23 August 19
Markets calm ahead of Fed talks (CGC, MYX, GMG, SGM)
23 August 19
Markets calm ahead of Fed talks (CGC, MYX, GMG, SGM)
23 August 19
Markets calm ahead of Fed talks (CGC, MYX, GMG, SGM)
23 August 19
Reviewing the Australian IT sector as the NASDAQ struggles - (CGC, NAB, GDX, WTC, XRO, APT, APX, ALU)
22 August 19
Reporting peaking today with over 30 companies out with results (BIN, Z1P, PPT, VOC, FLT, QAN, WEB, COL)
22 August 19
Can we see any value in the 5 shockers from yesterday? (BHP, BSL, RSG, A2M, ILU, NEA, BXB, EHL)
21 August 19
Markets give back yesterdays rally as reporting ratchets up (EHL, DMP, WTC, CTD, A2M, CAR, BAP, APA, SGP, CWN)
21 August 19
Income Report: We’re adding another property stock to the portfolio (ABP, GMA, SGP)
21 August 19
Overseas Wednesday – International Equities & ETF Portfolios (BHP, RIO, IPH, SEK, EEM, FB US, JPM US, DIS US, ABX US, GDX US, TYU9)
20 August 19
Strong day as company results impress (BHP, KGN, MND, EHE, SEK)
20 August 19
Actions MM are considering if we rally ~2% towards 6600 (NST, GDX AU, BBOZ, GDX US, BOQ, FMG, EHL)
Last week global equity markets were choppy with strength early, a soft middle part of the week before the usual EOFY window dressing played out into Friday – the final day of the financial year for Australian investors. Last Monday, the ASX 200 hit our long held 6250 target (to the point!) and then sold off thereafter while US stocks led by the NASDAQ have now turned more bearish in the short term.
Overall, the year has been another positive one for Australian investors with the index adding 8.27% before dividends and 13.01% inclusive of dividends, however being in the right sectors and stocks was incredibly important in achieving that performance, as was avoiding the many landmines that presented themselves throughout the year. The NBN roll out has simply been a disaster for the Telco sector while I doubt many would have picked Energy, led by a resurgence in Oil prices to be the No 1 sector over the year. Many thought electric cars and a growing reliance on renewable energy was creating a looming demand ‘black hole’ – not to be. It was a lonely call we made when Oil was at $US40/Barrel calling it to $US70/Barrel but now at US$74 the risk reward no longer stacks up for the buyers.
Market & Sector Performance in FY18
Looking globally, the NASDAQ / US Tech stocks proved the best place to be during FY18 with the index adding 24.68% while the broader S&P 500 added 12.17%. The 8.27% for the ASX 200 put it in the middle of the road in terms of global equity performance.
European markets had a more difficult time of it with the FTSE 100 in London doing best up 4.43% followed by the French CAC which added 3.96%. The German’s proved to be less optimistic and their market ended just down for the year (-0.16%). Asian markets were interesting with some significant divergence across the board. Chinese Equities lost -10.80%, much of that in the last few weeks despite inclusion in some MSCI Global Indices. For those not familiar, the MSCI is the U.S Index Publisher of the worlds ‘go to’ benchmark which now includes 234 Chinese large cap stocks in its global measure from June 1, a change that many thought would lead to more international investment in Chinese stocks (currently just 2% of Chinese equities are owned by foreigners) – time will tell.
Elsewhere in Asia, the Hang Seng tracked inline with the S&P 500 adding 12.38% while the Japanese pushed their market up by 11.34% over the year.
Yearly Winners – US Nasdaq 24.68%, US Down Jones 13.69%, US S&P 500 12.17%, Hong Kong Hang Seng 12.38%, Japanese Nikkei 11.34%, Australian ASX 200 8.27%, UK FTSE 100 4.43%, French CAC 3.96%
Yearly Losers – China Shanghai Composite -10.80% and the German DAX -0.16%.
Now the Financial Year is behind us we can sit back and look at markets with a fresh lens. Currently there are two competing forces at play. The Australian market looks reasonable with the internals of the market improving towards the back end of June. Banks found some support while the resource stocks have moved strongly up from their recent lows, however the fact the market hit its head on overhead resistance (6250) has us mildly bearish Australian stocks from here, however we do need to see a drop below 6140 on the ASX 200 for that opinion to grow in strength. Overseas, the NASADAQ has provided a sell signal and being the index that has led the current bull market we simply have to give this appropriate weight.
Although traditional seasonality has simply not worked of late we still remain conscious that the ASX200's average gain since the GFC in July is 3.59% with it closing positive 7 out of the 8-years. Also, on those 7 bullish occasions the market closed out July around the highs of the month telling us early monthly strength usually follows through at this time of year. We start the first trading day of July on Monday with Futures pricing in a rise of 23pts.
