Author: james Carter
The “YIELD PLAY” feels like it needs a rest after Telstra (TLS) and Commonwealth Bank (CBA) have both rallied approximately 10% in 3 weeks. Yesterday, we saw the market rally strongly for the 10th consecutive day, but interestingly both TLS and CBA were in negative territory at 3pm, they and the market simply need a rest. I have very mixed feelings at present on US equities as you all know, but the local yield stocks should remain supported if we get a correction overseas. The feedback I am getting from friends on US trading desks is they have not seen so much interest in Australian equities for years, I assume due to the low $A.
• The ASX 200 rallied for an 11th consecutive day, ending 34 points higher at 5811.• The yielding stocks again reigned the broader market today with Commonwealth Bank (CBA) soaring $2.48, or +2.7% at $93.27 and Telstra (TLS) up 7c, or +1.1% at $6.67.• The safe haven asset, gold performed well, with Newcrest Mining (NCM) closed 51c, or +3.7% at $14.39.• The energy sector underperformed as expected, with Santos (STO) down 27c, or -3.2% at $8.09 and Woodside (WPL) down 61c, or -1.7% at $35.26.• The iron ore sector reversed yesterday’s gains, with BHP Billiton (BHP) down 63c, or -2% at $31.36 and Fortescue Metals (FMG) down 7c, at 2.7% at $2.51 despite large private equity, Capital Group becoming a substantial holder in FMG recently.• As interest rates in Australia look to go further lower, the demand in spending and borrowing is likely to be seen. This was certainly the case for financing company Flexigroup (FXL) lifting its first half 2014 profit by 11%. FXL closed 45c, or +14.8% higher at $3.49.
Yesterday I was off the mark by thinking the RBA would delay the inevitable rate cut by a month or two, instead they ran with my observation that this was the most awaited decision in many months – they got exposure! The RBA cut its rate yesterday to 2.25%, the lowest in history, sending equity soaring over 70 points in a matter of minutes. Australian equities are simply looking for a new level of equilibrium / fair value as they factor in lower rates for 2015. Markets are now looking for at least one more rate cut in 2015 and with Australian 3-year bonds touching below 1.8% potentially more. Interestingly, the potential earnings ramifications of a rate cut on the financial stocks are mixed and another reason Telstra should continue to shine.
• The ASX 200 closed 70 points higher at 5,777, its 10th consecutive close into positive territory, up 8.8%.• The “yielding stocks” started to lose some steam after outperforming the broader market recently. Commonwealth Bank (CBA) closed 39c higher, or +0.4% at $90.79 after trading down 9c and Telstra (TLS) down 7c or -1.1% at $6.60.• The resources sector outperformed the ASX200 today. BHP Billiton (BHP) continued its recent rally, up $1.34, or +4.4% at $31.99 and Fortescue Metals (FMG) up 8.9% at 2.58 as short covering is beginning to be apparent.• Echo Entertainment (EGP), the owner of the Star closed 9c, or -2.1% lower at $4.14 despite more than doubling its profit for the calendar year. • The Materials sector continues to be the headline. Nufarm Ltd (NUF) closed down 24c, or -4% at $5.77 after it announced its CEO, Doug Rathbone steps down along with a reduction in CAPEX.
This morning, 15 out of 19 economists surveyed are predicting no rate cut at 2.30pm today by the Reserve Bank of Australia (RBA). However, my feeling is who cares, we will get two cuts (0.5%) this year if all economic conditions remain the same, the question is simply when. I believe the RBA will not cut rates today as their initial main concern, the $A has already fallen from 94c to 78c in 5 months making Australia more competitive on the world stage. To me it makes sense for the RBA to sit back for a month, evaluate how the world economies are unfolding in 2015 and importantly to see if housing prices, a concern for the RBA if they cut rates, remain subdued – the RBA however do not always appear logical!The stock market is playing a very simple game at present, both chase yield and cover shorts in the resources sector, this equals the very bullish combination we are currently witnessing.
Please see our weekly Market Matters video – Market Update, Gold and SMSF Trading and Investing 3rd February 2015
Apart from the quality high yield paying stocks over the last 12 months, a sector of the ASX200 that has had a stellar time are stocks exposed to US earnings. This outperformance is hardly surprising considering the relative position of the two economies. The recent collapse in the $A under 78c has proved this market positioning to be on the money, however when everybody is “on board a trade” reversions can be noticeably dramatic. On Friday night we witnessed a savage 250 point fall in the Dow after very important US GDP Data (Growth indicator) was lower than anticipated. I believe economic data will continue to fuel the recent decline in the DOW, accelerating closer towards my targeted sub 16,000 area i.e. approx. 10% lower. As we have witnessed over recent weeks, the ASX200 is dramatically outperforming the US market. It again appears overseas investors are chasing the Australian high yielding stocks as the weakening $A reduces their entry cost. However, if this US correction does materialise, it is likely to be the “crowded” long US earners trade that will be unwound quickly leading to excellent buying opportunities.
• The ASX 200 opened near its lows this morning, only to rally as much as 48 points before ending the day up 37 points, or +0.7% at 5,625.• The strength was again seen in both the banking and energy sector, Commonwealth Bank (CBA) closed 35c higher at $89.68, BHP Billiton (BHP) up 34c at $29.60 and Oil Search (OSH) up 21c at $7.98.• The retail sector had a lacklustre day, particularly Kathmandu (KMD) down 51.5c, or -27.5% at $1.355 after announcing a profit warning to investors today. JB Hi-Fi (JBH) however, closed 30c higher, or +1.8% at $17.05, despite announcing a minor profit slide in its half yearly reports. Could the retail sector turn around anytime soon?
The Australian equity market is performing exceptionally at present, up around 1% in recent weeks, while the Dow was down 5% – both at yesterday’s close. At a glance, this would seem crazy as the Bloomberg Commodity Index hit a 12-month low last night (see chart 2), but there are other influences that are very much in play and should not be ignored.
• It was a choppy session in the ASX 200 today; having ended 19 points higher at 5688 with the Energy sector, surprisingly the strongest link.• The gold sector underperformed the broader market; Newcrest Mining (NCM) closed 0.8% lower at $13.59 and Regis Resources (RRL) down 3.3% at $1.895.• Commonwealth Bank (CBA) continues to reach for the stars, ending up 57c at $89.33 after touching another all-time high of $90.00! Today, we bought another bank as mentioned to our subscribers, live.• Telstra (TLS) ended 3c higher at $6.50 as the yield play continues.• Beach Petroleum (BPT) closed 6.7% higher at 96c after Seven Group (SVW) announced it has acquired a 3.5% stake in BPT.• Please watch out for the Hickman Report tomorrow.
Really bullish, there's more to go in the reflation rally
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