The Big Aussie Short, Is It Time to Pull the Trigger?

It’s been a few months now since Jonathan Tepper caused a stir with his provocative report about the Australian housing market. While it’s unlikely that there is going to be a sharp crash like the US bubble any time soon, the headwinds are building. We are going to take this opportunity to do some analysis on the Australian banking stocks and “the Big Aussie Short” trading idea is still valid, and if it is to use technical analysis it identify entries and benefit from a potential crash in the housing market.

Risks Affecting the Banks

The macro environment for the banks has been ideal for almost 25 years, allowing them to become some of the biggest and most profitable in the world. That environment however is changing and is going to test how well the banks have managed risk in the good times and prepared for the bad(hint: they haven’t!). These risks are paraphrased from Moody’s August report with a few others added by myself. They affect all the Australian banks:

  • Operating Environment
    • Low commodity prices likely to adversely impact mining and mining related industries and regions, creating pockets of stress
    • Low wage growth, high household leverage and rising house prices present rising risks for the household sector
    • Excessive apartment development in Eastern capital cities has created a supply glut which will last through 2017-2018
  • Asset Quality and Capital
    • Problem loans are rising and asset quality is likely to weaken in commodity-related industries and regions
    • Problem loans will rise and asset quality is likely to weaken in eastern capitals with exposure to the apartment glut
    • Record low interest rates will continue to support mortgages. However if it necessary to raise the rates then problems will increase
  • Funding and Liquidity
    • The banks are dependent on overseas funding. If there was a credit crunch or loss of confidence in the Australian banks then this cost increases. At a certain threshold it becomes cost prohibitive and there are no alternative source of funding they can turn to
  • Profitability and Efficiency
    • Rising credit costs from very low levels, will exert pressure on profits
    • Falling profits will force the banks to cut the dividends which are currently at record high levels

Record Short Interest

In May the Wall Street Journal reported that the short positions held held on the big 4 banks was at $9 Billion Australian dollars.  That has ballooned to $10.6 Billion Australian dollars, an increase of 17% in 6 months. Since May there has been very little high profile news stories bringing attention to the Big Aussie Short so it appears that institutional investors and hedge funds are independently increasing their conviction that the big Aussie short is on.

While this highlights the expectations of the bigger traders it also creates a risk of violent short squeezes. Small movements upwards in price will potentially cause these traders to start covering their positions, temporarily sending the stock sharply upwards.

The Big Aussie Short is Still On!

It is clear that the fundamentals for the banks are bad and they are certain to get worse with structural problems that will be unavoidable. So the “big Aussie short” trading idea is still on. Next I’ll go through each of the big 4 banks to see if there what the entry points could be.

Commonwealth Bank of Australia (CBA)

In March last year CBA reached it peaked at $AU96, since then it has declined 23%. More recently it has been trading in a descending triangle which is a bearish continuation pattern. The pattern provides clearly defined technical entry points. If there was a banking crisis and the banks were hit hard, the low of the last GFC at $AU22 would be a potential target, a 66% fall from it’s current price.

Potential short selling opportunities would be as it hits the top of the triangle or to wait until it breaks down below the lower trend line, retests and is rejected.

 

Australian & New Zealand Banking Group (ANZ)

ANZ hit an all time high of $AU37 around the same time as CBA. Shortly after the high point it had a strong impulse down, at one point reaching a whopping 40% decline, breaking through the long term trend line. There has been a corrective wave which is providing a good opportunity as it retests the trend line and is rejected.

Assuming it doesn’t move up and over that long term trend line then it is providing an ideal short entry point. In the last GFC the price reached $AU12, a 50% fall from the current price.

 

Westpac Banking Corp (WBC)

WBC reached its all time high of $40, in March last year and has declined 24% from that high. As with CBA, since it’s high point it has been moving in a fairly well defined descending triangle. The descending triangle pattern is nearing completion and the entry points are clearly defined.

Potential short selling opportunities would be as it hits the top of the triangle or to wait until it breaks down below the lower trend line, retests and is rejected. The low of the GFC was around the $AU14 mark.

 

National Australia Bank Limited (NAB)

The NAB share price is currently 27% down from it’s high of $AU40 in April last year. This pattern is similar to ANZ, it has had a moderate impulse down and has broken through the long term trend line.

Assuming it doesn’t move up and over that trend line then that it is providing an ideal short entry point. In the last GFC the price reached $AU15, a 50% fall from the current price.

Conclusion

We have established that the Big Aussie short is still a good trading idea and using technical analysis we can see that there are some good entry points either right now or in the very near future. Trade with care though, keep in mind you have an entire propertocracy built around keeping this going so you can be certain that those in power will continue to do everything within their power to keep it from imploding.

I’d like to hear from you. Do you have some insight that you can offer to provide another perspective on the analysis.

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