Market Matters Report / Market Matters Weekend Report Sunday 16th June 2019

By Market Matters 16 June 19

Market Matters Weekend Report Sunday 16th June 2019

Market Matters Weekend Report Sunday 16th June 2019

The ASX200 continues to make fresh post GFC highs actually managing to close off the shortened week only 4.6% below its all-time high set back in November 2007, this “unloved” bull market continues to climb the wall of worry. Over the 4 trading days the market managed to rally +1.7% with gains across all sectors except retail, the underlying strength of local stocks was illustrated by the ease of which a couple of major downgrades were simply shrugged off by the index i.e. Star Entertainment (SGR) -14.2% and Challenger Ltd (CGF) -18.3%.

Over the last 5 trading days we’ve seen some decent volatility on the stock level with almost 30% of the ASX200 closing up, or down, by 5% or more:

Winners: GWA Group (GWA), Seven Group (SVW), Emeco Holdings (EHL), ALS Ltd (ALQ), IPH Ltd (IPH), Bingo Industries (BIN), Nearmap NEA), IDP Education (IEL), Credit Corp (CCL), Janus Henderson (JHG), Magellan (MFG), Washington Soul (SOL), Costa Group (CGC), Elders Ltd (ELD), GrainCorp (GNC), Tassal Group (TGR), Nanosonics (NAN), Sonic Healthcare (SHC), QBE Insurance (QBE), Steadfast (SDF),  NIB Holdings (NHF), Northern Star (NST), Saracen (SAR), Fortescue (FMG), Ausdrill (ASL), Evolution Mining (EVN), Regis (RRL), Pilbara (PLS), RIO Tinto (RIO), BlueScope (BSL), Newcrest (NCM), Iluka (ILU), Sandfire (SFR), Mineral Resources (MIN), Independence Group (IGO), OZ Minerals (OZL), BHP Group (BHP), Sims Metal (SGM), Fletcher (FBU), Nufarm (NUF), Domain (DHG), CSL Ltd (CSL), Charter Hall (CHC), National Storage (NSR), Technology One (TNE),  Altium (ALU), Vocus (VOC) and Atlas Arteria (ALX) – 48 in total.

Losers: Star Entertainment (SGR), Flight Centre (FLT), Ardent Leisure (ALG), Challenger (CGF), Syrah (SYR), Bapcor (BAP), Wesfarmers (WES), Afterpay (APT) and AGL Energy (AGL) – 9 in total.

The simple but important standout is the broad based strength within the market which is illustrated by the winners dominating the above group with 84% sitting on the positive side of the ledger. Markets usually “top out” when a few major stocks are dragging the index higher but currently the buying is across the board in our stock market. Hence as we often say “KISS” (keep it simple stupid) and at the moment the underbelly of the market is strong so don’t fight the tape – please excuse the clichés but they are very apt at the moment with so many pundits calling a market top.

At MM we are in “sell mode” by definition of our large exposure to stocks in both our Platinum and Income Portfolio’s but it feels like the markets heading higher into EOFY. Some shenanigans on the stock level is common in June and we will be happy to sell any of our holdings which MM believes have been pushed too far - Theoretically the important G20 meeting being held in Tokyo on the 28th and 29th will impact stocks in July unless the US and China create some news before the meeting concludes on the Saturday.

Short-term MM remains bullish the ASX200 while it can remain above 6500 with an initial technical target above 6600.

On Friday night markets were very quiet with the SPI futures calling the ASX200 up ~10-points on Monday morning.

ASX200 Chart

It feels to me like since the GFC that no global central bank wants to see a recession, in their country, on their watch. Definitely no Paul Keating’s appear around the corner, the leader who described our recession in the 1990’s as the one we had to have, now we and the world are literally  throwing anything at the economy to keep it afloat i.e. both low interest rates and QE – German 10-year bond yields actually closed at -0.24% on Friday, that’s minus interest.

Both low interest rates and QE are major tailwinds for equities assuming the confidence remains that central banks can fend off any meaningful recession, hence at MM we are watching a number of confidence indicators closely.

MM believes stocks will remain firm until bond yields start to increase, or perhaps just plateau.

Australian & US 10-year bond yields Chart

Global bond yields and interest rates continue to tumble with our own winning the race to the bottom against those in the US, hence the $A is back under 69c.

It’s fascinating times we live in with interest rates continually falling as the below chart illustrates but many gauges of our economy are nothing like as bad as bond yields imply e.g. our unemployment rate was far worse in the 1990’s, housing prices struggled far more in the 1970’s and 80’s in real terms and we experienced lower inflation in the 1990’s.

