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Market Observations Late June 2015

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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 | Jul 01 2015

This story features AINSWORTH GAME TECHNOLOGY LIMITED, and other companies. For more info SHARE ANALYSIS: AGI

In this week's Weekly Insights:

– How Are We Doing?
– The Club Of Minus 20%
– Greece Is No Longer The Word
– Glamour Falling Off IAG's Buffett Deal
– Flight Centre: Temporary Or Structural Decline?
– The Robot Did It!
– First Week Of July = Opportunity
– Rudi On TV
– Rudi On Tour

Market Observations Late June 2015

By Rudi Filapek-Vandyck, Editor FNArena

As I sit behind my pc to write this week's Weekly Insights, no doubt many among you have lost interest in the share market, for the time being, or you are awaiting that illusive headline on the international news wire that can turn around things quickly.

To some it was inevitable, to others it remained implausible, but fact is the market's focus is once again firmly centred on Greece and it ain't for no good reasons, again.

Here's the opening paragraph from the first email that left the economics desk at National Australia Bank on Monday morning:

"Well, we didn’t see that coming, neither did the Institutions (nee Troika), nor the markets. Greece has pulled the negotiations plug at the last minute and put the deal to a national referendum (5 July) AFTER the deadline for payment (1 July). The Eurogroup has said there will be no bailout extension, the ECB has frozen the ELA and the Greek banks are to be closed for the week. That leaves a high degree of uncertainty with regards to payments, Greek bank solvency and indeed the future of the EUR; not just a Greek exit from the Euro. This will not be solved easily or soon."

I have decided this is the ideal opportunity to share some of my recent market observations.

How Are We Doing?

It has become somewhat de rigeur to whinge and complain about the lack of performance for the local share market, but how are we performing to date?

As per always, it all depends on what is one's perspective. On June 30th last year, the ASX200 closed at 5395.70. The final session of 2014 saw the index close at 5411.00.

As I am writing these sentences, the ASX200 is trading around 5429. Probably the biggest surprise from all of this is that despite the long drawn out non-performance for resources stocks, the sell-down in the energy space, the sell-off in bank shares and the many share market shenanigans since mid-May, the average return as represented by the index, including dividends and franking, is still going to be positive for both the financial year ending on June 30 and the first half of calendar 2015.

US indices have not performed better over the past six months (and they pay out lower dividends) and while Chinese equities more than doubled over the past twelve months, the world is now fearing a continuous freefall, which is the "other" reason as to why Australian shares are doing it tough while we approach the final session of June.

I do know these numbers look poor and they assume portfolios are at least on par with the index, but surely I am not the only one who's surprised the numbers aren't worse because that's certainly how it feels these days?

The Club Of Minus 20%

Yes, volatility has picked up because of macro-economic considerations (Greece in particular), but there's nevertheless one observation that deserves every investor's attention: industrial stocks plunging by 20%, and more. Recent weeks have seen the members of this club multiply and the numbers seemed to accelerate in recent sessions, even without Greece spoiling the party.

This is no longer the privilege of resources stocks, in various cases the company involved doesn't need to issue an official market statement or update either. What exactly is happening here? Don't know as yet, but what I do know is there are many more members in this club already than most would be aware of. Unless, of course, you have a few in your portfolio. In that case, you are by now very, very much aware of the 20%+ falls that have occurred as liquidity shrank and risk appetite retreated post April.

Note: the observed 20%+ falls are not necessarily from the highest price point this year. The incomplete membership list of the -20% Club includes Ainsworth Gaming ((AGI)), Ansell ((ANN)), Flexigroup ((FXL)), Flight Centre ((FLT)), G8 Education ((GEM)), Greencross ((GXL)), Nine Entertainment ((NEC)), Medibank Private ((MPL)), Metcash ((MTS)), OzForex ((OZL)), Pacific Brands ((PBG)), REA Group ((REA)), ResMed ((RMD)), Retail Food Group ((RFG)), Seek ((SEK)), Seven West Media ((SWM)), Slater & Gordon ((SGH), Shine Corp ((SHJ)), The Reject Shop ((TRS)), Virtus Health ((VRT)) and Westpac ((WBC)).

Greece Is No Longer The Word

It has been one of the most copied and repeated word plays in recent years: Greece is the word (thanks to Frankie Valli's contribution to the teen movie sensation from 1978 starring Olivia Newton-John and John Travolta).

However, in recent times a substitute has made its way into the global financial lingo which better describes the general sentiment worldwide: Gretigue.

The term may never become as widely used as Grexit or as, indeed, Greece is the word, but it far better captures the general mood.

Glamour Falling Off IAG's Buffett Deal

Last week I questioned initial market (and media) euphoria post Insurance Australia Group's ((IAG)) announced deal with Warren Buffett's Berkshire Hathaway. If you think that was kinda harsh, try reading some of the stockbroking analysts reports that have since been released.

