Market Matters Report / Market Matters Weekend Report Sunday 25th August 2019

By Market Matters 25 August 19

Market Matters Weekend Report Sunday 25th August 2019

Market Matters Weekend Report Sunday 25th August  2019

Last week was a relatively quiet week with the ASX200 rallying 127-points  / 2% but Fridays significant escalation of US-China trade tensions looks set to smash the regions comfort on Monday morning. Both President Xi Jinping and Trump came out firing on Friday sending stocks spiralling lower – it might one day be known as “Trade War Friday”. The respective steps by both China and the US looks poised to push an already struggling global economy into recession.

1 – Late Friday evening China announced they would retaliate on the new US sanctions by increasing tariffs on soy, oil and auto’s. The $US75bn in additional tariffs is set to be  implemented in September and December – the market didn’t like this but the dip was relatively small and  controlled in nature.

2 – Trump then appeared to lose the plot if you read his tweets, the resulting action by the US was to raise the tariffs on $US250bn of Chinese goods from 25%  to 30%, plus on an additional $US300bn worth of goods will see them go up from 10% to 15% - the market hated this, especially the accompanying hysterics by Trump, the Dow melted  over 700 -points at one stage before finally closing down over  600-points.

The enormous brinkmanship unfolding between the world largest 2 superpowers has one very important factor looming on the horizon – Trump has an election to try and win next November while Xi can rule for life. If the standard of living in the US falls over the next year, which it appears extremely likely without a trade resolution, it’s hard to imagine the President getting a second-term, although never say never with Trump. Enough of “boys and their toys, we need to avoid losing $$ and ideally make some money from the opportunities that are presenting themselves by the increased market volatility.

The SPI futures are calling the ASX200 to open down almost 90-points on Monday, around the 6430 level. What a difference a tweets makes, our market was looking strong on Friday afternoon appearing  destined for our targeted 6600 area. Today’s report has focused on the risk / reward with stocks following Fridays sharp drop by US stocks.

Unsurprisingly at MM we remain comfortable currently adopting a more defensive stance than over the first-half of 2019.

ASX200 Chart

Investors have increased  their cash levels over the last week by a whopping 10%, this decade high defensive allocation illustrates  2 things clearly:

1 – Investors believe a global recession is almost inevitable, undoubtedly things look tough on the economic front although its likely to help push interest rates down even further.

2 – When investors do decide the worst is behind  us there is a mountain of cash looking for a home which is likely to send  stocks soaring, but when is the big question.

Money Market Assets $US Monthly Chart

The US-China trade war escalation has had 2 major impacts on the interest rate markets, neither of which were a surprise:

1 – US 10-year bond yields plunged lower almost reaching their all-time low, the downside momentum feels entrenched.

2 – The 2/10 yield curve inversion continues implying many traders / investors believe  that the US is about to plunge into a recession.

The 2/10’s only inverted ~10-gays ago yet history shows us that stocks typically rally for the next ~18-months before the major trouble hits.

NB this historical rally is fuelled by optimism around low interest rates and relative value, sounds familiar.

US 10-year bond yields Chart

At MM we feel the critical key to adding value in the weeks / months ahead is having a handle on the heavyweight US and Asian indices, we are likely to dance their tunes through 2019:

1 – The US S&P500 still looks destined to test the 2740 area,  almost 4% lower, whether the market can first bounce towards the 2975 now only feels like a ~20% chance.

2 – The Emerging markets still looks poised for a “dummy spit” to fresh 2019 lows, easy to imagine after the XI & Trump actions on Friday.

MM is in no hurry to aggressively buy the market.

US S&P500 Chart

Emerging Markets  ETF (EEM) Chart

1 –  The MM Platinum Portfolio

We have been tweaking the MM Platinum Portfolio slowly but surely with cash levels now standing at 18%, never high enough when the Dow tumbles over 600-points:  https://www.marketmatters.com.au/new-portfolio-csv/ 

Our macro plays have been solid e.g. cash, gold and iron ore / resources weightings but it’s been an extremely tough month on the reporting front for MM with Costa Group (CGC), Adelaide Brighton (ABC),  Emeco Holdings (EHL), Janus Henderson and Pact Group (PGH) all disappointing the market.

When 24% of a portfolio has a bad month at the office it puts enormous pressure on both the macro standpoint and other stocks in the portfolio.

