WWN#41 – Aussie Stock Market Plunges: Should You Buy, Hold or Sell?

ASX200 February Fall.png

Source:  Yahoo Finance

What’s Been Happening?

At the beginning of February, the benchmark 10-year bond yield rose to a four-year high on the back of positive payroll data being released in America. With wages rising and unemployment falling, the data acted as a signal to many that the U.S. was inevitably about to start increasing interest rates.

A week prior to the news, the Dow Jones Industrial Average had its highest closing record of 26,616.71 set on January 26. This meant investors were already quite cautious of a pull-back and inevitably the release of positive economic data triggered an immediate sell-off in the stock markets there and around the world.

After falling slightly on Monday, the Australian stock market had one of their worst trading sessions with $56 billion in value wiped off the stock market on Tuesday. The S&P/ASX 200 dropped 3.2% which makes it the worst one day fall since September 2015. There was some reprieve on the following day as bargain hunters came in and stabilised the market which recovered about 1.2%.

What Now?

On Thursday night, the sell-off on Wall Street deepened and the Dow Jones Industrial Average lost 4.2%, taking the losses since last Friday past 10 percent, the definition of a correction. That led to renewed selling on Friday for Australian shares, albeit it was only a 0.9 percent drop to finish the session at 5838 points. Over the week, the cumulative losses add up to 4.6% and the total value of the Australia sharemarket has dropped by more than 70 billion.

What’s Next?

Is it time to buy? Focus on the Fundamentals

Head of equities research at Morningstar, Peter Warnes, has commented that: “It’s way too early to go bargain hunting” as there will be reliefs but more downside is likely to develop over the next few weeks. Investors are likely to wary as volatility remains high.

Having said that, stock market pull-backs can be an advantageous time for investors to pick up stock more cheaply. During periods of volatility, individual stocks are more likely to outperform the market especially as the reporting season has begun in Australia and companies have started to report their half yearly earnings.

Is it time to hold?

Currently, we are in correction territory and corrections are generally temporary in nature. Although the U.S. political situation is a mess, the U.S. economy is actually doing fine (higher wage growth and lower unemployment) and therefore there is no definitive cause to be alarmed. Unless you have reason to believe that a stock will never reach that price again, it would be silly to sell now and lock in losses.

Is it time to sell?

Now is not the time to panic sell. Compared to overseas markets, the losses sustained in the Australian stockmarket are mild. It’s still $44 billion ahead of where it was this time last year and $220 billion ahead of where it was three years ago. Furthermore, even if there are a couple of rate rises, the interest rate is still relatively low in historical terms. In Australia, reporting season has only just begun and there are expectations that corporate earnings should rise by about 7% or so which should support stock prices that have not risen as sharply as in the U.S.

In Warren Buffet’s memorable words: “Be fearful when others are greedy and greedy when others are fearful.”

References:
http://www.smh.com.au/business/markets/nowhere-to-hide-as-sharemarket-shakeout-rolls-on-20180208-h0vrsb.html
http://www.abc.net.au/news/2018-02-10/are-australians-exposed-to-stock-market-falls/9417210
http://www.smh.com.au/business/markets/need2know/beware-sharemarket-panic-selling-20180206-p4yzh8.html
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WWN28# – Is this justice? Michelle Carter receives verdict in texting suicide case

What’s Been Happening? Conrad and Michelle

In June 2014, 18 year old Conrad Roy III started sharing suicidal thoughts with Michelle Carter over text messages. Carter initially urges Roy to seek medical help and discourages him from harming himself. Later on, she changes tone and successfully convinces Roy to commit suicide. Roy was found dead near a compression pump that had filled a pick-up truck with carbon monoxide. His death was initially deemed a suicide but police have subsequently charged Carter with involuntary manslaughter after investigating text messages that were sent between Carter and Roy. In one exchange, Carter had told him to stay in the vehicle from 30 miles away after Roy exited the vehicle because the carbon monoxide was “working and he got scared”.

On June 16 2017, Massachusetts judge Lawrence Moniz found Carter to be guilty of Roy’s death and announced that she could face up to 20 years of prison time.

