Capital 19 Catch-Up

Weekly Index Movement

Aussie All Ords+0.5%

What you think of the stock market these days will depend a lot on which index you’re looking at.  The Dow was down every day last week and eight of the last nine trading days.  The Nasdaq, on the other hand, has been up in four of the last five trading days and is near its highs of the year.

The Aussie market was flat last week and is up 3.2% so far for 2023.

Like the Aussie market, the Aussie budget was flat with nothing unexpected in it. All the main points had been leaked prior. Overall, there will be about $12billion of new stimulus in the coming 12 months. The government says this will not be inflationary because they will also take out more from the economy than they are adding.

They are missing one very important point.

Exactly who you give it to and who you take it away from.

In typical Labor fashion, low-income earners will benefit from the stimulus and high-income earners and companies is where it will be removed from.

High-income tends to save and invest extra money whereas low-income will spend it.

This budget is definitely inflationary, which is bad.

This whole cost of energy crisis really gets me going. If we weren’t trying to go green there would be no energy crisis. When they put me in charge I will take that $1.5billion Energy Relief Fund and use it to invest in coal mining. I’d also grant more licenses to mine coal. Maybe I’d use my $1.5billion to buy my own coal mine and use the profits to build a hospital in Tasmania so they don’t have to choose between that and a stadium.

More coal produced means the price of a unit of coal goes down. That lowers energy production prices for a long time. Giving low-income $500 sees that money disappear in a week and we will have the same problem again next year, except you will need to hand out more because energy prices will be higher.

You see how this becomes inflationary?

I also agree with Dutton. Nuclear is the answer. We can mine uranium and Silex Systems (SLX) (that is one to buy for you) can refine it. Then we replace coal generators with nuclear in exactly the same site as the old coal and away we go with cleaner production and no need to build a brand new grid to transport it.

Alas, I suspect my bid for leadership won’t go very far and we will all be stuck in this loop of bad decisions forever. Doesn’t mean we can’t profit from their bad decisions though.

That’s why I own a lot of Coal (NHC is my favourite) and Copper (SFR).

Taking of coal, last week I explained about why share buybacks are good. Here is one for you in the US. Peabody Energy Corporation (BTU) is going to return $1billion to shareholders through a buyback. That is about 25% of its market-cap.

BTU trades on a PE of 2. Let’s say it makes $10 profit and has 10 shares out there. That means the earnings per share is 10/10 = 1. On a PE of 2 that puts the share price as $2.

Now, after we eliminate 25% of the shares through a buyback, the EPS becomes 10/7.5 = 1.33. On a PE of 2 that puts the price at 2.66 which is a 33% increase.

Right there is a very good reason why BTU shares should be 33% higher next year. (You will also get dividends along the way to add to this)

Whilst the government of Australia is doing its best to add to inflation (by the way – where are these 1.5million immigrants going to live? I suspect Albanese thinks this won’t add any extra demand for housing in the capital cities because he will build extra housing in woop-woop to offset it. Maybe they will all live in Alice Springs as I hear the vacancy rates are increasing there) US inflation continues to fall.

Note to RBA – that’s what happens when you have interest rates higher than inflation.

US inflation came in at 4.9% year-on-year for another slight decrease.

But what is worrying markets at the moment is the debt-ceiling. This debt-ceiling is a limit on what the government can borrow. The US government ran out of money in January and since then the Federal Reserve has been enacting temporary extraordinary measures to keep going without raising more debt.

Quite what these measures are, I do not know, but they sound very much like lending money out without asking for it back to me.

All kinds of crazy ideas are being thrown around. You’ve probably heard the idea of minting a $1trillion coin. It won’t happen.

At some point, Biden and the Republicans will agree and they will raise the ceiling. They have already done that 90 times so what’s one more?

I am a little worried this leads Moody’s and Standard and Poors to downgrade US Federal Debt. They did so after the debt ceiling was raised in 2011 and the S&P promptly fell 17%. Mind you, three months later it was back up so perhaps I do want this to happen so I get a buying opportunity.

1-month Treasuries are yielding 5.68%. 2-month are yielding 4.88%.

It isn’t supposed to be that way around and these yields are saying that the most liquid and well-informed capital market in the world is discounting a chance of a technical default in the coming 30 days.

The risk of default is not zero and could lead to a sudden and sharp drop in stock prices.

I’m also not surprised to see earnings expectations coming down for Q2. They are down 7% so far and probably about at the right level now given what Q1 came in like. As the year continues they will lower Q3 and Q4 too. This puts a cap on potential gains.

Lastly, semiconductors have been weak recently. Semiconductors are the new transports and are a leading indicator of the market.

The surge in semi’s from late March has been completely reversed. Whilst the relative strength hasn’t broken down completely yet, it’s going to be difficult for the broader market to break out of its range with semis struggling like this.

Summary – it is time to be cautious. I definitely would not be adding anything here and reducing exposure is probably a good idea.


Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.