Australian Investment Blog

Good Afternoon everyone

Market Data

What Mattered Today

A good day for local stocks – particularly in late trader with the index kicking higher from around lunchtime onwards. Banks the main driver while resources struggled on the back of weak Iron Ore trade in China – FUTURES were limit down by mid-afternoon.

CBA rallied on the back of a reasonable Q3 trading update this morning with the stock adding +1.92% to $75.78 while ANZ was off $0.76 after going ex-dividend for 80cps plus franking – so a positive result in aggregate. We’ve now seen the four majors update the market with some clear trends emerging….

Bad debts; most banks have seen the bad debt charge lift, with the banks sighting a few problematic loans rather than more widespread loan stress as the reason. Whether or not bad debts will increase materially is a function of whether or not the economy holds up, and with the RBA cutting rates recently, this should be a positive for bad debts in the second half. If we see 2H16 bad debt charges fall, which is likely, this concern is may be removed. The obvious Q becomes; has the mkt cottoned on to how important the RBA moving to a rate cutting cycle will be to support asset prices and lower bad debts?

Capital; Clearly an overhang at present with the amount of additional capital required, yet to be determined (We’ll find out more later this year). At the moment, it seems banks and APRA are of the view that capital can be generated organically rather than through any large equity issuance

Yield vs Growth vs Risk: Banks are seem as low growth vehicles with widespread exposure to the ebbs and flows of the Australian economy. At the moment we seem to be ebbing hence the RBA cut interest rates. Bank earnings are therefore fairly risky, so, the Q is whether or not the yield is enough to take on a risky earnings profile. We think it is so large sell offs should be bought yet rallies should be sold or Options can be used to overlay portfolios.

Here’s an interesting chart courtesy of Shaw and Partners which shows Bank Grossed up dividends less 1 year term deposits….

Source; Shaw and Partners

Orica (ORI) – one of the beaten down stocks we’ve touched on recently given its large short exposure produced a weak first half trading update today and the stock got whacked….down -12% to $13.53. Net profit for the six months fell to $149 million from $222 million in the year-earlier however there was a one off expense to the ATO of $41m...so on an underlying basis earnings are down about 13%. Revenue was probably more important off 22% to $2.6 billion – so we are seeing the current cost out program gain some traction, but growing the top line is still challenging. An area still with headwinds and the shorts had a day in the sun today….

Speaking of shorts, Metcash (MTS) remains the No1 short sold stock on the ASX, however it is approaching a key level of resistance as shown in the chart below. Clearly MTS has some major structural issues, huge levels of competition etc. etc., however, we can’t ignore such a key level when shorts are so high. With 15% of the issued stock sold short, it would take around 30 days to cover….One to watch if it cracks $1.85 and shorts start to scramble…

Sectors Today
Source; Bloomberg


ASX 200 Movers

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

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