Market Matters Report / Market Matters Weekend Report Sunday 31st March 2019

By Market Matters 31 March 19

Market Matters Weekend Report Sunday 31st March 2019

Market Matters Weekend Report Sunday 31st March 2019

The ASX200 has just enjoyed its best quarter since 2009, a very impressive +9.5% rally before dividends, which we believe is a remarkable performance considering the Australian economy is teetering on the edge of slipping towards into recession as housing prices continue their much debated fall from grace. When we look across the sectors the banks & financials were generally solid but it was the large cap miners who were the main points contributor to the advance. The broad based strength was also impressive with only ~20% of the ASX200 closing down for the quarter. MM has been bullish the market since mid-December but the velocity of the recovery did even outstrip our bullish forecast. Some standout stocks of the quarter:

Stocks that have rallied by over +50% - Breville Group (BRG) +54%, Magellan Financial (MFG) +53%, Beach Energy (BPT) +53%, Bellamy’s (BAL) +51%, Nanosonics (NAN) +54%, Fortescue Metals (FMG) +74%, Afterpay (APT) +74%, Altium (ALU) +54% and Appen Ltd (APX) +77%.

Stocks that have fallen by over -25% - Eclipx (ECX) -73%, Costa Group (CGC) -29%, Blackmores (BKL) -25%, Syrah Resources (SYR) -26% and St Barbara Ltd (SBM) -28%.

With the exception of the 3 IT stocks, which all soared following the deep sell-off in high valuations stocks in Q4 of 2018, the above major movers for Q1 2019 on the surface appear fairly random. However the story is different when we look under the hood:

The 9 major winners - with the exception of BAL the other stocks were already in a bullish uptrend.

The 5 major losers – with the exception of SBM the other stocks were already in a bearish downtrend.

This reminds me of an accurate phrase that a number of my trading friends often quote: “Surprises usually happen in the direction of the trend”.

This is a simple but important statistical reason why MM exhibits caution when we purchase underperforming stocks, although interestingly it’s something we did more of last quarter than in the previous 2-years combined.

Today’s report will try and unravel the reasons why rallying stocks are managing to ignore the increasing risks of a recession in Australia, and globally – the ASX200 looks well positioned to test 6300 in April.

MM continues to hold an aggressive 28% and 13% cash position respectively in our Platinum & Income Portfolios, this will enable us to be active on the buy side if / when opportunities present themselves.

ASX200 Chart

Last week we again witnessed a solid performance from global equities as they appear to shrug of the recent global downturn in economic data. However it’s important to understand there’s a big difference between now and the markets psyche in late 2018:

1 – Only a few months ago In late 2018 equities were hammered as almost panic like selling rolled through global stock markets with investors focused on the Fed raising interest rates too fast and subsequently pushing the worlds largest economy into a recession. The “uncle point” for US short-term bond yields appeared to be around 3% area as we can see below with the orange line.

2 – However following the market’s reaction in December and recent weak economic date we are now seeing central banks around the world perform a 180 degree about turn on policy and adopt a far more dovish stance than in 2018 (lower interest rates) – last week it was New Zealand’s turn to join the party.

Hence while we still appear to be heading towards tough economic times interest rates will be lower than previously anticipated – since late 2018 US 3-year bonds yields have fallen by ~0.8%, or a 26% drop while the Australian equivalent has tumbled ~30% to fresh all-time lows of sub 1.4%. Plus as we mentioned last week Germany, which is already in a recession, has seen the yield on its 10-year bonds again turn negative – something most economic teachers would have thought was impossible before the GFC.

Stocks appear comfortable with a poor economy if interest rates & QE remain accommodative, until one day but picking that time will be tough, its easier to let the market tell you what it wants to do.

Australian & US 3-year bond yields Chart

Since the GFC Australian 3-year bond yields have fallen from well over 5% to make fresh all-time lows under 1.5% - that’s why we now see an abundance of home loans below 4% compared to the extreme of over 18% back in 1990.

However people under the pressure of a large mortgages should be aware that if the RBA cuts interest rates by say 0.5% (2 cuts) they will probably be fortunate to see their mortgage rate fall by more than 0.2% i.e. banks are paying almost 0% on term deposits so passing on rate cuts from here is tough on margins for the banks, not ideal trading conditions especially if we see declining house prices leading to an increase in bad doubts.

However when we look at the correlation between the ASX200 and 3-year bond yields it’s a clear picture i.e. falling interest rates has been good for stocks over the last decade.

A 10-year old trend is a tough one to fight although slowly the effectiveness of reducing interest rates is diminishing but that’s where QE comes in – increased liquidity.

ASX200 v Australian 3-year bond yields Chart

We have discussed in previous reports the massive company buybacks which have fuelled equity markets over recent years e.g. in 2018 US companies bought back an amazing 2.8% of shares outstanding providing a huge floor for the market. That amounted to a phenomenal $US1.1 trillion spent on buybacks in the US last year. So far the appetite for such purchases in 2019 has continued unabated with the Bank of America suggesting last month that we may easily see another record year.

Hence the health of the “junk Bond” market is a huge indicator for US stocks in 2019 /2020 as this is where much of these funds are raised for the huge buybacks. The chart below shows US corporate bonds are breaking out to new highs indicating strongly that the S&P500 should remain strong, at least short/medium-term.

NB Since 2015 junk bonds have either led or accompanied all the meaningful declines in US stocks.

US S&P500 v iBOXX high yield index Chart

The below bar chart shows clearly how buybacks have a habit of forming a peak around major stock market tops – no great surprise here for the reasons explained earlier.

We have previously discussed buybacks, “Junk Bonds” and bond yields as we create a picture to explain recent strength in equities as economic conditions appear to deteriorate.

