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The Bubble Is (Finally) Ready To Burst

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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)).

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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".

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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)).

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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?

Depends on one's definition, it appears. Mellor is ready to accept Australia is over-building, in particular in so-called High Density Dwellings (that's apartments to you and me). On Bis Oxford's projections, just about every major market in Australia will be over-supplied from mid-year onwards, except Sydney. Australia's premier city is still catching up on the massive deficiency created when Bob Car ruled over Martin Place and Circular Quay. It's going to take a few years still before Sydney can join the others, assuming today's projections prove accurate.

The impact of seeing Brisbane, Melbourne, Canberra and elsewhere offering up more accommodation than is required to satisfy natural demand locally is likely going to impact on prices, future building activity and domestic economic growth. But Mellor is not anticipating any major disaster scenarios. Which is why he asked the question whether every bubble ultimately has to burst?

Single digit percentage declines in prices, on average, and building activity levels partially being compensated through an up-tick in infrastructure construction and in maintenance of bulk commodities operations, should ensure the Australian economy is not heading for a downturn a la Spain or the USA less than ten years ago.

Although there will be pockets where investors might lose -15-20% on, say, off-the-plan purchases in the wrong place at the wrong time. It is Bis Oxford's observation such price falls have already occurred in WA on the back of the mining downturn, and despite historically low interest rates.

Clearly, it wasn't enough to elevate One Nation to be the winner of last weekend's state election, but what about the Coalition's landslide loss to a resurgent Labor?

Mellor's somewhat soothing predictions, backed by Chief Economist Frank Gelber, stood somewhat in contrast with the observations made by Kim Hawtrey, responsible for data gathering and prognostications regarding building activity throughout Australia. On Hawtrey's observation, Australian builders are now staring at the longest and biggest upswing ("bubble") in building activity in Australia – ever.

And the only way from here onwards is down, down, down.

For good measure: Hawtrey wasn't predicting Armageddon lies ahead, but he did seem a little less sanguine, openly asking the question what should be expected in terms of downturn given the preceding build-up has been unprecedented and out-of-proportion with the past?

I was promised a copy of Hawtrey's chart and two accompanying tables, showing just much this upswing has been out of sorts with the past, but the man in charge quickly abandoned his promise when other news services jumped on the occasion with titles such as "Historic boom will mean a historic reversal".

Clearly, Bis Oxford doesn't want to be seen as the messenger of doom and gloom for Australia. Those scary looking charts and tables would only do more damage to the central narrative.

That narrative remains that house prices, and building activity, are now peaking and the next phase will be a downturn, likely of relatively benign character overall, and concentrated in high density dwellings/apartments.

Whatever will unfold exactly, and how, is something we shall all be witnessing and observing from the second half of this year onwards. Only a few more months to go…

Note that banking analysts at Citi just released dedicated research on this matter and their prediction too is any damage to major banks shall remain limited, because the banks have been preparing, and because no GFC-style collapse is being considered.

New Website: How Do I Find Stuff?

The launch of the new website is still generating positive feedback with many subscribers, new and old, reporting they very much enjoy the new features and improved lay-out.

Alas, not everybody has sufficient time and energy to explore the many new options, add-ons and tools. To assist them, and everybody else, with maximising their benefits from accessing the new website, FNArena will publish a weekly series aimed at highlighting new and valuable features.

This week we'll zoom in on the improved method to navigate the website.

It has been a constant feature since FNArena launched the new website in February: where can I find this? I don't know how I can find that? Subscribers relying on old reflexes to find their favourite tools and applications, can sometimes feel a bit off when dealing with the new and improved FNArena.

And yet, we feel we made life a lot simpler and easier. Underneath the company logo and the large banner advertisement near the top of the front page runs a grey-ish horizontal bar with three key items on it: the home symbol, followed by FINANCIAL NEWS and DATA & ANALYSIS.

Both FINANCIAL NEWS and DATA & ANALYSIS open up a drop down menu where subscribers and other users can find most of what they could possibly be looking for, including The Australian Broker Call Report, Calendar, All-Weather Performers, Stock Analysis, Rudi's Views and Special Reports.

Many of these also feature on the front page, when scrolling down, but it's probably best to concentrate on these two central drop down menus as the focal starting point from which to find other sections on the website. We have no doubt subscribers will navigate much faster and easier, once they incorporate the new system in their daily habits. They stand to discover a lot of extra items as well, making their personal experience much fuller and richer.

2016 – L'Année Extraordinaire

It was quite the exceptional year, 2016, and I did grab the opportunity to write down my observations and offer investors today the opportunity to look back, relive the moments and draw some hard conclusions about investing in the world today.

If you are a paid subscriber to FNArena, and you still haven't downloaded your copy, all you have to do is visit the website, look up "Special Reports" and download your very own copy of "Who's Afraid Of The Big Bad Bear. Chronicles of 2016, A Veritable Year Extraordinaire" (in PDF).

For all others who still haven't been convinced, eBook copies are for sale on Amazon and many other online channels. You'll have to visit a foreign Amazon website to also find the print book version.

All-Weather Model Portfolio

In partnership with Queensland based Vested Equities, FNArena manages an All-Weather Model Portfolio based upon my post-GFC research. The idea is to offer diversification away from banks and resources stocks which are so dominant in Australia, while also providing ongoing real time evidence into the validity of my research into All-Weather Performers.

This All-Weather Model Portfolio is available through Self-Managed Accounts (SMAs) on the Praemium platform. For more info: info@fnarena.com

Rudi On TV

This week my appearances on the Sky Business channel are scheduled as follows:

-Tuesday around 11.15am, Skype-link to discuss broker calls
-Thursday, 12.30-2.30pm, co-host in the studio
-Friday around 11.05am, Skype-link to discuss broker calls

Rudi On Tour

Your Editor has been invited to present at the Australian Shareholders Association's (ASA) 2017 Securing Your Investing Future Conference to be held at the Grand Hyatt Melbourne from 15-16 May.

The conference details – www.australianshareholders.com.au/conference-2017

Speaker information – www.australianshareholders.com.au/speakers

Program information – www.australianshareholders.com.au/program

Those who register before 31 March 2017 will receive $70 off the registration fee. Telephone: 1300 368 448

(This story was written on Monday 13th March 2016. It was published on the day in the form of an email to paying subscribers at FNArena).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via the direct messaging system on the website).

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BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:

– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
– Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
– Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.

Subscriptions cost $380 for twelve months or $210 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): http://www.fnarena.com/index2.cfm?type=dsp_signup

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