Market Matters Morning Report Tuesday 19th July 2016

Morning Report 19/07/2016

Market Matters Morning Report Tuesday 19th July 2016

Searching for performance in this very mature bull market

The US S&P500 closed at another record high last night for the fifth time in six days, while the ASX200 has been up for a healthy 8 consecutive days. Stock markets have shaken off some bad news in 2016 including China's economic concerns and BREXIT but they continue to climb a wall of worry, importantly with cash levels sitting around all-time highs - this bull market is not making many people rich like previous strong advances.

The view we have held for well over 6 months is unfolding – largely as anticipated; equities will rally to fresh all time highs, before topping out probably in 2017, prior to a ~20% correction.

As mentioned recently we believe the stocks that drive the termination "Phase 5" of the bull market will be the laggards of the last 6/7 years advance.

Yesterday was a classic day illustrating this characteristic with the ASX200 up 0.53% but Woolworths was up 1.95% and CSR 2.3%. Over the next 6 months we will be looking closely at the underperformers of this huge bull market for stocks that can give us ~10% before we reweight heavily into cash. What should help us in this quest is the combination of record cash levels looking for a home and the "Fear of missing out" (FOMO) hence when investors search for "cheap stocks" it's likely to lead to follow through when stocks do start to play some catch up.

S&P500 Monthly Chart

Today we will consider 3 stocks that we have mentioned recently which are very much on our radar at present. However, this will be an ongoing exercise as we only envisage buying stocks for 3-6 months going forward - option strategies may also be implemented at times.

ANZ Bank (ANZ) $24.96

ANZ has had a very tough 12 months being the underperformer in the weak banking sector - the stock is down 23% over the last 12 months. The stock is currently yielding 7% fully franked which is extremely attractive in today's low rate environment plus its trading on an undemanding PE of 11x estimated P/E for 2016. In simple terms, ANZ is pulling back from its push into Asia, looking to re-allocate capital towards areas where they will generate a higher return. Selling assets and rejigging strategy carries risk and reduces the ability for analysts to predict earnings, however importantly, if done well it can also create value – particularly given the low expectations currently circulating the market.

Last night Bank of America rallied over 3% after reporting better than forecasted earnings and it's our opinion that the local banks may copy this performance. Expectations are low aided by so much negativity surrounding the sector – which sets it up for a bounce on less bad news…We can see 10% capital appreciation plus a healthy dividend in November over the next 3-6 months. We are positive the banks as a sector for the balance of 2016 but have focused on ANZ due to its recent underperformance.

NB Market Matters currently owns ANZ Bank.

ANZ Bank Monthly Chart

CSR Ltd (CSR) $3.94

CSR is a building products supplier leveraged to construction in Australia & New Zealand. It’s a recovery/self-help story that trades at a steep discount to the market, and more importantly, to its major competitors - easily perceived as cheap.

Clearly, it’s hard to escape the broader macro challenges however as with anything it comes down to valuation. CSR trades at a 25% discount to the market and a 30% discount to the peers . Its balance sheet is in good shape with $74m cash and they have a $150m stock buy-back under way (over the next 2 years). Its yield of ~6.% is attractive relative to the broader industrials which averages around 4.3%.

Technically CSR looks excellent targeting well over $5.

NB Market Matters currently owns CSR, but only a small 5% holding.

CSR Ltd (CSR) Monthly Chart

South32 (S32) $1.97

S32 is a diversified mining company based in Perth which was spun out of BHP back in 2015. BHP put a lot of their non-core assets, in commodities like coal, manganese, silver, lead and alumina into S32 at a time when prices were low, and the outlook for many of the commodities were weak. Since then, Coal has rallied, Silver has shot up and the stock is clearly enjoying the resurgence in the resources sector more generally; In short, we believe the move here has further to play out.Currently we are keen buyers under $1.90 but we may be tempted to pay up considering our very bullish outlook for the highly correlated emerging markets index.

Technically S32 looks excellent targeting at least the $2.20 region i.e. ~11% higher.

South 32 (S32) Weekly Chart

Summary

Simple - at current levels with like ANZ (banking sector in general), CSR and S32
Importantly, we will be conscious of reducing bank holdings into strength if/when that prevails
Right now it’s a time to dance with stocks, not marry them. When the music stops, be prepared to cut and run

Watch out for Market Matters Alerts

Overnight Market Matters Wrap

The US markets at fresh new highs last night with the Dow up 16points (+0.09%) to 18,533, whilst the S&P500 closed up a little stronger, 5 points (+0.24%) 2,167.
Oil was lower overnight down 75c (-1.6%) to US$45.20/bbl on reports of higher supply. Confirmation will be sort in the weekly supply figures published Thursday morning (21st).
Iron Ore weakened US$1.56 (-2.7%) to US$56.86/t. – RIO out with production numbers this morning. Look for 88mt for the quarter and guidance of 330-340mt pa
The September SPI Futures is indicating the ASX 200 will open slightly higher this morning, rising 12 points to around the 5,470 level.

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 19/07/2016. 9:00AM.

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