Market Matters Report / Market Matters Weekend Report Sunday 16th December 2018

By Market Matters 16 December 18

Market Matters Weekend Report Sunday 16th December 2018

Market Matters Weekend Report Sunday 16th December 2018

The ASX200 had a frustrating week rallying strongly almost testing 5700 on Thursday before succumbing to negative sentiment, both locally and overseas. The Banks and Telco’s led the declines while the heavyweight resources found a bid around optimism on US – China trade negotiations, however as we regularly say “the local market cannot go up without the banks”, of course it can but its very tough going with the “big Four” making up almost 22% of the index by market capitalisation.

Local stocks again perfectly picked the downturn in the Dow which fell over 700-points from Wednesday’s intra-day high. The initial optimism around Trump and Xi’s apparent softening attitude on trade slowly lost momentum throughout the week as markets again became fixated on a looming global recession i.e. the market is looking through a negative lens at present continuing to focus on any poor news flow and of course as we all know there’s plenty around.

I enjoyed reading an article from legendary investor Stanley Druckenmiller on Livewire yesterday with a few important takeout’s from the below 2 poignant sentences.

“But one of my strengths over the years was having deep respect for the markets and using the markets to predict the economy, and particularly using internal groups within the market to make predictions. I was always open-minded enough and had enough humility that if those signals challenged my opinion, I went back to the drawing board and made sure things weren’t changing.” – Stanley Druckenmiller..

Some of the above rang bells with me and has high relevance to MM in 2018 and importantly beyond:

1 –  We have been bearish the ASX200 medium-term targeting the 5000 area but we have moved to basically fully invested looking for a bounce towards 5950 as we attempt to add some short-term value / alpha – we must remain very focused in case the bounce doesn’t eventuate.

2 – Some sectors are calling a very tough time for the Australian economy in 2019 / 2020, we must remain open-minded as to whether they are correct -we will cover this in Point 1 later.

MM remains bullish the ASX200 into Christmas / 2019 ideally targeting the 5950 area +/- 50-points – but our conviction is far more muted than a fortnight ago.

ASX200 Chart

Again the Volatility Index caught our eye falling in a week when US stocks closed at their lowest close since April, including another almost 500-point drop on Friday.

Surprisingly the VIX closed down on the week, this is a bullish indicator showing that sophisticated investors do not believe that the risks are high for stocks to fall significantly lower.

Volatility VIX (Fear Gauge) Index Chart

Australian & Global Equity Indices

Technically the big picture is average for stock indices both locally and internationally but for the prudent / in-tune investor this should provide some of the best opportunities since the GFC – we are extremely excited at MM.

Correct stock / sector positioning will enable an investor, both large and small, to be able to confidently buy the market if we do endure a tough few years.

Its important to put our thoughts into perspective regularly…

1 – We are looking for the ASX200 to correct its run up from 3121 in March 2009, an advance of 3252-points over 113-months.

2 – If we assume that the August high at 6373 is the end for the longest bull market in history a typical correction would be back to 4750 over around 4-years i.e. 50%.

3 – Hence we have already corrected 824-points over just 5-months which implies strongly the market needs a rest on the downside, especially as a great deal of bad news is already built into the market.

Generally we do intend to invest with a more conservative approach so we can be aggressive buyers if the correction does head towards 5000 but we will also look to add value into decent bounces – as we are today.

Remember during the post-GFC rally the market had 2 major corrections of 25% and 21.5% illustrating perfectly that markets very rarely go up, or down, in a straight line.

ASX200 Chart

Similarly, looking overseas for clues,  our eventual target for the German DAX is the 9000 area. This may be another 15% but theoretically the German Bourse has already sustained well over 60% of MM’s anticipated correction i.e. the risk / reward is not compelling to jump on board the sell wagon at current levels.

German DAX Chart

In  the US, the broad Russell 3000 index has already fallen over 40% of the hammering it took during the GFC – from a points, not %, perspective.

Already in the US S&P500 more than half of the members are down over 20% which is referred to as in a Bear Market for the particular stocks. However compared to both Australia and Europe the US does feel vulnerable to deeper falls from current levels.

Russell 3000 Chart

1 Is Australia headed for a recession?

The stock market is sending a very clear and pessimistic message about the Australian economy into 2019 i.e. things are going to get tough. We’ve made a couple of poor calls in 2018 like all market pundits but avoiding exposure to the heavily indebted average Australian household has helped us avoid some major land mines. Just look at the below 3-month returns for some stocks with exposure to the Australian consumer:

Automotive Holdings (ASX: AHG) -34%, JB HIFI (ASX: JBH) -10%, Webjet (ASX: WEB) -27% and CSR Ltd (ASX: CSR) -31% - there are plenty more!

Over the last few quarters falling home prices has been a dominant feature in the financial press, not only are housing prices falling but so is turnover as sellers struggle to face reality and many buyers are finding it tougher to borrow money. People are already spending less whether it be on home renovations, TV’s, furniture or new cars, however stocks usually lead the underlying economy by 6-9 months, hence we expect this to get noticeably worse before it improves.

However we must always look ahead and stocks that are exposed to domestic spending have already been smashed with ~50% corrections commonplace as we see below from household names CSR and Harvey Norman.

We don’t believe it’s time to buy the panic yet BUT we now think the bottom is closer than top for stocks in that sector.

We will be watching for signs of exhaustion on the downside e.g. bad news not leading to weakness at the sector / individual stock level.

CSR Ltd (ASX: CSR) Chart

Harvey Norman (ASX: HVN) Chart

2 The Energy Sector is catching our eye.

Crude oil is sitting over 30% below the years high but as we said a few week ago the next 15% now appears likely to be up, as opposed to the recent trend which is clearly lower. As would be expected the energy sector has followed the price of Crude lower creating a significant drag on the index - over the last 3-months Beach Petroleum (ASX: BPT) -24%, Santos (ASX: STO) and Woodside Petroleum (ASX: WPL) -15.6%.

