The Monday Report – 30 March 2020

This story features KMD BRANDS LIMITED, and other companies. For more info SHARE ANALYSIS: KMD

By Greg Peel

I Don’t Like Mondays

Mondays have a history of being the worst days in a correction – the big drops in ’29 and ’87 were Mondays, while Monday last week saw the local market and Wall Street bottom out – so when it comes to a Friday it’s not surprising traders back away with caution. When the market has run up over 18% in the week, it’s not a difficult decision.

Recently weekends have brought escalation in virus counter-measures, in Australia’s case via meetings of the National Cabinet, and as anticipated the screws were tightened further last night with “gatherings” limited to two people, moratoriums on rent and a suggestion anyone over 70 might want to stay indoors.

Thanks Scoop.

Friday saw more retailers shuttering their stores – Kathmandu ((KMD)) was one, Adairs ((ADH)) another – while the list of companies withdrawing guidance grows ever longer. Even Breville Group ((BRG)), which has to date been a “defensive” thanks to its at-home espresso machines for those in withdrawal, joined the party on Friday.

Some of the biggest hits among individual stocks were taken by the retail REITs on Friday, unsurprisingly as rents are frozen. Charter Hall Retail ((CQR)) led the charge, down -14.7%, followed by Scentre Group ((SCG)) and GPT Group ((GPT)), down -12.5% and -10.8%.

Credit Corp ((CCP)) will similarly need to act on loan repayments (-14.3%) while rumours fly with regard Virgin Australia’s ((VAH)) survival (-13.3%).

In a sign if the times, mineral processer and life sciences company ALS Ltd ((ALQ)) topped the winners’ board on Friday with a 5.5% gain, simply for declaring its balance sheet was strong.

The ASX200 shot out of the blocks on Friday following Wall Street’s lead, was up 120 points in the first ten minutes, and then did nothing but fall back all session, by about -400 points, to close at the low. Selling accelerated right at the death. A tough day, but there would have been plenty of profits locked in by short-term traders.

Beyond that, accelerated selling would reflect both the Friday blues and the fact many have been pointing out snap-back rallies are typical in a correction and typically don’t last. So selling begets selling.

On the sector front, the two outliers on Friday were utilities, falling only -0.4%, and healthcare, worst performer with -7.1% as investors took up stock in Cochlear’s ((COH)) raising and had to sell other sector names to rebalance their portfolios. All other sectors saw relatively even falls, with little in the way of cyclical/defensive discrimination (other than utilities).

On the subject of portfolio rebalancing, it has been pointed out by many a commentator that fund managers typically review and rebalance once a quarter, and as it happens the March quarter ends tomorrow. Those managing classic “balanced portfolios” of 60/40 equity to fixed income have seen share prices crash in the quarter and bond prices surge. Thus to get back to 60/40 for the new quarter, equities need to be bought and bonds sold.

Did we see this last week? Possibly, although the speed of the rally suggests fund managers may have struggled to get on. As to whether these last two days of the quarter will see a rush is unclear. With Wall Street also falling back on Friday night, our futures were up a mere 6 points on Saturday morning.

Not Keen on Fridays Either

While all of the above largely applied to Wall Street on Friday night as well, there were some other factors underpinning the selling.

The US case-count rose on Friday to be the highest in the world.

The House passed, and the president signed, the US$2.2trn relief package. Given the 20% Wall Street snap-back rally had been led by anticipation of exactly that, there was likely an element of “sell the fact”. There followed a lot of tub-thumping and flag waving over the bill being put into law at such a “speed”, particularly given how long it took Congress to settle on the equivalent TARP package in 2008, but it still managed to be the slowest fiscal response of any developed economy.

Within the package is a bailout for Boeing. On Friday night Boeing said it may not be taken up (given it involves an equity stake), thus Boeing shares fell -10% to be a major weight on the Dow.

Cruise lines, which had seen sharp bounces in the snap-back in anticipation of some government relief, were left out. The three majors are registered in Liberia, Panama and the Bahamas respectively, and thus don’t pay US taxes. They were all sold back down hard.

Oil prices also fell another -6% on Friday night, not much helping, while the US ten-year yield dropped -6 basis points to 0.75% having hit 0.66% in the session. The Fed announced it did not put as much play money into the system on Friday as previous days which may have set off a bit of panic, until someone pointed out Fed injections are unlimited, so what’s the worry?

There is much focus on the VIX volatility index at present, which hit 90 at the height of the panic and has settled back to around 65. This still suggests extreme fear.

In reality it reflects two things – investors are not yet calling the bottom, of the end of volatility, and when the Dow is posting 1000-plus point moves in every session, Wall Street simply is volatile. The VIX does not discriminate between up and down.

In economic news, the fortnightly Michigan consumer sentiment index has fallen to 89.1 from a prior 95.9 and 101.0 at end-February, bearing in mind 100 is the line between optimism and pessimism.

Commodities

Unlimited Fed support, along with phone numbers being provided by the government, continues to impact on the US dollar. It fell another -1%.

That’s not providing much support for metal prices nonetheless, while gold has been moving in fits and starts.

As was known previously but confirmed on Friday night, Trump’s once promised oil purchases for the country’s Strategic Reserve, intended to prop up oil prices and save insolvent oil companies, did not make it into the package.

The Aussie continues merrily on its way back as the greenback drops, up another 1.5% at US$0.6156.

The SPI Overnight closed up 6 points on Saturday morning, suggesting we begin today with “What now?”

The Week Ahead

This week will bring some more relevant economic data in the form of global manufacturing and services PMIs for March, beginning with China on Tuesday, with other fools following on Wednesday.

It’s jobs week in the US, starting with the private sector number on Wednesday and then non-farm payrolls on Friday.

Be very afraid.

All other major data due across the globe this week will be lost in the mists of time (February).

This week on the local market sees a big late rush of ex-dividends, if they haven’t been pulled, before April brings only a trickle of laggards. Today is the day in the season we see a lot of REITS and similar funds going ex.

Cimic ((CIM)) holds its AGM on Wednesday, followed by Santos ((STO)) on Friday.

The Australian share market over the past thirty days…

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