a “passing of the baton” from mining investment and engineering construction to home building. The purchase of existing homes and building of new homes both generate significant multiplier effects across the economy.
• On Tuesday the Bureau of Statistics (ABS) issues a report called Migrant Data Matrices, a report that attempts to pull together in one place “demographic, geographic, socio-economic and collection specific data items.” The information is useful for businesses to try to identify new marketing opportunities.
• On Wednesday the ABS issues the quarterly inflation report – the Consumer Price index for the June quarter. Given that the economy has been generally treading water over 2013, it would be surprising if the report was to flag any inflationary pressures. Many consumers are reluctant to spend, so businesses are choosing to trim margins to lift sales, rather than adopt a strategy of lifting prices to boost profits and thus compensate for weak sales.
• Overall we expect that the CPI rose by 0.4 per cent in the June quarter, cutting the annual rate of inflation to 2.4 per cent. And while the underlying price measures probably grew on average by 0.5 per cent in the quarter, up from 0.4 per cent, the annual rate of growth is expected to have eased from 2.4 per cent to 2.3 per cent.
• The main seasonal boost to the inflation rate will come from the Health group, reflecting increases in private health insurance. But working to push the inflation rate in the other direction will be seasonal declines in domestic holiday travel costs.
• Also on Wednesday the ABS issues a publication entitled Innovation and Technology Update, June 2013
• On Thursday the ABS issues its Australian Social Trends report while its Spotlight on National Accountspublication is issued on Friday.
• In the US, the week kicks off on Monday with data on existing home sales while the Chicago Federal Reserve also releases an activity gauge the same day. Economists tip a small 0.4 per cent lift in sales taking them to an annual rate of 5.2 million.
• On Tuesday the customary weekly report on chain store sales is issued alongside the home price report from the Federal Housing Finance Agency, and the influential regional activity gauge – the Richmond Fed index. The FHFA calculated that prices rose for the 15^th straight month in April, up 0.7 per cent.
• On Wednesday in the US, data on new home sales is scheduled for release. In May, sales rose for the third straight month, up by 2.1 per cent to a 476,000 annual rate. Economists are tipping a similar gain in June to a 485,000 annual rate. The weekly data on home loans will also be issued.
• Also on Wednesday, the Markit organisation issues its “flash” July readings on manufacturing activity across a raft of countries including the US, China and Germany.
• And on Thursday the weekly estimates of claims for unemployment insurance (jobless claims) are issued together with data on durable goods orders and a gauge on activity in Kansas City published by the district Federal Reserve office. Orders for durable goods (goods lasting three years or more) are expected to have edged 0.5 per cent higher in June.

Sharemarket, interest rates, currencies & commodities

• The US profit-reporting season rolls on in the coming week. Around 40 companies are expected to report earnings on Monday with eight of these from the S&P 500 index including Kimberly-Clark, McDonalds and Texas Instruments. On Tuesday around 33 companies from the S&P 500 index are slated to report earnings including Apple, AT&T, United Parcel Service and Freeport McMoRan Copper & Gold. Amongst major companies reporting earnings on Wednesday are Boeing, Caterpillar, E*Trade, Ford, Eli Lilly and PepsiCo. On Thursday Amazon.com is one of the bellwether firms to report earnings together with General Motors, 3M, and Colgate-Palmolive.
• The Australian profit reporting season kicks off with Australand, Petsec Energy and Aquarius Platinum (Wednesday), OceanaGold (Thursday) and GUD Holdings and Korvest (Friday).
• There is one event that could define whether the Reserve Bank cuts rates again in August – the Consumer Price Index. So ahead of that event, it is useful to assess market pricing of another rate cut. Before the Reserve Bank Board minutes were released, financial markets assessed that there was a 70 per cent chance of a rate cut. Now that estimate stands at 54 per cent. However looking out over the next six months, the belief is that the Reserve Bank will cut rates again, but just once.

The post Investor Signposts: Week Beginning July 21 2013 appeared first on AdviserVoice.

The big picture

• There is an old adage in economics – there are lies, damned lies and statistics. And when it comes to the issue of housing valuations and affordability, there is a lot of data that can be categorised in the two former terms and much less in the latter.
• As we go across the country we are amazed at the number of people concerned that our home prices are overvalued. Magazines like The Economist must take some of the blame, together with web sites like Demographia and even some industry groups like the Housing Industry Association.
• Home prices in Australia are determined by demand and supply. In recent years demand has been strong, driven by the biggest in-bound migration in history. But in some parts of the country, supply – new dwelling construction – has not kept pace. In large part this has been in NSW as well as Queensland. In other parts of the country, governments have increased land supply, reduced barriers for developers and rezoned land for housing. And as a result dwelling starts are running above long-term averages.
• The Reserve Bank Governor was asked a question on Australian home prices when he delivered a speech in London on March 10. The comments weren’t well reported, but he highlighted the fact that home prices aren’t rising strongly at present, that arrears rates on mortgages are low, gearing isn’t high and that, overall, home prices “are probably not top of my list of worries.”
• However Glenn Stevens did say something else: “But I think – the other thing I’ll say is that it’s quite often quoted very high ratios of price to income for Australia, but if you get the broadest measures, a country-wide price and a country-wide measure of income, the ratio is about 4 ½ and it hasn’t moved much either way for 10 years. And that is higher than it used to be, but it’s actually not exceptional by a global standard as far as I can see.”
• What he was quoting here was the analysis by Rismark International and RP Data on housing affordability. To measure home affordability you need to compare all incomes across Australia with all home prices across Australia – city and regional. Unfortunately a raft of industry bodies don’t do that and it produces spurious outcomes.
• The bottom-line is that Australian home prices aren’t so extraordinary after all. Once foreign investors start focussing on the facts rather than fiction then perhaps a few more dollars will start flowing Down Under. Because it is a concern abroad, and it’s not being helped by misinformation.

