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In Search Of A New Market Consensus

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Oct 21 2015

This story features MCMILLAN SHAKESPEARE LIMITED, and other companies. For more info SHARE ANALYSIS: MMS

In this week's Weekly Insights:

– In Search Of A New Market Consensus
– Investor Illogicality: Auto Leasing
– El Nino Benefits Insurers
– Broker Call Changes
– Rudi On Tour
– Rudi On TV

In Search Of A New Market Consensus

By Rudi Filapek-Vandyck, Editor FNArena

"Never have we seen so many clients who just do not know what is happening and have cashed up"

It is my view the Federal Reserve should have hiked by 25 basis points, or less, in 2014 or earlier this year, when US indicators, profits and momentum were strong, and so was the global context.

Admittedly, it is much easier to form a view, and stick by it, when you are not a member of the Federal Open Market Committee. Maybe, if one looks at the world from Janet Yellen's chair, then maybe there are plenty of reasons to dismiss my view and stick to the softly, softly approach. And hope it doesn't derail the underlying strategy in the meantime.

But one has the feeling the Fed is in a pickle and not sure exactly what to do. Now Fed-watchers worldwide are starting to look into the internal division that is captivating the centre of decision making at the world's most important central bank.

Fed Policy Now A Power Play?

At the centre of the Fed's internal division, analyses Commerzbank, is a battle raging between economic ideologies about whether the Phillips curve, so long a key guide for the Fed, is still sacrosanct, or should it be questioned? The Phillips curve is based upon the long held assumption there is a reasonably stable, reliable and predictable correlation between capacity utilisation (read: labour market) and inflation.

Janet Yellen and her Vice Stanley Fisher seem to be sticking to the traditional script, and thus interest rates should move higher. But there's growing dissent and two FOMC members, Lael Brainard and Daniel Tarullo, are openly questioning the validity of the Phillips curve, no doubt arguing the world has changed, while pointing at the world's low-flationary environment.

Commerzbank is now looking at the Fed through the prism of a power struggle, suggesting Yellen and Fisher are probably sticking to the December meeting to deliver that first rate hike, while trying to pull at least some of the dissenters in line. One observation is undeniable, however, and it is that the absence of a clear road map for action by the Fed is impacting on views and strategies in financial markets.

There is no consensus about what comes next. The result is that views and opinions are all over the shop, ranging between the advent of a new bear market to expectations this year's correction is already done and dusted, to the Fed will never, ever be able to raise interest rates, to markets and the Fed will soon find themselves behind the inflation curve.

Add just about everything in between every possible scenario, with regional variances.

We can all make jokes about market consensus more often being wrong, but the absence of consensus might turn out worse, and less predictable, of course. Now nobody knows what to think or what comes next.

On my observation, the lack of any form of consensus is the most important feature in today's markets and it is one observation that keeps rearing its head whenever I read analyses and observations by market experts and strategists this month.

Lack of conviction. No direction. Maybe what we are experiencing this month is the realisation that market consensus, whether right or wrong, is one key ingredient for financial markets that is required to show any form of direction, up or down?

Lost And Bearish

"Lost and bearish", such was the conclusion from Credit Suisse global strategists following meetings with institutional clients in the US, Europe and Asia in past weeks. Most have been hurt, in some form, by the many rotations that have occurred in recent times, and are confused, if not at a loss about what to make of it.

Enter: bearish sentiment. Uncertainty leads to a focus on what is there to worry about. China's "New Normal". Global trade. US profits. QE forever. Demographic shifts. Eurozone politics. Migrants. US debt ceiling. Russia's involvement in Syria. UK referendum on the EU. OPEC and oil. Global debt. Permanently lower trend growth.

"Never have we seen so many clients who just do not know what is happening and have cashed up".

If anyone out there feels at a loss, confused and uncertain, don't despair. You are not alone, far from.

Peak Buffett

We had a lot of "peak" calls these past years. Peak oil. Peak gold. Peak inflation. Peak global growth. Now somebody has done the unthinkable and called for "Peak Buffett".

Yes, you read that right. Warren Buffett's Berkshire Hathaway has endured a few big blows in recent times. When global headlines zoomed in on the profit warning, and subsequent share market punishment for the world's largest supermarket operator, Wal-Mart, Warren Buffett's investment vehicle was feeling the pain too. Wal-Mart is one of Berkshire's key long-term investments.

Wal-Mart is the second blow from the same sector. Buffett already had been left licking his wounds following disaster at Tesco in the UK. Loyal shareholders in Woolworths here in Australia who've seen the share price slide from $36 to the mid-20s might feel relieved knowing the world's best investor himself is feeling the same pain.

But is there a deeper message in this?

Wal-Mart is "old economy". Essentially a long term, super-defensive, dividend paying, reliable performer who's now falling victim to a changing landscape. Sounds familiar? One could say the same about The Coca-Cola Company, or IBM, or American Express, or Wells Fargo, or Deere. These are all old economy representatives. And all are owned by Berkshire Hathaway.

Hedge fund manager Douglas A. Kass, from Seabreeze Partners Management, made the call last week. He's short Berkshire since.

Peak Fear?

Strategists at Citi do not deny there are valid reasons to be on the cautious side, but they do question the extent of bearishness that has crept into investors' minds, and in asset prices.

