26 April 19
Flight Centre lands in a heap (FLT)
26 April 19
Flight Centre lands in a heap (FLT)
26 April 19
Reviewing 5 market themes catching our eye - (BEN, BOQ, FLT, FMG, MMM, NHF, RMD)
24 April 19
Noflation should lead to imminent rate cut (BAL, HLS, EHL, CGC)
24 April 19
Platinum Portfolio Alert – Reduce Telstra (TLS)
24 April 19
Income Report: Will NAB cut its dividend? (NAB)
24 April 19
Reviewing 5 of the World’s largest 10 companies
23 April 19
ASX 200 breaks 6300 – Energy stocks lead the way (TLS, NAB, XRO)
23 April 19
5 stocks MM is watching post Easter (SIQ, SGR, NCM, FMG, LLC)
18 April 19
Unemployment data drags market
18 April 19
Are we seeing the next big sector rotation with healthcare & resources set to be the losers?
Last week we saw the ASX200 rally over 1% courtesy of a resurgence in the banking sector on Friday, although over the week the strength was far more broad-based with less than 35% of the index closing in the red. The realignment by stocks to a dovish RBA, and global central banks, is clearly still unfolding as the Real Estate, Telco’s and “yield play” sectors continue to embrace and believe we are set to enjoy lower interest rates for longer. Only the Resources / Materials caught our eye for the wrong reason with the majority of the stocks within the sector closing down for the week – albeit after a sensational run of late.
Interestingly the ASX200 has now rotated around the psychological 6200 level for 7-weeks following its exceptional rally from late 2018 with any hint of weakness being greeted by solid buying. Its felt like an extremely tricky market of late which coincides with the almost 2-months of choppy trading by the index which has produced plenty of short-term stock and sector rotation as investors get to grips with a rare and dynamic “V-shaped” recovery from 2018’s panic style 5410 low.
To justify today’s market valuation from an historical perspective everything needs to align / fall into place which feels extremely optimistic when we consider the current macro-economic news both locally and overseas but you cannot “fight the tape” which remains strong. Global stocks have rallied since the GFC on the high octane fuel of low interest rate, “free money” and central bank stimulus which now appears to be basically on the menu again in 2019.
MM has been looking for a 6000-6300 trading range for this the second quarter of 2019 with a test of 6300 again now feeling on the cards.
Following our cutting of the Sims Metal (SGM) position and tweaking of our Income Portfolio last week we are now holding 30% and 17% cash positions respectively in our Platinum & Income Portfolios, this will enable us to be active on the buy side if / when opportunities present themselves.
The focus of todays report will be when and where we should looking to put these relatively large cash balances to work in this generally expensive market.
We have previously discussed the largely watched tech based US NASDAQ which has now appreciated ~750% since the GFC and while we remain confident that this mature bull market is closer to its end than the beginning more importantly MM maintains its initial bullish target for the NASDAQ of the 8000 area, or 5% higher.
Unfortunately we have been a touch “too fussy” since we increased our cash levels around February time, after previously going aggressively long into the markets sharp decline in December. However as an “Active Investor” we need to look through the windscreen as opposed to in the rear view mirror to produce the best returns, hence what do we anticipate doing from here? Today we have started by focusing on one of our favourite index the small cap Russell 2000 (RTY):
1 – We are bullish the RTY medium-term targeting with an ultimate target ~15% higher.
2 – Short-term chasing the index after its sharp 25% rally is a tough ask just here and we are now neutral with our initial preferred entry only a few % lower.
We are now neutral US equities short-term but we continue to look to buy pullbacks.
US Russell 2000 (RTY) Chart
At times it feels like there’s a large disconnect between the ASX200 and US indices, especially in the short-term but the below chart illustrates that’s not the case, even if one does outperform the other for shorter periods of time.
Since the December lows the ASX200 has appreciated +16.2% while the US S&P500 has advanced +24%, no great surprises there considering our indebted consumer plus a potential change of government - hence the change to franking credits for many investors.
The interesting extrapolation here is if we see the Russell 2000 eventually ~15% higher how far could the local index push.
US S&P500 v ASX200 Chart
We believe the health of the “junk Bond” market remains a huge indicator for US stocks in 2019 /2020 with it being a major funder for the massive buybacks being undertaken in the US equity market. The chart below shows US corporate bonds are continuing to make fresh 2019 highs indicating that the S&P500 should remain strong, at least short / medium-term.
NB Since 2015 junk bonds have either led or accompanied all the meaningful declines in US stocks as they are a great representation to the degree of liquidity which by definition is required for stocks to rally.