The week ahead

• Most of the ‘top-shelf’ economic indicators aren’t released until late in the coming week. But there is still a good spattering of indicators for investors to focus on in the next few days. And in the US, the main game is also late in the week with data on employment (non-farm payrolls) on Friday.
• On Tuesday, Reserve Bank Assistant Governor Malcolm Edey will speak at a credit/debit cards conference while population data will be released the same day. Population growth has slowed markedly over the past 18-months, easing from a 40-year high of 2.2 per cent to 1.7 per cent. Australia’s population growth is still one of the fastest rates in the world, but arguably it should be higher given our tight job market and urgent need for skilled migrants. Australia has been poorly served by political debate on migration.
• On Wednesday, the Department of Education, Employment and Workplace Relations releases data on skilled job vacancies while the Bureau of Statistics releases broader data on job vacancies. The job market is tight, but the Reserve Bank says it isn’t overly tight. Home sales data for February is also issued.
• On Thursday, February data on retail sales, building approvals and lending (private sector credit) are released. Retail spending certainly hasn’t been flash of late, up 0.4 per cent in January and up 1.8 per cent over the year – below the rate of inflation. But the Commonwealth Bank Business Sales Indicator lifted in February, and as a result we tip a 0.6 per cent increase in retail trade in the month.
• And building approvals have also been weak, although the Queensland floods and cyclone make analysis tougher. Approvals slumped by 15.9 per cent in January, although we expect a modest 4 per cent lift in February. The floods will depress readings on approvals in the short-term but boost data from mid-year.
• In the US, most investors will only have eyes for one indicator – non-farm payrolls (or employment) to be released on Friday. The job market is clearly picking up with new claims for unemployment insurance sliding. In fact the four-week average of claims is the lowest since July 2008. Economists tip a rise in non-farm payrolls of around 180,000 in March after gains of 192,000 in February. But the jobless rate is expected to remain high near 8.9 per cent.
• The other indicator that will be in focus is the ISM manufacturing gauge for March, also released on Friday. The gauge stands at 61.4 – a reading that hasn’t been surpassed in just over 27 years – so it is clear that a solid economic recovery is underway. Economists tip a March ISM reading near 61.6.
• Of the other indicators, personal income and spending data are released on Monday together with pending home sales. On Tuesday, the Standard & Poor’s/Case-Shiller home price index is released together with consumer confidence. On Wednesday the ADP employment index is issued together with the Challenger job layoffs series. On Thursday regional purchasing manger surveys are released in New York and Chicago together with data on factory orders. And on Friday car sales figures are released.
• Australian investors will also closely watch the Chinese purchasing managers survey on Friday.

Sharemarket

• CommSec has adjusted its forecasts for the All Ordinaries/ASX 200 for the remainder of the year. The Japanese earthquake, tsunami and nuclear shock have clearly had a depressing influence on investor confidence together with air strikes against Libya. Separately, foreign investors remain cold on the Australian market. Our economy is treading water and both the mining resource rent tax and proposed carbon tax are seen to have depressed the outlook for the economy. The high Australian dollar is also crimping foreign interest in our sharemarket. Sure, China continues to expand, boosting earnings and profits for resource companies. But mining represents just 9 per cent of the economy. It is the other 91 per cent that investors are worried about.
• We now expect the All Ordinaries/ASX 200 to be around 4,900 points mid-year and 5,200 points by the end of the year. Our expectation of a softer Australian dollar in the second half of 2011 (US92 cents by end year) should boost interest of foreign investors – a group owning 40-45 per cent of our shares. And high corporate profits do point to a firmer sharemarket as well.

Interest rates, currencies & commodities

• The Japanese nuclear shock has certainly thrown the spotlight on energy prices. Most would have expected that uranium prices would have weakened in response to the problems experienced by a number of Japanese nuclear plants. And certainly that has been the case with the spot U308 price down from around US$73 a pound to US$60 a pound in the past few weeks. But its worth pointing out that the current price is well up from recent lows of US$40 a pound in June last year and most nuclear plants still are tied to longer-term price contracts.
• The price of competing natural gas has lifted from US$3.75/mmbtu to US$4.25/mmbtu, but this is still in the middle of the US$3.25-5.25/mmbtu range over the past year. And the price of the other fuel that Japan could switch to – thermal coal – has actually fallen by 4 per cent since the earthquake. Still Tohoku Electric Power had to suspend its coal imports because of earthquake damage. The longer-term outlook is more positive, especially given that Germany has decided to suspend seven nuclear reactors and plans by other countries are also under review. And this longer-term outlook is an important consideration for investors in the energy sector.

The post Investor Signposts: Week Beginning March 27 2011 appeared first on AdviserVoice.

Key points

• The $A is continuing to push further above parity against the $US, reaching a 29 year high. This reflects a combination of strong commodity prices, $US weakness and high Australian interest rates.
• Unless the global economy slides back into recession, which appears unlikely, the $A is likely to average above parity over the next few years on the back of strong commodity prices and relatively high Australian interest rates. Expect $US1.10 by year end.
• On balance a strong $A is positive for the Australian economy, & is part of the adjustment made necessary by strong demand for Australian raw material exports.

Introduction

After being stuck in a narrow range around parity against the $US since last October, the Australian dollar has reached a new 29 year high. The strength in the $A reflects renewed $US weakness, strong commodity prices and relatively high Australian interest rates. My view for some time has been that having breached parity against the $US, the $A would head to $US1.10. Allowing for usual currency volatility this still seems on track.

The bigger picture – a falling $US

First, to the US dollar. A major part of the Australian dollar’s strength over the last decade has been the downtrend in the US dollar. After a pause this appears to be resuming.

Source: Bloomberg, AMP Capital Investors

Further $US weakness is likely. The US Federal Reserve is signalling no urgency to raise interest rates at a time when other central banks are either lifting interest rates or contemplating lifting them. In addition, rising global investor confidence is reducing demand for the US dollar as a “safe haven”. The converse of US dollar weakness is renewed strength in a range of other currencies:

• The euro is looking stronger on the back of European Central Bank (ECB) talk of a rate hike, and confidence European authorities are confining sovereign debt problems to Greece, Ireland and Portugal.
• Asian currencies have risen to the top of their recent range against the $US. With the Renminbi steadily appreciating against the $US and interest rates still rising across Asia, it’s likely Asian currencies – including the Korean won, Taiwan dollar and Singapore dollar – have more upside.
• The Yen strengthened after the Japanese earthquake. This has since been short circuited by G7 intervention, confusing the outlook for this currency.
• A weaker $US is also likely to coincide with a stronger $A.

