Market Matters Report / The Hickman Report - Saturday 2nd May 2015

By Market Matters 02 May 15

The Hickman Report - Saturday 2nd May 2015

The Hickman Report - Saturday 2nd May 2015

Afternoon All,

Equities had another volatile week falling almost 200 points in 1 ½ days as the “Big Four” banks were savaged in line with our recent predictions / concerns -
Both ANZ Bank and Westpac were down over 9% from their recent highs by Friday morning. Last week alone wiped $20bn from the value of the “Big Four” banks. A number of headlines were being spruiked in the press as the driving force but I believe the following simple line sums it up:

· The Banks have ran way too hard recently, trading at levels of a 20% premium to their historical price/ earnings ratio (P/E Ratio) as investors assumed interest rates would continue to fall and no account was taken of future headwinds to earnings, or valuations.

I have been advocating selling / reducing exposure to the “yield play” now for a number of weeks and I believe the pullback in the sector is probably less than ½ complete. People have chased the banks to unprecedented levels with no thought to risk of capital and now some people are down around 9% when the official local interest rate is only at 2.25%! I still hear no noises of panic, investors believe the banks will bounce back, I find these levels of complacency very concerning. Some fundamental issue make is easier for me to imagine further waves of selling rather than buying in coming months:

1. US Margin debt is at record levels adding weight to my view US equities are primed for a 10-15% correction – see charts 8-12.

2. Interest rates are at unprecedented levels and may easily rise from here, if only temporarily – see charts7, it’s an amazing picture.

3. It feels like the last leg up in the stock market, and especially the banks was created by retail buying, as a number of high profile professionals reduced equities exposure e.g. The Future Fund, Perpetual Global Equities and Magellan Financial Group.

4. The Financial Markets are forecasting the Fed Funds rate will be 1.7% at the end of 2017 BUT the Fed says 3% - a VERY successful play of the last 5 years has been “Don’t bet against the Fed!”…..If the Feds correct equities could easily tumble 10-15%.

5. Australians debt to income ratio is at an all-time high.

I want to reiterate what I said last week this is not a “PANIC REPORT” but planning a strategy for potential bargain hunting e.g. we all know CBA is a great company but if there is a good chance of buying shares 10-15% lower I simply want to have some ammunition in reserve.

Summary:

A few important changes:

1. I now believe the ASX200 will not push towards 6100 over coming weeks but I will be selling any strength that occurs e.g. a spike on an interest rate cut.

2. I am likely to move towards 30-50% cash over coming weeks.

3. I will remain patient on purchasing banks but yield hungry investors may want to consider purchasing a % ahead of May dividends.

4. I continue to have no interest investing in the mining sector.

My cash holding is ~25% (swelled by options and recent dividends) but could be interpreted to be higher if we consider that IIN is in a takeover situation.

*Watch for alerts next week.

1. For traders – I will be looking for opportunities to go short over the next few weeks.

What Matters this week

The ASX200 looks likely to open up around 35 points higher on Monday, maintaining Friday’s momentum.

Potential Investing opportunities for the coming week

  •  I remain a seller of the “yield play” ideally into any strength e.g. a rate cut on Tuesday.

Potential Trading for the coming week

  • I could scale short positions into strength but a 100 point bounce could easily occur if we get a rate cut on Tuesday.

Portfolio Holdings

My portfolio outperformed the market last week where the ASX200 fell -2.0%.

1. Bank of Queensland (BOQ) +1.2% - medium term investment.

2. Challenger (CGF) +0.1% - medium term investment.

3. iiNet (IIN) +15.7% situation stock.

4. Mirvac (MGR) -2.4% - medium term investment.

5. Vocus (VOC) -1.9% - Medium term investment.

Cash for future purchases, ~25%.

Australian ASX200

I continue to look to spread my portfolio into more growth stocks going forward and importantly cash.

Chart 1 – ASX200 Monthly Chart

Chart 2 – ASX200 Weekly Chart

Chart 3 – ASX200 Daily Chart

Chart 4 - SPI (Share Price Index) Futures 60 mins Chart

Chart 5  ASX200 REIT Index Monthly Chart

Chart 6  Volatility Index VIX Weekly Chart

Chart 7a – The US 10-year Interest Rate Quarterly Chart

Chart 7b – The German 10-year Interest Rate Quarterly Chart

 American Equities

The American indices continue to show signs of topping out for 2015 and a final blow-off is starting to feel less likely by the week.

Chart 8 – Dow Jones Index Monthly Chart

Chart 9 – Dow Jones Index Daily Chart


Chart 10 – S&P500 Monthly Chart

Chart 11 – NYSE Composite Index Monthly Chart

Chart 12 – Russell 2000 Index Monthly Chart


Chart 13 – NASDAQ Weekly Chart

Chart 14 – The Canadian Composite Monthly Chart

 

European Indices

European Indices still look set to rally another 2-3% aided by ECB stimulus.

Chart 15 – Euro Stoxx 50 Weekly Chart

Chart 16 – FTSE Weekly Chart

 

Chart 17 – Spanish IBEX Monthly Chart

Chart 18 – German DAX Monthly Chart

Chart 19 – German DAX Daily Chart

 

Asian Indices

Asian indices are bullish at present, led by China as it opens its market to offshore investors, Japan is receiving great strength from ongoing aggressive QE.

Chart 20 – Hang Seng Weekly Chart

Chart 21 – China Shanghai Composite Monthly Chart

 Chart 22 – Japanese Nikkei 225 Monthly Chart

 

Australian Stocks

Quality stocks with sustainable yield have been standouts but some industrial stocks are now looking better. Overall I remain a net seller of the “yield play” and looking to buy growth stocks BUT not resources.

Chart 23 – BHP (US) Monthly Chart

Chart 24 – BHP Weekly Chart

Chart 25 – Woodside (WPL) Weekly Chart

Chart 26 – RIO Tinto (RIO) Weekly Chart


Chart 27 – Fortescue Metals (FMG) Weekly Chart

Chart 28 – Vale (US) Weekly Chart

Chart 29 – Newcrest Mining (NCM) Monthly Chart

Chart 30 – Regis Resources (RRL) Weekly Chart

 

Chart 31 – Barrick Gold Corp. (US) Monthly Chart