Rudi's View | Nov 16 2016
This story features BHP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BHP
In this week's Weekly Insights:
– How To Make Uncertainty And Volatility Great Again
– Rudi On Tour
– Nothing Ever Changes, Or Does It?
– Rudi On TV
How To Make Uncertainty And Volatility Great Again
By Rudi Filapek-Vandyck, Editor FNArena
"My clients have had a genuine GFC experience since August"
History is an accumulation of moments. Some are violent, some are confusing, and others are very, very scary.
It is easy to get carried along when "in the moment" and, certainly, a wise man once said those who do not learn from the past will keep on repeating its mistakes.
But draw a long term trend line through all the collective moments we have so far, and there should be no doubt about it: the world is progressively turning into a better place, accommodating most of us.
What many among us don't realise, or don't want to acknowledge, is all progress is achieved after long and difficult, convoluted processes and heart-breaking battles. And there are set-backs in between.
It numbs the mind to think that, less than one hundred years ago, a young girl who wanted work in the local factory first had to visit the owner in his private chambers. We all know what was going to happen next.
This is not the side of history that is heralded in Hollywood movies, or even taught at schools, but it was happening. Everybody knew it was. Nobody dared to speak up or try to prevent it from happening.
It was only 1955 when Rosa Parks, of African-American descent, started a nationwide protest movement by refusing to abandon her seat on a public bus to a Caucasian looking man.
Women in Switzerland had to wait until 1971 before they were legally allowed to vote in federal elections. It wasn't until 1991 before the last of the resisting local governments, Appenzell Innerrhoden, was finally forced to allow women to also vote on local issues.
That was three years before South Africa had its first multi-racial democratic elections, and only two years after the Berlin Wall was torn apart and with it an oppressive system that officially made life fairer for all, but in practice it kept most citizens poor, subjugated and in constant fear and disillusionment.
Qatar, Bhutan, Saudi Arabia, Yemen, the United Arab Emirates waited until the 1950s and 1960s to officially abandon slavery. Oman waited until 1970.
We humans like to beat ourselves on the chest -loudly- about how we traveled to the moon, put a machine on a comet and how we manage to find answers to most complex questions, but think about it, those moments you just read about, most of those happened during our own life time.
It Gets Scarier
It gets scarier, still, would you believe.
None of the developments unfolded in a straight line. There always are throw backs and interruptions, in most cases many of them. It was French opposition to the first industrial revolution imported from London that gave us the word "sabotage". France's great emperor Napoleon Bonaparte re-introduced slavery to grow sugar cane in French colonies. Today's democratic Spain had to endure 39 years of Francisco Franco dictatorship.
When I visited the United States in 2012 I felt I'd become a contemporary witness of yet another break-through moment: the first coloured President in the mightiest country of our time, about to win his second term. Of course, I was right. The long term trend remains intact, but there will be throw backs and resistance. It is the one lesson history keeps pointing at.
In many ways, Donald Trump's ascendency to become the 45th President of the USA finds its roots in eight years of Obama administration. Whether we agree or not, find it difficult to stomach or swoon in admiration of his success, The Donald is everything Barack Obama isn't, and then some.
For what it's worth: I think he's going to elevate many a crackpot figure into the public eye for which artists, cartoonists and stand-up comedians the world around will thank him for many years to come.
A substantial part of The Donald's electorate support stems from the fact Caucasian white males are no longer the all-dominant species in America and neither is their conservative view on life and history. Most importantly, however, is what many a social observer has been pointing at in years past: the gap between the rich and the poor is back at an all-time high, and the poor feel being left out.
Social Contract Is Broken
The above is why Saxo strategist Jacob Steen is correct when he argues the social contract that binds together today's societies is broken. In other words: Donald Trump did not genuinely win the election, Clinton lost it. And she lost because American society is revolting against too many injustices remaining in place for too long. Enough is enough. Change had to come.
Today's America is perfectly captured by the following two charts, published by Steen earlier this year, when he started arguing the odds were shifting in favour of Clinton losing the election.