Strong commodity prices

Despite a brief dip as a result of the Japanese nuclear crisis, commodity prices have shown renewed strength. This reflects strong growth in Europe, expectations of rebuilding demand for raw materials from Japan, turmoil in the Middle East and North Africa boosting energy prices and expectations Japan’s nuclear crisis will add to demand for oil, gas and coal. With the industrialisation process in China and other emerging countries likely having much further to go and supply likely to continue to struggle to keep up, the uptrend in commodity prices likely has years to run. And, of course, a weak $US is also positive for commodity prices as the latter are priced in US dollars.

Source: Thompson Financial, AMP Capital Investors

Australian commodity exports such as iron ore, coal and liquid natural gas are all key beneficiaries of this. Commodities make up 70% or so of Australian exports and so the strength in commodity prices has seen the ratio of Australia’s export prices to import prices, or the terms of trade, rise to its highest level since the early 1950s and it is continuing to surprise on the upside. As can be seen in the next chart the $A has tended to lag the strength in the terms of trade. The last time the terms of trade was this high, in the early 1950s, the equivalent of one Australian dollar bought $US1.12.

Australia's strong terms of trade supports the $A above parity

Relatively high interest rates

Australian interest rates at 4.75% are well above those in the US, Europe and Japan where the range is zero to 1%. While the ECB is likely to raise rates next month to 1.25%, there is unlikely to be much follow through and the Bank of Japan has been undertaking more (quantitative) easing. Meanwhile the Fed is likely to be on hold for some time. By contrast, Australian rates are on hold but the Reserve Bank’s bias remains towards more tightening which we expect to occur during the second half as Australian economic growth rebounds on mining investment, Queensland production returns to pre flood levels, flood related rebuilding kicks in and as national income remains strong on the back of high commodity prices. By year end the interest rate differential in Australia’s favour is likely to have increased to around 5% against the US and Japan and 4% versus Europe. This has the effect of attracting funds to Australia, which in turn pushes up the $A.

A longer term perspective on the $A

The general consensus seems to be the Australian dollar is way overvalued and that parity and above is unsustainable. By contrast we think parity and above is sustainable. There are several reasons for this.

First, most fair value models for the Australian dollar have been estimated over a relatively narrow period of history, ie the period since the $A floated in 1983. However, this misses the longer term perspective and the changed fundamentals now facing Australia.
Second, most of the factors that drove the long term slide below parity for the $A have now reversed. Back in 1901 the equivalent of one Australian dollar bought $US2.40 and for most of the last century the $A was above parity against the $US. The long term slide in the $A from $US2.40 in 1901 to a low of $US0.48 in 2001 reflected a combination of soft commodity prices and a perception of Australia as a mediocre, poorly managed, inflation prone “old” economy.

Source: Thomson Financial, AMP Capital Investors

However, these drivers have now all turned around. Commodity prices are in a long term upswing and Australia is seen as well managed with low public debt, inflation under control and relatively high interest rates.

Third, the global financial crisis has exposed a fundamental imbalance in the global economy, which is a high level of consumption and/or public debt in major advanced countries in contrast to low consumption and low debt in emerging countries. A part of the adjustment to rebalance the world is that currencies in the US, Japan and Europe need to fall relative to those in the emerging world, and also against currencies that benefit from emerging world growth such as the Canadian and Australian dollars.

In short, it is likely the sub-parity period from the 1980s was an aberration for the $A, and the improvement in Australia’s relative fundamentals suggest it is likely the $A is going to settle above parity against the $US. Forecasting currency levels is an impossible task but I expect an average around $US1.10 is likely in the years ahead, unless the global economy collapses again. This would be consistent with the high terms of trade.

The impact of a rising $A on the economy and shares

The strong Australian dollar is great news for Australian consumers as it will result in lower prices for imported items, notably things like cars, clothing, petrol and many electrical goods. This in turn is likely to take pressure off inflation and reduce the extent to which the RBA will ultimately have to raise interest rates.

For the broader economy and shares, a strong $A is often seen as bad news as export and import competing companies become less competitive. With around 30% of listed company earnings sourced overseas, a 10% rise in the $A will cut earnings by about 3%. This would suggest a rising $A is bad for the Australian share market.

However, the actual relationship between the $A and the Australian share market is ambiguous. In fact, over the last decade a strong $A has gone hand in hand with economic strength and a weak $A has correlated with economic weakness. The reason is because while a rise in the $A is a dampener for company profits on its own, it’s normally associated with strong economic growth which is good for profits. Given the latest bout of $A strength has been associated with renewed vigour in commodity prices and improved optimism regarding the global outlook, it’s unlikely to cause major problems for the share market or the economy at an aggregate level. This is because the direct negative impact on profit growth from the surge in the $A should be largely offset by the positive impact from solid economic conditions. However, the strong $A could remain a drag on the relative performance of Australian shares against global shares.

From a longer term perspective though, the rise in the $A will present challenges. It’s helping to shift economic resources to the strongly growing resources sector of the economy, which is appropriate from a technical economic perspective but such restructuring will invariably have significant social and regional consequences.

The strong $A and investors

For investors, a rising $A reduces the value of offshore investments, unless they are hedged back to Australian dollars. Global bond and property funds are usually hedged to remove the currency impact. Fully hedged international equity funds are available. With the $A likely to see further gains over time, there is a case to remain biased towards hedged international equity funds as opposed to unhedged funds, although not as strong a case when the $A was well below parity.

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With offices in London and New York, ISAM was founded by Stanley Fink, former CEO of the Man Group, in July 2008 to provide alternative investment strategies to institutions, family offices and private individuals.

When Stanley Fink joined Man, the organisation was a medium sized private company, largely focusing on agricultural commodity trading, with small operations in futures broking and hedge fund management. By 2008, when Stanley left to join ISAM, Man had a stock market capitalisation of $20B and managed alternative assets approaching $80B.

ISAM CEO Stanley Fink and his senior management team have established long term track records in the fund management industry and collectively bring decades of hedge fund experience to the Firm.