The latest of such reports originates from Macquarie offices where the insurance analysts covering IAG locally took a long and detailed look at what can possibly await on the horizon for the insurer and its shareholders. Conclusion number one is that IAG already has market shares of 30% and 40% on both sides of the Tasman Sea, with competition heating up, so any growth prospects in its core markets seem limited. This is in particular the case because Macquarie analysts (like just about anybody else) can only see further downward margin pressure on the horizon.

As the Berkshire Hathaway deal effectively signed the rest of the world, except Asia, over to Warren Buffett, Macquarie assumes IAG will be looking at additional investment in Asia. But here, say the analysts, the track record is far from great, and prospects seem long dated, if not doubtful. For the short term at least.

Macquarie points out IAG has been investing in Asia for ten years now, having spent circa $850m over the period for assets that are currently valued (by Macquarie) at no more than $400m, generating a rather measly net profit contribution of $14m in FY14. Most Asian markets are a lot more difficult to navigate than Australia and New Zealand, with China, for example, dominated by five local giants and India difficult and loss-making to date for IAG.

The market seems to agree, with consensus expectations anticipating no growth for IAG this year or next. Extra cash payouts to shareholders should be on the agenda, but thus far no concrete indications have been given by company management. The share price seems to be retreating to where it was before the BH Specialty Insurance (BHSI) announcement.

Equally remarkable: none of the stockbrokers in the FNArena universe rates IAG a Buy (or equivalent), though some brokers do have a target above $6, which suggests double-digit return ex dividends.

Flight Centre: Temporary Or Structural Decline?

Among many decisions made over the past six months, I am glad I listened to my gut and did not jump on board the Flight Centre ((FLT)) share price rally following the first profit warning in December. The share price briefly touched below $32 and recently, prior to profit warning number two, the share price was trading back above $46.

A case of twice bitten, three times shy? Three stockbrokers did downgrade to Neutral last week, but both Deutsche Bank and UBS are stoically sticking to the view that all headwinds shall prove temporary with price targets of $46 and $41.50 respectively suggesting faithful shareholders need not despair.

This is not the view of the team at Morgan Stanley who already last year believed the trend for Flight Centre has turned negative, and it's structural, not temporary or cyclical. Morgan Stanley believes the strength or weakness in the Aussie dollar remains of key importance to the company's fortunes. A fact Flight Centre management has steadfastly denied, but two profit warnings in seven months on top of ABS data suggesting Australians have started traveling less abroad suggests otherwise.

But there's more. Online competitors are starting to catch up and grab market share. Morgan Stanley also suggests airlines operating more rationally implies they need to rely less on travel agents and this will keep the pressure to the downside for Flight Centre margins. The fact that low cost carriers are gaining market share in airline travel represents yet another obvious headwind for Flight Centre.

The positive post the second profit warning is the share price did not fall as far as back in December ($34 versus $31) and even tried to rally higher before yet another crisis in Greece nipped it all in the bud.

The Robot Did It!

A number of share market experts has issued warnings of late about unintended consequences from the rising popularity of ETFs around the world. As we'd all expect, the ETF industry has swiftly responded in defense of itself.

Amidst reported pros and cons, one item caught my attention. Thanks to a high yield ETF listed in New York, so goes the story, one local mining services provider enjoyed a sudden spike of 60% in its share price when investors poured in more funds and the robots supporting this particular ETF started buying more shares in the locally listed shares.

This unnamed locally listed mining services provider, I believe, is NRW Holdings ((NWH)). Thanks to an enquiry from subscriber Robert, I also noticed a swift reduction in reported short positions to ASIC from late May onwards. Could it be that when the robots started buying the shorts lost their confidence? Or did they see the fallacy in time and got out of their positions on the way down?

Whatever happened in May, NRW's share price has simply fallen back to where it was prior. All that is left today is one small bump in the share price trajectory over the past twelve months.

That also illustrates just how relentless and humongous the fall from grace has been for this once popular sector, and for NRW Holdings in particular.

All the talk is now about who's going to combine forces with whom? Programmed Maintenance ((PRG)) and Skilled Group ((SKE)) already announced a deal that has just about everyone's support. Bradken ((BKN)), on the other hand, just showed there's absolutely no guarantee that shareholders will be better off too. See also Atlas Iron ((AGO)) in the mid-tier iron ore space.

First Week Of July = Opportunity

Stocks with a woeful performance up until late June tend to rally in the first week of July, report analysts at stockbroker Morgans. The analysts have combined academic research with their own data analysis and proved that in 8 of the last 10 years, the worst performing stocks in June outperform in the first week of July with an average gain of 4.6% over the first week.

Importantly, the analysts report this July effect holds up regardless of the overall performance of the broader ASX index. Morgans' list of worst performers in June was updated up until June 24, so there's plenty of potential for further shifts and inclusions. But for those willing to explore the theme, the 20 nominated stocks are: Ainsworth Gaming ((AGI)), Arrium ((ARI)), Bradken ((BKN)), Cabcharge ((CAB)), Fairfax Media ((FXJ)), Flexigroup ((FXL)), Flight Centre ((FLT)), IOOF ((IFL)), Karoon Gas ((KAR)), Metcash ((MTS)), Nine Entertainment ((NEC)), Pacific Brands ((PBG)), Qube Holdings ((QUB)), Retail Food Group ((RFG)), Seek ((SEK)), Senex Energy ((SXY)), Seven Group ((SVW)), Seven West Media ((SWM)), Trade Me Group ((TME)) and Virtus Health ((VRT)).