While we’ve clearly had some poor outcomes on a stock level this reporting season, the portfolio overall has actually outperformed a weak market by around 90bp / 0.90% over the month, it certainly doesn’t feel like that’s the case.

Taking into account our view for the  S&P500 and Emerging markets we are definitely NOT considering going “all in”  on Monday, even if the market opens down ~2%.

On the buyside we are considering taking our BHP holding from 3% to 5% around $34.50 while on the sell side  it will depend how certain stocks open, an extremely hard call under the circumstances.

*Watch for alerts.

BHP Group (BHP) Chart

2 MM Income Portfolio

Last week we bought Abacus Property Group (ABC) for the Income Portfolio taking advantage of what we thought was a short term mispricing opportunity, reducing our cash position to 2%:  https://www.marketmatters.com.au/new-income-portfolio-csv/

No major change, until we see any indication that bond yields have bottomed MM sees no reason to significantly reduce our 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 portfolio is set defensively, with around 50% in stocks and 50% in more defensive income securities.

Again while local 10-year bond yields sit well below the RBA Cash rate MM is comfortable with our view that the RBA will cut at the least once more in this cycle. 

The Australian 10-year bond yield & RBA Cash Rate Chart

3 –  International Equites Portfolio

Last week I wrote “Over the last few weeks we’ve seen global equities lose their “mojo” hence we remain comfortable playing a defensive  game”, that certainly feels on the money today : https://www.marketmatters.com.au/new-international-portfolio/ .

The MM International Portfolio is currently  comprised of 75% in cash, 15% in stocks, 5% short the US index and 5% in a gold stocks. - this mix should fare very well on Monday morning.

On Friday night any Asian facing stocks were smacked particularly hard e.g. Apple (AAPL) -4.6% and  Alibaba (BABA) -4.3%. This is the very group we are looking to buy aggressively  if and when the EEM / S&P500 reach our targets mentioned earlier but for now patience remains our opus operandi.

Alibaba (BABA US) Chart

4 - MM Global ETF Portfolio

No major change last week with MM’s new Global ETF Portfolio -  we are holding 3 positions, long both the $A and gold, plus we have a small short US equities position leaving us holding 80% in cash. Construction of this portfolio, similar to our International Portfolio, has been slow but opportunities are starting to present themselves. We are  now considering the following 2 positions / views:

1 – We believe US stocks are vulnerable to a deeper correction hence we are looking to increase our ProShares short S&P500 (SH US) from 5% to 10% above 2950 while we are  also looking to take profit if stocks panic ~4% lower next week.

2 – Averaging our long $A position: the little “Aussie  Battler” is holding up well with so much recession talk around, hence we are getting closer by the day to averaging our long position.

Australian Dollar ($A) Chart

Conclusion

Assuming we see no fresh tweets before Monday morning a bad opening is anticipated for the regions stocks tomorrow, from a risk reward basis we plan to be patient with any buying with the possible exception of allocating an additional 2% into BHP Group (BHP).

US stocks have triggered a sell signal with the break below the 2960 area by the S&P500, we continue  to believe it’s time to sell rallies in the US while being very selective with the buying of any dips, for now.

*Watch for alerts.

Chart of the week.

We’ve  deliberately come close to home this week while also keeping things fairly short-dated. We see the SPI, and hence  the ASX200, will unfold in 2 possible ways next week:

1 - The SPI opens down around 6400,  around 1.5% lower, before bouncing and closing above 6425 triggering buy signals.

2 -  The SPI opens around 6400 and drives lower with a subsequent target significantly lower.

In our opinion this a time to let the market tell you what it wants to do as opposed to starting the day with a strong opinion which another Trump tweet can change  in the blink of an eye.

ASX200 Share Price Index (SPI) Chart

Investment of the week.

Poultry stock Ingham’s Group (ING) has corrected over 20% in 2019 which in our opinion has now creating some solid value in this relatively recession proof business, plus the sustainable ~5% fully franked dividend is certainly attractive.

MM likes ING around $4 with a conservative 3%  stop.

Ingham’s Group (ING) Chart

Trade of the week.

Packaging business Pact Group (PGH) has caused us some angst this month but the stocks quick 15% recovery looks very encouraging and we feel the worst is behind this business making todays entry opportunity very tempting.

MM is bullish PGH targeting ~20% upside.

Pact Group (PGH) Chart

This week, I will provide a more comprehensive view of our portfolio’s via a members only recording , outlining our views post results with particular focus on those stocks that have caused us some pain during the period. Stay tuned.

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.

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