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Protrader – October 2018 Market Wrap

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“2 out Of 3 ain’t bad”
Meat Loaf 1977
Gripped by fear, the market fell 6% for the month of October. Down 407 points.

The Australian market completely and totally succumbed to fear in the month of October. The October 5th US Treasury bond yield jump was the catalyst that precipitated the worst market performance since Aug 2015, declining 6%, and erasing its year-to-year date gains.

Despite some strong economic and industry figures both domestically and abroad the market was overwhelmed by the two themes of trade war and interest rate increases.

These combined with very legitimate concerns surrounding the banking sector, with ASIC criminal and civil actions likely commencing soon and the breadth of already existing class actions against the big four expanding with CBA now hit with a class action, combined for the market to completely dissolve throughout October, being completely overcome with fear.


  • RBA held official rate @ 1.5%.
  • World Copper demand predicted to rise by 7%.
  • Aus trade surplus rose to $1.6b.
  • Aus retail spending beat expectations.
  • Aus Unemployment dropped to 5%.
  • Iron Ore prices broke through resistance.

The Banks

Despite all this negativity, it is important to remember that at the end of the day, all roads lead to ROI (Return On Investment). Using the bar chart below, one can see compared with other forms of investment, that banks presently offer, an amazing dividend return/yield. At some stage, all the ramifications and consequences of the Banking Royal Commission will have been digested, and then we are left with a country with 25,000,000 citizens, who will still need a loan to buy a house, car, or holiday, who will still need credit cards, and businesses that still need loans to run.
ie: The banks will go back doing what they do best, making money.

DOW JONES IND AVG 26,598 – 25,115: DOWN 1,483


October started by hitting an all-time record high on October 3rd, and then fell into, what could only be described, as a  brutal drop. The market was completely overwhelmed by a perfect storm of factors resulting in a major correction.

  • NASDAQ fell 9.2% – biggest monthly loss since Nov 2008.
  • NASDAQ Biggest one day decline since August 18th, 2011.
  • S&P500 fell 6.9%
  • DOW fell 5.1% – biggest monthly drop since Jan 2006.

The month opened with the market still grappling with concerns related to potential expanding trade War with China still hanging over the market, and other factors such as the upcoming US Midterm elections on Nov 6th, and EU budget factors certainly playing a role in market trepidation, yet the stream of strong domestic economic data appeared to enable the DOW to withstand these concerns.

However, it was this very strong economic data that precipitated a 1500 + point fall.  October the 4th/5th, saw US Treasury yields jump to the highest levels in 7yrs, this paradigm shift in interest rate ideology resulting in yields jumping to 3.28%, in only 24 hours, with a likely 3.56% in the near future, saw large institutional resources deciding to cash in now and transition from the DOW to US 10 yr Bonds. This funds re-allocation resulted in the DOW dropping over 800 points on Oct 10th, and the S&P lost 3.3% in one day.

Amongst all this carnage remains these underlying facts:

  • 77% of S&P company earnings beat market expectations.
  • Agg 3rd Qtr earnings growth of 26.2%.
  • S&P Valuations hit a two and a half yr low of 15.3 P/E.

Key Developments in the Month of October

  • US GDP again beat market expectations
  • Job growth continued: with US now on track for the lowest peacetime unemployment level in HISTORY.
  • US Unemployment rate hit 3.7%, lowest since DEC 1969.
  • First-time Unemployment benefits claims fell to the lowest level in 49 yrs.
  • Factory Orders beat Market expectations.
  • ISM (Institute of Supply Management) Data hit two and a half yr high.

  US & China trader War

Over the last 6 months, there has been a great deal of market angst surrounding the realignment of trade negotiations, and now particularly the escalating/expanding war between China & U.S.

Before delving into the particular U.S & China trade relationship, and potential War, it is important to understand the backdrop, and view the full horizon around this situation.

Fundamentally what Trump has been requesting is equity and fairness in the bilateral trade relationships. Furthermore, it is very important to understand that this is an issue that has been concerning the U.S establishment for over 20 years. Trump didn’t create this issue, he simply has had the courage to deal with it.

In addition, what the Trump administration is asking is, at the end of the day, basically fair and reasonable. This is why we have seen trade deals and relationships being redrawn left, right and center.