In February 2010 ISAM formally announced a strategic alliance with Hite Capital Management (HCM), the hedge fund firm founded by renowned systematic trading authority Larry Hite. The new venture resulted in Larry Hite and his key senior managers Alex Greyserman and Gilbert Lee becoming shareholders in ISAM.

The immediate benefit for ISAM was access to the Hite investment program that is now the Fund that was the subject of Zenith’s review.

Larry Hite and his team developed and refined the Fund’s strategy over the last 30 years, initially at Mint Investment Management Company and then at Hite Capital Management. For 15 of those years Mint had a successful joint venture with Man Group.

This period occurred during Stanley Fink’s tenure at Man.

“The ISAM Systematic Fund uses a combination of trend following and other quantitative investment techniques for currency and futures markets,” said Daniel Liptak. “The system operates 24hrs a day with trades generated automatically with pre-defined stop / loss orders in place.”

The investment objective of the Fund is to achieve capital appreciation through active management using purely systematic trend following models. The strategy seeks to capture profits from market price trends using a rules based platform.

The program has evolved over the last 30 years and is continually monitored and refined.

Today, the systems are applied to over 50 global financial and commodity futures markets and forward currencies.

The Fund targets a return of 15 – 20% per annum with volatility in the same range.

Daniel Liptak added, “For the purpose of Zenith’s review, the Alternatives Team have incorporated the track record of the Hite Futures Strategy and the performance of the Fund since inception.”

“As a result we have data back to June 2001, with an observed volatility of 19.34% with an annualised return of 18.27%, providing evidence that the program can be profitable, but not without risk.”

Zenith believes the strength of the Fund comes from the stability of the team that has built the investment program, the purity of its approach and, given the Fund’s AUM – the ability to follow trends in markets, such as commodities efficiently.

In addition to this, the partnership of Fink and Hite was successful in the past at Man Group and enhances Zenith’s confidence in the management of the business.

“Zenith is confident that the Manager clearly has identified trends and noticeably is able to efficiently and profitably trade them in a risk aware manner. The Manager does not dilute or smooth out the investment process with a broader range of investment strategies designed to reduce risk,” concluded Daniel Liptak.

The post Experience & Long-term Results Underpins Zenith’s ISAM Systematic Fund ‘Recommended’ Rating appeared first on AdviserVoice.

The big picture

• If you wanted to get a good textbook example of a ‘fear-driven’ event it is the so-called Japanese nuclear crisis. It started with one of the biggest earthquakes in the modern era. But clearly that earthquake wouldn’t have had a major impact on global financial markets if it weren’t accompanied by a destructive tsunami and then by the damage to nuclear facilities in north-eastern Japan.
• The panic that followed news of radiation leakage at the nuclear plants was understandable. Most investors haven’t had any experience with such events, and the initial response was to dump shares and commodities and to factor in significant monetary stimulus.
• It is hard to work out how Australia would be affected by nuclear crisis in Japan, but still investors dumped stocks, driving the local sharemarket down by over 2 per cent. The Aussie dollar fell more than US3 cents and the chances of an imminent rate cut soared to more than 60 per cent. Clearly there was a lot of uncertainty about the ramifications of a nuclear plant meltdown. But that was also fed by misinformation about nuclear power and the industry more broadly.
• While questions are being raised about the future of nuclear power, it is worth highlighting that many countries across the globe already have high reliance on nuclear power without key problems and other countries are pushing ahead with plans for nuclear power plants. In France, nuclear plants provide 80 per cent of power and there have been no major incidents. In China there are 13 nuclear power plants with 25 currently under construction. In addition there are a further 52 plants planned and another 72 plants proposed.
• But what about the Japanese situation? Well, as always it is best to defer to the experts – impartial experts, that is, those that neither promote, nor are fierce critics of, the nuclear industry. One such person is Dr Josef Oehman from MIT. He states that “there was and will not be any significant release of radioactivity.” Perhaps. It depends how you define “significant”.
• But Dr Oehman has gone into significant detail in explaining how the Fukushima plants work, the type of fuel they use and containment devices that are in place. Eventually, considered explanations like this will filter out through the media and into the wider community. But the risk in the short-term is that misinformation will continue.
• Hopefully the event will have a positive side in that there will be greater understanding of the nuclear power industry, how each of the plants work, as well as more focus on the safety mechanisms in place. For Japan, the other implication of the damage to the nuclear power plants is on going power needs. In the short to mediumterm, Japan will have to rationalise power and that will hamper economic recovery.
• Last week we spoke about a thinning out of the economic calendar. Well the coming week calendar looks like a virtual wasteland in terms of fresh economic or financial events to provide direction for investors. Certainly that is the case in Australia, although there is still a good spattering of economic data in the US.
• In Australia, the week kicks off with February data on imports to be released on Monday. This is one of the more timely economic indicators and highlights spending made by consumers and businesses. But there are also complications such as the influence of the Australian dollar, lumpy imports like airplanes and rising fuel imports caused by higher oil prices. But the data is certainly worth dissecting.
• Also released on Monday is data on enterprise bargaining claims, but the figures are dated, covering the September quarter last year.
• Then there is a gap until Thursday when the Reserve Bank releases its bi-annual Financial Stability Review and assistant governor Malcolm Edey delivers a speech. The financial sector will be given a clean bill of health while Edey has the opportunity to outline Reserve Bank views on the Japanese situation.
• And on Friday the Bureau of Statistics releases its financial accounts for the December quarter. These figures are a treasure trove of information including data on overseas holdings of shares, financial wealth levels of households and cash holdings by businesses and superannuation funds.
• In the US, the housing market is centre-stage over the coming week. On Monday, February data on existing home sales is released with home price figures on Tuesday and new home sales on Wednesday.
• Existing home sales are expected to have softened from a 5.36 million annual rate in January to 5.20 million in February. Despite soft home prices, the market won’t fundamentally recover until there are less people on dole queues. But new home sales are expected to have edged higher from a 284,000 annual rate in January to 290,000 in February. Harsh winter weather has been affecting the monthly readings in this series.
• Also on the agenda this week is the Chicago Fed index on Monday, Richmond Fed manufacturing survey on Tuesday, durable goods orders on Thursday and economic growth (GDP), consumer sentiment and corporate profits on Friday.
• Economists expect that the final estimate of economic growth in the December quarter (they have three attempts at estimating growth) will be confirmed around 2.9/3.0 per cent. In Australia, economic growth stands at 2.7 per cent so you can understand the willingness of foreign investors to put their money to work in the US at present.

