ASX News LIVE | XJO Falls, China’s Consumer Prices Flat, Earnings Season Looms

China’s consumer price index was dead flat year on year to June, falling 0.2% from May.

While other major economies struggle to tamp down rising prices, China faces a different problem — deflation.

Source: Financial Times

Central banks like the US Fed and our own Reserve Bank are seeking to achieve disinflation — the slowing of the rate of inflation.

China is on the precipice of deflation — a reduction in the general price level itself; that is, falling prices.

Economist Greg Mankiw highlighted the difference with a car simile:

Disinflation is like slowing down; deflation is like going in reverse.

The ASX 200 ended Monday 0.54% in the red after opening 0.50% higher — a 1% swing.

Weak inflation data (bordering on deflation) from China sapped optimism.

The major miners — demand for whose commodity exports may wane with a faltering China — finished lower.

• BHP finished 1.10% lower
• Rio Tinto finished 1.14% lower
• Fortescue Metals finished 2% lower

China is an outlier in the global fight against inflation.

China’s June CPI fell to zero year-on-year from 0.2% in May, undershooting expectations.

China June CPI inflation fell to 0%yoy, from 0.2% in May. Mkt exp was +0.2%. Core (ex food and energy) inflation fell further to 0.4%yoy
PPI inflation fell to 5.4%yoy, v mkt exp of 5%
(Goldman Sachs chart) pic.twitter.com/qY53Byqjtl

— Shane Oliver (@ShaneOliverAMP) July 10, 2023

Source: Commsec

Consensus estimates have S&P 500 companies posting a third consecutive decline in quarterly earnings.

Second-quarter profits of calendar 2023 are forecast to fall 7.2% from the same time last year, according to FactSet.

That would be steepest quarterly fall since the second quarter of 2020.

However, some think the pessimism is setting a low bar for the stocks to clear.

Chief investment strategist at CFRA Research Sam Stovall told the Wall Street Journal, ‘rarely can you injure yourself falling out of a basement window’.

Touché.

What matters this earnings season is whether earnings fare better or worse than the gloomy outcome embedded in expectations.

Which reminds me of a 2Q22 note from Charles Schwab:

‘As with most economic and/or earnings data, trend tends to matter more than level (“better or worse matters more than good or bad”). As shown in the chart below, the year-over-year rate of change in S&P 500 earnings growth (yellow bars) is directly tied to the year-over-year rate of change in the S&P 500, with the S&P’s descent into negative territory often preceding earnings’ descent into negative territory (2008 being an exception).’

Source: Charles Schwab

Counter-intuitively, high earnings growth is not the best indicator of a strong bull market:

‘One might think that high earnings growth rates would usher in strong stock market performance, but earnings are (obviously) reported after the fact, while stocks are a discounting mechanism.Earnings growth of more than 20% has historically been accompanied by a barely positive annualized return of less than 2%; the best zone for stocks has historically been when earnings growth is between -20% and +5%. Perhaps no surprise is that the worst earnings zone for stocks is when earnings were imploding (worse than -20%). But what the trajectory of the data shows is that once earnings bottom and begin to accelerate, that’s when the strongest market gains kicked in. Conversely, once earnings growth had surged to more than +20%, the market started to discount the inevitable turn down from peak levels.’

Source: Schwab

It’s the end of an era.

Westpac’s long-serving chief economist Bill Evans will leave the role in January, 2024.

Not too sure what's more surprising. Luci's move or Bill's!?https://t.co/9BhjrpcUrG

— Alex Joiner 🇦🇺 (@IFM_Economist) July 10, 2023

My personal investing focus is on high-growth sectors with exponential potential.

Things like small-cap stocks in industries like technology, biotech, and mining.

I’m basically looking for asymmetric returns — the potential to make much more on the upside than on the downside.

Which brings me to my first chart:

Source: Incredible Charts

This is the chart of Global X Uranium ETF [URA].

It’s an ETF investing in a basket of stocks in the nuclear energy industry.

I’ve seen a bit of chatter from some energy experts lately, suggesting that many countries are turning back to the nuclear option.

For example, Sweden recently announced it was keeping nuclear plants going, reversing a decision 40 years ago to phase the technology out.

Anyway, it’s definitely an area worth diving into.

But what does the chart say?

Well, as you can see, it’s still in a bit of a downtrend, but there are also signs that we’re in a sideways phase too.

If we get a break above that $24 level, it could be game on for the sector.

The second chart is interesting…

Source: Incredible Charts

This nightmare of a chart is the AdvisorShares Pure Cannabis ETF [YOLO].

I love that ticker!

But as you can see, YOLO-ing (millennial slang for ‘you only live once’) into speculative sectors like cannabis isn’t for the fainthearted.

Cannabis has had two decent bull runs in the past six years.

First in 2017 and then in early 2021.

Both bull runs coincided with election cycles in the US that promised more deregulation.

But as you can see, it hasn’t translated into sustainable profits for investors, and the ETF has plummeted by more than 90% from the 2021 highs.

However, though it’s early, we’re seeing signs of a bottom forming at these levels.

For me, this is a signal to take another look at this beaten-down sector.

While I don’t expect it to turn around any time soon, in the depths of such charts can lie extreme hidden value — as long as the original idea had merit.

The third chart is of Van Eck Rare Earth/Strategic Metals ETF [REMX].

Source: Incredible Charts

I looked at this chart because there was a story in the news yesterday about how China was about to block exports of two critical rare earth minerals.

