Morning Report / Subscriber Questions (TLS, VCX, PIO, MIN, MYR)

By Market Matters 13 November 17

Subscriber Questions (TLS, VCX, PIO, MIN, MYR)

Market Matters Morning Report 13th November 2017

The ASX200 enjoyed another strong week rallying over 1% while most global indices drifted lower. We feel this week will be the big test for our local market with both ANZ and Westpac trading ex-dividend today as we enter a seasonally very weak period for local stocks but only for a few weeks so in theory, don’t blink!

  • Since the GFC the ASX200 has corrected on average over 5% from this period in November.
  • Since the GFC the Commonwealth Bank (CBA) has corrected on average over 6% from this period in November.
  • Historically this pullback has provided an excellent buying opportunity for the traditional “Christmas Rally”.

A quick mention of  the recent Alibaba’s Singles Day online sales figures which illustrates perfectly the massive transformation which the global retail sector is undergoing:

  1. $23.5 billion of sales in just 24-hours.
  2. Over 800 million orders to be delivered.
  3. Over 80% of orders processed using a mobile phone.

These numbers show why MM is very cautious towards retail stocks in a general, however we do own Harvey Norman, Nick Scali and to a lesser degree AP Eagers which do not lend themselves to online shopping (some parts of Harvey Norman at least)

This week we have again received a record volume of questions which we regard as a huge compliment (at least most of them!), we’ve managed to cover 6 in this morning’s report. - we are sorry if we could not get to yours but most importantly thanks, keep them coming!

ASX200 Daily Chart

If we were specifically looking at US stocks we would continue to increase our cash levels in anticipation of a reasonable correction.

US S&P500 Weekly Chart

Question 1

“Hi Market Matters. You keep reiterating this market correction, but the market has moved far more than your anticipated drop. Seems to me that there is something wrong with kind of thinking as it does influence a person's trading. It has influenced me, to my detriment. I am a member of market matters, and since joining I can't say that I am inspired in any way !” – Regards Stefan.

“Hi James and co, I was hoping for your updated view re likelihood, and approx. timing, for any pullback that a lot of us are looking for. With the anticipated 5% drop in US not materialising yet does that alter your views re minor pullback or the 20%+ correction you are predicting? I took on a small bet with BBOZ late Sept, so am feeling the pain! Look fwd to your insights.” -  Thanks Radley

Morning Gents, I have combined your 2 questions this morning because they both relate to our view that a decent correction is approaching for equities. A few very important points to make here, especially towards your comments Stefan:

1.       At MM we remain bullish equities into 2018 which is why we currently have ~90% of our funds committed to the market.

2.       When we believe a top is in place, or imminent, we will most likely move to high cash levels (~50%) as we did in 2015 prior to the 18% correction by US stocks. We will also consider positions / funds that inversely track the market.

3.       At Market Matters, we simply write about our views on the market, and outline the approach we take on our two portfolios. The level of influence that has on individual subscribers will vary, however that is completely up to the individual. Whether or not an individual subscriber follows, or not follows our views and alerts is completely up to the individual.

4.       One of the main issues we see in the investment world is that the majority of commentary / investment analysis is skewed to be positive. The investment industry does better (in aggregate) by being positive – less negative views get airtime, there are studies to back this up however one example that springs to mind was the level of bullishness in stocks at the end of 2007, calling 7000 almost a ‘done deal’ from some very well credentialed managers of large super funds in Australia.  We take these views on board but importantly, we do our own work –a lot of it (just look at the weekend report), formulate our own unique opinions and as the Barefoot Investor would say, we tread our own path!

5.       From a statistical standpoint, 20% corrections happen every 2.7 years, yet we have not had one for more than 8.5 years. This simply means we should be on high alert, and we are. Being cognisant of history, looking at asset trends, using experience and above all, presenting our view  on markets is what we’re all about. Views will not always play out in the time frames we suggest , we don’t have a crystal ball nor proclaim to have one, we simply offer a realistic and pragmatic view on markets daily,  and we’ve found that a lot of people appreciate it!

6.       To give some real life examples here,  we moved to ~50% cash at the 2015 highs before moving to being fully invested at / near the low  in Q1 2016 and we have remained overall long since.

7.       From here our preferred scenario is a ~5% pullback basically from current levels followed by one final run up into 2018 when we are anticipating moving to large cash positions / funds that inversely track the market.

I hope this addressed both of your questions / comments, as we often say, remain open-minded and embrace this very exciting time for investing. The strong likelihood is we will “tweak” our view expressed in point 7 but it’s the actions that matter!

US S&P500 Quarterly Chart

Question 2

“Hi, James, you continually refer to rising US interest rates assuming that Australia is following suit, which couldn’t be further than the truth with the most accurate forecaster - Bill Evans from Westpac - continuing to forecast no rate hike until well into 2019. Ergo, why should Aussie banks & insurers perform well ? And isn’t your recent capitulation re VCX testament to the fact that Aussie bond yields aren’t going up dramatically from here & therefore present no imminent threat to the AREIT sector, which has already discounted the reality of higher US T-bonds, given the sector’s 10-15% from mid-2016 highs to their 2017 lows ??” – James W.

Morning James, a great question which hopefully will clarify our thoughts for a number of subscribers.