First up is the employee compensation to GDP ratio in the US. Steen believes we are currently witnessing the lowest in history… ever!
The second chart shows the level of corporate profits in the USA. It's at its highest level… ever!
At present, explains Steen, monetary policy action is designed to cater to, or help, the 20% of the economy that already has access to credit: banks and market-listed companies. This comes at the expense of the 80% – the small- and medium-sized companies that get less than 5% of the credit and 0% of the political capital.
Meanwhile, the 20% – Wall Street – gets 95% of the credit and 100% of the political capital.
This leads us to the core of the problem: The 20% that gets 95% and 100% of these benefits creates less than 10% of all new jobs and productivity. The 80%, however, which gets 5% and 0%, creates 90% of all new jobs and 100% of all new productivity.
I touched upon this theme in my eBook "Change. Investing in a low growth world", published late last year, by explaining today's "progress" led by internationalism, liberalism and technological advances have been mostly to the direct benefit of consumers and businesses, while excluding governments and labour.
The problem with such a set-up is that governments will eventually find a way to be included, but what about labour? Can a society built upon "consumerism" continue to flourish if labour fails to participate in society's wealth bonanza?
The answer is: of course not. Cue: Rodrigo Duterte. Brexit. The Donald…
It can hardly be denied this year's "revolutions" occur amidst a plethora of excesses trickling down from the top echelons of society. The board at Slater & Gordon sees no reason why there should be no additional bonuses despite reporting a loss in excess of $1bn. All shareholders money, of course.
Why did Victorian Labor minister Steve Herbert resign from his post last week? Yes, that's right, he had his two dogs chauffeured by a tax-payer funded driver between residences in city and country, every week, multiple times.
Many more examples could be summed up here, and not just from within Australia. The intriguing question behind all this is whether "outsider" Donald Trump will effectively lead society's backlash towards these reprehensible and unconscionable excesses, or whether he'll just be another name on the list. Will today's voters hold it against him if he proves ineffective?
Trump Presidency – Early Assessment
Thousands of words already have been written and published about the reasons behind, and the possible consequences of Donald Trump's election win. A lot of it is make-it-up-as-you-go stuff, because there is no political blue print or anything similar available. We have clues, from tweets and from speeches and from The Donald's colourful past.
Economists at National Australia Bank put together a brief early assessment of what we should expect in terms of key economic reform:
1) Tax reform – reductions in both personal and company tax rates;
2) Increased infrastructure spending – USD 1 trillion is the number being bandied about although the reality may be more modest when we consider 1) this is 6% of US GDP, and 2) it will likely spread over a number of years as putting infrastructure in place quickly is not easy;
3) A wind back in free trade – tariff initiatives and the roll-back of some multi-lateral trade deals like NAFTA have been mentioned;
4) Financial Regulation – he wants to dismantle the Dodd-Frank Act and replace it with “new policies to encourage economic growth and job growth”.
5) Many other policies were mentioned during the campaigns which have the potential to impact economic outcomes – e.g. immigration, healthcare, and defence.
NAB economists also point out that "while it is reasonable to expect economic change, the degree is understandably uncertain given that in recent days some of the President Elect’s policy positions have been softened and meanwhile policy initiatives will need to be approved by Congress."
One result that will come from a Trump Presidency, the world has decided, is more inflation, quicker and for much longer.
The reasons why were summed up by GaveKal's Will Denyer last week:
1. Public infrastructure spending will cause consumer prices to rise
2. Less cheap labor in the US will also put upward pressure on prices
3. Protectionism would drive up prices
The ultimate conundrum that comes from such policies was pointed out by GaveKal's Louis Gave a few days later: History shows both higher government spending and higher inflation tend to go hand-in-hand with lower Price-Earnings (PE) ratios for US equities.
Therein lies the real dilemma for investors today.
Winners & Losers In Australia
Market strategists at Credit Suisse suggest the uncertainty that precedes a Trump Presidency could well translate into a correction for US equities of between 5-10%. For Australian investors, the strategists expect the risk-off environment to be relatively positive for cash-generative companies.
