Market Matters Morning Report Friday 5th August 2016

Morning Report 05/08/2016

Market Matters Morning Report Friday 5th August 2016

Does Suncorp show the key to reporting season?

Today's report is simple in nature but powerful in its message for stocks today. Yesterday Suncorp (SUN) reported a cash profit of $1089m and a fully franked dividend of 38c, overall about a 4% miss on analysts' expectations. As would be expected the stock opened down 39c (3%) but quickly climbed its way back up to close up 9c (0.7%). The result was simply not too bad and showed promise moving forward. We were obviously pleased by its performance as SUN is the equal largest holding at 12% in the Market Matters portfolio - we remain bullish SUN targeting over $15.50.

However it's the inference from the performance of SUN yesterday on our overall market that's catching our attention today, as reporting season looms - especially Commonwealth Bank (CBA) next Wednesday. We have two initial points:

1. SUN remains bullish both fundamentally and technically with our target a whopping 16% higher if the broad local financials can rally only half of this the ASX200 could be well over the 5750 level in 2016.
2. In the current market "not too bad" is a buy. This ties in with our current short term bullish view for equities with fund managers sitting on record cash levels searching for some value.

Suncorp (SUN) Monthly Chart

Assuming we have no large events unfolding over the coming weeks our view is CBA's report next Wednesday is the key to the next 5% move for the ASX200. Investors and the press alike have recently become extremely anti-banks, hence If the result is simply ok we believe the stock / sector can enjoy a strong advance.

Simply comparing P/E's can illustrate the lack of confidence in the Australian banks, CBA is trading on 13.7x while the embattled supermarket Woolworths is trading on an estimated 19.2x. Australian banks may be trading around historical fair value BUT compared to the market, which is struggling for returns, they are cheap.

Technically CBA is neutral / range trading between $80 and $69 since mid-January, it’s certainly overdue for a move one way or the other. The report will likely determine the direction.

Commonwealth Bank (CBA) Weekly Chart

Yesterday we took profit on our South32 (S32) position for a combination 4 reasons.

1. The stock achieved our target of a break over $2, albeit a touch disappointing that it did not reach our ideal target of ~$2.10.
2. We are in sell mode and increasing our cash position back towards 10% is a step in the right direction.
3. We have maintained some exposure to the resources sector via Independence Group (IGO) where we are still targeting over $4.50 – however, this is down from our previously guided $4.70. Remember, markets are fluid and our decisions should also be fluid.
4. The current market is very whippy, presenting opportunities to both buy / sell and then taking them away very quickly. We missed good selling opportunities in Origin (ORG) and CSL through being a touch too fussy on exit levels - if we had sold ORG over $6 we would have been able to buy back in this week under $5.40.

South32 (S32) Weekly Chart.

The oil market which was again attracting many knockers over the last week has reached our correction target and we are now bullish targeting an advance towards the $US60/barrel area. Hence as mentioned above we would again be buyers of Origin ~$5.50 if we had no position.

Crude Oil Monthly Chart

Summary

We remain comfortable local stocks at current levels as investors buy average results. We often quote the below:
"A market that goes up on bad news is a strong market" - Market Matters
We remain in "sell mode" looking for ideal opportunities to increase our extremely low cash position.

Overnight Market Matters Wrap

The US markets drifted in neutral last night, with the Dow finishing down 3 points to 18,352 whilst the S&P500 finish virtually steady at 2,164.
Although the European markets were stronger, especially the London market after the Bank of England reduced rates 25bp to 0.25%, the US markets decided it would rather wait for the jobs number due tonight our time before deciding what to do.
The jobs number experts are expecting employment to rise by 180,000 jobs, with unemployment coming down to 4.8% from 4.9%.
Oil managed to climb +2.7% or US$1.10 to US$41.92/bbl on short covering as the price moved above its 200 day moving average.
Iron Ore, however, fell below US60, dropping US$2.17 (-3.5%) to US$59.50/t.
The ASX 200 is expected to open higher this morning with the September SPI Futures indicating an open of 35 points higher, around the 5,511 level.

Regards,
The Market Matters Team
Level 12 28-34 O'Connell St
Sydney NSW 2000

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 5/08/2016. 9:00AM.

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