Let’s start the week in Europe, where the hangover from the last boom is still claiming casualties. Over the weekend, the Financial Times (FT) reported that two Italian banks are set to close their doors:
‘Veneto Banca and Banca Popolare di Vicenza, two mid-sized lenders based in the country’s prosperous industrial north-east, will be wound down by the Italian authorities after the European Central Bank confirmed on Friday evening that the two lenders were “failing or likely to fail”.’
The ‘good’ news for Italy is that the wind up of the banks will take place under Italian insolvency laws, not the European Union laws that say a banks’ losses will be borne by the banks’ creditors.
Apparently tens of thousands of northern Italian locals hold deposits with these institutions, and the Italian authorities are fearful of them being wiped out. Instead, they want ALL Italians to pay the cost. As the FT article states:
‘Bankers estimate the cost of the wind-down to the Italian taxpayer and Italian financial system, which may have to contribute to a deposit insurance fund, could be in the region of €10bn.’
Great, get everyone to chip in for the mistakes of a few. And we wonder why bankers are so reckless? There’s virtually no downside for their recklessness!
Of course, this is not a big deal in the scheme of things. The European and global economies are healthy enough to enable the Italian banking system to slowly crawl out of its hole. It will take years, though.
That’s the important point to note about this. That is, it’s not a big deal. While you might hear the bears talk about the dire state of the Italian banking system as evidence that the potential for a bust has not gone away. It’s rear vision mirror analysis.
The next crisis, whenever that is, will have as its cause something completely different.
If you’re a reader of Phil Anderson’s Cycles, Trends and Forecasts newsletter, you’ll know exactly when to look for the next bust (hint: it’s not for a while). But in his latest report, Phil drops a bit of a bombshell and says that there is one very real threat that could derail the US real estate cycle — a cycle that the rest of the global economy runs on.
The two World Wars have been the only disruptor of the cycle in the past. But Phil isn’t predicting war any time soon. It’s something much bigger and more damaging. He calls it the ‘nightmare scenario’.
In deference to Cycles, Trends & Forecasts subscribers, I’m not going to spill the beans here. But if you want to find out more, click here.
If you want further evidence that the Italian banking strife is a product of yesterday’s, and not tomorrow’s troubles, cast your eyes west, over to the Emerald Isles. From the FT again:
‘Ireland has raised at least €3bn by relisting one of the banks whose collapse helped push the country to an international bailout, marking a milestone in the country’s economic turnround.
‘The new shares in Allied Irish Banks (AIB) will begin trading on Tuesday in Dublin and London, seven years after the bank was nationalised at a cost of €20.8bn. The Irish government will still hold between 71 and 75 per cent of AIB’s shares after the sale, and expects to slowly sell down its stake in the coming years.’
The old cycle is dead. A new one is emerging. If you spend too much time looking into past, you’ll miss the future…or at least the here and now.
What of the present then? What do you make of it?
Well, in the US, it’s all about technology. Not even Donald Trump can derail that juggernaut. Tech stocks seemingly won’t put in a decent correction. Every sell-off is followed by a ‘buy-the-dip’ mentality.
That will end at some point. There will be a panic sell-off down the track and everyone will come to their senses. It’s the one thing that makes me a bit wary about stocks right now. That is, the potential for a mini panic out of tech stocks.
But in Australia, the mood seems different.
One sector that is a good barometer for investor risk appetite is the IPO market. IPO stands for Initial Public Offering. It’s when companies first list on the ASX.
When investor sentiment is hot, companies find it easy to attract the money to list at whatever price they want. When the mood is less ebullient, it’s not so easy.
Using this as a guide, the Aussie market is less than hot right now. Late last week, Craveable Brands pulled their IPO due to lack of investor interest. The company owns the Red Rooster and Oporto fast food brands, as well as the Chicken Treat chain of restaurants in WA.
The business itself is a good one. However, the vendor, private equity company Archer Capital, wanted a price that the market wasn’t willing to meet.
The forecast was for Craveable Brands to generate a hefty 17% increase in net profits during FY18. Investors were then asked to pay around 12 times for those not-yet-achieved earnings.
The promoters did their best. They utilised tax credits to boost the initial dividend yield to around 9%, but the market remained rightfully wary. It wanted a lower price. The vendor wasn’t prepared to sell at that lower price.
It joins a lengthy list of companies that have pulled their IPO plans this year. That tells you that investors remain discerning and price conscious when it comes to new company listings.
And it tells you that we’re not in a boom mentality yet. In a hot market, a company like Craveable Brands would have listed without too many problems.
But as it stands, there’s a lot of nervousness about the growth prospects of companies that rely on discretionary consumer spending. There is a fear that Australia’s record household debt levels will impact demand.
That makes sense intuitively. But it’s not borne out by the facts. The chart below shows the ASX 200 Consumer Discretionary Index. It’s trading near its highest level since 2008.
[Click to enlarge]
Perhaps the index is topping out. Who knows?
But the chart tells you that consumer discretionary stocks (in aggregate) are making money. My guess is that as long as interest rates remain low, they will continue to make money.
It’s more a measure of investor sentiment, rather than poor operating conditions, that many vendors can’t IPO companies at a price they’d like.
It’s another reason I don’t fear a major bust right now. Busts follow booms, and the IPO market tells you there is no boom to speak of.