Namely, gallium and germanium.

The story breathlessly declared this could be a boon for Aussie rare earth miners.

It’s not an unreasonable assumption (though similar China ‘rare earths ban’ stories have played out many times over the past few years). However, as I said at the start, I’ve never made money from reading such ideas in the mainstream press.

But I checked the chart anyway.

What does it say?

Well, to me, this is a fairly weak chart right now.

I see lower highs, and slightly lower lows, though it is holding onto a strong support line at around $77 , just!

We’ll see if this latest ‘big news’ moves the needle on rare earths stocks. But if it doesn’t, the psychological clue is that there are few new buyers.

And that means a big risk it loses support at $77.

Of course, that doesn’t mean it will happen.

But for me, I don’t see any reason to pay more attention here until we at least see a break of that downtrend from early 2022.

Now you, too, can join the ranks of macroeconomic forecasters for the price of the premium version of ChatGPT.

Here’s Bloomberg’s Joe Weisenthal using ChatGPT’s code interpreter function to plot some recession indicators.

Holly shit lol, this is so sick. @Claudia_Sahm pic.twitter.com/vnpnXSd7iX

— Joe Weisenthal (@TheStalwart) July 10, 2023

I don’t think I’ve ever come up with a single good investment idea from watching or reading the news.

Don’t get me wrong, I have nothing against journalists who work for these organisations.

You just have to remember that they are only journalists.

They make money from writing in an engaging and informative way — not from being good at investing.

Too many people forget that.

I think a lot of people, especially of my parent’s generation, grew up treating ‘the news’ as some special arbiter of wisdom and truth.

I don’t think that’s true today…if it ever was.

Today, most news is noise put out by people who know just enough to sound like they know a lot more than you do.

Even worse…

Sadly, a lot of news is thinly disguised propaganda pushing whatever ideological barrow they support.

It’s hard for the average person to know what’s really going on. And without knowing that, it makes it hard to invest wisely.

I suppose that’s part of the Money Morning mission.

To cut through the noise and provide some genuine insight that you can use in your own investing decisions.

In my experience, there are two distinct ways you can do this…

https://www.moneymorning.com.au/20230710/three-charts-to-watch.html

If you’re into podcasts and want to listen to some ideas on what the market is yet to price in, catch the latest episode of our podcast below.

‼️ The latest episode of #WNPI is live ‼️

> Market asleep to the 'jaws of death'
> Tech #stocks and sentiment at bullish extremes
> Howard Marks and needing a contrarian streak
> Subdued sentiment for Aussie market
> $AUD, China & #commodities#ASX https://t.co/XBzOrcQMDf

— Fat Tail Daily (@FatTailDaily) July 7, 2023

Tertiary education services firm NextED [ASX:NXD] is down 10% in early Monday trade after releasing a FY23 performance update.

Despite leading its announcement with ‘record FY23 financial performance expected’, investors looked past the positive headline.

Did they think NextED buried the lede?

According to consensus estimates compiled by Market Screener, NextED’s sales were expected at $105 million.

Today, the education company said FY23 revenues are set to come in between $102 and $103 million. So record revenues, yes. But slightly below expectations.

NextED also said that to ‘effectively manage student overflow’, it is using short-term licensed classrooms, the costs for which have ‘materially increased in 2H23.

Source: NextED

Ardent Leisure talked up its performance and its favourable comparison to FY19, before pandemic struck.

However, on the last page of its preliminary FY23 announcement, Ardent Leisure admitted the business has ‘seen a slight moderation in attendance volumes and revenues in 2H23. Consistent with many operators in the consumer discretionary sector, worsening economic conditions have started to reduce discretionary spending and the high inflationary environment has introduced some additional cost pressures for the business.’

Ardent expects to break even in 2H23 and deliver its first positive full-year EBITDA result since 2017. However, this positive EBITDA excludes ‘specific items’ not specified in the announcement.

On its outlook, Ardent Leisure said revenue may soften in the near-term but the company is bullish on its prospects long-term:

‘While the short-term headwinds of macroeconomic conditions may lead to more moderate growth in the near term, the Group expects performance to meaningfully improve further as it delivers new capital investments. As international and interstate visitation improves this will boost profitability due to the relatively fixed nature of many operating costs. Management remains focussed on delivering its recently announced pipeline of new attractions to drive incremental visitation and return performance of the business to historical earnings levels.’

 

Owner of reaction assets like Dreamworld, WhiteWater World and SkyPoint Ardent Leisure [ASX:ALG] is up 15% in early trade on Monday.

Ardent Leisure’s theme parks & attractions business continued to record year-on-year growth in visits and revenue.

The firm singled out the last two months of FY23, saying operating revenue for that period was up 21% compared to the prior relevant stretch.

All up, 2H23 revenue is up 30% on the prior period and FY23 revenue is expected at $83.9 million, up 70% on FY22 and 25% above FY19.

Ardent Leisure said this was the ‘highest annual revenue for the Theme Parks & Attractions business since FY16 and was achieved notwithstanding international visitation remaining well below historical levels (less than 2% in FY23 versus 21% in FY16).’

With international visitation so low, how is Ardent Leisure boosting revenue?

Ticket price inflation.

The ‘aggregate value ticket sales was also the highest recorded since FY16 and significantly above levels achieved in every other subsequent year. In addition, FY23 revenue per capita was the highest recorded for many years and was 54% above FY16 levels.’

Source: Ardent Leisure