What Now?

Moniz has sentenced Michelle Carter to a 2.5 year term but has said that only 15 months is mandatory. He also sentenced her to five years of probation. If she violates the terms of her five year probation, she will have to serve her full sentence in jail.

Terms of Five Year Probation

  • No contact with Roy’s family and classmates who acted as witnesses for the prosecution
  • Cannot leave the state of Massachusetts
  • Must submit a DNA sample
  • Must have a mental health evaluation
  • Banned from using social media

Carter’s lawyer, Joseph Cataldo successfully petitioned to have her sentence stayed which means that she will not go to jail yet until all of her state appeals are exhausted and denied. Cataldo has asked the judge to spare his client from going to prison at all and require her to receive mental counselling while in probation instead.

Following the sentencing, the prosecutor Assistant District Attorney Maryclare Flynn said that he was disappointed the judge chose to stay the sentence. He had recommended a sentence of 7 to 12 years for Carter who he said has not shown remorse or accepted responsibility for her actions.

What’s Next?

It was certainly unexpected. A 2.5 years sentence is a much shorter sentence than the potential 20. In addition, Carter is appealing the sentence so it could result in only probation time and no time in jail at all. Regarding the sentencing, it is possible that the judge was trying to rehabilitate and not punish and relied on the fact that she was aged 17 when the crime was committed and tried a juvenile court.

The case has drawn a lot of attention to the issue of whether “words encouraging suicide” is a criminal act. In the U.S, criminal law typically punishes physical action and this case could set a new legal precedent in which words and not just actions are deemed to cause death. At this stage, it is unlikely to be used as precedent but the verdict indicates a shift in legal landscape where it may ultimately lead to changes in the way we communicate with others (some say in a more careful manner and with limited freedom).

Postponing the case is also not in the best interests of anyone involved. It offers no peace to Roy’s family and shows a refusal by Carter and her parents to accept responsibility for her actions. The appeal process is likely to drag on for a while and there is no doubt that Carter’s lawyer will surely try to stretch out the process. While some may say that Michelle needs our sympathy and help, I say that she needs to take ownership and accept the consequences of her actions as well.

References:
https://www.thesun.co.uk/news/3741960/michelle-carter-guilty-encouraging-conrad-roy-boyfriend-suicide/
http://www.nbcnews.com/news/us-news/michelle-carter-was-wrongfully-convicted-texting-suicide-case-amanda-knox-n789541
http://edition.cnn.com/2017/06/08/us/text-message-suicide-michelle-carter-conrad-roy/index.html
http://www.nbcnews.com/news/us-news/michelle-carter-convicted-texting-suicide-case-sentenced-15-months-jail-n789276
https://qz.com/1009681/a-new-legal-precedent-means-americans-can-go-to-jail-for-what-they-say/

WWN#22 – U.S. Federal Reserve Raises Interest Rate to 1.25%

 

fed-funds-rate-historical-chart-2017-06-15-macrotrends

Credits: Historical Federal Funds Rate


What’s Been Happening?

The Federal Reserve hiked up US interest rates by 25 basis points for the first time in March, its third upward move since the 2008 financial crisis. At the time, Janet Yellen who is the chair of the Board of Governors of the Federal Reserve System, expected rates to be increased twice more this year. Some economists are sceptical of this however, including global economist Anna Stupnytska from Fidelity International. She said that their base case is only for one more hike to occur this year, as a cyclical peak is being reached soon and the likelihood of a China slowdown weighing on “global inflation, markets and growth is fairly high”.

 

What Now?

At the latest Federal Reserve meeting on Wednesday, it seems Janet and policymakers were ‘feeling good’ about the economy and have forged ahead with an interest rate increase despite growing concerns of weak inflation. The target range for the federal funds rate is now between 1% – 1.25%.

A statement issued by the Federal Reserve indicated that “On a 12-month basis, inflation has declined recently and is expected to remain somewhat below 2 percent in the near term but to stabilise around the committee’s 2 percent objective over the medium term.”

