Market Matters Report / Market Matters Weekend Report Sunday 21st July 2019

By Market Matters 21 July 19

Market Matters Weekend Report Sunday 21st July 2019

Market Matters Weekend Report Sunday 21st July 2019

The ASX200 finally managed to close the week up a couple of points courtesy of Fridays strong rally, a solid performance considering in many countries the sellers prevailed with the US S&P500 slipping -1.2%, while our neighbours in Asia closed mixed. Locally the losers actually outnumbered the winners but in terms of large moves we saw 9 stocks rally by over 10% while only 4 fell by the same degree. This and a firm banking sector was enough to keep the market in positive territory, although only just. Gold stocks dominated the winners, a sector we remain bullish and keen to increase our exposure across the MM Portfolios into any pullback.

The 4 worst losers on the week CIMIC (CIM) -18.8%, AMP Ltd (AMP) -16.5%, Perpetual (PPT) -11.7% and Oil Search (OSH) -10% all fell following disappointing corporate news. I feel like this reporting season will see a continuation of last week’s price action i.e. stocks that miss / disappoint will be crucified while  those that report solidly are likely to rally by less than half of what the losers fall. Hence we believe its an ideal time to hold an elevated cash position awaiting some potential bargains.

1 – CIMIC (CIM) $36.57 -  CIM shares were hammered after its first half results were released on Wednesday, a miss of ~7% led to an almost 19% rerating of the stock. There seems to be more at play here.  

2 - AMP Ltd (AMP) $1.79 – AMP shares were smacked again after the company announced that the RBNZ had blocked the sale of its AMP Life business in NZ, this forced the board of the struggling finance company to cancel the cherished dividend in August.

3 - Perpetual (PPT) $37.70 – shares in the fund manager endured a bad week after reporting FUM (funds under management) numbers well below expectations.

4 - Oil Search (OSH) $6.67 – the oil producer fell after reporting its half year results with the share price not being helped by a weakening oil price and sector.

At MM we continue  to believe it’s a time to be boring, or conservative, with our exposure to stocks and we are rejigging our portfolios accordingly. The chart below illustrates perfectly the huge rally Australian stocks have enjoyed since late December i.e. up over 25% with the largest pullback (s) along the way only ~3%.

Our “Gut Feel” is the local market still has a very good chance of making fresh 2019 highs in the weeks to come but for the traders amongst our subscribers we would be sellers of such strength if it eventuates.

We reiterate no sell signals have been generated by the ASX200 as the potential “rounding top” illustrated below in orange continues to evolve however US  stocks are far closer to hoisting up the bearish flags. We should not be an ostrich and forget the relative value supporting equities into weakness i.e. term deposits are paying below 2% while Commonwealth Bank (CBA) is yielding around 5% fully franked.

At MM we remain in “sell mode” as we look to adopt a more defensive stance than over the previous 6-months; the specific thoughts and skews across our 4 Portfolio’s will be discussed later. Note a defensive stance largely dictates which sectors we are keen to own as opposed to piling into cash and / or  going short. However we can generate Alpha / add value and make money in a falling market using negative facing ETF’s just as was implemented in Q4 of 2018.

ASX200 Chart

In our opinion today’s market is all about interest rates, if they stay where they are we believe stocks are cheap, let alone if they actually fall further as many predict. Hence our almost fixation with bond markets at this stage of the economic and market cycle. Both Australian 3-year bond yields and the RBA cash rate have halved since the ASX200 corrected well over 20% in 2015/6, producing a subsequent huge positive tailwind for asset prices, including equities.

MM are not convinced of a 3rd rate cut in Australia this year but we do believe the downward trend by bond yields is intact.

Moving forward interest rates can go up, down or sideways with 2 out of 3 good news for stocks but with 3-year bond yields hovering below that of the RBA Cash Rate the implication is the RBA will cut again moving forward, importantly not raise. Local bond yields may have slowed their descent but we still feel the path of least resistance is down so we are not standing Infront of this train just yet. Although subscribers should remain cognisant of the 2 risks which we see evolving in the months ahead:

1 – Global equities tumbled in Q4 of 2018 due to concerns that the Fed would raise rates too far and push the US into a recession, Australian bond yields / interest rates were largely unmoved over the same period, once stocks get a “a bee in their bonnet” its best not to fight the tape. Its been a while since stocks have been sideswiped by a surprise event.

2 – Markets become concerned that central banks will not be able to prevent a recession, even with their combined  attack of interest rates and  QE.

