The week that was; economics and finance in Australia.

Bewildered. That’s exactly how I feel about the first week of the year. What a ride! The excitement of heading out the zoo and sky high stock prices, I can hardly believe what’s happened already.

On a glorious sunny 24C (75F)day I headed up through the twisting, forrest lined roads to Healesville Sanctuary. A zoo for native Australian animals, and I couldn’t believe how lazy and comfy those koala’s were. It’s like they’d all just had their Christmas feast and were dozing off like fat cat bankers. Earlier in the day though I had a fascinating conversation with my father, an old economics teacher and lecturer.

The Dollar Conundrum

We discussed an economic curiosity of the Australian dollar. The recent economic data shows that capital is flowing out of Australia but the dollar has risen. This is contrary to basic economic theory. Any explanations of increasing tourism, or higher priced resources would result in an increase of capital inflows, so they are immediately ruled out.

What has happened recently that has no doubt sparked the fluctuations are the interest rate rises in the US. With America recovering and tightening monetary policy the US and Australian interest rates have come to parity. It’s unusual for the interest rates to be at parity and even more unusual for Australia to have lower interest rates than the US.

Why does this affect the money going in and out of the country?

Well there are a number of reasons but put simply it’s about returns. Interest rates are the return on money and investors are driven by higher returns, so they often move capital to higher interest rates. This really only holds true in a low interest environment, like the times we have been going through. There’s a whole heap of economy theory dedicated to this but it’s not the time nor the place to delve into that pile.

The dollar conundrum is bizarre. The money is leaving the country, the Central Bank is on loose monetary policy and yet the currency stays at a higher valuation. The only valid explanation is softness in the US currency due to Trump, and speculation. The economic fundamentals all point to a fall in the dollar, so based on that logic, we know what to anticipate.

The Plight of the Pollies

Our beloved and useless politicians are back at it again. Wasting time and tax payer dollars with over hyped rhetoric about gangs and hoodlums. The States are challenging how the Fed allocates resources and assistance.

Bitter after receiving a fine over the weekend for failing to adhere to the law and wear a life jacket whilst on a boat the Prime Minister has lashed out against the people of Victoria. The reason; the State Premier essentially said the Fed is terrible at helping out Victoria, and they need some assistance. There are concerns over crime, but police officers cost money. As does education, truancy management, infrastructure, health care and all the things that go along with preventing these youths from going down this path.

The fingers are flying all over the place as we gear up for another election. It’s this persons fault for letting immigrants in and that persons fault for not policing them and another persons fault for not bringing the tea and biscuits to the All Politician morning tea at a beachside villa in Thailand (at taxpayer expense of course). Well that last bit didn’t happen — that I’m aware of. But our politicians are ridiculous and anything is possible. Especially after the citizenship debacle or the general litany of screw ups.

Enough said though, the Federal politicians are struggling to stay relevant. South Australia has engaged in their own energy supply, AGL has said no to keeping a coal power plant open, Victoria has had enough of being snubbed for Sydney, and the revolving door at the Prime Ministers office combined with infighting has left them the laughing stock of the world. It’s also revealed the plight of the pollies.

A Stock Pick

The last choice was Graincorp (GNC), back on the 15/12/17 when it traded at $7.88 on news of a bad season. It’s now headed towards the target price of $8.75 and with any luck it will get there shortly. Although, I’ve probably jinxed it now.

This week I’ve had some challenges looking at stocks. I’ve been watching National Australia Bank with a keen eye as at $29.00 it looks like good value but until then it’s just a watch and wait.

Today I began investigating a small-cap firm, National Veterinary Care (NVL). On the graphs it has broken through the slow stochastic price barrier and has leapt up to $3.15. It’s a hard firm to accurately value as it is a roll-up growth stock that has only been listed for a short time. The slow stochastic analysis shows it’s a time to buy and the stock has some legs yet.

After reviewing the board members I started to take some comfort. With board members having experience at competitor Greencross there is knowledge of the industry and proven ability to grow shareholder wealth. There’s also Director experience at G8 Education which has a very similar growth strategy as NVL and was proven to generate good returns.

The numbers, well they look okay. Growth and acquisitions can hide a lot. The businesses need to be getting efficiencies from the acquisitions and that’s hard to confirm at this stage. That being said, NVL doesn’t appear to be overleveraged and when investigating the practices they purchase all have excellent reviews. Customers are rating the clinics highly and leaving positive feedback. Meaning that the end user, the ultimate supplier of profits are happy with the service. With some legs to go on it, I’m shooting for $3.60 and a reasonable 14% return.

Articles to Read

Here’s some interesting articles from the week for you to have a read and think over.

  • Australia is running out of booms
  • Fed's Monetary Policy Cornerstone Attacked at Economists' Gathering
  • Nocookies

This is not financial advice, or any recommendation to engage in any financial markets. This is an opinion only, that takes no responsibility for the outcome of markets, and please conduct your own research prior to buying or selling any assets.

Thank you for reading.

Yours,
Chris Leeson




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