Australian Investment Blog

The ASX200 closed marginally lower yesterday after looking extremely strong at midday, the $348m worth of Telstra (TLS) which was crossed close to the day’s 6-year low for the embattled telco probably took the wind out of a few buyers sails, at least short-term. If our banks in particular can break free of their recent shackles we could easily see the ASX200 leave the 6000 area in the rear view mirror into Christmas, last night’s news may be just the catalyst they require.

Overnight markets received a trifecta of positive economic news and totally ignored North Korea’s missile launch which again landed in Japanese waters. It clearly appears that Kim Jong-Un needs to up the ante before equity markets will pay him any attention and stroke his ego.

1. Rumours are percolating through newswires that a BREXIT deal is close to completion which helped the UK FTSE rally over 1%, around double that of Europe in general.
2. US corporate tax cuts inched closer to reality after passing another hurdle in the US senate.
3. The likely new Fed Chair Jerome Powell said he believes that US banking regulation is more than adequate which saw the financials up 2% on the session
4. While he also made it clear that the scene is set for further interest rate hikes, starting in December, but stressed that interest rate hikes would be gradual as would any sell down of the Fed $US4 trillion balance sheet.

Make no mistake, this was a very ‘markets friendly’ first public appearance from Trumps nomination to take over from Janet Yellen as the worlds most important central banker.

Today we are going to look at 3 topical and important issues to MM’s investment thoughts into 2018 i.e. should we add to our overweight banking / financials position? Should we accumulate more resources? Should we cut our 2 losers Telstra (TLS) and Nanosonics (NAN)?

ASX200 Weekly Chart

1 Is it time to add to our banks?

Following our switch from Challenger (CGF) to Fortescue (FMG) yesterday MM remains overweight financials, but with a little more room to accumulate further if we perceive prudent. However, note we still have over 50% of our MM Growth Portfolio in Financials which is clearly on the rich side.

1. Banks – CYB, CBA, WBC and NAB for a total exposure of 28%.
2. Financials – IOOF, QBE and Suncorp for a total exposure of 24%.

Following the good news on banking regulation, plus added bonus of an anticipated further US interest rate increase in December US banks soared last night and from a trading perspective can be bought with only a 2% stop.

• We are bullish US banks, targeting a further ~8% upside from this mornings close.

US S&P500 Banking Index Weekly Chart

On many metrics our banks are fairly priced at current levels, however if we think about NAB’s 6.74% fully franked yield, it remains compelling even in the face of rising interest rates. The risk of course remains if house prices really start to slide however even then, and we showed a good chart of this in Monday’s afternoon report, that typically doesn’t have a huge impact on bank balance sheets. Whatever the case, we doubt house prices will plunge, but will experience a softening which is part of normal market cycles, and nothing compared to the last 5-years advance.

We are still considering increasing our CBA holding with one eye on February’s attractive dividend plus if we see a strong rally into 2018 we can take profit on one / part of our other bank holdings at better levels – remember CBA’s average gain in December since the GFC is 4%.

Commonwealth Bank (CBA) Daily Chart

On the financials front we are happy with our IOOF, QBE and SUN holdings, however we are also considering moving back into an old favourite Janus Henderson (JHG) which has made MM some nice returns over previous years. The combination of a deal with BREXIT, overseas earnings and position in the financial sector puts the stock in the cross-hairs of our macro view at present.

• We are bullish JHG with stops under $46, a comfortable ~3% risk basis yesterdays close.

*watch for alerts.

Janus Henderson (JHG) Weekly Chart

2 How aggressively should we accumulate resources?

Yesterday we allocated 3% of the MM Growth Portfolio in Fortescue (FMG) at $4.60, the stock has corrected 37% in 2017 and we simply feel its gone too far for now however please note our allocation leaves room to average at lower levels.

Fortescue Metals (FMG) Daily Chart

We have been “stalking” base metals over recent weeks, ideally targeting a ~7% correction in the underlying index. Following last night’s weakness, led by a 2% fall in copper, we are basically half way there.

Our preferred option remains OZL ~$8, or 5% below yesterdays close, hence we will remain patient increasing our resources exposure at this moment in time.

Base Metals Spot Index Weekly Chart

OZ Minerals (OZL) Daily Chart

3 Is it time to cut our 2 main losers NAN and TLS?

We have 2 stocks in our MM Growth Portfolio that are causing us some angst i.e. Nanasonics (NAN) -9.7% and Telstra (TLS) -4.3%. We simply hate losing money, especially in a rising market! Our plan on these 2 positions is simple:

1. Nanosonics (NAN) - we will exit the stock if it cannot hold above $2.60 today.
2. Telstra (TLS) – while our paper loss is relatively small it’s still very annoying with TLS currently so out of favour it actually feels like a buy! However capital preservation is vital in investing and we will exit at least half of our position in the Platinum, Portfolio if TLS cannot close over $3.35 plus we are likely to exit 50% of our holding into any strength.

Telstra (TLS) Daily Chart

Global markets

US Stocks

The US continues to make fresh all-time highs and although we still need a ~5% correction to provide a decent risk / reward buying opportunity, no sell signals have been generated to-date.

The current strong rally since Donald Trump’s election adds to our confidence with buying a decent ~5% pullback.

US S&P500 Weekly Chart

European Stocks

European stocks look to be failing after their recent break out to fresh 2017 highs, we are now neutral / negative Europe over the next few weeks.

German DAX Weekly Chart

Conclusion (s)

1 - We remain bullish financials / banks but are already overweight the area, we are considering adding to CBA today.

2 – We are keen to buy resources but believe better opportunities are likely down the track.

3 – We are not married to NAN or TLS and will exit / reduce if the appropriate signals are generated.

*watch for alerts.

Overnight Market Matters Wrap

· The chances of an interest rate hike in the US next month is all but baked in, with Fed chair nominee Jerome Powell asserting the central banks independence. Powell also indicated a lightening of regulation in the financial sector, in particular the “re write” of the Dodd-Frank Volcker rule.

· US consumer confidence rose above analysts’ expectations, to a 16 year high.

· Copper and nickel fell 2% on the LME, while oil fell on Russian concerns regarding supply cuts and iron ore rose.

· The December SPI Futures is indicating the ASX 200 to storm out of the opening gates this morning towards the 6025 level.

Disclosure

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