Market Matters Report / Market Matters Weekend Report Sunday 4th July 2019

By Market Matters 04 August 19

Market Matters Weekend Report Sunday 4th July 2019

Market Matters Weekend Report Sunday 4th July 2019

The ASX200 received a Muhammad Ali  1-2 combination of bad news last week and considering the meaningful nature of both events the Australian bourse held up extremely well, it remains only 1.6% below its all-time high. Over the week we only slipped 25-points compared  to the Dow which tumbled over 700-points. The local markets internals remain ok with 35% of the ASX200 closing up on the week and if it hadn’t been for a few rogue performances as reporting season kicks into gear the local index could easily have finished the week in the green. Today we have picked out stocks that have moved over 8% for the week as being eye catching as volatility increases under the hood:

Winners: IPH Ltd (IPH) +8.7%, Saracen (SAR) +9.3%, Newcrest Mining (NCM) +8.9% and Orica (ORI) +8.9%.

Losers: CYBG Plc (CYB) -20.3%, Seven Group (SVW) -8%, Bingo (BIN) -13.3%, Janus Henderson (JHG) -14.7%, Pinnacle Investments (PNI) -8.3%, Adelaide Brighton (ABC) -21.2%, CSR Ltd  (CSR) -8.3% and Galaxy (GXY) -9.2%.

The obvious takeaway being stocks that disappoint with their earnings are facing an unforgiving market plus other members of their sector should expect a bumpy ride. Also gold stocks enjoyed an aggressive safety bid as bond  yields fell and investors nerves increased. Coming back to the 2 major economic events which weighed on stocks last week, in our opinion most equity markets survived relatively unscathed considering the implications from the news  out of the US:

1 – The US Fed only cut interest rates by -0.25% but more importantly the Chair Jerome Powell implied rates may not fall as fast as many anticipated / hoped. He described the move as a “midcycle adjustment” while also saying the Feds first cut in a decade does not mean policymakers will follow up with an aggressive rate-reducing regime.  I’m finding it hard to reconcile the term mid-cycle however J Powell does struggle articulating his thoughts at times.

2 – Donald Trump has imposed a further 10% of tariffs on $300bn of Chinese goods. The worlds second largest economy have said they will retaliate and Trump has since said he could boost the levies to a much higher number – this standoff  feels likely to get far worse before it improves.

Also just to add spice  to the mix on Saturday the US  imposed further sanctions on Russia, there is not a lot of positive vibes crossing the news wires at present.

My “Gut Feel” is the market is not cheap enough to absorb the very bad news being thrown at it but conversely we cannot ignore the large cash reserves hoping to buy weakness as bond  yields / term deposits plunge to all-time lows. It feels that over the last few  days that the markets focus has switched from a myopic fixation with interest rates to an increased concern with a potential global recession but as we know central banks are fighting hard with whatever means possible to hold onto any post GFC economic expansion, a tough ask if a full blown trade war erupts.

At MM we remain comfortable adopting a more defensive stance than over the first half of 2019 but we are in “buy mode” primarily due to our large cash positions in most portfolios. The ASX200 looks on track to initially fall another ~2% and combined with the volatility of reporting season this makes us confident of some bargains presenting themselves in August.

ASX200 Chart

At MM we continue to believe it’s time to keep stock market investing simple (KISS), today’s market is all about interest rates and relative value however the market moves in cycles and last week the focus reverted to a potential global recession which led to plunging bond yields & commodity prices plus a flock to the perceived safety of gold.  Last week Australian 3-year bond yields again made fresh all-time lows, more than 0.25% below the RBA Cash Rate implying the RBA will cut again this year. At MM we feel interest rates are going to remain low for a while, even if the race to bottom by bond yields is reaching maturity. Current interest rates we believe makes stocks cheap, although we should probably qualify this by saying quality stocks who will fare ok in an weak economic environment.

The almost “free money” environment is forcing increasing numbers of investors up the risk curve in an effort to achieve any meaningful income from their monies but I feel this is not a particularly mature move at this point in time as banks are still slashing both their borrowing and lending rates in earnest. Unfortunately history tells us that when the masses take on more risk things usually end badly.

