Australian Investment Blog

The "Bears" are back on the front pages

Normality should return to the stock market next week, as both Janet Yellen's speech at Jackson Hole and the local reporting season will be behind us. Market players are poised to scrutinise the speech when Fed Chair Janet Yellen takes the stage for any clues to the future timing of US rate rises, with the title of her talk "The Federal Reserve's Monetary Toolkit". Currently, markets are pricing in ~50% probability of another rate increase by Christmas - yes, the festive time is again slowly approaching.

The US Fed raised interest rates for the first time since 2006 by 0.25% last December, taking the new target rate to 0.25-0.5% - they use a target band. Historically, a tightening cycle for US rates comprises of over 20 increases, implying strongly that this is just the beginning. Medium-term investors in equities should not ignore the correlation with the bull market and global interest rates falling to almost zero.

Our view, like many market participants is that Central Banks have reached, or are very close to the end of their monetary policy actions, in an attempt to generate growth and fiscal moves will follow. Simply, the end of super low-interest rates is close and governments may, for example, lower taxes to stimulate spending.

US Fed Funds Rate Monthly Chart



Prominent billionaires, George Soros and Paul Tudor Jones, have gained a lot of press recently due to their large "bearish bets" on stocks, from buying S&P500 put options with a face of over $3bn. Our view remains their view is correct, but they are off in the timing with further upside, likely before a major correction for equities. Fortunately, both of these famous investors have recently been relatively "cold", helping us feel comfortable to have a different skew on our opinion.

NYSE Composite Index Monthly Chart



Yesterday, Woolworths (WOW) announced a $1.2bn loss, but the stock rallied 4% on growth optimism. Overall, the results were ~1% below most analysts’ forecasts, but some green shoots were perceived to be emerging - on a valuation basis, the stock is not cheap. Human nature leads to investors wanting to buy perceived "cheap" stocks, hence after this bounce, we have received numerous emails wondering if WOW is a buy as it still languishes over 35% below its 2014 highs.

Unfortunately, we believe the stock is currently in "no man's land”, with an enormous amount of work required on the ground floor level. Actually, our "gut feel" is the +25% correction in WOW from close to $20, may prove to be a better short-term selling opportunity as opposed to a buying one.

Woolworths (WOW) Weekly Chart



Rival Wesfarmers (WES) also reported this week and again, they matched market expectations. The stock arguably still represents better value than WOW, looking at expectations for 2017.

Technically, we remain mildly bullish WES targeting fresh highs towards the $47 area.

Wesfarmers (WES) Weekly Chart



Summary

Remain patient, we still believe equities have further upside before we press the abandon ship button. Interest rates may well be the key on many levels, but this weekend's comments by Janet Yellen are so highly anticipated, the likelihood is they will be a fizzer!
We remain on the sidelines when it comes to WOW and at current levels, would prefer WES, but currently are happy not to be in either.

Overnight Market Matters Wrap

• In the US, the Dow finished barely changed, down 33 points (-0.2%) to 18,448 and the S&P500 closed down 3 points at 2,172. The NASDAQ however, which has been powering along, had its first 2-day loss in two months, closing down just 8 points to 4,775.
• A quick summary of last night can be put down to the upcoming speech by Janet Yellen of the Federal Reserve and her speech on the economy due tonight our time. It seems everybody is holding back to see which way
• Oil reversed weakness of Wednesday and rose 61c (+1.3%) to US$47.38/bbl. Traders took the view that the US$ will weaken following the Yellen speech.
• Gold, however, ended towards four-week lows, again traders not willing to commit. The yellow metal closed down US$4.30 (-0.3%) to US$1,320.1/oz.
• The following corporate earnings are due today: APN News & Media (APN) 1H, Coca-Cola Amatil (CCL) 1H, Regis Healthcare (REG) FY, The Star (SGR) FY, Super Retail (SUL) FY
• The ASX 200 is expected to open with little change this morning, around the 5,543 level as indicated by the September SPI Futures this morning.

All figures contained from sources believed to be accurate. Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy. Prices as at 26/08/2016. 9:00AM.

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