Equities with sustainable yield remain arguably cheap with interest rates at current levels – term deposits are paying way under half of the average yield of the ASX200.

Comparative Australian interest  rates / bond yields Chart

US bond yields have bounced slightly over the last week as the probability of a 0.5% rate cut by the Fed has been pulled back from 40% to just above 20% but basically everybody expects 0.25%. This moderated dovish optimism leaves less room for dramatic disappointment although I do feel we need to see the full 0.5% for stocks to roar back towards fresh all-time highs.

The correlation we looked at last week is continuing to flash warning signals for US equities, the last 18-months rally by US stocks has been strongly correlated  to “cheap money”, often called junk bonds - the S&P500 and iShares IBOXX ETF (HYG US) have moved in almost perfect tandem but the later has now  been falling for the last 4-weeks.

MM is becoming increasing wary of US stocks after they have reached our targeted 3000 area, especially while Junk Bonds are feeling heavy.

US S&P500 & Junk Bond ETF (HYG US) Chart

In the previous Weekend Report we discussed how over the last 12-months the Australian resources had become a game of 2 halves i.e. iron ore and the rest. Last week In a timely fashion we witnesses some mean reversion in this play between the bulk commodity and base metal nickel, the moves had a dramatic impact on the underlying stocks – while Fortescue Metals (FMG) slipped -0.9% nickel producers Independence Group (IGO) +9.1% and Western Areas (WSA) +20.2% soared, the obvious question is has this horse bolted.

1 - MM remains wary of iron ore short-term but we are still keen buyers into a decent pullback e.g. FMG closer to $8.

2 – Last week’s rally by nickel has triggered our interest in both WSA and IGBO but ideally a few % below last weeks close.

Comparing Nickel & Iron Ore Chart

The 2 strategies we’ve outlined recently remain at the front of our minds with regard to both sector allocation and the macro back drop for stocks:

1 – Investors have been chasing the obvious and usual suspects in their hunt for yield, we believe these stocks have generally become too expensive thus the secondary (not necessarily in quality) less familiar “yield play” stocks will come to the fore and outperform.

2 – The market is expecting a recession but it’s not currently pricing the risk into share prices. Investors were far more afraid of a recession because of higher rates than one which unfolds when rates are already low – this makes no sense to us because central banks have far less ammunition to deal with economic issues if they unfold today as rates are already at extremely low levels.

Hence we are keeping a close eye on stocks / sectors that usually outperform during a recession.

1 –  The MM Platinum Portfolio

We continued  to tweak the MM Platinum Portfolio largely as flagged in previous reports - we took a great profit on Ausdrill (ASL) and bought gold ETF  (GDX AXW) plus we switched Commonwealth Bank (CBA) into the less popular ANZ Bank (ANZ) – I feel a bit naked not owning CBA but I am confident we will re-enter at more favourable levels later in 2019/20.

Our cash position remains at a very elevated  23% as we await opportunities from the  looming reporting season:   https://www.marketmatters.com.au/new-portfolio-csv/

As touched on earlier we have no sell signals for stocks at this stage but we are becoming increasingly cautious with both our own and especially US indices, hence we feel the prudent risk / reward strategy is to continue slowly moving to a more defensive skew over our portfolio.

Following the last few weeks ongoing repositioning we still have a number of stocks that we are considering switching out off, and obviously into, below is the updated  list:

Holdings MM is considering selling -  Healius (HLS), NIB Holdings (NHF) and Janus  Henderson (JHG).

Stocks MM is considering purchasing – Adelaide  Brighton (ABC), Elders (ELD), Chorus (CNU), Smart Group (SIQ) and Sigma Healthcare (SIG) plus of course increasing some of our existing holdings.

Expect MM to continue “tweaking” our Platinum Portfolio although I do still feel we are certainly more than half way along the path.

*watch for alerts over next few weeks.

Sigma Healthcare (SIG) Chart

Below is a quick snapshot of the stocks currently on our by radar:

1 – Adelaide Brighton (ABC), building company ABC has had a tough 12-months which has seen its shares halve due to the fall off in construction but we believe this is a quality business whose shares are now presenting decent value, our initial target is 15-20% higher.

2 – Elders (ELD), soared last week after successfully raising capital to takeover of AIRR. ELD had been on our radar for a while, we have now raised our level of interest to the $7 area.