Rudi On TV

– on Wednesday, Sky Business, 5.30-6pm, Market Moves
– on Wednesday, Sky Business, 8-9pm, Your Money, Your Call Equities (host)
– on Thursday, Sky Business, noon-12.45pm, Lunch Money

Rudi On Tour

I have accepted invitations to present:

– July 2, Invast, Sydney Clients and Contacts evening meeting, 6.30-8.30pm

To register for this (free) event:

http://www.meetup.com/Circular-Quay-Trading-Group-Powered-by-Invast/events/223409534/?elqTrackId=91F15FCD28F8EC386A744EA9FFCBC89E&elq=fd0110f33f9a429fbd497ed1ebc04312&elqCampaignId=893&elqaid=982&elqat=1

– August 2-5, AIA National Conference, Surfers Paradise Marriott Resort and Spa, Queensland – for more information about this event:

http://www.investors.asn.au/events/events-schedule/aia-national-investors-conference/

Note: FNArena subscribers can attend at similar discount as AIA members

(This story was written on Monday, 29 June 2015. 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 Editor Direct on the website).

****

THE AUD AND THE AUSTRALIAN SHARE MARKET

This eBooklet published in July 2013 forms part of FNArena's bonus package for a paid subscription (excluding one month subscriptions).

My previous eBooklet (see below) is also still included.

****

MAKE RISK YOUR FRIEND – ALL-WEATHER PERFORMERS

Odd as it may seem, but today's share market is NOT only about dividend yield. Post-2008, less risky, reliable performers among industrials have significantly outperformed and my market research over the past six years has been focused on identifying which stocks, and why, are part of the chosen few; the All-Weather Performers.

The original eBooklet was released in early 2013, followed by a more recent general update in December 2014.

Making Risk Your Friend. Finding All-Weather Performers, in both eBooklet versions, is included in FNArena's free bonus package for a paid subscription (excluding one month subscription).

If you haven't received your copy as yet, send an email to info@fnarena.com

For paying subscribers only: we have an excel sheet overview with share price as at the end of May available. Just send an email to the address above if you are interested.

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CHARTS

AGI ANN FLT FXL GEM IAG IFL KAR MPL MTS NEC NWH OZL QUB REA RFG RMD SEK SHJ SVW SWM SXY TRS VRT WBC

For more info SHARE ANALYSIS: AGI - AINSWORTH GAME TECHNOLOGY LIMITED

For more info SHARE ANALYSIS: ANN - ANSELL LIMITED

For more info SHARE ANALYSIS: FLT - FLIGHT CENTRE TRAVEL GROUP LIMITED

For more info SHARE ANALYSIS: FXL - Flexigroup

For more info SHARE ANALYSIS: GEM - G8 EDUCATION LIMITED

For more info SHARE ANALYSIS: IAG - INSURANCE AUSTRALIA GROUP LIMITED

For more info SHARE ANALYSIS: IFL - INSIGNIA FINANCIAL LIMITED

For more info SHARE ANALYSIS: KAR - KAROON ENERGY LIMITED

For more info SHARE ANALYSIS: MPL - MEDIBANK PRIVATE LIMITED

For more info SHARE ANALYSIS: MTS - METCASH LIMITED

For more info SHARE ANALYSIS: NEC - NINE ENTERTAINMENT CO. HOLDINGS LIMITED

For more info SHARE ANALYSIS: NWH - NRW HOLDINGS LIMITED

For more info SHARE ANALYSIS: OZL - OZ MINERALS LIMITED

For more info SHARE ANALYSIS: QUB - QUBE HOLDINGS LIMITED

For more info SHARE ANALYSIS: REA - REA GROUP LIMITED

For more info SHARE ANALYSIS: RFG - RETAIL FOOD GROUP LIMITED

For more info SHARE ANALYSIS: RMD - RESMED INC

For more info SHARE ANALYSIS: SEK - SEEK LIMITED

For more info SHARE ANALYSIS: SHJ - SHINE JUSTICE LIMITED

For more info SHARE ANALYSIS: SVW - SEVEN GROUP HOLDINGS LIMITED

For more info SHARE ANALYSIS: SWM - SEVEN WEST MEDIA LIMITED

For more info SHARE ANALYSIS: SXY - SENEX ENERGY LIMITED

For more info SHARE ANALYSIS: TRS - REJECT SHOP LIMITED

For more info SHARE ANALYSIS: VRT - VIRTUS HEALTH LIMITED

For more info SHARE ANALYSIS: WBC - WESTPAC BANKING CORPORATION