Market Matters Morning Report Monday 1st August 2016

Morning Report 01/08/2016

Market Matters Morning Report Monday 1st August 2016

Subscribers questions - tricky & tough!

We are going to continue with subscribers' questions today as the number were receiving suggests this is a popular addition for a Monday morning. With equity markets making fresh 2016 highs, global interest rates edging lower and central banks "actively attempting to stimulate economies" we are in one of the most interesting markets in many years. Please keep the questions coming in to ensure you understand both what is unfolding and are thoughts on the best way to generate above average returns in 2016/7.

Question 1; “The Market Matters Position report shows holdings as Long,Medium and Short Term positions. When a Market Alert is sent the email indicates what type of trade it is i.e. L, M or S. However the text message which is usually received first does not indicate what type of trade it is. Would it be possible to indicate on both the text and email whether it is L, M or S”.Thanks Bill.

Answer; Great timing Bill, we are in the process of refining our position report, adding in previous positions / trades for reference and to simplify / standardise our texts / email alerts. This is all part of a wider ranging review of our report structures and the way we communicate with subscribers. As you may be aware, we have had a number of new additions to the Market Matters team in recent times and will continue to develop our website/reports in line with this growth.

Question 2; We have selected two parts of a rather comprehensive question from a subscriber:

Answer; "Concerning CBA, I note your comments in the Weekend Report. Do I take this to mean that you are now confident that CBA is pretty much at the bottom of its price slide and that you’re no longer predicting it to drop to the $60 area (as per your Morning Report dated 12th April)?

We believe that Australian banks are trading at fair value but relative to the index they are cheap and hence likely to have further upside from current levels. Turning to CBA in particular:

1. We are confident that it will continue to trade in a choppy manner for another 12-18 months at least, albeit it within a large range.

2. Short term, assuming pending profit report is ok, we expect a foray back into the $80's.

3. Medium term, considering we are targeting a 20-25% correction in US equities a test of major support ~$60 is a strong possibility and remains our preferred scenario.

So in simple terms, up in the shorter term before it rolls over.

Commonwealth Bank (CBA) Monthly Chart

"I’ve noticed a number of trades recently where opportunities for greater gains have been missed by not staying with certain stocks for longer periods. e.g. ANN, BHP, FMG, MGR,RIO and TLS" Paul

Thanks Paul for bringing up the subject that has brought us the most angst in 2016......"when to hold'em and when to fold'em"

We believe the market is in "Phase 5" of a huge multi-year bull market and the significant volatility from individual stocks and sectors is likely to remain and be very testing for market players e.g. We felt great last week to have sold Graincorp (GNC) at a small loss but frustrated to have not taken profits in Origin Energy (ORG).

The reason for the trade / investment is what we focus on the most which in the case of BHP, RIO and FMG played out as expected, we took our money but as you point out they ran again. With investing you cannot look back only forward and this is exactly what we do e.g. we have no hesitation buying a stock for a higher price than we sold it if we believe it will make money e.g Vocus. Also when we have sold a stock too early the area where we moved the funds may also be performing well e.g. Independance Group (IGO).

We do anticipate being more active over the next 6 months and getting on the front / right foot as much as possible as we think the market will demand this.

The gold sector is currently where most frustration lies for us as we have taken profit on positions in anticipation of a pullback which has not materialised, it now feels we will be paying more to renter.

Question 3; "I’m an existing holder of BEN with entry price of $12. I note on the ASX website, BEN is listed among the top 20 most shorted stocks and this is obviously concerning as the market is worried about its margins from the last major report in February. Would like to get some thoughts from you around – • What’s your take on the banking sector as whole with the anticipation of future interest cut(s) and, • Should I be waiting for BEN yearly report on 8th of August and see the finer numbers before selling." Kind regards, Tianlei

Answer; Hi Tianlei, a large question around a sector that has put significant pressure on most retail investors portfolios over the last year.

We cannot give personal advice and will just comment on BEN and the banking sector in general terms.

The regional banks andBendigo in particular have a number of push / pull factors currently playing out. Firstly, BEN is being helped by changing capital requirements for the big 4 which in essence will level the playing field. Previously, regional banks had to hold significantly higher regulatory capital than their bigger competitors reducing return of equity and ultimately profitability.

Countering that is BENs large reliance on ‘deposit funding’. They rely more on Term Deposit investors as a source of funding over and above wholesale debt markets. When interest rates fall, term deposits become less attractive and therefore BEN has less money to lend.

The sector collectively gets hurt as interest rates fall given it puts pressure on margins. For example (and in very simple terms), when banks can borrow at 5% and lend at 7.5% they collect a margin of 2.5%. When banks are borrowing at 2% it is more difficult for them to achieve a 2.5% margin. The trend is obvious in the below chart

From a trading perspective, BEN is a heavily "shorted stock" which is not all bad news. Some of the strongest share price rallies from local stocks in 2016 has come as covering of shorts unfolds e.g. Woolworths'. Further interest rate cuts play both ways with the banks as they make their dividends more attractive but puts pressure on their trading margins as outlined above. Perhaps a net neutral in Australia BUT negative interest rates is very bad news for bank earnings globally.

Important to note here, the price you enter a stock should have no bearing on your decision when to exit, it should be centred around does the reason for the purchased still exist.

Taking into account our overall bullish outlook for equities and the current upside momentum for BEN we can see a test of $12 resistance area in 2016. However obviously both BEN and CBA's reports in coming days will have an enormous impact on both stocks and the sector overall.

Our current view of the Australian banking sector is that it will continue to recover between 3.5 and 6%, a large range we understand but we will monitor carefully and tweak over time.

Bendigo Bank (BEN) Monthly Chart

Australian Banking Sector Monthly Chart

Overnight Market Matters Wrap

The Dow lost 24 points on Friday and 139 points for the week to 18,432 whilst the S&P500 fared better by finishing Friday up just under 4 points on the day and just 2 points for the week.
Oil prices were better on Friday with Crude finishing up 46c (+1.1%) to US$41.60/bbl as short sellers covered, after a week of losses. Crude was down over 6% for the week and just over 14% for the month notably its biggest monthly loss since July 2015.
Gold continued to strengthen, finishing up US$16.70 (+1.3%) to US$1,349.00/oz after a much lower than expected GDP figure was released. The US Dept. of Commerce reported that GDP grew at an annual rate of 1.2%, which was a lot less than the 2.6% that economists were expecting.
The ASX 200 is expected to open 30 points higher this morning, around the 5,593 as indicated by the September SPI Futures this morning.

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 1/08/2016. 9:00AM.

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