At MM we believe  liquidity is more than ever the key for stocks – basically the markets still awash with cash, as the below chart from Tom McClellan illustrates, hence until we see weakness in corporate bonds its hard to see stocks falling too hard.

US S&P500 v iBOXX high yield index Chart

Stocks, Sectors & ideas that have caught our eye.

After a fairly lengthy piece talking about markets hopefully subscribers understand we remain bullish stocks into 2019 until the “Junk Bond” market starts rolling over – a conclusion we had reached previously but after all the news around bond yields and dovish central banks we felt it was time to revisit / clarify the  macro-economic picture.

The rest of todays report is going to look at 6 simple thoughts that are likely to influence our actions in April and beyond:

1 Indices may tire in April.

US stocks enjoyed their best quarter in almost a decade led by the high flying tech based NASDAQ. While we remain bullish for the months ahead the short-term momentum is implying another pullback may be close at hand:

1 – The ASX200 closed slightly lower last week with only 46% of the index closing up over the 5-days.

2 – On Friday the S&P500 closed up +0.67% but the small cap Russell 2000 only rallied +0.3% - remember at MM we believe the Russell 2000 is often a leading indicator for US stocks.

There are no sell signals in markets at present but we continue to believe the ASX200 is in the cliché phase where we would like to “buy weakness and sell strength” – we are buyers around 6000 and sellers into fresh highs ~6300.

US Russell 2000 index Chart

2 The banks look tired.

We have been considering reducing our bank exposure further over the last week with trimming / cutting CBA probably our favoured move.

Rate cuts moving forward by the RBA are likely to be tough on banking margins as discussed earlier – we are cautious the sector both fundamentally and technically.

If the banking sector were to break under 2018 lows we want to be aggressive buyers not concerned overweight holders.

Westpac (WBC) Chart

3 A few ”majors” are pointing to a new high before a correction.

As mentioned in point 1 we can see a new high for 2019 towards 6300 by the ASX200 before a correction to the whole advance from late Decembers low. A few stocks are pointing to a similar move over the coming weeks which adds a degree of confidence to our thoughts for April. Two examples are:

1 – QBE Insurance (QBE) now looks likely to push towards $13 resistance before probably spending some time between $12 and $13.

2 – Magellan Financial (MFG) now looks likely to push towards at least the $38 to $40 region.

QBE Insurance (QBE) Chart

Magellan Financial (MFG) Chart

4 The resources remain the new ASX’s rock.

The “Big 3” iron ore stocks BHP Group (BHP), RIO Tinto (RIO) and Fortescue Metals (FMG) enjoyed a phenomenal run in Q1 2019 largely assisted by the awful Vale tragedy in Brazil which sent the bulk commodity soaring over 40% higher where it has remained almost 2-months later.

A few weeks ago we called FMG a trading sell ~$7 which looked  good after it dropped 13% in under 2-weeks but the risk / reward has clearly gone after the stock punched higher through $7 last week.

Currently iron Ore remains strong and looks set to rally another 6-8% hence we would not be short FMG and actually expect the influential group to drag the sector and index higher.

Fortescue Metals (FMG) Chart

Iron Ore Active contract

5 Maybe it’s time to “tweak” portfolios with ETF’s.

If we are right at MM then the ASX200 is about to experience a choppy time trading between 6000 and 6300, a relatively tight range to expect decent returns from most individual stocks. However, a couple of well-timed ETF positions could add some value to our Platinum Portfolio. Since Decembers low the geared ASX200 (GEAR) fund has rallied ~28% while the geared bear (BBOZ) has declined by a similar degree, how easy it is in hindsight!

Our current thoughts:

1 – reduce our banking exposure as mentioned earlier and park the funds into the GEAR for a short-term “pop” higher.

2 – Around the 6300 area look to buy the BBOZ for some downside protection.

BetaShares ASX200 geared bullish & bearish ETF Chart

6 Potential portfolio “tweaks”.

We have 4 things catching our eye this weekend, all in the Platinum Portfolio:

1 – Orica (ORI) ultimately struggled in March after looking good early last week, MM is considering cutting this position for a small profit.

2 – Our Janus Henderson (JHG) position looks well positioned to make fresh 2019 highs above $36 – we are considering cutting our position, or raising stops to $35 if this unfolds.

3 – MM is concerned that our Platinum Portfolio is overweight the banks, we are seriously considering reducing this exposure next week.

4 – As mentioned in Point 5 we are considering using leveraged ETF’s in the next few months e.g. reduce our bank exposure and replace with the GEAR ETF.

Orica (ORI) Chart

Conclusion

We remain mildly positive medium-term targeting a choppy advance through 2019 until we see weakness in the “junk bond market”.

We believe stocks / sectors that benefit from lower interest rates as opposed to a strong Australian consumer will continue to outperform for at least a few quarters.

Sustainable dividends are likely to be on many fund managers menu as we head into Q2 of 2019.

Watch for alerts.

Chart of the week.

We are not keen on Platinum Asset Management (PTM) either fundamentally or technically.

The Neilson’s are reducing their substantial holding into strength =  a major supply overhang, while technically a break under $4 would not surprise.

MM remains bearish PTM expecting at least another 10% downside.

Platinum Asset Management (PTM) Chart

Investment of the week.

This is a scary one considering the indebted Australian consumer but Harvey Norman (HVN) looks destined for a decent rally into its August dividend – perhaps Gerry will pull a rabbit out of the hat to use up the companies huge pile of franking credits if Labor win in May.

MM likes HVN with stops below $3.80 – around 5% risk.

Harvey Norman (HVN) Chart

Trade of the week.

Coca-Cola is not a company that we like fundamentally but it appears another “dog” is set for a little pop higher.

MM is bullish CCL targeting a quick foray above $9.

Coca-Cola Amatil (CCL) 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 30/03/2019

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