Australian 3-year bond yields v RBA cash rate Chart

Two major indicators of economic strength are copper (often called Dr Copper) and crude oil, and they both have been trading weakly over the last 12-months with risks around US-China trade weighing on confidence. There are 2 main points which we believe are worth considering and understanding:

1 – If the US and China does enter a full scale economic trade war it will be very bad news for both commodities and equities.

2 – Donald Trump has an election looming on 3rd November, 2020. He needs a strong economy to be re-elected and a trade war will definitely not create that back drop. Like most people I have no idea exactly what “game” Donald Trump is playing but at the business end of his election race next year he will want the US economic juggernaut to be firing on all cylinders, he has time on his side for now but as we all know it passes fast.

The US and Mexico resolved their trade issues about a week ago in fairly rapid fashion, in a sign of the times both the start of the ructions and resolution were announced with a Tweet. Potentially we could see an end to the US – China disagreements on trade come out of the G20 meeting at the end of this month, we currently feel any spike higher by stocks on a positive outcome is likely to be a selling opportunity.

Copper and Crude Oil Chart

1 –  Platinum Portfolio

The MM Platinum Portfolio enjoyed a very good week courtesy of strong performances from Iluka (ILU), BHP Group (BHP),  Costa Group (CGC) and especially Bingo (BIN) plus importantly no negative hand grenades! - MM now holds 15% of the MM Platinum Portfolio in cash after taking a ~30% profit on our ResMed (RMD) position:  https://www.marketmatters.com.au/new-portfolio-csv/

As mentioned earlier we are in “sell mode” but we think the market still trades higher into the EOFY hence we are considering more of a drip feed approach as opposed to any outright aggressive selling.

Following some strong moves last week we have a number of stocks close, or at, our objectives, including the 6 below:

1 Iluka (ILU) $10.48 : the mineral sands operator has rallied nicely with our target remaining ~$10.80, now less than 4% away.

2 Bingo (BIN) $2.11 : we have been targeting the $2.10 area which was achieved on Friday putting our position up almost 50%, we will be watching the stock closely throughout the week. They have a site tour on the 26th which could be another positive catalyst.

3 BHP Billiton (BHP) $40.30 – BHP has reached our initial objective courtesy of the soaring iron ore price, we are considering taking a relatively small profit above $40.

4 Healius (HLS) $3.16 – HLS popped above Jangho’s $3.25 takeover bid last week but reversed to close marginally lower on the week. We feel the only reason to hold HLS is for potential further corporate activity which makes it an uncomfortable position, do we take our ~20% and run is the question?

5 NIB Holdings (NHF) $7.13 – NHF hit our initial target by breaking above $7.20 making fresh all-time highs in the process, ideally we will take some money of the table ~$7.50.

6 Aristocrat (ALL) $30.62 – The stocks momentum has taken it above our $29 target, technically it may reach $34 but it shouldn’t be influenced by EOFY as its only 0.5% below where it closed out June 2018.

*watch for alerts over the next 2-weeks.

BHP Billiton (BHP) Chart

Unfortunately not all positions are winners at MM and we are watching carefully our positions that could easily have a tough last few weeks in June as investors lock in some tax losses. Hence MM is considering sweeping the decks of all / some of our stocks that are unfortunately residing in the red - Pact Group (PGH), Ausdrill (ASL), Orocobre (ORE), Janus Henderson (JHG) and Emeco Holdings (EHL).

Again the broad market threw up very few fresh buy ideas this week as it rallied towards out initial 6600 target area, remember we are generally looking to sell into current strength, not buy. However there are 2 stocks / sectors we do have our eyes on:

1 Telstra (TLS) $3.87 – we clearly took profit too early on TLS around ~$3.40, however, we were also bullish when the crowd was not (see my discussion on TLS  the day we actually added to  it- click here –from the 3min mark). While it’s not as compelling as it was at lower levels,   the relatively recession proof earnings plus ~5% fully franked dividend is appealing in todays current bond yield environment. MM is considering buying the next ~2% correction.

2 Regis Resources (RRL) $4.86 – frustratingly RRL was close to our buy zone early last week before popping higher, we will be patient for now, however we do want Gold exposure in the portfolio.

Telstra (TLS) Chart

Regis Resources (RRL) Chart

2 Income Portfolio

The Income Portfolio https://www.marketmatters.com.au/new-income-portfolio-csv/ had another quiet week not transacting hence it still holds 4.83% in cash.

The AFR led on Saturday with the story that the “RBA Cash Rate could fall as far as 0.5%” with 2 cuts being anticipated this year alone. Even if the “doves” are getting ahead of themselves stocks which pay a decent sustainable yield should remain attractive to investors, especially when we consider its rapidly becoming tough to get a term deposit paying over 2%.