As suggested last week, while the market has reached our initial target there are no sell signals on the ASX (yet) hence we will only continue our slow build-up of cash as / when individual stocks hit our target areas until further notice. Two triggers will concern us with the local market at this point in time:
ASX200 Index Chart
1 Current Bull market – Long in the tooth!
Humour me for a second with a quick recount of the current advance – a theme we have spoken about a lot! The current bull market started in March of 2009 after the S&P 500 based out at 667 and we’ve now enjoyed 111 months of market gains (without a 20% correction). The longest bull market in history lasted 114 months back between 1990 & 2000 rallying 418% for the S&P 500. Currently this bull market has seen the S&P 500 up 307% to Fridays close.
The breath of the current rally in equities is narrowing, with a very tight knit group of stocks driving the market higher, primarily the tech stocks. It’s simply impossible to anchor the current valuations in some parts of the market on earnings – it’s a momentum trade on the bluesky of the future!
S&P 500 Chart
2 Share buy-backs a given
A large proportion of buying over the past 12 months or so has been coming from the companies themselves - through company buy backs. Share buy backs have simply been a massive component of overall buying and it looks set to continue over the next 12 months if recent data is a guide – we spoke about this on Friday Morning – Click Here
Bank of America for instance say they can buy about $20b of shares versus their current market capitalisation of $290b – or in other words they will likely be the biggest buyer of their own shares over the next 12 months buying up to ~7% of their own stock. That theme is playing out across the sector and broadly across the market.
Friday was the first trading session where that news was digested, and Bank Of America opened higher (as you’d expect),however the market sold into it, or in other words this is already expected by the market. It’s like my youngest daughter that expects an ice cream whenever we go to Manly on the weekend – the status quo is maintained if we get one, but all hell breaks loose if we don’t. She’s simply become uncustomed to it, just as the market has come accustomed to share buy backs!
Bank of America Chart
3 The Oil price has been explosive
Crude Oil has almost doubled over the past 12 months now exceeding our $US70/barrel price target taking local energy stocks along for the ride. Momentum here remains strong and its very hard to now turn negative on Crude – we simply believe the risk v reward now does not favour any buying. The recent OPEC meeting was interesting although it ended with a degree of ambiguity as to what the agreement in terms of production means going forward.
Back in 2016 they announced production cuts to support prices and that has clearly worked, however they now believe that Oil prices have run too hot because of ‘over compliance’ of these cuts by members. Being naturally cynical, overcompliance and OPEC in the one sentence rings an alarm bell. I sincerely doubt ‘over compliance’ has been a conscious decision, more likely is that over-compliance has not been voluntary – it’s probably more a sign that lack of investment in maintenance, social unrest, war, and the collapse of output from Venezuela is the main cause, and these are not controllable factors – or at least less controllable than removing ‘voluntary overcompliance’ as they infer.
So despite Oil having an exceptional run to date, the risk in the short term is to the upside, albeit, we will be unlikely buyers at current levels.
Crude Oil Chart
4 We should watch the yield curve closely
The spread between short term US interest rates and long term US rates has narrowed in recent weeks and as of Friday the gap sits at 0.34% - the narrowest since before the GFC. While the huge amount of central bank intervention in the bond markets could be influencing this in ways we simply have not seen historically, this is a trend that we should keep a close handle on. A flattening yield curve can often be a sign that the markets longer term outlook for growth has become less optimistic. On the rare occasions where the curve has become inverted – short term rates higher than long term rates – it’s been a warning sign of a recession.
A less dramatic way of interpreting it is to simply think that rates are likely to go up shorter term, but stay lower for longer. This theme is why the yield play – infrastructure stocks etc have continued to hold up.
2 year yield v 10 year yield spread – currently 0.34%
We’ve now taken a more bearish stance across our portfolio’s with increased cash and some negative facing ETFs in the Platinum Portfolio
Standout technical chart (s) of the week
The NASDAQ has been the leading global index for much of this current bull run – the break below 7050 has generated a technical sell signal which should serve as a warning sign more generally.
US NASDAQ Chart
Trading Opportunities on our radar
Perpetual (PPT) typically trades at a premium to IOOF (IFL) however we have the reverse playing out at the moment. IFL has more risk from a regulatory standpoint around grandfathered commissions following their recent ANZ acquisition. Perpetual is significantly cheaper and the spread between the two should revert.
Sell IFL and Buy PPT as a pairs trade
IOOF (IGL) versus Perpetual (PPT)
Our positions as of Friday. All past activity can also be viewed on the website through this link
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