Market Matters Morning Report Thursday 4th August 2016

Morning Report 04/08/2016

Market Matters Morning Report Thursday 4th August 2016

What now as August delivers on weakness?

We have discussed over recent reports the statistic that the first day of the month is usually strong for the ASX200 and that August has been a tough month since the current bull market commenced in 2009. Here we are on only the 4th of August and the script has already played out to a certain degree with a high on the 1st followed by an aggressive 146-point (2.6%) correction. Our view remains that this pullback should be bought with stops under 5400.

While markets continue to unfold as we expect there are some important points to be considered, especially for subscribers who have very defensive style portfolios.

ASX200 Daily Chart

Bond markets have been on our lips over recent weeks and the last few days have actually seen the G-7 bond yields hit a 5-week high i.e. the combined rates of the US, Canada, France, Germany, Italy, UK, and Japan. Japan has led the increase in rates as central banks are making noises that negative rates are not the future. We believe this should be short term good news for banks BUT the market is not currently agreeing.

The big US Tech. firms like Goggle, Microsoft, and Apple appear to agree with our view that interest rates are bottoming with them having raised ~$US100bn already this year, more than the whole of 2015, noticeably while they already sit on over $US1trilion of cash. While there are tax benefits for these names to issue bonds we believe the main reason they are raising all this cash at basically zero interest rate is simply because they can!

Japanese 10-year Bond Yield Weekly Chart

If we are correct and the 35-year bear market for interest rates is close to over, then interest rates are set to rise and many defensive stocks that have performed exceptionally over recent years will rapidly become the market laggards.

Remember when cycles turn the effect on share prices is often very pronounced as most investors are left facing the same / wrong way. Also in a number of cases, these defensive stocks have become very expensive as risk averse investors have only felt comfortable buying where safety is perceived – effectively pricing these stocks for perfection. Remember the quote from last Weekend's Report:

"If you can find something everyone agrees on, it's wrong." - Mo Udall

US 10-year Bond Rates Monthly Chart

The Healthcare sector is one place where valuations have been pushed to extreme levels - similar to the euphoria / confidence in the banks last year and we all know now they are ~25% lower. We also believe stocks like Sydney Airports (SYD) will see a +15% correction over the next few months / years - again all brokers love this one at present.

We reiterate that we still see value being created in the financials on a global basis, as well as locally, but clearly that is not currently being reflected by our local banks who are down over 20% for the last year.

Sydney Airports (SYD) Monthly Chart

Summary

- We believe it's time to buck the trend and commence selling defensive stocks and allocating some of these funds into the embattled financial sector and / or cash

We are in "sell mode" looking for ideal opportunities to increase our extremely low cash position.

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 4/08/2016. 9:00AM.

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