Morning Report / Overseas Wednesday – International Equities & ETF Portfolios (FMG, CBA, BSL, EEM, AAPL US, MSFT US, MCD US, GOLD US, EUM US, SLVP US)

By Market Matters 28 August 19

Overseas Wednesday – International Equities & ETF Portfolios (FMG, CBA, BSL, EEM, AAPL US, MSFT US, MCD US, GOLD US, EUM US, SLVP US)

Market Matters Morning Report 28th August 2019

The ASX200 bounced well yesterday finally closing up +0.5% with over 60% of the market closing in the black, along with 9 of the 11 sectors i.e. a solid day but certainly nothing unusual compared to this month’s volatility. The standout for us on Tuesday was the big volumes which were crossed in a couple of well-known stocks, primarily 23.6m shares of Star Entertainment (SGR) and 75 million shares in Cleanaway (CWY) – the former appeared to be buyer driven as opposed to CWY where a major holder sold 3.7% of the waste management business – major fund managers appear to be “placing their bets” following the volatile and unpredictable reporting season.

**News just across the ticker with Macquarie Group (MQG) entering a trading halt to raise $1bn in new capital for what seems to be primarily regulatory purposes. They’ve also provided a trading update saying that 1H20 is up around 10% on 1H19, however down on 2H19 while they maintained their full year guidance for FY20 to be slightly down on FY19**

Today should theoretically be a quiet one “under the hood” before some big guns report later in the week. This morning we see reports from Afterpay (APT), Oz Mineral (OZL) - 1H results & Virgin (VAH) – tomorrow is the final solid day of reporting with Adelaide Brighton (ABC), Ausdrill (ASL), Appen (APX), Independence Group (IGO), Link (LNK), Ramsay Healthcare (RHC) & Woolworths (WOW) out with results. Reporting calendar available here. I cover Initial thoughts this morning on: MQG, VAH

On balance MM still believes there’s a very good chance that the ASX200 can test /  break the psychological 6600 area, or +2% higher in the coming weeks. Hence we haven’t yet pressed the  “sell button” on some of the holdings we are looking to liquidate within the Platinum Portfolio, this short-term patience finely paid dividends yesterday as Orocobre (ORE) and Adelaide Brighton (ABC) both enjoyed a comparatively strong day, although both from depressed levels.

MM remains comfortable to adopt a more defensive stance than during the first 6-months of 2019.

Overnight US stocks closed down although the tech based NASDAQ only retreated -0.1%, a widening US yield curve is continuing to worry investors about the health of the US & global economies. Locally the SPI futures are calling the ASX200 to open mildly lower, down around 10-points.

In today’s report we are going to update our ideas and plans for our International Equities and ETF Portfolios while also considering a 3 stock situations in the local market.

ASX200 Chart

Platinum Portfolio

Again 3 stocks have caught my eye over the last 24-hours, below is a quick update of our thoughts towards these companies all of which reside in our MM Platinum Portfolio:

1 Fortescue  Metals (FMG) $7.55

MM liked FMG’s report on Monday where the company posted a record profit of $US3.2bn courtesy of the iron tailwind earlier in the year. Also, in today’s environment of record low intertest rates their 24c fully franked dividend is nothing to be sniffed at, the markets currently forecasting Twiggy Forrest’s company to yield an impressive 6.5% fully franked over the next 12-months.

MM likes FMG for an ongoing 6-8% bounce.

Fortescue Metals (FMG) Chart

Iron ore (CNY/Tonne) Chart

2 Commonwealth Bank (CBA) $77.15

CBA continues to trade strongly which is no surprise considering its 5.6% yield which MM believes is sustainable. MM remains overweight the Banking sector which has played out nicely in 2019 but we are considering moving towards market weight ~2% higher – we are likely to reduce / cut  BOQ to fund this.  

MM is bullish CBA short-term targeting ~$79.

Commonwealth Bank (CBA) Chart

3 BlueScope Steel (BSL) $12.85

BSL continues to trade strongly following its report which the market initially interpreted bearishly. Technically the reaction from the $11 area is very bullish while for good measure we believe the stocks offering solid  risk / reward from a valuation perspective below $13.

Our upside target for BSL is ~8% higher.

BlueScope Steel (BSL) Chart

International Equites Portfolio

The US S&P500 remains 5.2% below its all-time high posted only last month but things have certainly heated up on the volatility front for investors this August, primarily because of concerns that the US – China trade dispute will lead  to a global recession.

At MM we still expect further choppy action into September, before another leg to the downside. A pop towards 2950 would be ideal as it will probably stop out all the “weak shorts” making it easier to decline – remember markets do like to move in the path of most pain.

MM believes the risk / reward for US stocks is on the downside for the next few months.

Our preferred scenario is the S&P500 will test the 2750 area when the next leg lower commences, or another 5% lower.

