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Is ‘confidence’ the missing ingredient in getting <a href="http://www.moneymorning.com.au/category/economy/australia-economy" title="More on Australia's economy"><strong>Australia’s economy</strong></a> back on the road to recovery?

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The Best and Worst of the Australian Economy

Posted on 25 February 2015 by Greg Canavan

Is ‘confidence’ the missing ingredient in getting Australia’s economy back on the road to recovery? That’s the question I’ll attempt to answer in today’s Daily Reckoning. Plus, I’ll look at two stocks that show you the divergent paths the Aussie economy is on right now.

But first…is the oil price on the way back down?

Monday night, West Texas Crude fell more than 3%, to back under US$50 a barrel. As you can see from the chart below, over the past month oil rallied nearly US$10 a barrel. It took prices back up to the 50-day moving average (blue line).

But this looks like an area of resistance. There’s a good chance that oil will now retest its late January low of around US$45. After such a big decline from mid-2014, at the very least, oil has a lot of work to do before it can start moving higher in a sustainable manner.

That’s why trying to pick the bottom after such large sell-offs is always fraught with danger. The rallies tend to be short and sharp…and most of the gains are lost when the downtrend reasserts itself.

So if you’re a buyer of oil and energy stocks here, understand this is a long term bet. Hindsight will probably prove you correct. But in the meantime, you’ll look like a fool while oil goes nowhere and the rest of the market moves higher.

At least that is the lesson from gold’s sell-off in mid-2013. While the very sharp falls brought gold close to its lows, here we are nearly two years later and the gold price, at least in US dollar terms, is still struggling.

But in Aussie dollar terms, it’s a different story. As an Aussie investor, it’s a difference you need to take notice of. Most of the analysis about gold centres on gold priced in US dollars.

If you’re investing in Aussie gold companies though, you need to focus on gold priced in Aussie dollars, because that’s how these companies earn and derive their profits.

So while US dollar gold continues to languish around $1,200 an ounce, Aussie dollar gold is a healthy $1,540 an ounce. At this price, local producers should start to generate strong profit growth.

That’s why I think it’s an important time to start looking at the sector again. If I’m right, you’re going to see big gains in the years ahead. The biggest gains will be reserved for those getting onto the trend early.

Last week, I recorded a brief presentation outlining the case for gold and some favoured stocks in the sector. You can check it out here.

But the market isn’t really interested in gold companies. They are flying under the radar right now. Which is why now is such an exciting time to take a look.

Two companies reported profit results Monday that tell a tale of two economies. For engineering contractor, UGL, it is the worst of times.

UGL reported a writedown of around $280 million for a half year loss of over $120 million. This related to cost blow-outs at an LNG plant it is building in Darwin as well as other provisions based on the general slowdown in the commodities sector.

Underlying profit fell 40% to $29.3 million. It’s tough times for companies exposed to the resource sector.

UGL’s share price has declined more than 50% over the past few months, and that’s after taking into account the sale of its property management business, which netted shareholders around $500 million.

But after disbursing the sales proceeds, now the company can’t afford to pay a dividend. It could be a while before its reinstated. In this market, failure to pay a dividend due to cash constraints is like having corporate leprosy.

UGL’s share price is in a solid downtrend so I’d be steering clear of it for a while.

Meanwhile, over in property land, it’s the best of times. Global property developer Lend Lease announced a 25% increase in first half profit to $315.6 million.

The solid result was largely due to the strong performance of the Aussie division, which saw a 33% increase in operating profits. And that was due to the strength in the residential property market. From the press release:

Strong residential trading conditions saw the Property Development business deliver profit of $132.6 million. Residential settlements increased 18 per cent from the prior corresponding period, apartment pre sales increased 195 per cent including sales for The Yards at Brisbane Showgrounds, 888 and 889 Collins Street in Melbourne and at Darling Square in Sydney.’

Lend Lease is one of the largest land bankers in the country. That is, it owns a huge amount of vacant land zoned for residential development. It can choose to hold back from developing this land when times aren’t so good, or it can make hay with it…like now.

The problem with this approach to land management is that it exacerbates the supply issues that Australia faces. A common refrain is that Australia has limited supply of land for residential property.

That’s not exactly true. We have a limited supply of land because land banking companies restrict it. They only release it in numbers when the profit margins are fat.

When people aren’t willing to pay big prices, the land sits idle, accruing gains while the land banker’s wait. Heads they win, tails you lose.

Lend Lease is in a strong uptrend, but it’s not exactly cheap. I’d be holding if I owned it but wouldn’t be buying at these levels.

The moral of the story? Resource related work is tough going right now…property related business is good. Very good.

Yet property transactions, construction and the associated money shuffling that facilitates all of this is not enough to give our economy the boost it needs to get over the resource downturn.

