The Bubble Is (Finally) Ready To Burst

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Mar 15 2017

The Bubble Is (Finally) Ready To Burst

By Rudi Filapek-Vandyck, Editor FNArena

In this week's Weekly Insights:

-Resources: Focus On Support
-Conviction Calls: Morningstar, Wilsons and Credit Suisse
-The Bubble Is (Finally) Ready To Burst
-New Website: How Do I Find Stuff?
-2016 - L'Année Extraordinaire
-All-Weather Model Portfolio
-Rudi On TV
-Rudi On Tour

Resources: Focus On Support

One of the "disadvantages", so to speak, of a strong bull market rally is that share prices can open up a sizeable gap with the 200 day moving average. This means that when profit taking takes over, and the market is looking for technical support at the 200 MA, share prices can pull back a lot. After a solid month of weakness, miners' share prices are still not enjoying solid buying support because that gap still hasn't closed.

Easy to say these things in hindsight, of course.

A simple observation: BHP Billiton ((BHP)) shares are now down -15% since late January, descending from $28 to below $24 in the process, and they still have a way to go before touching upon the 200 MA, currently running below $23. The good news is, of course, that elusive 200 MA is approaching, finally.

Sector analysts had been calling for a pullback since late last year, since virtually nobody believes US$95/tonne for high quality iron ore is sustainable, not even the most bullish producers, such as Fortescue ((FMG)), but markets had simply refused to pay attention. Now that markets are paying attention, general focus has shifted to how low before we can resume the uptrend?

CLSA analyst Laurence Balanco seems to have adopted the view that what started with bulk commodities iron ore and thermal coal first, is morphing into a general profit taking exercise for industrial minerals and metals. He singles out copper, zinc and aluminium as the next candidates for sizeable pullbacks.

As such, I note South32 ((S32)) shares have dropped from $3 to below $2.60 (-13.5%) with the 200 MA below $2.40 (suggesting -7.70% more downside). Alumina Ltd ((AWC)) shares have deflated from $2.04 to $1.84 (-10%) with the 200 MA currently around $1.60 (suggesting potential -15% further downside). Whitehaven Coal ((WHC)) shares lost -16% since November 8 in what has been a gradual, prolonged downtrend. The 200 MA sits at $2.40, suggesting -10% more downside, potentially.

The underlying message here is nobody believes this is the end of the bull market for commodities producers, underlying earnings forecasts remain in a firm uptrend, but right now market confidence seems fragile, and share prices remain vulnerable to more downside. Assuming this is a genuine bull market for commodities, those 200 MAs should hold.

For those waiting on the sidelines, it's called a healthy correction. For those sitting on falling share prices, the key term is "test of faith".

Conviction Calls: Morningstar, Wilsons and Credit Suisse

Perennial market disappointer iSentia ((ISD)) continues to fall out of favour post its shock profit warning in February. Analysts at Huntleys, erm, I mean Morningstar, have decided the company is no longer of sufficient quality to be included in their Conviction Calls, otherwise known as Morningstar's Best Stock Ideas. In its place comes Santos ((STO)).

With balance sheet risk reduced, and a potential 40% upside in the share price, the analysts believe free cash flow is poised to reach $1bn by end-2021. That'll be the end of the Santos debt story, by then.

Other names on the Best Stock Ideas list are DuluxGroup ((DLX)), Folkestone Education Trust ((FLK)), Platinum Asset Management ((PTM)), Ramsay Health Care ((RHC)), ResMed ((RMD)), Sonic Healthcare ((SHL)) and Vocus Group ((VOC)).


The good folk at Wilsons Advisory and Stockbroking also released their Conviction Calls. Since Wilsons is widely recognised as a trusted expert in small cap industrials, and many in that segment have seen their share price drop significantly since August last year, one would think Wilsons' favourites attract extra attention.

The list contains twelve names: EML Payments ((EML)), Afterpay ((AFY)), TechnologyOne ((TNE)), Rural Funds Group ((RFF)), Collins Foods ((CFK)), ImpediMed ((IPD)), Nanosonics ((NAN)), SomnoMed ((SOM)), Class ((CL1)), SeaLink Travel ((SLK)), Whitehaven Coal ((WHC)) and Independence Group ((IGO)).

Believe it or not, but only ImpediMed and Class on that list have generated a negative return over the twelve months past (-18% and -9% respectively). Medical instruments manufacturer ImpediMed offers the most upside potential on Wilsons' assessment (+262%) - with the emphasis on "potential".


Over at Credit Suisse, analyst Adnan Kucukalic runs a medley of both long and short Conviction Ideas, otherwise known as Australia Top Picks, otherwise known as Credit Suisse Top Investment Ideas.

Kucukalic has two key suggestions to go short (meaning: he's negative on the share price outlook): Brambles ((BXB)) and Sydney Airport ((SYD)).

Otherwise the list contains 18 "long" ideas; Ardent Leisure ((AAD)), AGL Energy ((AGL)), APN News & Media ((APN)), Boral ((BLD)), Challenger ((CGF)), Caltex ((CTX)), CYBG Ltd ((CYB)), Fairfax Media ((FXJ)), iSelect ((ISU)), Lend Lease ((LLC)), National Australia Bank ((NAB)), Nine Entertainment ((NEC)), Qantas ((QAN)), Rio Tinto ((RIO)), Speedcast International ((SDA)), The Star Entertainment Group ((SGR)), Transurban ((TCL)) and WPP AUNZ ((WPP)).


Readers note: last week's Weekly Insights contained Conviction Stock Picks by CLSA and stockbroker Morgans (see your inbox or Rudi's Views on the new website).

The Bubble Is (Finally) Ready To Burst

Does every bubble ultimately burst?

The question was asked by managing director Robert Mellor at the semi-annual Business Forecasting Conference from the company formerly known as Bis Shrapnel. Having recently agreed to become part of the international network of Oxford Economics, last week's Conference in Sydney was officially organised by the newly (e)merged Bis Oxford Economics.

In good tradition of internal debate, opinions are divided at Bis Oxford Economics. Mellor, himself a long standing believer in higher for longer house prices in Australia's major cities, has now switched to the dark side, but only in a gentle manner.

So is Australia finally ready to see the housing bubble burst?

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