All Ords Report 16 June 2017

Why try to disguise what the bank levy is really for?

Is it to help pay for services to support people with disabilities or is it really part of a plan to open our financial system to international players?

In the 80’s, Australia opened the door to foreign banks, which fuelled a credit boom and bust. And it seems that when Governments intervene and something goes wrong, the Australian people end up paying for it. The credit fuelled 80’s led to the collapse of Pyramid in the early 90’s.

It seems that regulators get the timing wrong. History shows time and time again that people who are supposed to be ‘wiser’ than the rest of us relax regulations in the financial system and the credit cycle gets out of control again.

There is also the issue of competition. Is the bank levy really just a tariff in reverse? Instead of providing protection to Australian companies, it’s reportedly going to provide foreign banks an opportunity to compete locally. How is this a level playing field?

History provides examples where Government and ACCC policies end up making it difficult for our home grown companies to compete in their own back yard.

The major banks have said that a levy on their profit isn’t going to generate what the Government expects anyway. Some financial analysts are predicting that the levy needs to be raised from 0.6 per cent to at least 0.8 per cent to meet Treasury projections. Remember, that clever accounting can have an impact on how much revenue such a levy actually generates, although I’m not suggesting that the banks would fiddle the books.

Recently, the Financials sector recorded a 12 per cent decline. Putting this into context, if we look back at history, falls of this degree are typical for the index. The fall in 2013 was 13.75 per cent and the recovery that followed occurred over a few months before it continued higher. Another fall of 10.5 per cent occurred in late 2013 through to early 2014 and 9.5 per cent in late 2014. Each time a solid rebound followed and the market traded to new highs.

Back to the levy. We all know who’s really going to pay for this levy, it’s their customers, including you and me. So are banks just the scapegoats? If so, why should we pay to create a level playing field for international banks, particularly as Australian companies are nowadays forced to compete against much bigger international corporations without protection? We’re told that it’s good for competition.

If you would like to learn a better way to profit from bank shares or any market for that matter, first get a good education.

What do we expect in the market?

As predicted, the Australian share market continued to trade south last week, dipping below 5700 points. However, this week the All Ordinaries Index (XAO) displayed evidence of renewed buyer interest, which indicates that the short term low may be in, although this is yet to be confirmed.

Short sellers profiting from the current decline in the major banks, which have led to the decline, will eventually close their positions to create a market rebound, which may be what is currently occurring.

It is also interesting to note that the reversal occurred right before the US Federal Reserve made its official announcement about raising US rates.

The target zone for the current decline is between 5600 and 5700 points and possibly as low as 5550 points as the market tests support for the next rise. I would prefer to see this low come in towards the end of the month, however, if it is already in we are likely to see a solid rise in market from here.

Remember that the current decline from the recent high of 5983 points is part of a natural movement on the market that must occur before the next significant rise towards the medium term target between 6200 and 6400 points.

To anyone learning about the market, it is important to understand the saying that ‘markets move up in stairs and down in elevators’. This simply means that any falls on the market are likely to occur faster than the rises and while we all enjoy it when the market rises, we also need to accept that falls must occur for the market to continue higher.

Global news

Many traders are watching the Oil price closely at the moment. There have been many reports about rallies in Oil, which have run up on hot air. The Wealth Within investment team have been waiting for Oil to rebound following the recent decline to $43.80 in May 2017 as the Organization of the Petroleum Exporting Countries (OPEC) production cuts were continuing to take effect.

Speculation has been building about output cuts and there has been a lot of postulating about what will occur with supply this year and into 2018. With talk that the supply situation may turn, Oil rebounded off its low and appeared poised to trade higher. However, for Oil to change trend it must break strongly above at least US$51.50 and preferably US$53.50 per barrel.

Despite the speculation about an oil rally, this week Oil continued to fall below US$45 per barrel and may continue lower to around $40 over the coming weeks, therefore it may be some months before we see any sign of a recovery.

Looking at the bigger picture, global economic growth is forecast to continue to rise slowly and this is likely to mean higher share prices. However, big global corporations must continue to demonstrate improved earnings growth in the second half of this year to justify further gains.

Remembering that markets tend to factor in share prices six months out, many people are wondering whether the US market has run ahead of what is realistic for the near term.

While the Dow Jones is likely to experience some resistance to the current rise in the next quarter, I believe there is further upside for the US market this year, particularly while it continues to trade above important support at 20,600 points.

Dale Gillham is Chief Analyst at Wealth Within