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

Comparative Australian interest rates / bond yields Chart

We had been comfortable that equities will remain strong until they make an about face and focus on the deteriorating global economy but this is exactly what we felt was unfolding last week. On Friday alone we saw copper plunge -3.5% closing just 1% above fresh 2-year lows, not a good sign for our resources on Monday – basis trading in the US, BHP looks set to open ~$38.27, down another  -1.3% after tumbling -3.7% on Friday.

Following on from last week’s concerns with “Dr Copper” the base metals sensitivity to the world’s economic health is implying that economically we are now moving from flu to something far nastier.

Copper ($US/lb) Chart

For obvious reasons MM will continue with its close scrutiny of bond yields, after all they have fuelled the longest bull market in equities in history. Last week’s market reaction to the significant news flow has  led us to form 2 views at this point in time:

1 – The  market has followed Donald Trump and not the Fed, they believe interest rates will fall further, even if it’s because of a Trump trade war induced recession.

2 – Australian bond yields continue to win the  “race to the bottom” against the US equivalent. Below is a comparison of the widely followed Australian 3-years, and the less so US version. The 0.92% differential has widened throughout 2019 and until we see a reversion in this relationship its unlikely that the  $A can enjoy any sort of meaningful recovery.

Australian & US  3-year bond yields Chart 

The last year has seen excellent performance from iron ore and gold with their gains in 2019 alone being 52% and 12% respectively. The chart below illustrates how they have moved in almost perfect tandem. These 2 very different commodities have moved for different reasons but surprisingly they have been in sync - the $US  is really their only thing in common:

1 – Gold has rallied supported by the tailwind of falling interest rates, strong demand from the likes of China and global uncertainty as it enjoys a definite safety bid.

2 – Iron Ore has soared primarily because of the Vale mining disaster in Brazil although they are now resuming production leading to a reality check to the bulk commodity and sector. Over the last 4 weeks we have seen a 12.8% correction although we can see this easily extending to over 16% in the relatively near future.

We dipped our toe back into the resources space on Friday by allocating 3% into Fortescue (FMG) around $7.60, the stock has corrected over 22% amplifying that of the underlying iron ore price. We intend  to increase our holding towards 5% if we see prices closer to $7.

MM will continue to be fussy with purchases in the Resources / Materials sector.

Comparing Gold & Iron Ore Chart

Over the last few  weeks we have mentioned the below point as we get increasingly concerned by some well-known stocks becoming very expensive, this is before we even consider the significant outperformance of momentum high P/E stocks over value. Today feels like classic late cycle investing driven by Fear of Missing Out (FOMO). We witnessed at the back end of 2018 when the market corrected 10% the momentum sector fell significantly more, when the music stops playing be very careful if you are invested with the crowd.

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

We have no idea when such “go too” stocks like ASX Ltd (ASX), Transurban (TCL) and Sydney Airports (SYD) will correct, especially as they love low interest rates but we believe its way too late to join this crowded trade.

ASX Ltd  (ASX) Chart

1 –  The MM Platinum Portfolio

We have been tweaking the MM Platinum Portfolio slowly but surely over recent weeks with our best 2 decisions to-date to raise our gold exposure to 10% and increasing cash levels  - now standing at 23% after investing 3% into Fortescue  ~$7.60 on Friday:

The combination of plunging commodity prices and reporting season is likely to see us active over August, we still find ourselves with an appetite for risk but it’s important to stress we only have interest where both the company and risk / reward is attractive. Below is a quick snapshot of the stocks currently on our “buy” list, a group that continues to evolve week to week:

1 – Elders (ELD), no change with our interest around the $7 area, less than 3% lower.

2 - Iron Ore stocks, we are looking to add an additional 2% Fortescue Metals (FMG) below $7.20 and to buy RIO Tinto (RIO) close to $90 – 6% & 5% lower respectively.

3 – Commonwealth Bank (CBA) around  $80, just over  2% lower – this level is before this month’s dividend.

