The Correction We Had To Have

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 | Feb 07 2018

In this week's Weekly Insights (published in two separate parts):

-Extra Service
-The Correction We Had To Have

-RBA: Waiting For Godot?
-Conviction Calls: Citi, Morgans, Ord Minnett, Morgan Stanley, UBS, Canaccord Genuity
-February 2018 Reporting Season Preview

[Note the non-highlighted items appear in part two on the website on Thursday]

By Rudi Filapek-Vandyck, Editor FNArena

Extra Service

FNArena is preparing for the launch the new website-based version of our very own Australian corporate Reporting Season Monitor. The newest addition to our website will be a permanent, dedicated section and, no doubt, soon a go-to destination for many among you looking for fresh updates and insights once Australian companies release their financial performance and profit outlook guidance.

The Reporting Season Monitor will go 'live' this week, so keep an eye on the drop down menu starting from Analysis & Data and your inbox on the website.

I am well and truly excited about this new addition. Once launched, FNArena will resume publishing daily updates through a fresh news story on the day, as we've done since August 2013. Stay tuned, not far off now...

The Correction We Had To Have

One stockbroker probably summarised it best when he stated recently after several months of holding out for that elusive market correction, a number of his clients had now started to worry weakness in US equities might be heralding something more than just a pullback in a long term bull market.

FNArena too has been receiving a number of enquiries since the beginning of the new calendar year.

Let's start with why 'risk off' is not a bad occurrence in the short term, and why is it happening anyway? One look at price charts for US equity indices should suffice. Or as one savvy commentator elsewhere put it: this bull market is nine years old and for most of that time risk assets have behaved in quite modest fashion, but all that changed over the past months; now markets have become overheated, exuberant and (a little) crazy.

January alone saw US equities add 7%. Excluding dividends, that's equivalent to the full year return of Australian equities over the full calendar year 2017. Enough said.

The big unknown is how far US treasuries might retreat, pushing up bond yields worldwide. The relatively sharp movement (up in yield, down in prices) since the start of the year is unsettling quite a number of investors and that is understandable, given the importance of bonds for valuing equities, not to mention their signalling power for central bankers, FX markets, commercial banks, and pretty much everything else.

Bond markets carry the overall image of wise old men who fret about important things only, leaving the small stuff to the headless chooks in FX and equity markets. But short term bond prices are just as susceptible to technical trading and momentum strategies as are other assets. Right now the trend has gone through all sorts of technical resistance levels, and into territories that haven't been seen in a long while.

Can bond prices overshoot to the downside? You bet they can.

One factor that has been under-reported, I note, is the incredibly bad timing of the economic stimulus achieved by the Trump administration. The late John Maynard Keynes has been rotating in his grave for quite a while now. According to general accepted Keynesian rules, governments should not be increasing debt and deficits when all is running well inside their economy, but Trump is promising more US government debt (through more US bonds) at a time when central banks are looking the other way, while actively spurring on FX traders to dump the US dollar.

Mr Big Mac Twitter-a-lot has been widely credited with the ability to extend the current bull market by an additional two years or so, but could the opposite happen with Trump policies killing off the bull market sooner than anticipated? You bet.

No need to worry just yet. Shorter term, most market participants will see this month's retreat as a buying opportunity, though it is the US bond market that sets the rules, the playing field and the goal posts. It is the referee overseeing all coaches, players and cheerleaders.

Mid-to-longer term, it will be interesting to observe exactly how this year's transition might unfold. Only one thing is 100% certain: Goldilocks is dead. Low volatility, alongside a rising tide for risk assets, against a background of growing economies, growing corporate profits, with no inflation, highly accommodative central bank policies and no geopolitical fault lines of any substance; that scenario was so 2017...

One other factor to keep on everybody's watch list is the direction for the US dollar. Trashing the greenback can only last for so long, and it had been one of the key supporting elements underneath firm rallies for US equities, precious metals, emerging markets, crude oil and industrial commodities. Any reversal into the opposite direction is doomed to hurt those rallies.

Conviction Calls: Citi, Morgans, Ord Minnett, Morgan Stanley, UBS, Canaccord Genuity

Small cap analysts at Citi have used this week's preview into the upcoming February reporting season to highlight they have two conviction views when it comes to small cap stocks under coverage.

Conviction number one is that independent data centre operator NextDC ((NXT)) remains destined for much better things. Citi's Conviction Buy rating is supported by a price target for the twelve months ahead of $7.02; more than 22% above the share price prior to the US inspired sell off on Monday.

The other conviction view is that valuation for high tech market darling WiseTech Global ((WTC)) simply cannot be justified, hence the Conviction Sell alongside a price target of $10.04, well below where the shares are trading.

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