Sharemarket

• In light of the fear-driven sell-off on global sharemarkets in response to the crisis in Japan, it is always useful to come back to fundamentals. We have assessed 12-month forward price-earnings ratios for a raft of markets across the globe provided by FactSet.
• Of the 70 regions assessed, only 14 have PE ratios that are higher than their 5-year averages. For the “world” market, the current PE ratio of 13.61 is almost 10 per cent lower than the decade average and stands at a sevenmonth low. Interestingly the most under-valued region is Austria with the PE ratio 64 per cent below the 5-year average. More understandable is the next cheapest – Japan – with the forward PE ratio (15.28) more than 53 per cent below the 5-year average.
• The forward PE ratio for the Australian market stands at a seven-month low of 12.7, which is 14.2 per cent below the 5-year average. Now clearly with investors far more conservative across the globe, the current lower PE ratios may prove the “new normal.” Unfortunately we won’t know the answer on this one for some time.

Interest rates, currencies & commodities

• It seemed that the Aussie dollar would remain permanently parked at US101 cents, but along came the Japanese nuclear crisis to shake things up. In the past, the Aussie dollar has been the first casualty of global crises, but this time around the reaction has been reasonably muted. The Aussie did fall away to below US98 cents, but then bounced. Most investors still vividly remember the Aussie at US47.75 cents in April 2001. CommSec continues to believe that the Aussie will hold US99-102 cents through to midyear before easing to US92 cents later in 2011 as attention shifts to tighter monetary policy in the US.
• With the Japanese nuclear crisis taking centre-stage, the other “crisis” – in the Middle East – moved to the back burner. This crisis again is one driven more by fear and speculation, rather than fundamentals. Once stability returns to the region and there are reduced fears of oil supply disruptions then the price of crude will probably return to US$85-90 a barrel. The world is well supplied with oil as highlighted by US gasoline inventories at 21- year highs.
• The Japanese situation is adding a complication to the interest rate outlook. At one point last Tuesday the chances of an April rate cut had soared to over 60 per cent. Financial markets still believe that rate cuts are more likely in coming months, rather than rate hikes. But the situation is fluid. CommSec believes a longer period of interest rate stability is more likely.

The post Investor Signposts: Week Beginning March 20 2011 appeared first on AdviserVoice.

The big picture

• One thing we can never escape here in Australia is natural disasters. Whether it is drought, floods, bushfires, cyclones or hail storms, natural disasters are part and parcel of our wide, brown land. And the Queensland floods are no different. While clearly historic in size and significant in magnitude, Australians are dealing with the immediate issues, and when the waters subside, we will deal with the necessary clean up and rebuilding.
• The Queensland Premier has estimated the cost of the floods at $5 billion. But estimates will change over time. First the floodwaters need to subside so that the impact to buildings, farms and infrastructure can be derived. And any estimate of the total cost involves actuarial assessments by insurance companies, builders and valuers. It needs to be remembered that we have a $1300 billion economy and the federal government finances are in good shape, so the impact can be absorbed. Floods are also less damaging than cyclones or hail storms.
• There have been some suggestions that the floods have pushed down the value of the Aussie dollar and may end up pushing up interest rates. Blame that on slow news days early in the year. The Reserve Bank will look through the short-term flood impact. And I suppose that the Euro is also weaker because of our floods?
• Some prices for fruit and vegetables will rise and some supplies will fail to reach markets at all. But shortfalls may be met via imports in some cases, by frozen product or supplies from other regions of Australia. It may be that growers from other regions will lift supplies to meet market demands. And consumers will substitute high-priced or unavailable items for other fruit, vegetables, frozen product – or do without completely.
• What about the impact on the economy? In the short-term there is the impact of lost production and activity. But in many cases this will be made up over time. Given that the floods have hit early in the quarter, lost production may be made up over February and March, minimising the impact to GDP. There may be a modest reduction in export output in the March quarter that will be recovered over the June and September quarters. Further, any reduction in building and production over the March quarter will be offset by repair and rebuilding activity over the remainder of the year. We see no reason to change our GDP growth forecasts of 3.5 per cent for 2011.
• The cost of the floods will be met by governments, donations, reinsurance and private individuals. But the net cost is a different figure. Some coal and farm producers in other parts of the country will benefit from increased prices and demand. And builders, construction companies and retail operations will face increased demand for services and goods when repair and rebuilding work get underway.

The week ahead

• Recent data indicates that the Australian economy ended 2010 with a whimper rather than a bang. Admittedly the data released so far covers so called “second tier” indicators. But there is a rash of “top tier” or “top shelf” indicators to be released in the coming week such as retail sales and employment, so we will get a better sense of how the economy was tracking late last year. And in the US there will similarly be a raft of ‘top shelf’ indicators.
• On Monday retail sales results will be released. Unfortunately the data covers November, not the keenly-awaited December figures. For that, we need to wait another month. But for the November figures, we expect that spending lifted by around 1 per cent in the month. That may appear encouraging, but that is until you consider that sales slumped by 1.1 per cent in October.
• Still, anecdotes from retailers suggest that consumers embraced the discounts on offer in December which adds to the more positive trends gleaned from the Commonwealth Business Sales Indicator in the last few months. Buoyed by a solid jobs market, consumers are emerging from their burrows, albeit cautiously.
• Data on job advertisements will also be released on Monday. In recent months hiring demand has remained resilient, but it will be interesting if the trend has been maintained in light of weakened business activity.
• On Tuesday, data should indicate that Australia notched up yet another solid trade surplus in November courtesy of the mining boom with a figure near $2 billion expected.
• On Wednesday four indicators are slated for release – housing finance, credit card lending, tourist arrivals & departures and job vacancies. Most interest will be in the data on new home loans, but a flat result is expected. While the number of loans to owner-occupiers likely rose by 0.5 per cent in November, the value of all loans, including loans to investors, probably eased 0.5 per cent. The Reserve Bank lifted rates at the start of November so future results may prove even softer.
• One area where the economy has been performing very well is in terms of job creation. On Thursday the employment results for December will be released and we are tipping a 25,000 lift in jobs, consistent with recent data showing a rise in job advertisements. If the participation rate eases from record levels, the jobless rate could also ease from around 5.2 per cent to 5.0 per cent.
• In the US, there is a bevy of top shelf indicators to be released, but the first one doesn’t appear until Thursday. Earlier in the week wholesale sales figures are released on Tuesday with export & import prices, the Beige Book and the monthly budget on Wednesday.
• On Thursday, the producer price index and international trade figures are released while consumer prices, retail sales, industrial production and consumer sentiment are all scheduled for Friday.
• Most interest will be in the activity indicators – sales and production – and the results should confirm that the economic recovery is firmly grounded. Overall economists expect that retail sales lifted 0.7 per cent in December while production rose by 0.4 per cent.
• Apart from US data, investors will also be focussed on the latest economic information from China. The monthly export and import figures are expected on Monday. Other indicators such as retail sales, production and the December quarter GDP figures are generally released around mid month, but no set time has been scheduled as yet.

