Market Matters Report / Market Matters Weekend Report Sunday 24th November 2019

By Market Matters 24 November 19

Market Matters Weekend Report Sunday 24th November 2019

Market Matters Weekend Report Sunday 24th November 2019

The ASX200 experienced yet another choppy week although this time there was some real downside momentum on Wednesday & Thursday following waning confidence around a successful US - China trade a deal. However for all the intra-day bluster and sector rotation the index is still trading at the same level that it was in early May, over 6-months ago, I’m sure investors / traders who have been sucked into buying when it looks good & selling when things have appeared weak have endured an awful 2019 to date – I know I’ve been caught once or twice expecting a breakout.

At MM we describe ourselves as active investors but not traders, however at the moment it’s almost best to “set and forget” around your macro-economic viewpoint into 2020, hence avoiding being sucked into the current choppy noise – sit back to wait and see if your outlook is correct but if not change positions quickly! We maintain a couple of few opinions moving forward which if correct are likely to have an enormous underlying impact on the performance of equities:

1 – We believe bond yields are potentially close to an inflection point, or low, this is likely to change the dynamic on the sector level i.e. value stocks will reverse their underperformance against growth /defensives.

2 – However underlying official rates are likely to stay “lower for longer” even if we see glimmers of inflation, central banks will want to avoid extinguishing any economic pick-up by lifting rates, similar to the US raising through 2016/8 which ultimately led to stocks plunging in late 2018.

3 - Lastly looking through 2020 we feel it could be a tougher year primarily because of the uncertainty caused by the US election in November – if the Democrats appear in with a shot to beat Trump its likely to create a headwind for equities and if it Elizabeth Warren is at the helm for the opposition a +20% correction would not surprise but I stress that’s unlikely in our opinion – more likely to us is the usual election year strength for equities which has seen markets rally ~86% of the time in the year of a US election.

MM believes the underlying health for stocks comes down to interest rates / bond yields hence today’s report again focuses on yields.

Our underlying view towards the ASX200 remains intact: MM is technically neutral to bullish while our “Gut Feel” is we’ll see fresh all-time highs before Christmas.

Last week’s main story from a points perspective was due to Westpac’s (WBC) 23 million money laundering breaches, there’s nothing like taking something to a whole new level – the markets 4th largest stock dropped almost 7% for the week. Unfortunately with the exception of a couple of stellar stock performances from the likes of Aristocrat (ALL) and a2 Milk (A2M) there was little to cheer the bulls and the -1.2% fall over the 5-days actually felt like a win.

ASX200 Index Chart

I’m sorry if readers find our focus with bond yields boring but as we believe it’s the key to equities moving forward hence, we simply wouldn’t be doing our job if we weren’t following them extremely closely. We have used some very simple charts to illustrate our current thoughts over the next few months with one in particular concerning to MM.

1 – US equities have soared almost 25% in 2019 as US bond yields have plunged with their 10-years more than halving at one stage.

2 – However as we saw through 2015 to 2018 yields and stocks often track together because rising interest rates implies a strengthening economy which is obviously good for business & stocks, unless of  course investors start to fear a recession because rates are rising too fast as they did in Q4 of 2018.

3 - Today it appears investors are currently enjoying low interest rates while discounting any real prospect of a recession in 2020.

US S&P500 and 10-year Bond Yield Chart

MM has referred to the below chart a number of times throughout the year but today alarm bells are starting to ring. All of the recent meaningful corrections by US stocks have either been led, or accompanied by a fall in high yielding / Junk bonds i.e. as these bonds fall in price their yields rise. These are the bonds that companies use to raise debt for operations, takeovers, M&A, buybacks etc.  This is a critical element of the last decades performance by US stocks who have enjoyed enormous buybacks with some pundits describing it as the backbone of the longest bull market in history.

