Australian Investment Blog

Good Afternoon everyone

Market Data

What Mattered Today

BANG…..!! a big day for Aussie stocks with the index up an pretty impressive +79pts…Resources the main driver with the likes of BHP up +6.04% to $17.92, RIO up +4.52% and Fortescue (FMG) up $7.77 to $3.19. Short covering, optimism around commodity prices, a weakening USD, better data from China…and momentum – which is a BIG driver of stock prices, underpinned the strength.



We’re underweight equities – overweight cash, and clearly on the wrong side of the trade today HOWEVER as we’ve been suggesting for some time, it comes down to risk v reward and clearly we’re not seeing a satisfactory payoff right now for the U.S market, which underpins our caution locally.

Sustained buying throughout the day, and a break up through the 5000 level + decent value going through the ASX ($4.83bn) are all positive signs. Particularly pleasing was the move in the Banks – all up more than 2%, however we’re still seeing risks around the U.S market, and that could ultimately provide a decent headwind for the ASX in coming days/weeks.

One of the obvious trends is $$$ moving into resource stocks, and even some tentative signs emerging of support for associated industries – like mining services. The dogs of the ASX – think Mineral Resources (MIN), Boart Longyear (BLY), Monadelphous (MND), Worley Parsons (WOR) and co. Of these, the biggest shorts sit in WOR (13% of stock), MND (11% of stock) & MIN (7.6% of stock) – so these have the greatest potential for short sharp moves higher as shorts are forced to cover.


Source; www.shortman.com.au

We think that’s an interesting discussion at this point in time, given the BIG move higher in the likes of BHP, RIO & FMG today. We chatted with many long/short Fund Managers last year who, in fairness, were booking some very good performance numbers. Long industrials, and short materials was the consensus trade – and it worked. The issue now is we’ve got a lot pushing the exit button at the same time, so we’ll get big swings as they buy back to cover.

So days like this, when we have good leads from overseas, backed up by decent eco data from China, we can get v’big moves – which we saw. Today it was better trade data, but the more interesting aspect was around electricity consumption which can’t be fudged (or not easily anyway). Electricity consumption rose by 5.6% in March, compared to a fall of 0.3% during 2015. Power consumption is a key gauge of activity at steel mills, glass manufacturers and cement plants, which all form part of China's old industrial economy – the area the market seems to have concerns about.

As we’ve written recently, we think resource focussed markets will outperform non-resource focussed markets, which means underperformance by the U.S in 2016 v Australia, Canada and the like…. The Aussie Dollar up today – trading above 77c at the highs.




Stocks & Sectors Today

Source; Bloomberg

Fortescue Metals (FMG) delivered a fairly strong production report with shipments running ahead of guidance and up 4% YoY, cash cost down another $1, net debt reduced by another US$200 which feeds into the likelihood of more de-gearing as the year goes on.

So, 9 quarters of cost reduction, margin optimisation, free cash flow generation – which is all pretty impressive. We’ve also seen BIG short covering of late pushing the number of shorts down from 12.5% of issued stock in mid 2015, to under 5% now. That has corresponded with a share price move from $2 to over $3…

Regarding the numbers, FMG achieved an Iron Ore price of $US45.94 for the quarter, while they reconfirmed FY16 cost guidance of US$15 a tonne and exit cost of US$13t – on a run rate of 165mtpa. FMG has cash of $2.5bn and generated $400m of free cash flow in the quarter.

A good story but its run hot. Market Matters have been in and out of FMG – currently out, looking for another entry point.




Source; www.shortman.com.au

ASX 200 Movers


***What Matters Tonight***

European leads are positive with the FUTURES on the FTSE +56, DAX +136 & CAC +66
In the States, DOW FUTURES are up +43pts, S&P 500 FUTURES up +4pts

JP Morgan reports tonight in the U.S

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



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