Sharemarket

• The gap between the All Ordinaries index and S&P/ASX 200 is the widest in 30 months, standing at 107 points. And the differential is not far off the widest level recorded of almost 129 points. So what does it all mean? Essentially it highlights the fact that smaller companies have been driving our benchmark indexes higher while the ‘big caps’ have been taking a breather. Over the past six months the Small Ordinaries index powered higher by almost 29 per cent while the ‘big cap’ ASX20 index lifted just 10 per cent. In part, the out-performance of small caps suggests an underlying confidence in the market. However it also occurred at the same time that the Aussie dollar lifted sharply, making Aussie big cap companies less competitive for global fund managers. So if the differential starts to narrow in coming days, investors have to first ask why it is occurring before then attempting to determine if it is a positive or negative signal for the broader market.

Interest rates, currencies & commodities

• It is always difficult to make sense of trading activity at this time of year. Late in the calendar year, some fund managers and hedge funds are focussed on squaring off their accounts for the month, quarter or year while others are attempting to paint their portfolios in the best light possible by executing last minute trades. Then at the start of the year investors of all descriptions are actively involved in structuring their portfolios for the period ahead. These exercises in book-keeping and strategic allocation are probably the only way to explain the machinations on currency and commodity markets. One moment the Aussie dollar is riding high at a 28-year high of US102.50c and the next minute it is struggling to maintain its grip on parity with the greenback. Certainly there have been no dramatic fundamental economic changes to justify the volatility. Or for that matter to explain the sharp falls in commodity prices including a drop over US$40 an ounce in the gold price.

The post Investor Signposts: Week Beginning January 9 2011 appeared first on AdviserVoice.

• Contrary to the expectations of the gloom and doomsters, 2010 turned out to be a positive year. The global economy expanded by around 4.5 per cent, the world didn’t slip into recession and global sharemarkets generally rose.
• Sure, the year wasn’t without its problems. Investors fretted about a double-dip recession in the US, European debt, and an over-heating of the Chinese economy. But worse case scenarios were avoided.
• Australian interest rates rose over 2010 and probably will again in 2011.
• At face value, the Australian sharemarket disappointed. But in large part that’s because the Aussie dollar soared – the second strongest currency in the world over the year. In US dollar terms, the Australian
  sharemarket actually out-performed the ‘world’ index.

Click here to download this doucument (pdf)

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While the strong Aussie dollar is good news for some, one of the groups feeling the pinch is expats living in Australia who have money overseas.

And according to Joe McKenna, of specialist foreign exchange broker World First, with the dollar expected to remain strong in the first half of 2011, such expats should be considering strategies to maximise the value of any funds they bring into the country.

“Most major currencies are struggling against the Aussie dollar at the moment, including the British pound, the Euro and the US dollar,” he said.

“This is good news for many, particularly those travelling overseas. However, we are also seeing more and more expats asking about the best ways to move their money into the country, concerned that the strength of the dollar is depleting funds they had earmarked to build their new lives here.

“For example, some clients may have sold a house in their home country but are now hesitant to move the proceeds here due to the eroded value of the sale proceeds. There are also those holding retirement savings offshore who are feeling that they are losing too much of the value of their nest egg if they bring that money over to Australia now.”

According to Mr. McKenna, predictions that the dollar will remain strong for the next six months or so means that these expats’ situations are unlikely to improve any time soon.

“While currency market movements are notoriously hard to predict, we expect that the dollar will stay high against other major currencies for the first half of 2011, then gradually depreciate as the pace of economic recovery in the UK, US and the Eurozone picks up.

“For example, we are predicting $1.65 to the British pound in three months’ time, which isn’t a significant change on current rates, then $1.75 to the pound in six months and $1.90 this time next year.”

Mr. McKenna has five tips for expats who need to bring money into Australia before the dollar begins to fall:

• Be realistic. Many expats benchmark their expectations against the much higher rates that prevailed a few years ago rather than current rates, but these highs are not likely to return for a number of years.
• Shop around. Exchange rates and fees can vary significantly between providers for the same transaction.  Banks in particular often take a large slice – up to three per cent – in commission, so it’s well worthwhile exploring the market for the best deal.
• Service counts. Find a provider that will closely monitor rates and contact you as soon as they rise to your chosen level.  Exchange rates fluctuate every second, so let someone else be your eyes and ears in the markets.
• Ask about flexible hedging. If you need to lock into a rate today – for example if you’re planning a large purchase such as property –  the most commonly used hedging tool is a forward contract. However, this locks you in to the current low exchange rate. Instead, ask your broker if he or she can offer a more flexible alternative, with some ability to benefit in upside if the market moves in your favour.
• Seek professional advice. We are seeing more and more clients who’ve been burned by either taking no advice at all or heeding poor advice, for example on online forums. Instead, speak to a specialist who can offer you sound, up-to-date advice that is tailored to your needs.

The post Strong Aussie dollar causing pain for many expats appeared first on AdviserVoice.