Citi's Panic/Euphoria Model is indicating overall sentiment is now well and truly into "panic" territory. The good news behind all this is that history shows, such bearishness is an ideal platform for positive returns in the year ahead,

The dark blue line shows investor sentiment. See how high it rose in 2007 and how low it fell in 2009, 2011 and in 2013. 2014 only showed a minor blip. Now sentiment is back deep in the negative and on Citi's measure, heading lower than it was in 2009, 2011 or 2013. This looks like a repeat of the mid-nineties when sentiment (apparently) remained well into the negative while share market returns ran into double digits; the grey-ish bars mostly above the zero line. Not that anyone is predicting a rerun of the nineties.

Citi strategists' philosophy is simple and straightforward: either the problems about which we worry show up, or the fear about them showing up will fade.

Investor Illogicality: Auto Leasing

As my past research into local All-Weather Performer stocks showed, the leasing of automobile vehicles is a sector that lends itself for solid, reliable, sustainable returns for shareholders over a prolonged period of time. It's why McMillan Shakespeare ((MMS)) featured prominently in my earlier publications around the theme.

McMillan Shakespeare management kept on performing post 2008 and the market said "thank you" and rewarded the shares with a big re-rating. Until someone in the Gillard government had an idea: how about we target this sector in order to save ourselves some tax leakage? No industry consultation. No transition period. No warning beforehand.

In the end, nothing came of it, but the damage had been done. McMillan Shakespeare shares never recovered from the Big Government Scare and even today they are trading well below the $18 they reached in mid-2011. End of a beautiful story that once was upon us.

At least, that's how it seems from a far away distance. In practice, what has happened is that McMillan Shakespeare has now been joined by various local competitors who also listed on the ASX. This has triggered renewed interest from stock broking analysts and a general agreement that leasing vehicles can be rewarding for shareholders. It doesn't require trend growth. It does require the government keeping its hands off legislation that allows for the sector's existence, but it appears more and more analysts have grown more confident on this issue.

When was the last time anyone heard a politician mention anything about this sector?

Citi analysts, who released a sector report last week, agree with me wholeheartedly, concluding perceived regulatory risk is greater than the actual risk. It is also Citi's assessment that the outsourcing of fleet management is still increasing in Australia and this provides a favourable background for the industry overall. Citi likes McMillan Shakespeare most, followed by Eclipx Group ((ECX)), then SGFleet ((SGF)). Smartgroup ((SIQ)) is also a member of this sector, though not part of Citi's sector coverage.

The irony today is (as everyone can check via Stock Analysis on the FNArena website) the three newcomers have performed solidly since listing, leaving McMillan Shakespeare behind as if the threat of government intervention -perceived or real- solely rests with the market leader alone.

At the very least, this suggests a relative valuation gap that needs to be closed at some stage because, unless I am missing something vital, it doesn't make sense to ignore and de-rate McMillan Shakespeare because one day, the government might have a Gillard moment, but then pile into the rest of the sector and completely ignore that what is keeping McMillan Shakespeare in the doghouse.

El Nino Benefits Insurers

El Nino is coming to Australia. The Bureau of Meteorology is forecasting a record El Nino year with a 91% chance of below-average cyclones in FY16. This is good news for insurers, reported analysts at Morgan Stanley on Monday. Extremely dry weather not only sharply reduces catastrophe claims, it also tends to reduce motor claims too (lower rainfall).

Morgan Stanley emphasises Insurance Australia Group ((IAG)) offers the highest leverage in Australia. Suncorp ((SUN)) should benefit too but its banking arm might suffer through its agri lending book due to the need for having to top up drought provisions.

Broker Call Changes

Regular readers of the Australian Broker Call Report would have noticed we've expanded the data available for consensus estimates. Instead of simply lining up present year estimates, data and calculations now extend to two years.

The reason for this is pretty straightforward: stock broking analysts usually look twelve months ahead, and so does our daily Report, but sometimes one year ahead is not enough. This is in particular the case when things are forecast to change in the following year or when we approach the end of the financial year, as is about to happen for Incitec Pivot ((IPL)), DuluxGroup ((DLX)) and three of the major Four Banks, to name but a few.

Especially prior to FY reports I always felt the Australian Broker Call Report could be missing vital information that would only be picked up if subscribers also visited Stock Analysis.

There's a lot more info on display now. I hope subscribers appreciate the improvement.

Rudi On Tour

– I have accepted to present to members of Australian Shareholders' Association (ASA) in Canberra, on Tuesday, 8th December 2015

Rudi On TV

– on Thursday, Sky Business, Lunch Money, noon-1pm
– on Thursday, Sky Business, Switzer TV, between 7-8pm

(This story was written on Monday, 19 October 2015. It was published on the day in the form of an email to paying subscribers at FNArena).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: or via Editor Direct on the website).



This eBooklet published in July 2013 forms part of FNArena's bonus package for a paid subscription (excluding one month subscriptions).

My previous eBooklet (see below) is also still included.



Odd as it may seem, but today's share market is NOT only about dividend yield. Post-2008, less risky, reliable performers among industrials have significantly outperformed and my market research over the past six years has been focused on identifying which stocks, and why, are part of the chosen few; the All-Weather Performers.

The original eBooklet was released in early 2013, followed by a more recent general update in December 2014.

Making Risk Your Friend. Finding All-Weather Performers, in both eBooklet versions, is included in FNArena's free bonus package for a paid subscription (excluding one month subscription).

If you haven't received your copy as yet, send an email to

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