Morning Report / Overseas Wednesday – International Equities & Global Macro Portfolio (ABY, CWN, GOOGL US, MSFT US, TTD US, QQQ US, IEM)

The ASX200’s post COVID rally continues in earnest with the local market breaking above both its March high and the psychological 6500 level during yesterday’s session. The markets now rallied well over 10% in the last 3-weeks as stocks continue to embrace the US election, positive vaccine development and ongoing huge monetary & fiscal stimulus. Last week I wrote “My “Gut Feel” is the buying in the banks and resources will continue but the aggressive selling of some tech names will abate pushing the underlying index higher.” – this has been on the money recently and we see no reason to doubt a further extension of this new trend into Christmas but after an almost vertical style rally some decent pullbacks or at least consolidation is inevitable.

The market breath is feeling tired but while the influential Banking and Resources stocks are enjoying a bid it’s the bulls who are likely to maintain the upper hand on an index level. Interestingly during yesterday’s small +0.2% advance we basically saw an equal number of winners and losers where 14 stocks rallied by over 4% and 16 fell by the same margin, in other words 15% of the ASX200 moved by 4% or more as stock / sector rotation continues to dominate the action under the hood.

Over the last month the big 4 banks have now rallied an average of almost 10% but we should remember they’re still well in the red over the last year, we feel a number of fund managers are probably becoming increasingly uncomfortable around their underweight stance to the sector. MM remains bullish the banks and as the market becomes increasingly comfortable with their earnings outlook an ongoing re-rating is a distinct possibility – considering the sector represents almost a quarter of the ASX it could just be the catalyst to send our market backs towards its 7000 pre-COVID levels.

MM remains bullish the ASX200 into 2021.

ASX200 Index Chart

Overseas markets

Overnight US stocks continued to rotate around their all-time highs, it doesn’t feel convincing short-term especially as the indicators are telling us the markets got itself long and optimistic – some consolidation and / or a pullback is our preferred scenario but nothing major is expected on the downside.

MM remains bullish US stocks through 2021.

US S&P500 Index Chart

The market is getting over cooked short-term, all of the stock market sentiment indicators MM evaluates have rallied to contrarian sell levels – it was only a few months ago where we highlighted the relatively high bearish consensus in the US which MM used as part of our investment thesis to be aggressively long stocks, just when many plyers sat in cash, the market was “climbing a wall of worry“, however over the last fortnight this picture has changed dramatically as the chart below illustrates.

MM remains bullish US equities into Christmas and Q1 of 2021 but we don’t believe it’s time to be chasing stocks into strength.

MM feels US stocks are poised for rest / pullback.

US AAII Investor Bullish Sentiment Chart

Yesterday we talked about our thoughts around the $US and importantly how we are considering fading any weakness down towards the 90 area illustrated below. Interestingly overnight the AFR ran a large article that a “vaccine is kryptonite for the $US dollar”, some of the world’s major FX players are suddenly looking for the greenback to fall off a cliff – my knee jerk reaction remains where were they in Q1 when MM said sell the $US and be careful of an appreciating $A. However with heavyweights Goldman Sachs and Citigroup calling the $US lower our bearish short-term view feels good, a move which will worry the RBA who definitely don’t want a strong $A  hindering exports but they might get lucky short-term.

Global central banks will all be striving to weaken their currency to assist exports and a post COVID recovery hence I cannot see short-term interest rates going up any time soon. The combination of a vaccine and Joe Biden has removed a huge amount of global uncertainty which is damaging safe havens like the $US and gold but we shouldn’t forget the $US Index started the year 10% higher prior to the exceptional volatility this years delivered - we still see a trading range of 90 to 95 over the next 3 to 6-months as central banks fight to become increasingly competitive on the global stage.

MM remains bearish the $US short-term.

The $US Index Chart

This week, Morgan Stanley & Shaw & Partners initiated coverage on Adore Beauty (ABY), the IPO we put out to Market Matters subscribers with many bidding into the offer. The offer opened up 10% on the day of listing however it’s been a struggle since as money moved out of higher valued growth.

Morgan Stanley initated with a buy and $8.35 price target, Shaw the same with a price target of $8.25. Adore closed yesterday at $6.54 versus it’s listing price of $6.75 and post listing high of $7.42. We continue to believe the company is very well positioned for ongoing growth, the next catalyst is likely to be full year results, they’re a December year end and will report full year earnings on the 19th February.