  • NAFTA dissolved, replaced with USMCA. A triangular pact between Mexico/U.S/Canada.
  • U.S /South Korea. All issues resolved and agreed within a week.
  • U.S / Japan, bilateral talks resolved within one meeting.
  • U.S/EU: Despite all of E.U’s blustering (which was basically domestic grandstanding), rolled over immediately with all of Trump’s demands effectively agreed.

All that remains is China negotiations. As can be seen from the two charts below, China has two very serious issues that will prevent them from achieving any other outcome than eventual negotiation.

Corporate Debt

Both countries went through economic upheaval during the 2008 Subprime crisis. However, largely due to structural and cultural issues, the U.S spent the subsequent 10 years very publicly, and painfully in a transparent manner fixing a great deal of these issues, laying the foundation for the solid economic growth that we are now seeing, such as the unemployment rate the lowest since DEC 1969.

China, on the other hand, didn’t rain in corporate or provincial govt debt at all but instead pumped more sovereign debt into a structurally flawed economy, and tried to cover up the cracks. China now has the situation of still hopelessly inefficient companies, many of whom have been unprofitable for nearly two decades, but simultaneously saddled with even greater debt than 10 years ago.

The result of this is that the U.S can now afford to sit back and negotiate when and how they wish, on their timescale. Thus turning Chinese negotiating tactics on the Chinese.

What exacerbates the entire situation for China is the imbalance regarding trade between the two countries.

As we can see from the pictogram above, ironically China’s enormous success over the last 20 years in developing their manufacturing and export economy has been so great that they export nearly four times what they import from the U.S.

Consequently, any tariffs will hurt China far more than the U.S, In fact, already half of U.S imports into China, are now covered by tariffs, yet the money gained by the U.S tariffs on Chinese imports is enabling the U.S to subsidies any industries that are being impacted. The culmination of these factors combined is that China is fragile, whilst the U.S is strong.

They are effectively playing chicken, with the U.S driving a Mack Truck, and China sitting on an aluminum unicycle, with every month this drags out, being another month China’s position becomes more precarious, and the economy teetering on the precipice.

Basically the Chinese have nowhere to go or negotiating room to maneuver. As the great Chinese general, Sun Tzu once said: “Patience is power: with time and patience the mulberry leaf becomes a silk gown”.

Right now, Trump has all the time in the world.

OIL STOCK UPDATES: Shadow of US Midterms

WTI Crude – Dropped from $75.03 – $65.06

Although supported by some fundamental issues, it appears that political overtones may be playing a part in the present oil price and the decline that we saw over the month of October.

The primary weight upon Oil prices was the trade skirmish between US & China, causing concerns that a full-blown trade war, would lead to a drop in economic growth next year, and thus reduced demand for Oil.

In addition after initial international condemnation regarding the death of journalist Jamal Khashoggi, in the Saudi Arabian Embassy in Turkey, (which normally would have led to sanctions), due to the lack of US political exertion over the matter, the uproar has died down somewhat, and with it the geopolitical premium that was in the Oil price.

Furthermore, the S.A Oil minister out of nowhere came out stating that Saudi Arabia, Russia, and the UAE had more than enough spare capacity to offset any drop of supply from re-imposed Iranian sanctions. One can not help but think has some kind of political deal been made between US & S.A, leading up to the US Midterms on Nov 6th, to keep oil prices low.

Key Oil Price Influences

  • Venezuelan Production continues to drop
  • Libyan Production volatile

The month of November will be the true test of future Oil price direction, as the last of the Iranian sanctions begin, on Nov 1st.

Alternative ETF’s: HACK & DRUG

ASX CODE: HACK $6.42 : BetaShares Globalsecurity ETF
HACK: This ETF aims to track the performance of the NASDAQ Consumer Technology Association Cybersecurity Index, Investing in both a broad range of sub-sectors within the Cybersecurity space, but also across a range of geographical operations.

Cybersecurity is quickly becoming an ever-expanding business threat and one of the most serious operational issues in the modern business landscape.

ASX Code: DRUG : BetaShares Global Healthcare ETF

DRUG: $5.72
The ETF provides exposure to the largest global healthcare companies, that are not listed on the ASX.  In addition, the ETF is currency Hedged. The allocation of investments is across a variety of countries and companies.


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Sam ProTrader

Sam ProTrader

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