Rudi's View | Nov 22 2017
In this week's Weekly Insights (published in two separate parts):
-Equities Bull Market: It's Raining Warnings
-Commodities And A Greener China
-Conviction Calls: Goldman Sachs, Ord Minnett, Bell Potter, CLSA, And Morgans
-Predicting December Index Changes
-Matt Barrie's Manifesto
-IPOs In September Quarter
-Rudi On BoardRoom.Media
-2016 – L'Année Extraordinaire
-All-Weather Model Portfolio
-Rudi On TV
-Rudi On Tour
[Note the non-highlighted items appear in part two on the website on Thursday]
Equities Bull Market: It's Raining Warnings
By Rudi Filapek-Vandyck, Editor FNArena
One of old share market truths that likely best describes present conditions is that a bull market makes heroes and geniuses out of all of us.
Certainly, making money in the local share market has never seemed easier with plenty of stocks rallying by 10% or more in only a brief period. Every day it seems all that is required is a positive announcement by or about a company to have share prices responding with a double digit percentage rally on the day.
Consider that Beach Energy shares are up nearly 75% since September, and so is Blackmores. a2 Milk shares are up 257% over the past twelve months; 55% in the past three months. Syrah Resources and Santos are not far behind on a three month glance into the past, and the same can be said of Altium, Platinum Asset Management and Bellamy's.
On Friday, Nick Radge, better known as The Chartist, whose technical analysis is sometimes shared with investors through FNArena, joked on Twitter about the next bear market surely being ready to soon announce itself. What triggered the unexpected references to the dreaded bear is the ease with which Radge's trend following strategies continue to accumulate further gains.
Radge can look back upon market experience of more than two decades, I estimate, and he knows first hand when things get this easy, they usually don't last long.
Surely tougher times are about to announce themselves?
Another battle-hardened market trader, Dennis Gartman, with more than five decades of day-to-day experience under his belt, made no jokes whatsoever when he announced last week the next bear market is taking shape right here, right now.
Gartman reminded all investors that when share prices only seem to go up, and economies are firing on multiple cylinders, and labor markets are tight, interest rates low, central banks still stimulating and it appears there is nothing on the horizon that can possibly derail the ongoing uptrend for equities, that's exactly when the seeds for the next bear market are being planted.
Gartman was on my observation and according to my memory one of the very first to warn about a developing bear market in mid-2007.
His gripe today is that all major equity indices around the world are breaking through well-defined trend lines, and they are doing so on solid volumes. The chart below, taken from The Gartman Letter last week, shows the Euro Stoxx 50 index as a prime example, but by now a similar observation can be made about US indices, including the market leading Nasdaq.
[Source: Gartman Letter]
Drawing trend lines on price charts is an old chartist technique which I oft practice myself. Prices breaking through trend lines to the downside doesn't mean they cannot continue moving higher for a while, but if/when they stay on the southern side of the trend line, it becomes more likely price will seek for support at some stage, and there is none underneath.
What triggered Gartman's attention is the large number of leading global equity indices all breaking through trend support in short succession of each other. It suggests, explains Gartman, a major reversal in underlying trend is likely upon us.
None of this guarantees global equities are about to fall into the abyss, but Gartman regardless is now short US equities.
The picture described above wouldn't be complete without adding Gartman made a similar observation in June this year. He had also been bearish in 2015 and during the first months of 2016.
Putting more weight into the balance, probably, is the fact that previously bullish market strategists at Canada's Canaccord Genuity are now also warning the US share market might be due for a retreat. On their observation, implied equity risk premium (valuation of equities vis-a-vis government bonds) is again approaching 3% and history suggests this is as far as the premium can shrink.
Market breadth in the US is deteriorating rapidly, notes Canaccord Genuity. If the S&P500 were an equal-weighted index adjusted for market caps, a downtrend would already have become visible on price charts. See chart below.
Canaccord's observation implies a declining number of influential market leading stocks is keeping the global bull market alive, but underneath the surface a trend reversal might already be playing out.
The equal-to-cap-weighted version of the S&P500 has now broken through the 2012-2016 trend line, report the strategists. They point out a similar "technical violation" was observed prior to the last bear market, in 2007.
For now, Canaccord Genuity stays slightly Underweight US equities and Marketweight Canadian equities, but the strategists state their next move will be dependent on how market breadth evolves from here.
Closer to home, Martin Crabb, CIO at Shaw and Partners, moved to a negative view on Australian equities on November 13th. His conclusion:"Stocks look expensive and it is a lack of risk premium that is driving valuations, not growth".
On Crabb's observation, which was near the ASX200's highest point for the year, Australian equities on average are valued one standard deviation above the long term average and projected return for the year ahead would be similar to the implied forward dividend yield (implies no net capital gain).
All this against a background of lack of earnings growth in the domestic market other than, potentially, for resources stocks. Crabb called the market overall a Sell and has been proved correct thus far. Though one has to add: nothing too dramatically has developed over the week past.
If anything, recent sessions both in Australia as well as in the US suggest buying interest picks up when share prices drop.
Also, the lack of earnings growth in Australia seems to apply more to the top end, as also shown in this week's update on stockbroker ratings, price targets and profit forecasts (see website, story published each week on Monday morning). But whereas out-of-season reporters such as REA Group, DuluxGroup and Incitec Pivot have forced analysts to lift their forecasts, revised price targets more often than not remain below current share prices. Last week saw analysts issuing twenty downgrades against only six upgrades in recommendations.
