06 Nov Capital 19 Catch-Up
Weekly Index Movement
|Aussie All Ords||+2.3%|
Wow. That was a massive week. After getting my timing out by a week, it is nice to see markets behaving as predicted.
As you know I have been saying the 10yr yield will stabilise and stocks will rally for the last 2 weeks. Last week we got a decent fall in the yield and a huge move up in stocks.
After touching 5% the prior week, the 10yr yield fell to 4.6% this week. Here is why.
Fed Chair Powell kicked things off when he kept rates on hold and sounded fairly dovish in his press conference. Although his statement was almost word for word the same as previously, the market took it to mean the rate hiking cycle is over. Here is a little slice of what he said:
“… persistent changes in broader financial conditions can have implications for the path of monetary policy. In this case, the tighter financial conditions we’re seeing from higher long-term rates but also from other sources like the stronger dollar and lower equity prices could matter for future rate decisions.”
But it wasn’t only this that caused yields to drop. The move started earlier than this and was kicked off by the Treasury Department.
The US Treasury said it’ll borrow less money than predicted this quarter, Every quarter, the Treasury announces how much funding it needs for the upcoming six months. That’s a must-watch reveal for bond investors, because the level of borrowing indicates the amount of US government bonds that will flow into the market. More borrowing, more bonds. And the more bonds issued, the lower their prices and the higher their yields. For this quarter, the Treasury dropped its estimated borrowing by some $70 billion.
This was a bit of a surprise and shows a more fiscally responsible Treasury.
Then, on Friday, we got the jobs number.
The US added a lower-than-expected number of jobs in October, a sign that the Federal Reserve’s biggest wish might finally be coming true. US companies filled a fewer-than-expected 150,000 jobs in October, while the unemployment rate crept up to 3.9%.
This is exactly what the Fed has been wanting for 18 months. Slower employment will slow the economy and shows the current rate of interest is restrictive.
Is it restrictive enough to see inflation fall back to 2%? Maybe, but I fear the opposite is going to happen.
I wrote about the Auto Union strike action several weeks back. After six weeks of strike action the big 3 car manufacturers have negotiated an agreement with their workers. Workers are set to get a 25% pay rise over the next 4 years. This rise will be bigger than what they have received in the last 22 years.
On the face of it we can say they probably deserve a rise as it would appear they have had little in the last two decades.
But, this will be inflationary, and from two counts.
First, workers with more money will spend more. That will increase inflation. Second, the car manufacturers will increase the prices of cars to offset this higher cost base. That will also increase inflation.
On its own, it isn’t an issue. But what if other unions see this and decide they want big pay rises too? The tight labor market gives the power to the employee.
That could become a real big problem.
Then this happens
It’s already started.
No need to panic just yet as this will take a long time to play out, but keep an eye on more news stories like this.
As time goes on I see an increasing chance of a double peak inflation cycle just like what happened in the 1970’s. That would be very bad.
Whilst lots of companies announced last week, the only really important one was Apple.
Revenue was down less than 1% for the period, and full-year revenue was down 3% from fiscal 2022. The company warned of a mild holiday quarter, too. Still, Apple reported a bright spot in its services revenue, up 16% year over year, and topped Wall Street expectations on several metrics.
It’s the longest slowdown in more than two decades, as the company struggles with sluggish Mac demand. The results also suggest Apple is facing a bigger deceleration in China than feared.
Apple products cost a premium and it should be no surprise to see a slowdown in a slowing economy.
It is difficult to see how they turn this around in the short-term so I would not be surprised to see more weakness over the coming months.
But, then again, Apple rarely disappoints for long. They have a tendency of introducing a new desirable product just when you don’t expect it.
Well done to all those who took our advice and hedged their currency last week. Aussie has already bounced up over 0.65.
The IMF must read this column as they said Australia needs two more interest rate hikes. I think it needs 4.
The first will come tomorrow on Melbourne Cup day so don’t waste your money gambling on horses. You will need it for mortgage repayments next month.
Paradigm Pharmaceuticals (ASX:PAR)
This stock idea comes from a Capital 19 member who introduced me to the company a little while ago. (Thank you Tony) so now I am sharing with you.
This is speculative, so treat accordingly, but along with the higher than usual risk comes higher than usual reward if it pays off.
Paradigm is in the business of treating osteoarthritis, particularly in the knee and hip.
Traditional treatments include steroidal anti-inflammatories which are notoriously ineffective or opioid painkillers which are notoriously addictive.
The PAR solution is a product called Zilosul (pentosan polysulphate sodium, or PPS) which is derived from the Beechwood tree. This is currently used to treat a bladder condition and deep-vein thrombosis by Germany’s Bene Pharmachem.
Paradigm has partnered with Bene Pharmachem to turn it into an injectable format that can go straight into the knee.
The reason I am making you aware of Paradigm now is because they have just released the results of a Phase 2 trial, the results of which were impressive.
The study showed benefits in pain reduction last for 365 days post a six-week treatment with an associated reduction in pain medication (80% less than the placebo group).
But more impressive was the MRI of 15 patients that showed not only had the cartilage reduction stop…..it was actually regrowing!!!
This could be a game changer.
PAR is still some way off being able to market Zilosul. It is hoping to get approval in Australia in 2025 and is in talks for Phase 3 trials in the US.
But, hot off the back of this upbeat trial they have announced a capital raise. That has depressed the share price to just 42cents, a 5 year low and a nice entry point for those with a speculative risk appetite.
Things will slow down next week. The calendar will be quiet on the economic front but earnings will continue.
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.