Some say it’s just a matter of confidence. Get the confidence and animal spirits back and we’ll be economic world-beaters again. I say that is utter bollocks.

I’ve run out of time to make the case for why that is, but I’ll revisit the issue later this week. Until then…

Greg Canavan,
Editor, Sound Money. Sound Investments.

Ed Note: The above article was originally published in The Daily Reckoning.

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Phil Anderson gives his take on the relationship between  recent <b>building activity</b>, the commodities cycle and <b>new technology</b>.

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Remembering the Future

Posted on 08 June 2013 by MoneyMorning

An edited extract from a presentation by Phil Anderson

[Below is a response to a question on how he interpreted recent building activity and technology]

I saw that they’re starting to build the southern hemisphere’s tallest residential tower. What it tells me is this: it tells me the strength of the commodity sector, in a bizarre sort of way.

Every single cycle I’ve seen, certainly in America and around the world and in Australia, the tall buildings get built, they open up in recession and generally it takes 6–7 years to actually recover before we start thinking about building another tall building.

This is a little different. It’s been the first time I can remember where tall buildings are getting put on the drawing board so quickly after the downturn that we’ve had.

Now they’re even thinking in Dubai of building something, I think it’s even bigger than a mile high and both the Chinese and the Americans are working quite feverishly to develop new lift technology that will allow those buildings to get built…so you can get up and down the buildings very fast.

We’re here in Melbourne and if you walk around the CBD of Melbourne and you go to many of the suburbs, every single street in Melbourne has become a construction zone. I’ve just never seen things so busy.

That to me indicates the sustainability of the new cycle going forward, based as it is, particularly for Australia, and commodity producing nations and the Middle East on commodity prices. It’s become obvious now this sort of stuff is dependent on China and things going forward and everybody is really nervous about whether this can last or not

It wasn’t so obvious ten years ago — even though it was all on my website, you can see it. It’s the 64 million dollar question really.

[WD] Gann in 45 Years on Wall Street — and Gann put this book out in 1949, so its um more than sixty years old now — Gann suggested that during the past history of the world following each depression some new discovery or some new invention has stimulated business and progress and bought on another boom.

Now that’s happened for sixty years, 3 additional cycles after Gann died, I think we can expect another one. You can see, generally in the US, what has happened after each major real estate cycle, major downturn, you get one of two things happening that starts of the next boom.

You either get the creation of new technology or you get a new energy development that just allows costs to come down and new technology does the same thing.

The US at the moment is unprecedented. It’s now having those two things happening. So you’ve now got with the energy related stuff (leaving aside the environmental concerns) and getting the gas out of the earth, it’s going to prodigiously lower cost for business to such an extent that you’re finding that manufacturing activity is going back to the United States.

That’s very significant and could bring a new, in my view, it’ll bring another huge boom. At the same time as that you’ve got all this new technology developing. I was going through some of my old files in preparation for today’s talk and you know, I had a cassette tape drop out of the file and I thought ‘I wonder what’s on there?’

Do you know, I couldn’t find a machine upon which to play it. And that’s only been, what, 15 years? Ten years even? Does anybody still have a radio player or a cassette player in their car? Not many. I don’t. I actually had to get, go to a friend, an elderly friend, they still had one…just to play a cassette tape.

The technology is prodigious. The invention is prodigious and relentless and while inflation stays low as it is at the moment because it feeds on itself as costs come down it lowers the inflationary process, it means business can look long term…much more forward, so they can continue to innovate and create. So it’s a cycle that can feed of itself.

Now I know this has gone a long way from a simple tall building question, but because I think with the energy cost savings and the technology inventions this is probably going to make Ben Bernanke a hero and its going to allow him to get away with prodigious money creation.

Money creation, as you know, it’s supposed to be inflationary. But if he continues to create that credit but the deflationary tendencies of the energy and the technology taking place, then we’re not going to get so much inflation, so he’ll be allowed to do that for quite some time and it will allow quite a recovery to take place.

In my view, and I could be wrong but what it’s tending to suggest to me out of all the cycle history that I’ve studied, it’s tending to suggest that we’re very early in the next cycle.

We’re so early to get new buildings, it could be the next cycle is very, very productive and enormous wealth could be created and lead to quite a substantial boom. And now we’ve just had the US market go into all-time new highs; nobody was expecting this, except me and one or two others.

It’s very clear in America and it’s very clear in the UK that there’s rising rents and it will eventually lead to a major recovery, and you’ve seen that already in the US. It will spur new construction and you get into the next cycle.

Now we just have to wait really to see whether Australia will continue to traditionally follow the US and its cycle or whether Australia is changing over a little bit and timing itself to what might be a Chinese cycle.