Unfortunately we feel it’s a matter of when, not if, US stocks drop another ~5%.

US S&P500 Index Chart

MM is still holding 75% in cash plus 2 market hedges via 5% a negative exposure to US stocks through bearish S&P500 ETF (SH US) and 5% in Barrick Gold (GOLD US) still an ideal mix while we are short-term bearish global equities:

While we continue to anticipate pressing the “Buy button”  around the 2750 area basis the S&P500 what comes next is more a function of the short-term swings of US / global stocks:

1 - We are likely to add to our bearish ETF into any short-term strength in the S&P500, ideally up towards the 2950 area, or 3% higher.

2 – MM is looking to be fairly aggressive buyers of any 5% spike lower by US stocks / global indices.

Emerging Markets  ETF (EEM) Chart

Below are another 3 stocks MM likes into further weakness noting that we are looking for stocks with the historical ability to recover hard and fast if markets recover strongly from their next sell off.

1 Apple (AAPL US) $US204.16

MM already holds AAPL in our International Portfolio from ~$195 but we would be keen to average into any short-term sharp weakness, especially around the $US180 technical support.

MM likes AAPL below $US180.

Apple (AAPL US) Chart

2 Microsoft (MSFT US) $135.74

MSFT is one of the few large cap tech stocks which has continued to rally in 2019 i.e. fewer names doing the heavy lifting is a bearish sign. Our concern for this quality business is both the market and momentum traders feel long this household name, when everyone’s long its usually just a matter of time before a sharp pullback unfolds.

Technically a break of $US130 should see a quick drop of ~8%.

MM likes MSFT around  $US120 short-term.

Microsoft (MSFT US) Chart

3 McDonalds (MCD US) $US216.05

Maccas like Microsoft has enjoyed a great 2019 - last week we had Magellan in talking up the golden arches - but similarly we feel it could easily experience a short / sharp correction. This is a relatively recession proof business and as such one MM is happy to own from the correct levels.

MM likes MCD around $US200.

McDonalds (MCD US) Chart

Conclusion (s)

MM likes sitting on our hands at this stage but we are dusting off the buy button in the 3 stocks mentioned above, if / when they correct in tune with our targeted pullback by the S&P500 towards the 2750 area.

Conversely we are looking to increase our bearish / defensive plays around  3% higher for the S&P500 i.e. increase our ProShares short S&P500 (SH US) ETF position and potentially increase our gold exposure simply through buying more Barrick gold (GOLD US) which even after  recent strength still looks great.

Barrick Gold (ABX US) Chart

MM ETF Portfolio

Sorry but still no change, MM continues to hold 3 positions in the portfolio: we are long gold, long the $A  and short US stocks while still holding 80% in cash:

We remain comfortable with these 3 positions but tweaks feel close at hand when / if the correct catalysts evolve:

1 – MM plans to average our long $A position following the local currencies fresh multi-year lows below the 67c area level, we are now looking for an optimal technical set-up as we believe the $A  “looks for a low”.

2 – We are looking to increase our bearish exposure to US stocks into a move above 2950 for the US S&P500 feels correct i.e. around 26.50 for the ProShares short S&P500 ETF which we currently hold.

Also as touched on previously we feel that Emerging markets are poised for a final spike lower, our preferred vehicle to profit from this move is the ProShares Emerging Markets Short MSCI ETF (EUM US). Details of this ETF are explained on this link :

Any pullback towards  the 19.50 area looks good risk / reward i.e. 2% lower.

ProShares short MSCI Emerging Markets  ETF (EUM US) Chart

Lastly MM is keen to increase our exposure to precious metals but we are now considering silver as our vehicle of choice to complement our GDX gold ETF following the metals technical breakout and  previous relative underperformance.

Our preferred long vehicle is the iShares MSCI Global Silver Miners ETF (SLVP US). Details of this ETF are explained in this link :

MM is bullish the silver miners ETF (SLVP US).

iShares MSCI Global Silver Miners ETF (SLVP US) Chart

Conclusion (s)

MM remains net bearish global stocks in the weeks ahead and will be looking for opportunities to invest into weakness accordingly.

Overnight Market Matters Wrap

·     The US equities market closed lower overnight, as this tiring US-China trade talk resumes with Chinese officials questioning US President Trump’s recent statements.

·     Crude oil gained 3.82% on the back of expected US weekly decline in supply, while Iron Ore fell leaving BHP in the US to close an equivalent of -0.12% from Australia’s previous close.

·     The ‘safe haven’ assets were better, with gold hitting 6-year highs in the futures market, while US treasury bond yields were lower as the unknown fear lingers in investor’s minds.

·     The September SPI Futures is indicating the ASX 200 to open 15 points lower, testing the 6455 level this morning.

Have a great day!

James & the Market Matters Team


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