The question is if $US50/barrel is going to hold how should we try and benefit from a likely recovery in the sector.

Crude Oil Chart

From an investment perspective we believe the question should actually be, regardless of the oil price, what stock in the energy sector would you most like to own.

Ironically the answer is a coal miner!  MM is bullish coal miner New Hope Corp (ASX: NHC) targeting 15-20% upside.

Our second favourite in the sector is actually Whitehaven Coal (ASX: WHC) so although we believe crude may haver bottomed we prefer the coal miners in the Energy Sector. The price action simply looks better.

New Hope Corp (ASX: NHC) Chart

Whitehaven Coal (ASX: WHC) Chart

3 The Insurance picture evolves.

The insurance picture has changed noticeably over the last few weeks as concerns around the state of the global economy have escalated leading to lower bond yields = bad news for insurers profitability as they hold their received premiums / cash in such interest yielding bonds.

The sector has had a tough time including Suncorp (ASX: SUN) and QBE Insurance (ASX: QBE) that we own i.e. over the last month QBE is -10.4% & SUN – 4% compared to the ASX200 which fell -2.3%. Last week QBE disappointed the market (again!) with its latest trading update which led to the stock closing down over 5% on the week following a near term hit to earnings.

Our position is back to around breakeven, we do like QBE at current levels but the market is likely to want to see some proof that new management can turnaround this serial underperformer before the shares can advance meaningfully. The stocks relatively cheap trading on a P/E of just over 10x Est 2019 earnings compared to SUN on 13x and ‘sort of’ sector rival NIB Holdings (ASX: NHF) on 15x Est 2019.

Technically we now like NHF the most and SUN, which we have held for ~3-years, the least.

Our next move in the sector is likely to be a sell of SUN & / or QBE, hopefully at higher levels.

NIB Holdings (ASX: NHF) Chart

4 Three overseas goliaths catching our eye

Its not just local stocks that have suffered a tough times recently with some global heavyweights getting smashed e.g. Apple -30%. Today we’ve looked at 3 American titans but the Emerging Markets are likely to dominate our selections in 2019. In July the cash reserves of Apple sat at $243.7bn as the company ups spending but that still equates to about one third of the companies market cap.

Trading on an Est. P/E for 2019 of 12.46x feels good value, Warren Buffett bought a huge 75 million shares in Q1 of this year and added another 522k at $187.30 in Q3 so I assume he’s definitely bullish at $US165!

MM likes AAPL at current levels

Apple Inc (AAPL US) Chart

We’ve touched on JP Morgan Chase (JPM US) previously with a buy level below $US100 which is basically where we are today.

This coincidentally is another stock that Warren Buffett likes as he purchased over 35m shares last quarter at an average price of US109.25, again I assume he likes it almost 10% lower.

MM likes JPM at current levels.

JP Morgan Chase (JPM US) Chart

We’ve been bearish Wells Fargo for most of 2018 targeting the US45 area and as we approach Christmas our target has basically been achieved.

MM is an accumulator of WFC into current weakness.

Wells Fargo (WFC US) Chart

5 The $US is testing our resolve.

MM remains bearish the $US targeting a ~3-4% decline in the short-term, back towards its late September lows. We’ve held this view for over a month but so far with the exceptions of a few failed dips the Greenback has remained firm.

The $US still feels like its “hanging in there” because of volatility in US stocks and ongoing uncertainty around a trade war, not a reason to chase the $US in our opinion.

However its important for us to remember that we are bearish the $A targeting the mid 60c region, or 10% lower. Potentially a conflict of opinion. Hence perhaps we are getting “too close” with our short-term bearish $US call – hopefully not as its would imply stocks will fail to stage some sort of partial recovery.

$US Index Chart

The Australian Dollar ($A) Chart


We remain mildly positive short-term targeting a Christmas rally ideally towards 5950 where MM will significantly increase our cash position.

While the stats / statistical validity of the Christmas rally are there for all to see,  unfortunately we’re now more confident of an eventual target of ~5000 for the ASX200 than I am of a Christmas bounce to 5950.

On the stock level, we are considering the following;

Selling: QBE &/or SUN, Janus Henderson and perhaps a small part of our Telstra to fund part of Vocus purchase if we were to go that way.

Buying: Vocus  and New Hope Corp

Chart of the week.

This week I have included 2 stocks with very similar chart patterns which unfortunately are negative:

1 MM remains bearish IRE targeting at least 10% downside.

2 MM is bearish PMV targeting at least 15% downside.

Iress (ASX: IRE) Chart

Premier Investments (ASX: PMV) Chart

Investment of the week.

The ACCC’s lack of decision on the TPG Telecom – Vodafone merger may just have provided an ideal opportunity to buy Vocus (ASX: VOC).

Subscribers should remember we like the Telco Sector into 2019.

MM likes VOC technically with an ideal entry level between $3 and $3.10,

Vocus (ASX: VOC) Chart

Trade of the week.

CYB is a stock we have navigated successfully over the last 12-months and its looking very interesting today for the aggressive investor / trader.

MM is bullish CYB targeting a 10-15% bounce.

NB I stress this is not a long-term investment.

CYBG Plc (ASX: CYB) Chart

Our Holdings

Our positions as of Friday. All past activity can also be viewed on the website through this link

Weekend Chart Pack

The weekend report includes a vast number of charts covering both domestic and international markets, including stock, indices, interest rates, currencies, sectors and more. This is the engine room of our weekend analysis. We encourage subscribers to utilise this resource which is available by clicking below.

Have a great day!

James & the Market Matters Team


Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.


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