One of the barometers that the Fed monitors is unemployment which dropped to a 16-year low at 4.3 percent in May. This may have given them the confidence to keep gradually lifting the low borrowing rates towards their historic norms.

Whilst the Federal Reserve maintains an accommodative stance on monetary policy, Yellen has said that it will be appropriate to move to a more neutral stance if they continue to move along the path [of interest rate rises].

What’s Next?

The journey is not over as the long-run interest rate is 3% which is the median estimate made by policymakers. According to 30-Day Fed Fund future prices, the probability of another rate hike later on in the year is currently at 2.5% for the July Federal Reserve meeting although this markedly increases to a probability of 30% by December. The timing of the interest rate increase would of course depend on the state of the US economy and its continued growth.

The bottom line for American consumers is that there will be an increase in their borrowing costs which may strain some households.

References:
https://www.bloomberg.com/news/articles/2017-06-14/fed-forges-on-with-rate-hike-asset-plan-amid-inflation-worry
https://www.investing.com/central-banks/fed-rate-monitor
http://www.bbc.com/news/business-40282066
http://www.abc.net.au/news/2017-06-15/us-federal-reserve-raises-interest-rates/8619182

WWN #8 -The Arduous Fight Against ISIS in Mosul

 

map-of-mosul

Credits – Map of Mosul, Map Data Copyright 2017 Google


Who is ISIS?

ISIS is radical jihadist group that is notorious for their hatred of the western world, particularly the United States. They seek to re-establish the caliphate (an Islamic state led by a religious leader who has absolute authority) and become the only legitimate state in the world.

What’s been happening? The Battle for Mosul: ISIS vs. Coalition Forces

In June 2014, the Islamic State of Iraq and Syria (ISIS) easily captured the northern Iraqi city of Mosul. An estimated 30,000 soldiers fled when confronted by as few as 800 militants and the ISIS militants were able to overrun the western bank of the city overnight. ISIS used the momentum from its victory to seize large portions of the country in quick succession, reversing some of the achievements made by the United States in driving ISIS and Al-Qaeda out of Iraq over the last few years.

When the ISIS fighters took over the city of Mosul, they were able to seize large quantities of weaponry such as vehicles, arms and ammunition which strengthened their position in Iraq. Ironically, much of the equipment was probably supplied by the United States who is Iraq’s biggest weapons provider.

The fight to take back Mosul began last year on the 16th of October when a coalition of more than 30,000 troops commenced a multi-pronged offensive on multiple fronts in an attempt to corner ISIS. Slow but steady progress has been made as troops reached the edges of Mosul by the end of October and taking over most of the eastern side of the city within the following months. According to Iraqi estimates, it is believed that the number of Islamic State fighters has dwindled to around 1,000 from a previous figure of 6,000 in October 2016.

What Now?

On the 23rd of February, there was finally a major breakthrough after months of intense fighting between the coalition forces and ISIS in Mosul. Iraqi government forces took control of most of Mosul airport, meeting their first key objective for retaking the western half of the city from Isis. The advance represents a major win for the Iraqi government as its recapture means that the coalition now controls all of the roads in and out of the city. ISIS had also reportedly used it as a training facility and a factory for car bombs. Not anymore!

What’s Next?

A difficult task lies ahead as the battle continues for the western part of Mosul which has many narrow and winding streets. Due to this fact, armoured vehicles cannot easily navigate the area. Much of the fighting is expected to be done in close quarters in the midst of 750,000 civilians who are still residing there. It’s likely to take at least few more months for the rest of the city to be under the control of the Iraqi government.

References:
https://www.washingtonpost.com/world/insurgents-seize-iraqi-city-of-mosul-as-troops-flee/2014/06/10/21061e87-8fcd-4ed3-bc94-0e309af0a674_story.html?utm_term=.7eded1785232
https://www.theguardian.com/world/2016/nov/04/battle-for-mosul-maps-visual-guide-fighting-iraq-isis
https://scroll.in/latest/829759/iraq-coalition-forces-begin-operation-to-take-back-western-mosul-from-islamic-state
http://www.nbcnews.com/news/world/iraqi-forces-recapture-isis-held-mosul-airport-under-fire-state-n724496