Clearly, if this share market wants to launch another attack at 6000 and beyond (ASX200), it will have to do so amidst rising headwinds from individual stock valuations.
Once upon a time I used to look at share prices of BHP and Rio Tinto and the Big Four banks to gauge where risk appetite is at, and what might be left in terms of further upside. This time around, there are few valid signals coming from these six market leaders.
CommBank shares are trading 2.3% above consensus target following a better-than-anticipated quarterly update which triggered a swift rally in the share price. Other banks, however, seem to be suffering sector specific headwinds and concerns, also because this month's bank reporting season was disappointing, with exception of CommBank.
BHP and Rio Tinto are trading well below consensus price targets, though Rio shares recently touched consensus target, and were instantly pushed back lower.
No additional market signals from the local market thus. I still think US equities will continue to show the way forward, any deterioration over there should be taken as a negative for the local market.
Commodities And A Greener China
It is the conclusion of commodity specialists visiting China or receiving feedback from sources inside the country: the Chinese government really is serious about adopting greener and sustainable energy and manufacturing policies in order to meet lower carbon emission targets and to substantially increase overall air quality in urbanised regions.
With this, Beijing is clearly distancing itself from coal lobby kowtowing governments in Canberra and Washington. As China remains the world's prime source of commodities demand, its push for a greener economy, and for "quality" growth rather than growth at all costs, has a significant impact on demand and the outlook for commodities, including iron ore, metallurgical coal and nickel.
The clearest impact, certainly for investors and companies in Australia, has been inside the global iron ore market. Greener policies and a continued push for steel sector rationalisation are reducing both production and demand inside the Middle Kingdom. The result is increased appetite for scrap steel, but more so for high quality ore.
Investors wondering as to why the share price for Fortescue Metals ((FMG)) doesn't seem able to sustainably move above $5; here is your answer. Lower quality ore is currently priced at a -40% discount to what the top end of the market is receiving and Fortescue management has already indicated it is looking beyond China to (hopefully) find better paying customers elsewhere.
In the meantime, producers BHP ((BHP)), Rio Tinto ((RIO)) and Vale are enjoying bull time conditions, which explains why their share prices have performed better. The big unknown is how much domestic supply exactly is currently exiting production. If it turns out Beijing's focus on reducing pollution is having a significant impact on lower quality production inside China, high quality ore might sustain its higher for longer mantra in the months ahead, while producers such as Fortescue might also see the price gap shrink, which could be a double benefit to the company's bottom line.
Similar dynamics are at play inside the global nickel market, where cheap pig iron is not suitable for high quality requirements stemming from emerging new battery technologies. However, the key conclusion for longer term investors in the sector, I believe, is that higher quality producers with higher quality product will be trading on premium valuations compared with their lower quality peers, just as is already the case among industrials stocks.
Previously, higher leveraged companies were instant favourites among investors during higher-prices-for-longer times. This may well be changing for good on the back of new policy focus in China.
Below: admire the ginormous price differential that has opened up in the seaborne iron ore market.
For further reading: see also "Resources Stocks: What's The Problem?"
Matt Barrie's Manifesto
Global contractor's forum Freelancer ((FLN)) listed in late 2013 and was thus part of the first wave of new technology additions to the ASX. A lot has happened since and with the business still not profitable and plenty of competing platforms out there, the share price has taken a beating, currently languishing around 50c.
At the peak of its popularity, in November 2015, the shares reached as high as $1.75. Investors are worried the promise of ongoing strong revenue growth might be less straightforward as once assumed/priced in.
None of this is holding back CEO Matt Barrie from taking swipes at backward looking governments and politicians in Australia. Barrie is not a big fan of the local coal lobby, and that's putting it mildly.
Last week, Barrie published a new manifesto about what is happening, and what needs to happen to retain Australia as the lucky country. Compulsive reading for anyone worried today's politicians are genuinely wasting opportunities, while creating none:
IPOs In September Quarter
A few weeks ago, FNArena published an update on ASX IPOs (in cooperation with OnMarket Bookbuilds) and I completely forgot to include it in my Weekly Insights. That omission is hereby rectified.
Investors interested in IPOs and in joining OnMarket Bookbuilds' database should note FNArena is rewarded for anyone joining our partner, so please do so through the final page of the report, which can be downloaded from the story below:
Rudi On BoardRoom.Media
Audio interview from Tuesday two weeks ago:
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: firstname.lastname@example.org
Rudi On TV
This week my appearances on the Sky Business channel are scheduled as follows:
-Tuesday, 11.15am Skype-link to discuss broker calls
-Thursday, Noon-2pm, Trading Day Live
-Friday, 11.15am Skype-link to discuss broker calls
Rudi On Tour
– I will be sharing my views and market observations to a select group of investors in Paddington (Sydney) this week. Alas, all tickets have sold out. Those who missed out shall have to wait until the next opportunity, which will probably be next year.
(This story was written on Monday 20th November, 2017. This first part was published on the day in the form of an email to paying subscribers at FNArena, and will be again on the following Wednesday as a story on the website. Part two shall be published on Thursday).
(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@example.com or via the direct messaging system on the website).
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