Market Matters Morning Report Wednesday 6th July 2016

Morning Report 06/07/2016

Market Matters Morning Report Wednesday 6th July 2016

BREXIT is causing reactions like the weather!

Over recent years the weather has constantly been giving us headlines along the lines of the hottest, wettest and coldest on record. This morning's headlines on Bloomberg led with the pound tumbling to 31-year lows and US 10 / 30-year yields fell to all-time lows. The investment world is very concerned about the health of the global economy which is driving interest rates lower. Australian 10-year bonds are yielding an all-time low of just 1.9% - which surprisingly is still high in the global context.

We talk a lot about bond yields in these notes and rightly so given that interest rates have a significant bearing on asset prices. Without going into too much detail, a lower ‘risk-free rate’ means that higher asset valuations can be justified, or in other words when interest rates are low, PE’s can be higher. The below chart explains this well by inverting the ten-year bond yield on the right axis and the ‘fair value’ PE on the left. Clearly, given how low-interest rates are, PE’s could easily go higher – therefore, the market can rally despite being ‘overvalued’ on historical measures.

Source; Shaw and Partners

Looking further afield, and working through the ‘noise’ that is reverberating around the market, global equities overall remain relatively healthy with the IShares all world equity Index ~13% below its 2015 high (contains 1200 stocks from developed and emerging markets).

Subscribers know we are bullish US equities, overall an easy prediction but "hopefully" world equities looking solid will indicate some potential strength from the Australian market.

IShares MSCI All Country World Index Monthly Chart

In recent times, we’ve seen a lot of varying movements from stocks/sectors within the Australian share market. For example over the last 12 months - Banks -20%, Consumer Services +22%, Energy -18.9% and Healthcare +6.2%.

One of the very simple lessons we’ve learnt investing over many years is to keep learning, reviewing the past as a means of shaping the future and improving our investment outcomes. Right now, we’re focusing on 3 areas that can be improved from our performance over the last 12 months.

Firstly, to ride our winners further e.g. our positioning in Gold was right, but our patience, or lack thereof, was not. This leads into a famous quote from Warren Buffett:

"The stock market is a device for transferring money from the impatient to the patient."

Secondly after exiting stocks / sectors at excellent levels – such as the banks in mid-2015, we should at times be fussier at re-entry.

Thirdly, which potentially conflicts with point one is to exit losers faster if the basis for entry is no longer valid. This does not necessarily mean that we should cut all stocks that have declined in value since our original purchase price, but is more focussed on the objectivity of analysing current holdings on their merit as of today, rather than the price at which we may have paid yesterday (figuratively speaking).

We have mentioned these 3 points today as we’re reviewing 2 major trend opportunities and 2 short term buys.
First of the short term buys is in the oil sector which is likely to be hit today after Oil fell almost 5% last night.

We recommend buying oil stocks ~$US45/barrel with Origin (ORG) our preferred stock - potential for next few days.

Crude Oil Daily Chart

Secondly, we remain bullish on Vocus (VOC) after its recent capital raising following a strategic acquisition. We are bullish at current levels.

Vocus (VOC) Weekly Chart

On the more macro front, we remain bullish the gold sector and will buy the next $2-$3 in Newcrest Mining (NCM) plus potentially Regis Resources and / or Northern Star (NST).

Newcrest Mining (NCM) Monthly Chart

….and perhaps most importantly, the Australian Banking Sector is still hovering 30% below its 2015 panic yield chasing highs. The sector remains "on the nose" as a further potential $20bn of capital raisings may be forced by regulators - a lovely reward for being so solid during the GFC. Banks globally are under pressure by collapsing interest rates and this puts downward pressure on margins.

The attitude towards the banks feels like we had towards gold and iron ore stocks not long ago......We believe banks are an accumulate into weakness with a longer term view. CBA under $70 is good value.

Australian Banking Index Monthly Chart

Summary

While we remain bullish equities over coming months.

We like oil stocks, on a risk / reward basis, if crude touches ~$US45/barrel.
We like Vocus (VOC) around $8.40.
We remain bullish gold.
We believe banks are entering an area where they should be accumulated into weakness.

Watch out for VOC which we may purchase today under $8.40.

Overnight Market Matters Wrap

The US markets closed down, following record lows in the 10 year Treasury yield. The Dow closed down 109 points (-0.6%) at 17,840, whilst the S&P500 closed 14 points (-0.7%) at 2,088.
A slowing economy seems to be on traders’ minds, as currency and yields came into focus and 30 year Treasury yields hit record lows of 2.15%.
Oil plunged 4.9% overnight and finished down US$2.39 to US$46.86/bbl on news that there was a build-up of 230,000 barrels in storage in Cushing, Oklahoma
Gold was pushed higher, as traders rushed for safety on fears of what is down the track for the UK on the Brexit vote, plus weak U S factory orders. Gold finished up US$19.70 (+1.5%) to US$1,358.70/oz.
The September SPI Futures is indicating the ASX 200 to open down 11 points, around the 5,217 level.

Regards,
The Market Matters Team
28-34 O'Connell St
Sydney, NSW 2000

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