3 – Chorus Ltd (CNU), the NZ telco was previously the golden child of the sector but its quickly fallen 14% from its high in 2019. We see value presenting itself below $5 where the yield will become a healthy 5% unfranked.

4 - Smart Group (SIQ), the main thing holding us back with this salary packaging business is the stocks turnover but we do like the business at todays levels.

5 - Sigma Healthcare (SIG), a similar issue to SIQ with volume but we like the shares at today’s prices; one option is a reduced position size in SIQ and SIG, allocating say only 2.5% in each. 

Chorus Ltd (CNU) Chart

2 MM Income Portfolio

The Income Portfolio https://www.marketmatters.com.au/new-income-portfolio-csv/ was further tweaked last week by MM, we switched CBA to ANZ in the same manner as our Platinum Portfolio while our cash position remained at 6%.

Again no major change, until we see any indication 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

Last week we added the ProShares Bearish S&P500 (SH US) ETF to our MM International Equities Portfolio leaving us still holding 70% in cash : https://www.marketmatters.com.au/new-international-portfolio/ .

We are again considering a couple of very different positions:

1 –  Sell Netflix (NFLX US) and take the loss, Walt Disney (DIS US) after an awesome run is now also looking average increasing my concerns around the streaming businesses, at least short-term.

2 – Cigarette and tobacco company Phillip Morris (PM US) is highly likely to have a large number of detractors and rightly so, I am just looking at the business from a valuation and risk / reward perspective. A 15-20% rally looks likely.

3 – IBM (IBM US) reported well on Friday night and we believe  the household name is now positioned well to at the very least outperform the index.

At this stage I can see us switching from NFLX into IBM.

International Business Machines (IBM US) Chart

Phillip Morris (PM US) Chart

One stock which interestingly caught my eye on the weekend was Warren Buffets  Berkshire Hathaway, if I was trading this stock I would be short with a tight stop above this months high, it looks poised to retest this year’s low.

Berkshire Hathaway Class A (BRK/A) Chart

4 - MM Global ETF Portfolio

No change last week with MM’s new Global ETF Portfolio -  so far we have tickled on 3 positions, long both the $A and gold, plus we have started building a short equities position leaving us 80% in cash. Construction of this portfolio like our International Portfolio one will be a slow and patient process. We are currently keeping an eye on 2 other scenarios:

1 – We like concept of Australian equities outperforming the US NASDAQ index, watch this space as we believe this elastic band has stretched way too far between the two, see chart below.

To play this we would buy the BetaShares (A200 AU) to capture exposure to the ASX200 while also buying the ProShares Short QQQ (PSQ US) to gain inverse exposure to the NASDAQ.

2  – We are looking for a short-term opportunities in the bond markets but at the moment no risk / reward opportunities we like are presenting themselves.

ASX200 v NASDAQ Chart

Conclusion

Short-term Australian stocks still look ok but we continue to feel it’s time to adopt a more conservative stance, hence we are likely to continue tweaking our portfolios accordingly in the weeks ahead. 

US stocks will trigger a sell signal with a break below the 2960 by the S&P500 (less than 1% away), alternatively if US stocks turn around sharply and make fresh all-time highs we are likely to add to our negative US equities ETF’s.

Gold still looks great and we want to increase our exposure to the sector if / when pullbacks unfold.

*Watch for alerts.

Chart of the week.

Financial platform provider HUB24 has been a great performer over the last few years but recent months has seen a sharp 25% correction although the stock continues to trade on a very large valuation. Last week the company announced an impressive update indicating net inflows on an annual basis above 60% to almost $4bn but the solid numbers failed to ignite the market.

We remain bearish HUB initially targeting 10% further downside.

HUB24 (HUB) Chart

Investment of the week.

A tough one this week between CNU and ABC, both mentioned earlier on the shopping list for our Platinum Portfolio. We finally selected ABC as we like it now as opposed to ~5% lower for CNU. One of the definite attractions to the building products business is its lack of correlation to the ASX200, or low Beta.

MM is bullish ABC initially targeting the $5 area.

Adelaide Brighton (ABC) Chart

Trade of the week.

We have discussed a few trades in today’s report hence we felt this was an ideal opportunity to look at something totally different, we have chosen energy stock Oil Search. The stock fell last week even after a large production increase plus recently we’ve heard takeover speculation muted from Santos  and when stocks fall on good news MM does not stand  in the way.

MM is bearish OSH with an initial target ~10% lower.

 Oil Search (OSH)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

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