Quant analysts at Credit Suisse have equally put out their initial recommendations for selecting stocks in the Australian share market. Based upon a six-factor quant stock selection model composite of: earnings momentum (3m), price momentum (12m), quality (ROE), earnings certainty, beta and low dividend yield, they have come up with the following winners and losers:
– Trump's Winner's Portfolio: Aristocrat Leisure ((ALL)), Amcor ((AMC)), Ansell ((ANN)), BHP Billiton, BlueScope Steel ((BSL)), Carsales ((CAR)), Cochlear ((COH)), CSL ((CSL)), CYBG ((CYB)), Domino's Pizza ((DMP)), Downer EDI ((DOW)), Fortescue Metals ((FMG)), JB Hi-Fi ((JBH)), Newcrest Mining ((NCM)), Northern Star Resources ((NST)), Navitas ((NVT)), Ramsay Health Care ((RHC)), Rio Tinto ((RIO)), South32 ((S32)) and Treasury Wine Estates ((TWE)).
– Trump's Loser's Portfolio: AMP ((AMP)), APA Group ((APA)), Alumina Ltd ((AWC)), Aurizon ((AZJ)), Bendigo and Adelaide Bank ((BEN)), Bank of Queensland ((BOQ)), Crown Resorts ((CWN)), DUET ((DUE)), Flight Centre ((FLT)), Henderson Group ((HGG)), Healthscope ((HSO)), IOOF Holdings ((IFL)), Iluka Resources ((ILU)), Incitec Pivot ((IPL)), James Hardie ((JHX)), QBE Insurance ((QBE)), Santos ((STO)), Suncorp ((SUN)), Transurban ((TCL)) and Vicinity Centres ((VCX)).
More Buys Than Holds
As of last Friday, 12th November 2016, total stock recommendations for the eight stockbrokers monitored daily by FNArena now carry more Buy (and equivalent) ratings than they do Hold/Neutral and equivalent ratings. The latest update tells us the numbers currently are Buy 42.67%; Hold 42.27%.
Why is this so important? Because, as the chart below shows, periods when Buy ratings outweigh Holds tend to coincide with less than pleasurable times for domestic equities. The last time we experienced such a period was mid-2015 until early 2016. Before that it was the final quarter of 2014.
Never rely on just one indicator to make up your mind about conditions and the general outlook for the share market.
Within the current context, however, it's probably fair to say stockbrokers' Buy ratings are simply signalling what our unencumbered common sense should already be telling us: Donald Trump is going to make uncertainty and volatility great again!
[Thanks to Seabreeze Partners' Douglas A. Kass for that last pun].
Rudi On Tour
I will be presenting:
– Christmas Special for Chatswood members of Australian Investors' Association (AIA), December 14, 7pm
– To Sydney chapter of Australian Shareholders' Association (ASA), December 15, noon-1pm, Sydney Mechanics School of Arts, 280 Pitt Street
– To Perth chapters of Australian Investors' Association (AIA) and Australian Shareholders' Association (ASA) on 7 February 2017
– At the ASA Conference 2017, Grand Hyatt Melbourne, 15-17 May 2017
Nothing Ever Changes, Or Does It?
Yes, of course, investing in the share market is never really different and best working strategies today are the same that worked pre-GFC. Seriously. I tell you, seriously.
Now that we had a good laugh about it, let's get straight to business. This is a low growth environment. Has been since 2010 (it was masked at the time because of the V-shaped recovery from the global recession) and it is not likely to change fundamentally in the near term. I wrote a book about this (see below). This means investment strategies must adapt. You'll be turning your portfolio into a wish list for dinosaurs otherwise (and your returns will be a reflection of it).
Those not afraid to contemplate "this time is different" can subscribe to FNArena and read all about it in our bonus eBooklets 'Make Risk Your Friend' (free with a paid 6 or 12 months subscription) plus the freshly published eBook 'Change. Investing in a low growth world' (equally free with subscription, or available through Amazon and other online distributors).