The big picture

• In the US, investors have been cheering the election result. That may seem odd, given the fact that it appears a recipe for doing nothing – a Republican-controlled House of Representatives, Democrat-controlled Senate and a Democrat in the White House. One study found that returns for the Dow Jones almost doubled in periods when there was a divided government compared with periods when one party ruled the White House and Congress.
• The theory goes that when the Government is divided there is less political interference with the economy, allowing companies and consumers to get on with business.
• So how does that theory apply to Australia? Unfortunately we don’t have a lot of past experience to work on. When a hung parliament last occurred between September 1940 and August 1943 the Sydney sharemarket lifted by 9.6 per cent or 3.2 per cent a year – around half the average annual average growth over the past 135 years. Still, the Second World War adds another complication to the analysis.
• When the most recent incarnation of a hung parliament became a reality in August, opinion was divided about the impact. Some thought it would prove positive with greater consultation between the parties and independent members. Others thought that little would get done.
• Unfortunately it appears that the latter will now be the more likely outcome. Despite initial optimism, there is no spirit of co-operation in the new Parliament. As a result little is getting done. And that means that businesses are still struggling to get certainty on key issues like the resource rent tax, pricing of carbon emissions, faster internet, migration and broader tax reform.
• The lack of certainty on the resource rent tax is stifling investment across the mining sector. Simply, how can you commit to a long-term investment with the knowledge that the tax regime could be dramatically altered? The final mining tax proposal and legislation are unlikely to be submitted until late 2011. That means that major mining companies may either further delay key projects or look to opportunities outside the country.
• Similarly, environmental issues. The Government has asked the Productivity Commission to give guidance on overseas carbon pricing schemes but the report is not due until May 2011. And Ross Garnaut has been asked to update his 2008 report. Again it will be a six-month process with no guarantees at the end.
• Add in the fact that there is a $43 billion National Broadband Network being built without a cost-benefit study and both the Opposition and Labor are putting limits on migration and it is clear that the economy is at risk.

The week ahead

• Another quiet week is in prospect in Australia with only three events of note on the economic calendar. In the US, the key date is Wednesday with at least seven indicators scheduled for release.
• In Australia, data on construction work done is released on Wednesday with business investment (private capital expenditure) on Thursday while on Friday the Reserve Bank Governor delivers testimony to Federal Parliamentarians.
• The “construction work done” release from the Bureau of Statistics provides a raft of information on the construction sector. Not only are estimates provided on home building, commercial and engineering construction activity in the September quarter, but there are also more forward-looking estimates such as commencements and work yet to be done.
• In the June quarter construction work completed hit record highs while work yet to be done was only marginally below record highs. At face value the construction sector appears in good shape. But the problem is that new approvals have slid by 25 per cent over the past nine months, pointing to weaker conditions ahead.
• Business investment has also been soft over the past year with spending falling in three of the past four quarters. But in contrast the outlook for investment has been upbeat, suggesting that investment lifted by 6 per cent in the September quarter. If the optimism about investment is to be maintained, the estimate of spending in 2010/11 will need to lift from $123.3 billion to around $131.5 billion.
• The Reserve Bank Governor faces a grilling by Federal Parliamentarians on Friday. Usually questions centre on inflation, interest rates and the job market, but this time around Glenn Stevens may get more than the odd question on bank funding. It’s clear that Federal politicians have incomplete knowledge of the topic, while at the last Reserve Bank Board meeting, members discussed the topic at length. Hopefully the Governor can fill the knowledge gap of politicians as well as some of the assembled media.
• In the US, the big day in the coming week is Wednesday with all manner of indicators due for release. Amongst the indicators to be released are personal income & spending, durable goods orders, new home sales, consumer sentiment, jobless claims and home prices. In addition minutes of the last Federal Reserve meeting will also be released.
• Personal income and spending are both expected to have risen by 0.4 per cent in October; new home sales may have lifted 4 per cent; and small gains are likely in durable goods orders and consumer sentiment.
• Earlier in the week GDP (economic growth) figures are released on Tuesday together with data on existing home sales. The US economy probably grew at a 2.3 per cent annual pace in the September quarter with existing home sales up modestly. Overall the data should give investors added confidence that the US economy is continuing to heal.

Sharemarket

• Many investors have been disappointed at the performance of the sharemarket this year. While the US Dow Jones has lifted by over 6 per cent, the ASX 200 has dropped 5.5 per cent while the All Ordinaries is down 2.5 per cent.
• However to get a better sense of how the Australian market has fared, its worth taking a different perspective. The capitalisation of the sharemarket is probably a better measure in the current environment, reflecting moves by companies to shift from debt capital to equity. Over 2010, the capitalisation of the All Ords has lifted 4.4 per cent and now stands 17 per cent lower that the November 2007 record high. By comparison, the All Ordinaries index is still 32 per cent below its high point.

Interest rates, currencies & commodities

• Politicians of all persuasions criticised the banks for lifting rates on loans by more than the movement in the cash rates. Banks were accused of being greedy and losing touch. A number of journalists and other commentators added to the debate. But that was before the Reserve Bank released minutes of the last Board meeting. According to the minutes, members spent some time considering the evidence. The conclusion was that old loans were being rolled over at higher spreads, leading to the risk that the higher funding costs would need to be passed on. Reserve Bank Board members took time to consider the issues, now it is up to others to get up to be brought up to speed.
• It may seem perverse, but the sharp lift in longer-term US treasury yields in recent days is clearly a positive development. Over the past seven days, US 10-year bond yields have risen by almost 40 basis points to 2.86 per cent. Given the fact that the Federal Reserve has embarked on QE2 – the second leg of quantitative easing or bond purchases – the lift in yields may seem surprising. But investors are starting to get the sense that the US economy is indeed recovering. At the same time commodity prices are rising and both these developments point to higher inflation. Clearly one of the biggest risks for holders of long-term government bonds is higher inflation, and bond investors are voting with their feet, moving to other asset classes.

The post Investor Signposts: Week Beginning November 21 2010 appeared first on AdviserVoice.

