Hard To Be Bearish

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In this week's Weekly Insights (published in two separate parts):

-Hard To Be Bearish
-An Evening With Rudi In November
–Beware Australian Chemicals
-Conviction Calls: Citi, Morgans, Morgan Stanley, CS, Canaccord
-Rudi On BoardRoom.Media
-The CPI Battle Among Economists
-All-Weather Model Portfolio
-Rudi On TV
-Rudi On Tour

[Note the non-highlighted items appear in part two on the website on Thursday]

Hard To Be Bearish

By Rudi Filapek-Vandyck, Editor FNArena

As I flagged in last week's Weekly Insights, it appears funds managers in Australia found themselves with too much cash on deposit, and with no weakness in September. The industry thus decided it's best to start moving some of that cash into the local share market.

The direct result has been eleven up-days out of the past thirteen, with Monday's minor loss for the ASX200 ending seven sessions of uninterrupted gains. Given the size of the cash on the sidelines, as reported by Deutsche Bank (see chart below), there should be a whole lot more ready to flow into Australian equities.

Investors should also note that with an unexpectedly buoyant October, year-to-date total return for the ASX200 has now accumulated to circa 8% with banks and companies such as Aristocrat Leisure, Incitec Pivot and TechnologyOne yet to report and pay out final dividends. This is far from bad for a year that had major indices boxed in a tight range throughout most of the five months preceding.

As far as I see it, this market has two obvious problems: having finally broken out of its sideways range to the upside, the ASX200 is now staring at the 6000 level, which might prove one mighty barrier to break through. The market broke through this level to the downside in the first quarter of 2008 and never felt confident enough to reach above it on the two upswings in 2015 and 2017 that pushed the index near it.

The second threat could be US equities running out of puff. I know what you're thinking: there's a whole army of worrywarts and bearish commentators who have been predicting a pullback for US equities for quite some time, and it never seems to happen. One day it will though, and that one day can just as easily be this week or next month; there is no rule that says the next correction has to occur past Christmas.

Valuation Constraints

Whereas resources stocks such as Rio Tinto, BHP and Oil Search are still trading well below consensus price targets, many others including Woodside Petroleum, Iluka, Western Areas and Independence Group are trading near or above target. Most importantly, two out of the Big Four Banks are now also above target, with ANZ Bank ((ANZ)) and Westpac ((WBC)) respectively having only -0.7% and -1.1% left to fill.

In particular the fact that CommBank ((CBA)) shares are now 1.3% above target, and National Australia Bank ((NAB)) shares 3.7% above target indicates to me this market is already stretching itself near to full capacity. Not fully there yet, but close. NAB is about to pay out 3% to shareholders and analysts might well lift price targets a little bit post the upcoming FY17 release, but by how much exactly is realistic?

Last time the banks released financial results, in May (June for CBA), consensus targets hardly moved and they are lower today for all Four Major Banks (see Stock Analysis on the website).

The reason as to why investors should pay close attention to where bank share prices are vis-a-vis consensus targets is because history shows a close correlation between local risk appetite and banks surging beyond targets. Pre-2008 I used to warn FNArena subscribers on a regular basis about domestic shares overheating and every time this was on the basis of bank share prices moving too high. Every time, without exception, a pull back or correction for the share market in general followed next.

As the banks have wrestled with their own specific sector problems post GFC, this correlation has not always remained in place throughout the years past. But I have little doubt it has been reinstated in 2017.

Hence, the most important question to ask as we are about to close off on a very strong October, is: what makes this time different?

The answer might well be that ANZ, NAB, Macquarie Group ((MQG)) and Westpac have as yet not reported and share prices are likely to remain supported until those fully franked final dividends are removed from share prices. Westpac closes off the season on November 6th, with CommBank providing a first quarter update two days later.

The usual seasonal pattern, if it can be relied upon this year, is for a share market dip in November, followed by a rally into the new calendar year.

Laggards And Shorts

Large cap stocks near full valuation is not what you want to hear if you are right now a fund manager with too much cash eager to be deployed. Already the past weeks have proved to be an absolute bonanza for many of the must have star stocks among the smaller and midcap names on the ASX.

Think a2 Milk. Mineral Resources. Afterpay Touch. WiseTech Global. Share price performance on recent charts looks vertical! Plus witness how quickly GUD Holdings shares surged from $10.50 to near $12; on one broker upgrade. Domino's Pizza shares rallied from below $40 to near $50 in a heart beat. The same goes for Blackmores (below $90 to $140), Platinum Asset Management (below $4.50 to above $7), and Santos (below $3 to $4.30).

But these opportunities cannot absorb all the cash that is looking to buy. Perennial dogs like QBE Insurance, AMP and Telstra have already moved off their lows.

It is not inconceivable investors' attention will increasingly focus on laggards outside the ASX Top50. It is here where a Bapcor, even after the recent rally, is still more than -15% below target. Similar for Webjet. APN Outdoor is more than -16% below target.

None of these stocks are without question marks, and they may not fill the gap in full in weeks to come, but at the very least there is a suggestion these share prices are not overly expensive, with plenty of room left to move to the upside.

In the absence of a full retreat in risk appetite, which would probably follow if and when US equities had a decent correction, it may well be there are still decent gains, and trading opportunities, to be had, even with the major index, and many a large cap stock, seemingly offering limited upside from here.

One obvious question to ask, in particular if investors own one or more stocks that carry a large contingent in short positions, is whether some of these shorters aren't feeling quietly uncomfortable in the face of more cash flowing into the share market? If they lose their nerve, sharp rallies can occur (see The Short Report on the FNArena website).