4 – Bingo Industries (BIN) around $2.25, or 4% lower.

Its important when buying markets which are falling fast to have pre-identified buy zones to avoid being suckered in by the investors  worst nightmare = Fear & Greed!

*Watch for alerts.

RIO Tinto (RIO) Chart

MM is currently holding CGC in our Platinum Portfolio having in hindsight attempted to pick a bottom too early in this fruit growers cycle.

We still see value in the company but for risk / reward reasons we are considering switching half of our holding within the sector to Elders.

Costa Group (CGC) Chart

2 MM Income Portfolio

The Income Portfolio was again left last week, although it did enjoy a strong bounce from Genworth (GMA) that rallied on a strong report.  .

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.

While local 3-year bond yields sit over 0.25% below the RBA Cash rate MM is comfortable with our view that the RBA will cut at the least once more in this cycle.

If RIO continues correcting back towards $92 we will consider increasing our exposure to the stock from 3 to 5%, remember they are paying over $3 fully franked on the 8th of this month.

The Australian 3-year bond yield & RBA Cash Rate Chart

3 –  International Equites Portfolio

In just 3-days we’ve seen over 5-weeks of gains wiped out in US stocks, something feels wrong and that’s not the thought of a guru, just a simple observation : .

The sharp “risk off” last week is why we have been extremely careful with the construction of this portfolio, holding 75% in cash, 5% short the index and 5% in a gold stock feels good, hopefully I’m not tempting fate. This week we are considering 3 different positions, or a combination there of:

1 –  Buy Bank of America (BAC US), at today’s levels, targeting a break of 2018 highs, around 20% further.

2 – Buy MacDonald’s (MCD US) at today’s levels, looking for a continuation of the multi-year bull trend even if we get global economic contraction.

3 – Increase our ProShares short S&P500 (SH US) position from 5 to 8%.

At this stage I can envisage MM buying at least one of the above stocks in combination with increasing our ProShares bearish ETF.

US S&P500 Chart

4 - MM Global ETF Portfolio

No change last week with MM’s new Global ETF Portfolio -  we have tickled on 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 action is starting to unfold. We are currently considering 3 additional 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 8%.

2 – We feel the risk / reward of being long volatility from current levels makes sense, especially as short positions are around record highs, hence  buy the VIXY ETF :

3 – Averaging our long $A position but ideally we will do this into a panic down below 67c, or ~2% lower.

ProShares Short Term VIX (VIXY US) ETF Chart


Short-term Australian stocks look poised to correct ~2% down towards the 6600 area, we are watching a few stocks for our Platinum Portfolio to accumulate into weakness.

US stocks have triggered a sell signal with the break below the 2960 area by the S&P500, we believe it’s now time to sell rallies in the US.

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.

This week we have added to stocks with similar patterns, they both suggest buy weakness but definitely not yet.

1 – Diversified miner South32 (S32) has been one of our favourite charts for months and it’s still following our anticipated  path, our target area remains $2.70, or 9% lower.

2 – Macquarie Group (MQG) needs no introduction but what’s often forgotten is the company’s shares close correlation to the US market. If we are  correct and US equities are poised for a decent correction then MQG might just reach our optimum buy zone ~$108, or 14% lower.

South32 (S32) Chart

Macquarie Group (MQG) Chart

Investment of the week.

When we are looking at stocks which actively trade overseas obviously we watch their behaviour away from our shores very closely.

For RIO this concurs with our current view on RIO (Australian stock), buy around 6% lower before next weeks $3.08 fully franked dividend otherwise nearer 10% lower.

MM is bullish RIO US ADR’s around 6% lower pre dividend.

RIO Tinto US ADR’s (RIO US) Chart

Trade of the week.

Another stock we have been following for a while but we feel its currently giving an excellent sell opportunity which may then become a buy.

Short-term we remain bearish the share registry business Computershare (CPU), targeting ~6% lower prices, a level we’ve been watching for months. However we see value emerging at this level, around 30% below its 2018 high.

MM likes CPU around the $14.50 area with stops below $13.50.

Computershare  (CPU) 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.


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 3/08/2019

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