The big picture

• It never ceases to surprise how many people treat budget figures as facts rather than estimates. The Mid Year Economic and Fiscal Outlook (MYEFO) didn’t contain much that was new. The economic assumptions were tweaked and the bottom-line budget numbers barely budged, but still the Treasurer and many commentators claimed that Australia’s finances were solidly on track to returning to the black. In the year to September the budget deficit stood at just over $63 billion, and the rolling annual deficits are still increasing, not improving, so the path to surplus is hardly a smooth one.
• The Government also claimed that the rising Australian dollar was to blame for wiping $10 billion off revenue estimates over the next four years. Perhaps. But while the Aussie dollar has been rising, making life difficult for exporters and the tourism sector, and crimping returns for mining producers, Federal Treasury also lifted economic growth estimates while cutting the forecast for the jobless rate. Apparently the economy will be growing at a faster pace but the Government will extract less in revenue. And if the Aussie dollar is indeed rising, the expectation is that commodity prices would also remain strong, and indeed the terms of trade are tipped to rise by 15.5 per cent this financial year, well up from the estimate at budget time.
• And when it comes to estimating the impact of the Australian dollar on the economy, the latest tourism figures have thrown something of a curve ball into the calculations. In September a record number of foreign tourists visited our shores. In seasonally adjusted terms, tourist arrivals hit 511,400 in September, up 1.8 per cent on the previous month and the fourth increase in five months. Tourist arrivals are now 7.7 per cent higher than a year ago and slightly ahead of long-term average annual growth.
• Certainly there are still more Aussies travelling abroad than people visiting our shores – almost 100,000 more in the latest month. And it will get even harder to attract visitors to Australia in coming months with the Aussie dollar at parity against the greenback and historically high against a raft of other countries. But the fact that more visitors came to our shores in September than ever before is clearly encouraging.
• However what isn’t encouraging is that the number of migrants coming to Australia continues to fall. In the year to September, 218,400 migrants came to Australia, down by over 110,000 people on last year’s annual total. If we want to keep the Australian economy growing at a sustainable rate and move the budget into surplus, we need to keep attracting foreign workers from abroad. Federal Treasury estimates that full-employment is consistent with a jobless rate between 4.5-5.0 per cent.

The week ahead

• The Australian economic calendar has been well populated over the past week, but by contrast the US calendar has been very quiet. Well in the coming week the tables are turned with most interest in the top-shelf indicators due for release across the other side of the Pacific.
• In Australia, the week kicks off with car sales and lending finance figures on Monday. On Tuesday the Reserve Bank releases minutes of the November Board meeting. On Wednesday, the main gauge of wage pressures is issued – the Labour Price Index. On Thursday the average weekly earnings data will provide a different take on wages, showing how much we earn in actual dollars. Figures on imports are also released on Thursday while Reserve Bank Deputy Governor Ric Battellino delivers a talk in Perth to a CEDA function. And on Friday the state accounts are issued – showing how the state economies fared over 2009/10.
• Car sales probably fell by 1.5 per cent in October – the first fall in three months. While car affordability is the best since the 1970s, buyer caution is emerging. Certainly lending has been soft in recent months – down 6.5 per cent in August alone. So analysts will be closely watching the latest data for signs of any improvement.
• While there will be the usual interest in the Reserve Bank Board minutes, it is questionable how many new insights will be gleaned given that the quarterly monetary policy statement was released just three days after the rate decision.
• The wage data should prove interesting. Certainly the job market has tightened and that suggests upward pressure on wages. But conditions vary significantly across industries and state and territory economies. We expect that wages lifted by 1.2 per cent in then quarter and by 3.4 per cent over the year.
• In the US, a bevy of top-shelf indicators will be released over the week. On Monday, retail sales figures are due with producer prices and industrial production on Tuesday and housing starts and consumer prices on Wednesday. Also thrown in for good measure during the week is the Empire State index on Monday with the leading index and Philadelphia Fed survey slated for Thursday.
• Overall the results should be encouraging with firmer activity readings expected as well as a dose of higher prices – serving to downplay some of the concerns about deflation. In terms of the activity indicators, economists tip a solid 0.7 per cent lift in retail sales for October, underpinned by higher car sales. Strip out autos and a 0.3 per cent lift is expected. Industrial production probably rose 0.3 per cent in the month given the guide provided by the ISM manufacturing gauge. And housing starts were probably little changed near a 608,000 annual pace.
• And turning to the inflation gauges, rising agricultural prices probably pushed up producer prices by 0.7 per cent in October with consumer prices up 0.3 per cent. But excluding food and energy, core prices probably rose just 0.1 per cent for each measure.

Sharemarket

• Sharemarket investors had been hoping for some stability, but things don’t always turn out as planned. The US mid-term elections are out of the way and similarly the US earnings season, Federal Reserve quantitative easing and US non-farm payrolls report have all come and gone, leaving something of a vacuum. But beware idle hands at work.
• Some media commentators and financial analysts have merely sought to revisit the European debt woes in the hope of conjuring up a fresh bad news story. There really isn’t anything new here – the issue has been bubbling beneath the surface over recent months but US issues have hogged the headlines. Simply, there isn’t much else to focus on at present and there are empty column inches to be filled.
• Investors should ignore the hype. The big picture story of the global economy continues to improve and small economies such as Ireland and Greece serve as no threat to the recovery process.

Interest rates, currencies & commodities

• In the US and Europe, policymakers and businesses are worried about disinflation – slowing rates of inflation – as well as deflation – falling prices. In fact many retailers in Australia are similarly concerned about these price trends. But in developing nations, it is inflation concerns that remain in focus – more specifically the issue of agflation or soaring prices for agricultural commodities.
• However what is clear is that Commodity Boom MkII is well underway. The Commodity Research Bureau spot index has now recovered all the ground lost in the global financial crisis (GFC) and is back at record highs.
• Amazingly the index has rebounded 63 per cent from the February 2009 lows, thus replicating the lift from October 2005 to June 2008. But the important point is that the rebound has occurred in a far shorter time frame.
• While gold, oil and base metals generally grab the headlines; it has been the agricultural commodities that have recorded stellar gains in recent months. The CRB foodstuffs index is up 20 per cent from the recent July lows with both the textiles and raw industrials indexes showing similar gains over that period. In fact the raw industrials index – which includes cotton, wool, rubber and scrap metals – has soared 71 per cent since the December 2008 lows, thus exceeding the 63 per cent lift from November 2005 to April 2008 in Commodity Boom Mk1.

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