1 - its bond yields that we look at far closer than actual “official interest rates” e.g. the RBA cash rate has stayed at its record low of 1.5% for many, many months but the Australian 3-year bond yield has rallied at one stage over 0.8% in the last 12-months, a huge gain of 64% from its low in 2016.

2 -  we agree with your comparison between the US and Australia, our economy has a number of headwinds led in our opinion by the volume of debt carried by the average person. Hence we do believe our interest rates will rise slower than those in the US but we still believe they will rise, not fall, from here.

3 – Insurers gain if bond yields rise because they keep their “free cash” to cover pending claims in bonds, earning safe interest, with QBE in particular benefiting from rising US rates because this is where they keep their cash.

4 – banks margins generally increase in a rising bond yield environment although they “borrow short and lend long” is not perfect at present e.g. pay interest on a 1-year term deposit and lend for a 20-year mortgage. At this stage short-term interest rates are rallying faster than long-term because we are not seeing any global inflation but assuming global economies continue to improve inflation should raise its head and eventually send long term interest rates higher assisting banks profitability.

US 10-year bond yields Quarterly Chart

Australian 3-year bond yields Weekly Chart

‘recent capitulation’ on VCX is an interesting way of describing it! We’ve had two property plays in the MM Income Portfolio since inception, Centuria (CNI) and more recently Vicinity Centres (VCX). We simply trimmed our exposure to CNI after it rallied ~18% since we entered and our position was large / 8.43%. We sold 4% and bought into VCX which as we explained at time of purchase, is a company that has some specific drivers that should see the share price do well, primarily around the markets lack of appreciation for their funds management division. We allocated 4% of the Income Portfolio into VCX at $2.74 last week, simply maintaining our overall exposure to property rather than increasing it.   

Vicinity Centres (VCX) Daily Chart

Question 3

“Hi Guys, Can you elaborate on the 4 million tonnes of gold sold in 10 minutes. I didn’t think there was that much gold in the world."

– Regards John R.

Hi John, another great question as we pride ourselves at MM on educating our subscribers as well as hopefully offering some sound views / opinions on the market.

On Friday night a huge stop went off in the gold futures market which is where the vast majority of gold is traded as opposed to the physical image we probably all have in our minds. At 11.10am New York time someone sold 40,000 contracts in a matter of minutes i.e. each contract is 100 oz. hence the equivalent of 4 million ounces of gold!!

CME December Gold Futures 60-mins Chart

Question 4

“Dear Sir/Madam, I have a reasonable shareholding in PIO and participated in the recent Capital Raising through the Share Placement Plan. With the recent strong gains in the PIO share price, I have had to reduce my holding somewhat to ensure that I stay within my stock allocation limit. Given the abundance of Lithium and Graphite I am considering reinvesting the funds released from the sale of a portion of my PIO shares into stock(s) exposed to Cobalt and was wondering whether Market Mtters have identified any Cobalt stocks worth looking that may better capture value from the forecast growth in Electric Vehicles and Battery Storage Systems.” -  Regards, Ian Porter.

Morning Ian, Obviously we cannot give personal advice as to how you should deal with your individual PIO holding but we have recently written on a note on 26th of October looking at the lithium space for batteries, our preferred option was / is Mineral Resources (MIN). We also like to reiterate that we feel this a high risk space considering the positive estimates around global battery usage.

Pioneer Resources (PIO) Daily Chart

Mineral Resources (MIN) Monthly Chart

Question 5

Hi MM, Could you please explain some of the most common chart waveforms, that are important for you.

In particular please advise:

  1. Why does TLS look like a hacksaw blade, whilst others such as BHP seem to have much more “Party Life”?
  2. How can we differentiate between decisions made by humans and computers?"

Regards, Phil.

Morning Phil, thanks for the question which could take literally hours to answer but we’ve focused on the main 3-points as we see them.

 We’re looking to buy an uptrend where the pullbacks do not overlap under previous highs e.g. in the Russell 3000 the pullback to 1056 do not challenge the previous 821 high – you’re “party life”.

  1. We’re looking to buy pullbacks of similar magnitudes as markets regularly repeat themselves e.g. in the Russell 3000 then pullback of 219-points was similar in magnitude to the previous 190 one.
  2. Your chart of Telstra is simply too short a timeframe it shows just the noise over a few days i.e. your hacksaw blade.

Computers just add liquidity to markets and have no influence over where they are travelling in the coming weeks / months and hence should be embraced.

Russell 3000 Monthly Chart

Telstra (TLS) 60-mins Chart

Question 6

“Greetings James, I would appreciate your views on Myer (MYR). Do you think the sell-off is overdone, and the stock could be a good recovery proposition?” – John W.

Hi John, Unfortunately the answer is probably not, for reasons mentioned around Alibaba earlier, its simply too hard and although bounces will more than likely occur it’s like playing with fire!

Myer (MYR) Weekly Chart

Overnight Market Matters Wrap

·    The US equity markets ended its session lower last Friday and its first weekly loss in over 7 weeks as the anticipated US tax reform loses its lustre.

·    The European region suffered worse with investors switching to lower risk assets following a slowdown in earnings growth.

·     The December SPI Futures is indicating the ASX 200 to open 5 points lower, towards the 6020 area this morning.

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 postions 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 13/11/2017.  8.00AM.

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