US S&P500 v iBOXX high yield index Chart
While the markets enjoyed a strong start to 2019 the diverse levels of performance across the ASX200 is simply staggering – at the extremes over the last 3-months we’ve witnessed well over 10% of the index rally by over 25% while 2% has fallen by the same degree. We ask the extremely poignant question “Why are investors flocking to market hugging ETF’s when much of our ASX200 will become a distant memory over the next decade?”- if you find this hard to comprehend remember that Facebook was founded just 15-years ago and the first iPhone is only 12-years old , I cannot imagine a teenager living without either today!
At MM we believe that investors are investing in ETF’s in an almost herd like mentality just when they should be considering stocks / sectors for the future as our lives evolve at an amazing pace.
Stocks, Sectors & ideas that have caught our eye.
No change in our underlying view that we remain bullish stocks into 2019, basically until the “Junk Bond” market starts rolling over but we continue to feel April / May are likely to be more muted and choppy than Q1.
However at this stage MM sees no reason to doubt that Q2 wont be all about stock / sector rotation, similar to recent months.
1 Bond yields have fallen, will central banks take the hint?
Over recent months bond yields have fallen fairly sharply with the Australian 3-year bonds making fresh all-time low. History tells us that if the RBA and Fed, in the case of the below chart, don’t follow the bond yields lower then equities usually struggle moving forward but not immediately – in other words the bond market is usually smarter than the central banks which don’t always take the hint fast enough.
At MM we believe there is a strong likelihood of lower rates in 2019 / 2020 but we should not underestimate the RBA’s apparent comfort with the current all-time low rate.
US v Australian 3-year bond yields Chart
Until further notice we still believe sectors that enjoy lower rates will perform strongly, if only in anticipation / expectation of falling official rates e.g. last week we again saw Transurban (TCL) make fresh all-time highs.
In the bigger picture we believe the ultra-low interest rate cycle is maturing but considering we have only just seen the likes of the Fed alter their stance its likely to have more to run at this stage. Technically we can see TCL above $14 but we would be looking for bearish catalysts to sell at those elevated levels.
Transurban (TCL) Chart
Albert Einstein is most famous for the equation “E=MC squared” which on the basic level means that energy and mass (matter) are interchangeable. However from an investment perspective it’s the below which is quoted the most often and I have noticed it pop up more this year as local bond yields make all-time lows and investors again search for yield – perhaps an indicator that we are entering the final straight for the “yield play”.
“Compound interest. Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it. Compound interest is the most powerful force in the universe.” - Albert Einstein.
The power of compound intertest and dividends for equities is illustrated perfectly by the below chart which shows the ASX200 index well below the GFC high whereas the Accumulation Index (including reinvested dividends) is soaring above its 2007 high.
ASX200 Accumulation v ASX200 Chart
2 The Banking & Financial Sector
Last week was mixed for the banks with regionals tumbling following Bank of Queensland’s (BOQ) poor result while the rest of the sector closed basically unchanged courtesy of Fridays strong bounce. As we said last week the vital ingredient called earnings are looking poor for the Australian banks with mortgage focused banks Westpac (WBC) and Commonwealth Bank (CBA) having forward earnings expectations down 10% on a year ago - cost cutting can only go so far and it becomes tougher each time, CBA are currently rumoured to be planning to cut 10,000 jobs and close 300 branches, a move that sent the stock up ~2% on Friday.
Also, any interest rate cuts moving forward by the RBA are likely to be tough on banking margins hence we remain cautious the sector both fundamentally and technically and are comfortable having moved from overweight to market weight the banks in our Platinum Portfolio following the sectors strong recovery in 2019.
If the banking sector were to break under 2018 lows we want to be aggressive buyers not concerned overweight holders.
Westpac (WBC) Chart
Bank of Queensland (BOQ) Chart
However the Financials look far more interesting at this point in time with a few stocks in the sector looking poised to break higher:
1 – Following Fridays strong rally by Perpetual, courtesy of better than expected Funds under Management (FUM), the fund manager looks likely to add to last weeks gains, our initial target is ~5% higher.
2 – Recently savaged by the Royal Commission IOOF looks positioned for a ~10 -15% rally above $7, good risk / reward with stops below last weeks $6.21 low.
IOOF Holdings (IFL) Chart
3 The Energy sector looks set for one more push.
Crude Oil has hit our $US64/barrel target but the stocks within the Energy sector look likely to push towards fresh 2019 highs. We would not be chasing at current levels but the implication is stocks will remain strong over the coming weeks:
1 – Santos (STO) $7.03 – Santos continues to look set for an assault on the $8 area, or ~10% higher.