Another question would be that if a given stock looks cheap, and it simply cannot move higher, even in this context, then maybe it's not a bargain, but a potential value trap instead?

All in all, it is but logical to expect a pause in the October rally, also because bank share prices seem valuation constrained, but with funds managers looking to deploy more cash, and no obvious trigger on the horizon for a sell-off (best not forget the season either), it remains a tough ask to turn genuinely bearish on this share market in the medium term.

It is more likely, I suspect, fresh money will zoom in on laggards and further opportunities outside the top end of the market. I would not expect to see much weakness for the market in general, nor sustained, unless the overall context changes dramatically.

An Evening With Rudi In November

The idea is to enjoy a nice meal, have a few drinks, meet some interesting fellow-investors and -the cherry on the cake- have myself sitting around the table, explaining my insights and views on the local economy, interest rates, what stocks to avoid and what the future possibly might bring in 2018, and beyond.

The place of action is The Bellevue Hotel in Sydney's Paddington, on 22nd November. Tickets are limited and expected to sell out, so no more time left for procrastination. You can still secure your presence via the following link:

https://www.fnarena.com/index.php/sign-up/?pid=32

Rudi On BoardRoom.Media

Audio interview from last week, with charts:

http://boardroom.media/broadcast/?eid=59e578d2b729304c49eb32ab

The CPI Battle Among Economists

Make no mistake: there is a battle being fought among economists in Australia and inflation -high or low, rising or lower for longer- will determine whose career and reputation is about to enjoy a boost, and who will get egg-faced. HSBC's Paul Bloxham is firmly of the view the RBA will hike rates as early as February next year. In the opposite corner sits Westpac Chief Economist Bill Evans, known for multiple contra-consensus accurate calls in years past. Evans says no hikes in either 2018 or 2019.

In between sits every other grey suit with a quantitative model trying to figure out real momentum for the Australian economy, and what really makes hearts beat faster inside the RBA building at Sydney's Martin Place.

On Wednesday this week, Australia's Q3 CPI will be released and just about everyone is anticipating a relatively large jump upwards, due to a large rise in gas and electricity prices, with core inflation expected to jump into the RBA's target 2-3% range. Time to join Bloxham and Co?

Not so fast. Economists at CommBank, who sit in the middle with no hikes expected until at least the second half of 2018, point out real wages growth remains crucial in the RBA's thinking and on their estimate real wages growth (i.e. the latest Wage Price Index deflated by CPI) will move into negative territory in Q3. Hardly the kind of statistic that suggests the hawks are having momentum on their side.

Bill Evans is actually of the view that, underlying, inflation momentum is slowing and, if anything, the RBA is more likely having to admit its own forecasts will prove to be too optimistic. Not this week, but sometime next year, probably.

Evans also points out the composition as to how CPI is being weighted and measured is about to change. This happens every six years and each revision puts pressure on measured inflation, usually by -0.2%. Preliminary estimates by Westpac suggest this time the impact can be up to -0.4% and by -0.3% for the underlying measurement.

"So, in conclusion, there is a significant risk that inflation falls short of the RBA’s current forecasts in 2018 and 2019. However financial stability risks preclude cutting rates. On the other hand raising rates in such an environment seems equally unnecessary while effective macro prudential tools are available to deal with unwelcome developments in asset markets."

Next chapter: Wednesday, 25th November 2017. Attendance is free.

2016 – L'Année Extraordinaire

It was quite the exceptional year, 2016, and I did grab the opportunity to write down my observations and offer investors today the opportunity to look back, relive the moments and draw some hard conclusions about investing in the world today.

If you are a paid subscriber to FNArena, and you still haven't downloaded your copy, all you have to do is visit the website, look up "Special Reports" and download your very own copy of "Who's Afraid Of The Big Bad Bear. Chronicles of 2016, A Veritable Year Extraordinaire" (in PDF).

For all others who still haven't been convinced, eBook copies are for sale on Amazon and many other online channels. You'll have to visit a foreign Amazon website to also find the print book version.
 

All-Weather Model Portfolio

In partnership with Queensland based Vested Equities, FNArena manages an All-Weather Model Portfolio based upon my post-GFC research. The idea is to offer diversification away from banks and resources stocks which are so dominant in Australia, while also providing ongoing real time evidence into the validity of my research into All-Weather Performers.

This All-Weather Model Portfolio is available through Self-Managed Accounts (SMAs) on the Praemium platform. For more info: info@fnarena.com

Rudi On TV

This week my appearances on the Sky Business channel are scheduled as follows:

-Tuesday, 11.15am Skype-link to discuss broker calls
-Thursday, 1pm-2pm, Trading Day Live
-Friday, 11.15am Skype-link to discuss broker calls

Rudi On Tour

– I will be presenting in Adelaide on November 14th to members of Australian Investors Association and other investors, 7pm inside the Fullarton Community Centre, 411 Fullarton Rd, Fullarton. Title of presentation: Investing In A Slow Growing World – An Update

(This story was written on Monday 23rd October, 2017. This first part was published on the day in the form of an email to paying subscribers at FNArena, and will be again on the following Wednesday as a story on the website. Part two shall be published on Thursday).

(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: info@fnarena.com or via the direct messaging system on the website).

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BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:

– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
– Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
– Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.

Subscriptions cost $380 for twelve months or $210 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index2.cfm?type=dsp_signup

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