However, these buybacks are slowing down after peaking following President Trumps huge tax cuts, in Q2 of this year they were down 25% on the quarter and 19% down compared to the same time in 2018. If we combine this slowing trend with interest rates increasing for corporate America (orange line below) at MM we get concerned that another pullback for equities is looming on the horizon. Only a few weeks ago Goldman Sachs issued a warning that buybacks were “plummeting” as they forecast the largest decline in a decade.

MM is cautious US stocks moving into 2020, we are overdue a 5% correction and Junk Bonds are suggesting it will be soon.

US S&P500 and High Yield (Junk) Bond ETF Chart

No change with what MM believes comes next and how we want to be positioned taking into account our old favourite “risk v reward”:

1 – MM’s preferred scenario is bond yields are headed down towards, and probably below their 2019 lows. This decline could be sparked by a lack of resolution to US - China trade talks, further deterioration of global economic conditions & / or a total blow up in Hong Kong.

2 – If this fall unfolds it would represent a further ~20% drop in yields and in all probability, we would see ongoing short-term strength / outperformance from the likes of IT, Healthcare, Real Estate and Utilities sectors.

3 – Thirdly if we do then see a major point of inflection from fresh lows as illustrated by the red / green arrows below the banks / resources should then return to favour with a bang but as always, the million-dollar question is when and from what level.

When we look at MM’s 4 portfolios today the major focus will be towards 2-points.

1 – We are concerned US stocks are close to a decent correction, especially from a risk / reward perspective when we consider the Junk Bond market.

2 – We believe a there’s a good possibility that bond yields are approaching a major low – a sharp pullback in stocks would probably push bond yields to new lows on a flight to safety, importantly we don’t believe investors are positioned for a strong bounce in yields. MM sees US 30-years between 1.7% and 2.6% at least early on in 2020.

US 30-year Bond Yield Chart

I often get asked how we see things moving for the next few weeks / months, obviously this is very often random noise, but we do generally have a view which at times MM uses with regards to tweaking our cash levels up, or down. Note the below illustration for US stocks may not be mirrored by our own ASX.

As we’ve see for the last 6-months the main action has been under the hood for Australian equities as markets regularly try and second guess bond yields – until they show their hand we feel it’s hard  to imagine a meaningful move by the ASX, with the potential exception of a classic Christmas rally.

MM’s best guess moving into Christmas for US stocks is as below.

US S&P500 Index Chart

Dr Copper is one of the best indicators of global economic health and following its 25% correction we believe the risk / reward is now sitting with the buyers, especially if Trump and Xi Jinping can finally settle their dispute with regards to trade.

Technically the downtrend remains intact but the manner in which the industrial metals is holding up is encouraging.

Copper ($US/lb) Chart

As we mentioned last week the civil unrest in Hong Kong has led to a sharp decline in both its and to a lesser extent China’s index, not surprisingly this has led to some knock on weakness in the Emerging Markets Indices – MM feels Hong Kong & China is the most likely “Black Swan” for the remainder of 2019. We like having some flexibility in our portfolios to buy potential panic selling in the region e.g. the Hang Seng around 10% lower, a drop that would probably cause a knock on effect which would satisfy our target area for bond yields.

MM would be very keen technical buyers of the Hang Seng ~24,000.

Hang Seng Index Chart

1 – The MM Growth Portfolio

No changes from last week which feels right and makes some sense considering our unusual comments earlier around “set and forget” taking into account our medium-term economic views. Our cash level remains at 13.0% -

Not a great week for the MM Growth Portfolio with weakness in Westpac (NAB) and National Australia Bank (NAB) banks weighing on our portfolio, at least our cash level and short ETF (BBOZ) added some green to the screen.

We remain reticent to be particularly active in today’s choppy market although there are always opportunities for the patient – our recent switch from BlueScope (BSL) to Sims Metals (SGM) is travelling ok. One very contrarian switch that we did consider was from Commonwealth Bank (CBA) to Bendigo (BEN) i.e. following Westpac’s (WBC) debacle last week, CBA has enjoyed another “safety bid” while the regional banks have continued to move very out of favour but when we compare back to 2016 the elastic band was far more stretched then, to us it’s too premature to fight the crowd on this one.

