Australian Investment Blog

**Firstly, the ‘Numbers that Matter’ table in yesterday afternoons note was incorrect – we apologise for the inaccuracy. Alex, our resident spreadsheet jockey is travelling in the US for the next few weeks and we’re blooding new talent**

As you all now know October has seasonally been the best time for local stocks in recent times even with its scary reputation. We saw a great example of this October strength yesterday with the Dow falling 200-points but the ASX200 closed down only an impressive 5-points. Some more comparative numbers illustrating Octobers seasonal backbone:

- Banks have gained on average 4.01% in October since the Olympics in 2000.
- The best October was in 2001 with a gain of 14.29%
- The worst October was in 2008 with the loss of -4.40%
- 12 of the last 16 October’s has been positive for the Banks
- CBA has gained on average 6.6% in October over the last 5-years.
- October has been the best month for the ASX200 since the Olympics with an average return of +1.7%.

Around a third of our way into October 2016 the Banking Index is up 2.9%, CBA is up 3.6% and the ASX200 is up 0.7% - everything is on track for the month with more gains feeling likely. However, beware November is traditionally a poor month so we will very likely switch our positive bias over coming weeks i.e. Banks have their best month of the year in October followed by their worst month in November.

We strongly believe that the "yield trade" is over and probably so are the local rate cuts with the most likely next move by the RBA actually a rate increase.

Bond markets are following our view and over the last few months, local 3-year bonds have seen their rate rise from 1.3% to 1.71% which actually represents an increase of over 30% in the interest rate.

Technically we are targeting a test of 97.60, or 2.4% which is where rates were at the end of 2015.

Australian 3-year bond yields Weekly Chart

So far we have not mentioned the Telco's except perhaps explaining the main reason they have been hammered i.e. our belief that the interest rate cycle has come to its end. When we originally came to this conclusion we became bearish the "yield play" and in particular identified SYD as a sell, the stock has since corrected 16%. During this decline the stock managed to actually recover 66c (10.3%) from its September lows illustrating perfectly that stocks / markets rarely travel in one direction without dips / bounces.

While we have zero intention of going long SYD another 10% bounce feels close at hand.

Sydney Airports (SYD) Daily Chart

The Telco sector has been smacked 15% over the last year with obviously TPG falling 32% and Vocus 22% in the last month gaining the most attention. It should be noted that while we have seen the NASDAQ make fresh all-time highs in recent days the US Telco sector is also down 9.6% over the last 3-months as US investors adjusted their portfolios for a higher interest rate environment.

Our short-term view is the local Telco's are ready for a decent bounce but we note this would only be a trade for the extremely aggressive as our core view is rates move higher which is a definite negative influence on the Telco Sector.

After plummeting almost 40% technically TPM looks poised for a rally back towards $9 i.e. ~15%. Stops would be at $7.45.

TPG Telecom (TPM) Daily Chart

Similarly, Vocus who has fallen to the same degree looks ready for a bounce back towards the $6.50 area ~18% higher. Stops would be at 5.19. Yesterday’s relatively benign reaction to board upheaval is a good sign that a low is close at hand. We discussed VOC in yesterday afternoon note – available here.

Vocus Communications (VOC) Daily Chart

Summary

We will not be taking long trades in the Telco sector but we are using this view of a short-term bounce as some comfort for our exit plan from our poor long exposure to Vocus.

Overnight

• The US markets finished flat after the minutes were released from September Fed meeting affirmed the previous expectations of a December rate rise. The Dow finished up 16 points to 18,144.20 whilst the S&P500 finished just above the line, up 2 points to 2,139.
• Oil lost ground after it was reported that OPEC announced its September oil output was at eight year highs, which offset optimism over its expected cut to production in November. Crude finished down 51c (-1%) to US$50.30/bbl.
• Iron Ore took a step back after two days of strength since returning from a week long holiday. It closed down 52c (-0.9%) to US57.16/t.
• The December SPI Futures is indicating the ASX 200 to open down ~12 points this morning, testing the 5,462 area.

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