Until we see any indications that bond yields have bottomed MM sees no major reason to significantly reduce our large market exposure, or re-position / skew holdings towards higher rates i.e. why hold cash in today’s market when yield / income is your objective.

The RBA Cash Rate Chart

3 –  International Equites Portfolio

The international portfolio on the MM website will be launched before June 30 – stay tuned.

No change, we’re sticking with this for now - “We remain bullish global equities but the “easy money” on the long side feels well and truly behind us hence our construction of an international portfolio is going to be a careful process.”

The US Russell 2000 (small cap) Index is usually an excellent indicator of the overall markets strength i.e. simply put, small cap stocks tend to be more sensitive to liquidity hence when enough cash is around to rally the small caps it implies there’s enough money for the whole index. However recently the Russell 2000 has been a significant underperformer, a rare bearish indicator moving forward.

US Russell 2000 (small cap) & S&P500 Index Chart

The Emerging Markets Indices still look capable of falling another 10% implying there maybe be no “quick fix” solution to the US – China trade talks. We still see no reason to jump “boots and all” into overseas stocks, especially those Asian facing, but as always there will always be bargains / value to be enjoyed.

Emerging Markets ETF (EEM) Chart

Below is a fascinating chat with Rupert Lowe who is a member of the BREXIT Party and a newly elected member of the European Parliament –he anticipates that BREXIT will be good for the UK. I feel he may be correct on this count but the overall framework of the EU still appears doomed hence we will be largely avoiding the region – a similar sentiment shares by Steve Jacobs who heads up $55bn asset management firm BTG Pactual.  

My chat with Rupert Lowe around BREXIT

4 - MM Global ETF Portfolio

This remains a new concept to MM but this portfolio will replicate our macro opinion primarily around global stock indices, different market sectors, interest rates and currencies, like the International Portfolio we will kick it off in the coming few weeks.

These views can often be implemented using an ASX listed ETF’s but when required we may also turn to overseas listed ETF’s. We have regularly discussed our views across these economic themes and its time to put theory into practice. Below is a list of Australian ETF’s updated at the end of February this year:

We still believe there are a couple of great scenarios worth considering and preparing for but remember major macro views don’t change too often:

1 – A potential spike towards 65c by the $A discussed throughout 2019 will represent great risk / reward buying in our opinion.

2 –  A month  ago MM said : “Sell Emerging markets v buy the ASX200 equal dollar exposure” this has worked perfectly and we would now be closing the position with a smile. However if we get a spike lower by the Emerging Markets Index over the coming weeks, probably on some news out of the G20, we would consider buying the EEM ETF (Emerging Markets ETF).

The following chat covers many macro situations which at MM we constantly consider and monitor – its extremely interesting and informative, definitely worth a listen.

My chat with Steve Jacobs, Chair BTG Pactual Asset Management, Chair, Shaw & Partners

Conclusion

Short-term Australian stocks look ok but we intend to be “trickle” sellers over the coming weeks, ideally into strength.

US stocks look bullish for now but a the relative weakness in the Russell 2000 is a concern.

*Watch for alerts.

Chart of the week.

The S&P500 is slowly setting itself up for an excellent, high strike rate, signal.

1 – Short-term the S&P looks set to challenge / break above the 2954 all-time high, only ~3% higher.

2 – A break above 2954 followed by a close below 2925 technically targets an initial drop of ~7%.

MM is a keen seller of a failed breakout over 2955 by the S&P500.

US S&P500 Index Chart

Investment of the week.

Nickel producer Western Areas (WSA) can be a volatile beast as can be seen below from its doubling and halving over the last 2 years. We scratched our position earlier in the year in WSA around $2.27, which looks correct today – if a position looks / feels wrong why hold it, irrelevant of your entry.

We will be interested in the stock into fresh multi year lows where value should re-emerge.

MM likes WSA below $1.80.

Western Areas (WSA) Chart

Trade of the week.

Steel producer BlueScope has endured an awful 18-months almost halving in the process and today its only commanding an Est P/E for 2019 of 6.4x illustrating concerns on trade moving forward. However we believe the risk / reward has now become attractive in the following manner:

We like BSL at current levels but would average into fresh lows so this is not an aggressive play at current levels, 50% at most is  my “Gut feel”.

MM likes BSL here and into fresh lows.

BlueScope Steel (BSL) 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

Disclosure

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.

Disclaimer

All figures contained from sources believed to be accurate.  Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy.  Prices as at 15/06/2019

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