Commonwealth Bank (CBA) v Bendigo Bank (BEN) Chart

2 MM Income Portfolio

Also no change with this portfolio, our cash level remains at 4.5% :

Last week was tough in this MM Portfolio with both Westpac (WBC) and Genworth (GWA) significantly underperforming – Genworth (GMA) pulled back through the $3.70 region we discussed in an income note two weeks ago however it has paid a big dividend during that time. We are now considering chopping GMA for a strong profit if it fails to bounce from current levels.  

Westpac (WBC) Chart

Genworth Mortgage (GMA) Chart

3 –  International Equites Portfolio

No change again! Or cash position remains at 48% :

At this stage we still feel that there are 3 ingredients missing / or need increasing within our International Portfolio, if bond yields are poised to make fresh all-time lows there’s no hurry to press most buy buttons. Firstly, is some extra resources exposure, BHP is good, but we like fancy more, secondly more banks and lastly exposure to the Emerging Markets.

1 - Copper stocks drifted lower last week as bond yields and the underlying industrial metal fell slightly but while we feel interest rates are close to a bottom, we particularly like Australian company OZ Minerals (OZL), a stock which already resides in our Growth Portfolio. MM is bullish OZ Minerals (OZL) into current weakness.

OZ Minerals (OZL) Chart

2 - We already own Bank of America (BAC) which is looking after us nicely but there’s no harm with increasing exposure to a good thing. MM’s preferred addition to the sector is now Wells Fargo (WFC) around current levels.

Wells Fargo (WFC US) Chart

MM has been talking about wanting to increase our exposure to the Emerging markets for a few weeks, we believe e-commerce giant Alibaba (BABA) remains the ideal candidate especially as it ignores the ructions in Hong Kong – a bullish sign.

MM is bullish Alibaba (BABA US).

Alibaba (BABA US) Chart


MM is bullish OZ Minerals (OZL), Wells Fargo (WFC) and Alibaba (BABA US) as discussed above.

4 - MM Global Macro ETF Portfolio

Also alas no change to this portfolio, our cash position remains at 51.5% :

As we’ve discussed recently our favourite view moving forward is to buy the British Pound, we feel Boris Johnson will win the election and BREXIT will finally get sorted, surely common sense will finally prevail. It’s just a matter of timing, the recent consolidation is feeling perfect.

The ETF will like to “play” this view is the Invesco British Pound Sterling Trust (FXB US):

NB This is a buy button we are likely to press sooner rather than later.

British Pound (GBP) v $US Chart


No change, MM likes the British Pound into current mild weakness.

Chart of the week.

MM bought Pendal Group (PDL) earlier in the month and it’s been following the technical path well to-date, if the path continues we envisage a dip towards $7.80 before a rally towards $9 – we may be tempted to increase our position sub $7.90.

MM likes Pendal Group (PDL) under $8.

Pendal Group (PDL) Chart

Investment of the week.

Another stock we hold in the Growth Portfolio that is on our radar to average into weakness is nickel producer Western Areas (WSA), it doesn’t have to be a new purchase to fill this spot in our Weekend report.

MM likes WSA sub $2.80.

Western Areas (WSA) Chart

Trade of the week.

A new stock to the MM Weekend Report today, its biotech Avita Medical, a volatile beast as can be seen below. This regenerative medicine company has been an amazing performer in 2019 and the company now has a market cap of almost $1.2bn – the recent 30% pullback is offering an excellent risk / reward buying opportunity for the brave.

MM likes AVH in the low 50’s with stops under 47c.

Avita Medical (AVH) Chart

Last week MYX was our “trade of the week” with a stop sub 51c, well that was triggered easily as the stock plunged 16%!

MM now likes MYX into fresh 2019 lows.

Mayne Pharma (MYX) 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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