On a wider note, for those subscriber’s interested in a good podcast which talks about ecommerce and specifically, how we should be thinking about ecommerce businesses that have benefitted through COVID, this link below is a good one. I listen to it regularly and find most of the episodes interesting. While it’s not about stocks / investments to make, its more about how others think about things / industries / concepts. There is a mention in the episode below about online beauty being similar to online ordering of groceries. An initial reluctance by consumers to embrace it, however once they do most actually stay if the user experience is good enough - Adore Beauty has a very good user experience. Click here to listen

Adore Beauty (ABY) Chart

Yesterday we switched from Star Entertainment (SGR) to Crown Resorts (CWN) as flagged in the morning report, we subsequently received number of interesting / thought provoking comments around the move and I felt today was an opportune time to address some of the issues from our perspective:

1 Some subscribers are disappointed with our new position because gaming has been a “murky business at the best of times”. I would agree with this 100% from a historical perspective but looking forward, regulation around casinos and especially CWN is likely to be better from here, remember how the Banking Sector has evolved over the last few years.

2 Its very important to note that MM have bought into the future outlook for CWN not its messy past where governance failures were clearly commonplace. We believe that Jamie Packer for example will be a silent shareholder at the most but when he finally manages to offload his stake our view is the stock is likely to rally strongly, the question of how much will be determined by the quality of the buyer (s).

3 At MM we are very conscious of the trend towards ethical investing but like all trends it can and will depress markets too far creating compelling opportunities – at this stage we buy investments which we believe offer solid risk / reward opportunities, it’s up to individual subscribers to see if it suits their particular views.

MM is bullish CWN with an initial +20% upside target.

Crown Resorts (CWN) Chart

MM International Portfolio

No change to our positions / cash holdings this week, MM continues to hold only 6% cash in the MM International Portfolio : Click Here

Taking into account our view that US stocks in particular are due a  rest / pullback plus our overall desire to move more towards the Value stocks / Europe it shouldn’t surprise subscribers that we are looking at the sell side of the ledger in the coming weeks but not in dramatic way. The plan is to add value / alpha through taking some profit (s) from some tech holdings with a view to reweighting back towards banks / resources plus Europe into the anticipated pullback i.e. we are considering legging a switch. Importantly while we remain bullish into 2021 MM doesn’t want to be caught with excessive cash levels - just yet!

Sell ideas

Two of our large tech plays remain under consideration here – Google Alphabet (GOOGL) and Microsoft (MSFT US).

However, I reiterate we are bullish equities into 2021 hence we are only looking to reweight / tweak portfolios over the coming weeks as opposed to moving aggressively into cash.

1 Google Alphabet (GOOGL US) $US1770

Currently we feel taking a 40-45% profit above $US1,800 makes sense following on from our market outlook.

MM is considering selling GOOGL above $US1800.

Google Alphabet (GOOGL US) Chart

2 Microsoft (MSFT US) $215.07

Currently we feel taking a 35% profit above $US220 on our MSFT position makes sense following on from our market outlook but its unlikely we will sell both MSFT and GOOGL considering our bullish view into 2021.

MM is considering selling MSFT above $US220.

Microsoft (MSFT US) Chart

3 Trade Desk Inc (TTD US) $US795

Following the savage correction by Alibaba (BABA US) I thought it was an opportune time to look at our best position, advertising technology business The Trade Desk TTD US) which is up well over 200% in just over 6-months. At this stage we remain bullish looking for a further upside but depending on our market view at the time, it may be tempting to take some profit in the $US850-900 region.

MM is considering trimming TTD ~10% higher.

Trade Desk Inc (TTD US) Chart

Conclusion

MM is considering taking profit on either Google (GOOGL US) or Microsoft (MSFT US) in the coming week (s) and trimming The Trade Desk (TTD US)

MM Global Macro ETF Portfolio

Last week we took a small 4% position in the European Vanguard ETF (VGK US) taking our cash position to zero, obviously our plan moving forward is to increase this to create some flexibility across the portfolio : Click Here

We’ve been patient and comfortable with most of our holdings in this portfolio through 2020 but the time for movement is nigh, similar to when we acted for the Growth Portfolio earlier this month. The coming few weeks are likely to be primarily around selling to increase cash / flexibility, obviously at this stage buying is out of the question! MM has been aggressively long risk assets throughout the year, but we now believe it’s time to lighten the stance slightly in some areas.

Sell ideas

Invesco QQQ Trust (QQQ US) $US292

Although we are not bearish the US tech stocks, we believe they will underperform hence MM is looking to take ~10% profit on our QQQ position and reweight further into the European VGK ETF, ideally into a pullback.

MM is looking to sell 5% above $US290 and 5% above $US300.

Invesco QQQ Trust (QQQ US) Chart

Emerging Markets iShares ETF (IEM) $66.70

The IEM has reached major resistance and while its only showing a 7-8% paper profit we believe this is an opportune time to close out this position – remember we were under a lot of water with this one back in March!

MM is considering closing our IEM position at current levels.

Emerging Markets iShares ETF (IEM) Chart

Conclusion

MM is looking to take profit on both our QQQ and IEM positions in the coming week (s).

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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