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The Trade That Paid!! July 20, 2021

Good Evening,

Another excellent episode of The BIP Show released a few days ago and it's a brilliant insight into the current state of the Australian economy with none other than Jo Masters, Chief Economist of EY Oceania

It's all there and then some so it's mandatory listening if you're an investor in the Australian story, which I know you are. Adding something to the podcast from a chat with Jo just now is that the construction pause costs the GDP about a billion dollars a week. That's on top of the bill a week that the Sydney lockdown is costing output. Ok now on with the show...

Jo goes into the shape of the recovery with regards to the new series of lockdowns. Having scanned the show I think the Trade That Paid this week is absolutely going to be something fairly relevant and that's a point made on the show of just how nimble governments have become. This is why we weren't really panicked last night or this morning.

Higher the vax rate, lower the mortality rate

The Delta variant is spreading but mortalities aren't (in vaccinated countries at least) so all there is ahead is government support to sustain whatever it needs to and a workforce well equipped to work from home.

I was two years above this person at school. I'm familiar with the Delta variant...

That being said there's a few ETFs to keep your eye on if it gets out of hand and the work from homers continue. WFH is the name of the ETF created last year to benefit most from people staying away from the office. It has some good hardware and software names in there. CLOU is an ETF specialising in cloud computing tech. It's exactly what you think it is and should probably have a home in most portfolios regardless of the current situation.

We think the market is ok with a pull back if it needs one. Breadth was telling you everything you needed to know. Not only breadth in market cap but breadth in earnings too. 16% is a lot of earnings pie for the top 5 out of 500 to eat.

Had a quick word to Jo this arvo as a follow up to the podcast regarding zombies. A zombie company (as we know) is one that is making enough to pay the interest on debt but no more. It can't grow so it just meanders along until rates rise or something happens and it goes into admin or gets bought or whatever. There's always been many zombies around and low rates have protected them. Then last year when rate normalisation was meant to be on the way we were pandemicked so zombies were again provided coverage.

One day these guys are going to get found out.

The Russell 2000 contained 40% unprofitable companies in the first quarter of this year and that should give you a good grab at how many companies EBIT couldn't cover Interest. It's a bit.

EY analysis suggests that we're seeing insolvencies start to pick up. In the same way Jo mentions in the show about a lockdown simply postponing spending so too do we see a lockdown postponing insolvency. We'll get the cave-ins we would usually have added to the company cave-ins that can't survive the post covid world. EY analysis expects the number to be well in excess of 2020.

I'm looking at some insolvency companies this evening. FSA, CLH, OBL etc. No reco's but worth a look.

Also of interest is that the jobs being created in the recovery aren't replacing jobs lost. People are getting work but it's not in the same field. I'm thinking of Amazon putting on thousands of people in their distribution centres. I'm thinking that there's not as big a demand for bus drivers right now. Run with that for a feel on the shifting sands of the economy and you'll get an idea for who survives and who doesn't.

Speaking of which, I'll leave this one with you. Look down the bottom and have a think (and a drink) about the 9% of fully vaccinated Americans who believe the vaccine THAT THEY HAVE INSIDE THEM is a Government microchip device.

Biggest economy in the world.

They have all the nukes.

10 days until I can have a drink again and I'm starting to think I'll need it...

All the best,


James Whelan | Investment Manager

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