Australian Investment Blog

Good afternoon everyone

Market Data

What Mattered Today

1. Banks Banks Banks – seems to be all that matters at the moment with the BIG 4 copping it on the chin once again. ANZ the worst – off -3.41% with CBA the best off ‘just’ -2.27%....collectively they took -30pts off the index which dropped -79pts in aggregate.

2. Unlike Thursday last week, the selling was fairly broad based with the negative sentiment in the banks overflowing to other sectors….Healthcare stocks in particular seemed to lose their defensive attributes today – dropping -2.56% collectively led by CSL which was off -3.55%

3. Interesting to look further afield with US futures resilient (DOW +14pts) throughout our session, while Asian markets were softish – but less so than what we experienced….

4. It’s largely on concern around exposure to resource companies (plus others service coys that have been under pressure such as Slater & Gordan and Dick Smith) and in particular, concern around whether or not current provisioning is adequate.

5. Two aspects here that are worth a mention again…ANZ said at least another $100m in bad debt charges for the half implying v’little clarity from management about what the actual number will be, while Westpac (WBC) have flagged exposure to five problematic loans which will dictate their bad debt charge for the half – again, this implies v’little clarity/predictability and a high degree of uncertainty which markets hate. Hence, banks get sold pending more clarification/confirmation of what their exposures are, and whether or not they have baked the numbers in already.

6. Over the last 20 years, the average bad debt charge has been 0.28% - which means, for every loan they write 0.28% of it is eaten up by the ones that go soar.

7. During the GFC, that number blew out to 0.80%, while in 2014 this number was just 0.16%. Right now, we sit at 0.19% - with most thinking, as written in this morning’s note – that we’ll track back towards more normal levels – around 0.28%. So, right now, bad debts are expected to rise which is playing out as expected, yet the market is in a tail spin, and we’re seeing a run on the banks

8. We’re now hearing more talk, more concern about the banks and seeing notes go around the market musing about the impending crisis. Again, this seems to us like emotional posturing rather rationale positioning – but time will tell.

Stocks On The Move

1. Woolworths (WOW $21.87, -2.58%) – A big ship pointing the wrong way…

• There’s currently a smell about Woolies, and it’s not ring fenced to the dairy isle…. it’s not about the disastrous Masters foray, nor is about their struggling general merchandise business which houses Big W and Ezibuy. It’s not even wafting from their hotels business which saw EBIT down -6.6% in 1H16. It’s more a function of public perception on the quality of their discount products relative to their much talked about German rivals.
• To address this ‘perception problem’, Woolies today announced plans to merge their Homebrand and Essentials product lines and package them as one – using the Essentials branding. It marks the end of the long running Homebrand labelling at Woolies, and is another step on a long road to recovery for the struggling retailer.
• It certainly is a step in the right direction, however it’s a big ship, and changes to packaging is only a fraction of what is needed to turn around the Australian Food and Liquor business, which is the main driver of Woolies earnings.
• Market Matters have no interest in Woolies at current levels

2. CSL (CSL $98.57, -3.55%) – Profit taking obvious into strength

• CSL is a quality company, with a great outlook for its plasma therapies, however on 32 times earnings, a 1.7% dividend yield and an extended run up in share price, it’s a little rich for us
• Today’s share price move -3.55% highlights the susceptibility of this stock to profit taking, as investors trim winners to put cash back into portfolios, with the hope of picking up bargains in the not too distant future
• Around $94 is the initial downside target for CSL, failing that, a move closer to $90 would look interesting.

ASX 200 Movers

Regards,

The Market Matters Team

Level 12 28-34 O'Connell St

Sydney NSW 2000

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