Here's the link to Amazon: https://goo.gl/XVMzmP
See also further below.
Rudi On TV
– On Tuesday, around 11.15am, on Sky Business, I shall make a brief appearance through Skype-link to discuss broker ratings for less than ten minutes
– On Wednesday, I will host Your Money, Your Call Equities, 8-9.30pm
– On Thursday, I will appear on Sky Business, 12.30-2.30pm
– On Thursday, I will appear on Switzer TV, Sky Business, between 7-8pm
– On Friday, around 11.05am, on Sky Business, I shall make a brief appearance through Skype-link to discuss broker ratings for less than ten minutes
(This story was written on Monday 14th November 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: [email protected] or via Editor Direct on the website).
BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS
Paid subscribers to FNArena 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. This book should transform your views and your investment strategies. Can you afford not to read it?
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): https://www.fnarena.com/index2.cfm?type=dsp_signup
FNArena has reformatted its monthly price tracker file for All-Weather Performers. Last updated until October 31st. Paying subscribers can request a copy at [email protected]
For more info SHARE ANALYSIS: ALL - ARISTOCRAT LEISURE LIMITED
For more info SHARE ANALYSIS: AMC - AMCOR PLC
For more info SHARE ANALYSIS: AMP - AMP LIMITED
For more info SHARE ANALYSIS: ANN - ANSELL LIMITED
For more info SHARE ANALYSIS: APA - APA GROUP
For more info SHARE ANALYSIS: AWC - ALUMINA LIMITED
For more info SHARE ANALYSIS: AZJ - AURIZON HOLDINGS LIMITED
For more info SHARE ANALYSIS: BEN - BENDIGO & ADELAIDE BANK LIMITED
For more info SHARE ANALYSIS: BHP - BHP GROUP LIMITED
For more info SHARE ANALYSIS: BLD - BORAL LIMITED
For more info SHARE ANALYSIS: BOQ - BANK OF QUEENSLAND LIMITED
For more info SHARE ANALYSIS: BSL - BLUESCOPE STEEL LIMITED
For more info SHARE ANALYSIS: CAR - CARSALES.COM LIMITED
For more info SHARE ANALYSIS: COH - COCHLEAR LIMITED
For more info SHARE ANALYSIS: CSL - CSL LIMITED
For more info SHARE ANALYSIS: DMP - DOMINO'S PIZZA ENTERPRISES LIMITED
For more info SHARE ANALYSIS: DOW - DOWNER EDI LIMITED
For more info SHARE ANALYSIS: FLT - FLIGHT CENTRE TRAVEL GROUP LIMITED
For more info SHARE ANALYSIS: FMG - FORTESCUE METALS GROUP LIMITED
For more info SHARE ANALYSIS: IFL - INSIGNIA FINANCIAL LIMITED
For more info SHARE ANALYSIS: ILU - ILUKA RESOURCES LIMITED
For more info SHARE ANALYSIS: IPL - INCITEC PIVOT LIMITED
For more info SHARE ANALYSIS: JBH - JB HI-FI LIMITED
For more info SHARE ANALYSIS: JHX - JAMES HARDIE INDUSTRIES PLC
For more info SHARE ANALYSIS: NCM - NEWCREST MINING LIMITED
For more info SHARE ANALYSIS: NST - NORTHERN STAR RESOURCES LIMITED
For more info SHARE ANALYSIS: QBE - QBE INSURANCE GROUP LIMITED
For more info SHARE ANALYSIS: RHC - RAMSAY HEALTH CARE LIMITED
For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED
For more info SHARE ANALYSIS: S32 - SOUTH32 LIMITED
For more info SHARE ANALYSIS: STO - SANTOS LIMITED
For more info SHARE ANALYSIS: SUN - SUNCORP GROUP LIMITED
For more info SHARE ANALYSIS: TCL - TRANSURBAN GROUP LIMITED
For more info SHARE ANALYSIS: TWE - TREASURY WINE ESTATES LIMITED
For more info SHARE ANALYSIS: VCX - VICINITY CENTRES