Phil Anderson
Contributing Editor,
Money Weekend

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Keep One Eye on Resource Stocks and the Other on the NASDAQ
31-05-2013 – Kris Sayce

Getting in on the ’99 Cent Craze’ with Crowdfunding
30-05-2013 – Sam Volkering

Buyer Beware: Japanese Government Bonds are Moving
29-05-2013 – Murray Dawes

The Best Contrarian Play on Gold I’ve Ever Seen…
28-05-2013 – Dr Alex Cowie

A Revolution in the Share Market is Coming…
27-05-2013 – Kris Sayce

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Queensland Housing’s 100-Year Slump

Posted on 10 October 2011 by Kris Sayce

If you own a home or investment property… or are thinking of buying either in Queensland, today’s Money Morning will make you think twice.

After spending a week holidaying on the Gold Coast we’ve come to the conclusion that Queensland house prices could fall and stay low for up to 100 years!

It’s a big claim. But we’ll explain all in a moment. First… Continue Reading

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Graph: RBA Index of Commodity Prices

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Is the China Boom Rumour or Fact for Aussie Stocks?

Posted on 04 July 2011 by Kris Sayce

“Doubts are mounting about the health of China’s property market, Beijing’s ability to control inflation and the true extent of government debt. Last week, the central government disclosed that local governments owed debts equal to a quarter of gross domestic product. It’s hard to imagine a large chunk of those borrowings won’t turn sour.” – The Wall Street Journal

It is hard to imagine.

That’s why we believe the China Ponzi economy will burst.

And when it does, it’ll have a major and disastrous impact on the Australian economy. It’ll make the Aussie property crash look like a blip. Continue Reading

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Shades of Things to Come

Posted on 28 June 2011 by Aaron Tyrrell

In the Guardian this morning, the chief of UK Asset Resolution (UKAR), Richard Banks, reckons the UK could face a ‘tsunami of home repossessions as soon as interest rates start to rise’.

UKAR has £80 billion worth of bailed-out mortgages on its books. And Banks is convinced it would be better to let them go under than force homeowners further into debt.

For a lot of Aussies, this is tough to believe.

Not that it could happen to over-stretched UK homeowners. They believe that alright.

But they can’t believe it could ever happen to them. Continue Reading

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Your ‘Great Property Debate’ Digest

Posted on 10 June 2011 by Kris Sayce

Your ‘Great Property Debate’ Digest

What can we say… the Great Property Debate went pretty much as we expected.

The housing bulls would drag out their usual excuses, and we’d counter them point for point.

Of course, the format wasn’t really a debate.  Rather it was seven individuals giving a presentation one after the other.

The event kicked off with Tony Hayek.  As we understand it, Mr. Hayek owns a property investment business.  The following three quotes will give you a good idea of his 15-minute presentation:

“The property market has grown forever.”

“The property doomsayers have been wrong forever.”

“The GFC was the best financial period of my life: interest rates went down… rents went up… and capital values went up.”

[Ed note: The last quote is paraphrased; we were a bit slow jotting down his full comment.] Continue Reading

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Why the Mainstream Wants to Silence Us

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Why the Mainstream Wants to Silence Us

Posted on 09 June 2011 by Kris Sayce

Why the Mainstream Wants to Silence Us

“Currently, there is a shortfall of 200,000 to 230,000 dwellings; we should be building 180,000 to 200,000 dwellings every year and we are building less than that, he said.”

The above quote is a summary from Margot Saville at Property Observer.

She was commenting on the claim made by Dr. Shane Oliver at the Great Property Debate in Sydney on Tuesday.

We don’t know why Ms. Saville didn’t mention our presentation – we spoke straight after Dr. Oliver.

Because we can guarantee you, we made it perfectly clear there’s no evidence for a chronic housing shortage.  In fact, we made it so clear we spent 12 minutes out of our allocated 15 minutes talking about it!

(If you were there for the debate you’ll know for the first 12 minutes it was as though we were taking a leisurely stroll with our presentation as we covered one of our five points… whereas for the last three minutes we raced through it in the fashion of Usain Bolt covering 100 metres!  Sorry about that.) Continue Reading

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How to Avoid Getting Caught Between 4500 and a Hard Landing

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How to Avoid Getting Caught Between 4500 and a Hard Landing

Posted on 24 May 2011 by Murray Dawes

How to Avoid Getting Caught Between 4500 and a Hard Landing

The ASX 200 fell sharply yesterday.  It lost 89 points to close at 4643.

The banks were the story of the day.  The big four each dropped around 3% by the close of trade.

But wasn’t just in Australia where markets fell.  Asian markets all fell sharply during the day…

China’s Shanghai composite index was down nearly 3%… Japan’s Nikkei fell 1.5%… and the Hang Seng fell over 2%.

The market trouble didn’t end there.  European markets reacted badly to the possible downgrade of Italian debt by Standard and Poor’s and the election defeats of governments in Spain and Italy.

But the real story is economic growth.  It’s slowing dramatically at the moment. Continue Reading

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