Rudi’s View: February – Reason For Optimism

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 04 2021

In this week's Weekly Insights:

-And Off We Go...
-When Dumb Money Is Savvy, And Smart Money Is Not
-A Lesson From History
-The January Share Market Barometer
-February: Reason For Optimism
-2021, The Year Of Earnings Recovery
-Conviction Calls
-FNArena Webinar

By Rudi Filapek-Vandyck, Editor FNArena

And Off We Go...

The new calendar year has only just begun, but January already delivered turmoil, volatility, momentum switches, and plenty of calls about overvalued share markets to keep any investor on the edge of his/her seat.

If this is the blueprint for the year ahead, then 2021 will be surprising, volatile and unpredictable, though not necessarily all at the same time.

Looks like February this year will continue the trend of the years past in that domestic corporate results season is not solely about results versus forecasts; there is once again plenty happening on the macro-level to overwhelm whatever should be concluded from corporate financial performances.

One trend is remaining intact and that is FNArena's daily coverage of analysts' assessments of released financial results. Our Monitor can be accessed via the website:

(Paying subscribers have access to past Monitors stretching back to August 2013).

Two observations stand out already: corporate results between September and December delivered many more "beats" than disappointments and there's broad optimism the February season will continue this trend.

Three early reporters thus far -IGO, HRL Holdings and ResMed- all provided signals current market expectations might be too low. Equally noteworthy, only one of these three -IGO- saw price targets rise post results release.

I think there is probably a message in there, though both HRL and ResMed shares are trading well below consensus target.

When Dumb Money Is Savvy, And Smart Money Is Not

I returned from holidays with a sense that financial markets needed a timely reset, which is usually what happens when groups of humans are having a jolly good time for too long without interruption.

I am by far not the only one who expressed such a view, but let me get my message straight: I am talking about a temporary pull back in an uptrend that has further to go. So no Doom and Gloom or Fall of the Cliff scenarios are on the cards as far as I am concerned.

Which, by the way, doesn't mean that individual shares and/or whole portfolios cannot get badly hurt in the short term.

While it is always a guess and a giggle about what exactly might cause exuberant market sentiment to turn (valuations on their own seldom do), it appears this year's left field correction trigger has come from the fresh cohort of millennial day traders who decided to take on the mighty hedge funds on Wall Street.

While doing so, these fearless youngsters painfully exposed the ones who like to refer to themselves as "the smart money" are, in reality, a lot less smart.

I know there are a lot more sides to this story, and many more complications will be explained and exposed in the days to come, but call me Mr Simplistic if you need to, but sitting on a significant short position in a stock that has 75% of its capital shorted (or more), how exactly is this still a smart move?

Long story short: billions have gone up in smoke as hedge funds had no other choice than to cover their short positions with share prices doubling, tripling, and more. As this ate into their capital, those funds were subsequently forced to sell other assets, which then pulled the whole market, and in response the rest of the world, to a lower level.

And this is just one part of this story.

For good measure: it is well possible this might prove but one festering problem of many more that can surface as equity markets weaken and become more volatile, in particular since valuations are not cheap and investment gains have been plenty, but I'd be inclined to treat persistent and substantial weakness as an opportunity to allocate more cash into this market.

If one's fully invested: these are excellent times for portfolio re-shuffling.

A Lesson From History

One of the more interesting assessments of what is currently happening in financial markets was published by technical analysts at US-based stockbrokerage Oppenheimer.

The opening sentence of their latest market update says it all:

"February has historically been the poorest-performing month of a post-election year, and this weakness has typically been bought ahead of strong returns into July."

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