No doubt you are all being deafened by the recent RBA action yesterday. But a far more important number to keep an eye on is the MOVE index in the US. Read on to learn more and find out what to do in this environment…
- No doubt you are all being deafened by the recent RBA action yesterday.
Globally, however, the RBA’s decisions on Australia’s cash rate carry about as much weight as dating advice from Prince Andrew.
A far more important figure to keep an eye on is the MOVE index in the US.
This is a measure of interest rate volatility based on the US Treasury market.
Some good news. In the last two weeks it has gone down.
Listen:
This may sound a bit unclear, but it does indicate that financial conditions in the US are easing.
Here’s the point. US Treasury bonds are the primary security in US financial markets.
The lower the MOVE index – ie the lower the uncertainty about interest rates and inflation – the more ‘liquidity’ can grow and enter the markets.
A great book on the subject is Michael Howell’s Capital Wars.
This is important. Today’s economy is not what most people imagine when they even think about such a topic.
While earnings and discount rates are important, what matters more to stock markets is the total amount of money floating around.
That’s why “QE” was a tailwind for stocks because it eased liquidity into the system.
These monetary points are unclear but important.
If you follow the financial press a little, you may have also seen a chart of US M2 money supply.
It has a frightening connotation that the financial situation in the US is collapsing.
However, this is a red herring.
M2 is a traditional measure of money supply – long ago abandoned for scientific reasons because it doesn’t work.
M2 mainly measures deposits and is heavily influenced by the Fed’s monetary transactions.
Liquidity actions must now be global and not just American, as China, Japan and Europe also have major implications.
The evidence I’ve seen suggests that liquidity is recovering from its lows of the past year and is one of the reasons US stocks have risen against expectations.
Let’s see if China’s monetary stimulus can do the same for the Australian market in the second half of 2023.
And keep watching the MOVE index. The lower it falls, the more optimistic I become.
- What to do in this environment?
Back in March, I recommended that Australian Small-Cap Investigator readers buy a company called Your [ASX:TUA].
I wrote then…
“Come to the fore, David Teoh!
“Do you know the name? Probably not.
“David Teoh was the mastermind behind the rise of communications company TPG.
“TPG made Teoh a billionaire.” That’s an amazing story considering he migrated to Australia from Malaysia and started selling computer parts.
“Teoh merged TPG with Vodafone back in 2020 and later stepped down as chairman of the company.”
“But he kept fire with a smaller company called Iron in the Market.” Your [ASX:TUA].
“It’s kind of like the original version of ‘TPG’ reincarnated, except Tuas’ market is now Singapore instead of Australia.
“Tuas trades on the ASX for around $1.30 per share and has a market cap of $600 million.”
“David Teoh is not afraid to support himself.” He entered the Singapore market from scratch, building a 4G network to rival the incumbents.
“He also used a well-known move: he undercut them on price to gain market share!”
Lo and behold, three months later, Tuas is now up 45%.
The company sees increasing subscriber numbers and is able to increase its sales by launching new products.
What made Tuas such a compelling idea was that the poor stock market had pushed the stock price down sharply over the past year.
Do you understand what I’m trying to say here?
There are cheap stocks everywhere in the market, and many of them are run by very competent and successful people.
David Teoh and Tuas are just one example. Wes Maas over at Holdings of the Maas Group [ASX:MGH] is another. That’s an increase of 35% since December last year.
2022 was undoubtedly a bad year for the stock market. But there were great stocks lying on the ground everywhere.
You can spend your life fretting over issues like the debt ceiling, over which you have absolutely no control, or you can focus on the opportunities that present themselves.
The more I stay in the stock market, the more comfortable I feel letting people I trust manage my money, no matter what the world throws at us.
David Teoh and Wes Maas would fit into that category.
If you would like to join me in my search for more men (and women) of this type, you can get started here.
Best wishes,
Callum Newman,
Publisher, Money Morning
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