2 – New Hope (NHC) $2.82 – major underperformer of the last month NHC has tumbled almost 40% now looks to have bottomed and at MM we are no longer technically bearish. Aggressive traders could consider buying NHC for a quick 10-20% bounce.
Santos (STO) Chart
New Hope Coal (NHC) Chart
4 The resources stocks are starting to tire.
The “Big 3” iron ore stocks BHP Group (BHP), RIO Tinto (RIO) and Fortescue Metals (FMG) have enjoyed a phenomenal run in Q1 2019 largely assisted by the awful Vale tragedy in Brazil which has led to the thee almost doubling in the price of the bulk commodity. This year, iron ore miners 1-year forward profit expectations are up close to 30% compared to the rest of the market which are down over 2% - simply the profit rally of 2019 is more than 100% iron ore.
However last week the Resources sector actually looked tired for the first time in a while even if the 3 mentioned above still managed to close in the black, a quick 10% pullback in the likes of BHP and RIO would not surprise. We saw Goldman Sachs express some concern for the sector calling them a “hold” with the American investment bank essentially saying this is as good as it gets for iron ore.
At MM we are now short-term cautious the iron ore stocks at current high levels.
BHP Billiton (BHP) Chart
Some stocks within the sector did actually endure a far tougher week with South32 (S32) tumbling over 7% as Goldman Sachs called the stock a sell.
At MM we remain bearish S32 with a potential target well over -10% lower.
South32 (S32) Chart
5 Growth stocks are now too hot to handle!
The Australian Software & Services sector soared another 3% last week and many of the stocks in the sector are feeling as hot today as they were cold in November. There is no major fundamental change in most of the businesses but the sector is illustrating the dangerous characteristic of momentum traders who buy stocks that are going up, especially as they make fresh all-time highs, but as we saw in November when the music stops playing don’t hesitate otherwise losses can mount very quickly.
We have missed the last 2-months of this advance and it probably sounds like frustration as we discuss the sector, which is undoubtedly partially true, as we said earlier we must look through the windscreen and the risk / reward is currently not appealing.
Technically the Software & Services index, Australia’s quasi growth index, has now basically reached our target area moving us to a neutral stance although the upside momentum clearly remains strong.
On the stock level we have now lost interest in most companies on a risk / reward perspective at current levels but into weakness a few will become interesting.
ASX200 Software & Services Sector Chart
Appen Ltd (APX) Chart
Short-term on balance we believe the ASX200 is still likely to trade between 6000 and 6300 this quarter but we cannot ignore the current underlying strength of the market.
We remain mildly positive medium-term targeting a choppy advance through 2019 until we see weakness in the “junk bond market”.
We believe stocks / sectors that benefit from lower interest rates as opposed to a strong Australian consumer will continue to outperform for at least a few quarters e.g. Telstra (TLS) looks set to make fresh 1-year highs around $3.50.
Sustainable dividends are likely to remain on many fund managers menu as we head into Q2 of 2019, last week the Bank of Queensland (BOQ) reminded investors not to be complacent.
Chart of the week.
Last week we had Star Entertainment (SGR) in this slot and we were planning to buy on Monday only for it surge on the opening due to Wynn’s bid for Crown – almost as annoying as a loser!
This week we’ve moved to the US with investment bank JP Morgan who smashed earnings expectations on Friday sending the stock up 5% - net income per share was a beat by over 10%.
MM is bullish JP Morgan eventually targeting fresh highs over $US120.
JP Morgan (JPM US) Chart
Investment of the week.
We could have easily put JPO Morgan in this slot with stops below $US106 – good risk / reward. However after looking to the US last week we felt it was time to return back to our own shores.
Bega Cheese (BGA) hit a 12-month low in March following disappointing half-year results.
We see BGA as an excellent recovery opportunity in the food space which we like but we would only consider a relatively small investment enabling the ability to average if the company stumbles again.
MM likes Bega Cheese (BGA) below $5.
Bega Cheese (BGA) Chart
Trade of the week.
This is a case of risk / reward as opposed to pure quality, Bellamys has been a trading stock for the last few years and until further notice it will remain so to MM.
So far over the last 2-years BAL has followed the technical picture extremely well while the downtrend has been painful for long-term investors.
MM likes BAL below $10 with a close stop under $9.30.
Bellamys (BAL) Chart
Our positions as of Friday. All past activity can also be viewed on the website through this link
Weekend Chart Pack
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Have a great day!
James & the Market Matters Team
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