Is This The Melt Up?

This story features ANZ GROUP HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: ANZ

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

-Is This The Melt Up?
-Conviction Calls: Shaw, Bell Potter, CLSA, MS, GS, JPMorgan, CS
–Last Ticket For Sale!
-Everybody Wrong! (Almost)
-New Website: Where To Find Rudi On Twitter
-Rudi On BoardRoom.Media
-2016 – L'Année Extraordinaire
-All-Weather Model Portfolio
-Rudi On TV
-Rudi On Tour

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

Is This The Melt Up?

By Rudi Filapek-Vandyck, Editor FNArena

The difference in internal market dynamics in Australia and the USA was almost perfectly illustrated by market updates from Amazon overseas and from ANZ Bank ((ANZ)) in the local market.

Whereas the internet shopping leviathan significantly outperformed market expectations, leaving analysts scrambling for estimates upgrades and even higher price targets, ANZ Bank's FY17 report provided more evidence the majors are currently enjoying an operational sweet spot, but it couldn't quite match what analysts were expecting.

Amazon shares jumped by double digit percentage, ANZ Bank shares fell.

Not helping matters is ANZ Bank's consensus price target has now fallen to $30.50 from $30.75 prior to the release. This doesn't seem like a big deal, but the share price already is trading above $30 and prior to this year, every release of financial numbers would be followed by at least a mild increase in stockbroker's price targets.

Not this time, thus.

It didn't happen in May either, at the half-year mark, and back then ANZ Bank shares, trading above target at around $33, fell whole the way to $27 after the event, including payout of 80c in interim dividend. Investors will be hoping history won't repeat in the coming weeks as weaker banks will almost certainly scupper any ambition for the ASX200 to finally crack the 6000 level either side of Christmas.

Fingers crossed National Australia Bank ((NAB)), Westpac ((WBC)) and CommBank ((CBA)) will deliver a Macquarie rather than an ANZ in the coming ten days?

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Either way, it should be obvious market dynamics in the USA are very different from those in Australia. In the US leading companies are beating market expectations with a smile, creating more upside potential, even though share prices already have been running very hard for a long while. Funds managers are very much fully invested. Valuations are high. Volatility seems low. Market breadth is narrowing. Momentum looks to be running out of puff, sometimes, but somehow there's always a new trigger to push markets higher.

In Australia, the contrasts are sharp and pronounced. Here the index has finally jumped higher in October, after five months of general inertia on low volumes. Funds managers are still cashed up. They would love blue chip stocks like ANZ Bank to provide them with plenty of reasons to push the share price back to levels last seen in May, but it simply ain't happening.

Instead, money is flowing into the second and third tier where stocks including a2 Milk, Blackmores and Altium can do no wrong. Their share prices simply look spectacular on price charts this year. But how long can this go on? Look carefully at recent price action for the likes of Afterpay Touch, WiseTech Global and Mineral Resources and it might be interpreted as share price rallies hitting a ceiling?

Market strategists at Citi think there's enough around to stay positive. They observe analysts' earnings estimates are slowly increasing, predominantly for resources stocks, but also for banks and industrials. A weakening Aussie dollar should further contribute to this. (FNArena's daily monitoring is still registering more downgrades than upgrades – see also "Weekly Ratings, Targets, Forecast Changes" on the website).

In addition, if US companies see their corporate tax rate cut, part of corporate Australia will benefit too. CSL ((CSL)), ResMed ((RMD)), Cochlear ((COH)), Aristocrat Leisure ((ALL)), Computershare ((CPU)), Amcor ((AMC)), Boral ((BLD)), Orora ((ORA)), BlueScope Steel ((BSL)), James Hardie ((JHX)), Brambles ((BXB)), Westfield ((WFD)),… they all have substantial operations in the country.

Citi maintains the ASX200 is poised to successfully break through the 6000 barrier, and reach 6250 by mid next year. Thereafter, things are expected to get more hairy, also because by then markets might be zooming in on rate hikes, again.

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Market strategists at Credit Suisse are more bullish than their peers at Citi. Credit Suisse believes as long as the RBA remains on the sideline and keeps its finger far away from the interest rate hike button valuations are set to remain higher for longer. Hence why CS's target for the ASX200 is 6500 by year-end 2018.

Credit Suisse sees a new upswing in global corporate earnings growth opening up, and corporate Australia is set to command its share too. In a dumbed down version of the CS formula for the year ahead, delayed central bank action feeds into higher corporate profits, which translates into higher share prices.

Simple.

Against this background, UBS strategists recently expressed their concern with the market's affection for proven high growth, high Price-Earnings (PE) stocks such as Cochlear, CSL, REA Group ((REA)), Seek ((SEK)), ResMed, and others. All of these stocks are currently trading on above average multiples against their own history, warns UBS. Exercising at least a degree of caution would seem but the prudent approach.

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I remain of the view that mid-tier companies and laggards will increasingly land on investor radars, deterred by valuation limits in the top end of the market (see ANZ Bank, others), for as long as US indices retain their positive momentum.

Which is why the view of Vincent Deluard, President, Global Macro Strategy at INTL FCStone has attracted my attention. Deluard believes US equities are in "melt up" mode. This is the opposite of melt down. Melt up is an oft used description among US commentators this year and Deluard suggests this usage is probably correct.

On his own definition, melt ups occur when markets record new all-time highs in combination with year-on-year gains of at least 20%. They end when indices sink below the six month moving average. Bounces from corrections do not qualify. Others might add this is when investors throw all caution overboard and join the bandwagon, because they can no longer resist and fear missing out on ever accumulating gains. This is when share prices move higher because they are moving higher, and more money keeps on flowing in.

Melt ups have a bad name because they have preceded some of the ugliest bear markets in history, including 1930, 1987 and 2000. Some might include 2007 as well.

Deluard has a different view. On his analysis, since 1900 US equities have experienced no less than 77 melt-ups, representing 16 years in total duration, or about 14% of total time since. The average such melt-up lasts 45 days and delivers a gain of 5%, but the current version is already running longer than 315 days for gains of 15%. The current version is approaching the 329 days between April 1954 and March 1955. If it continues, it soon will be the longest recorded in history (at least since 1900).

Based on these numbers, concludes Deluard, it's probably safe to say the best days of the present melt-up are behind us. Again, this need not be a disastrous outcome for investors. Out of the 77 melt-ups recorded, only a small number transformed into an ugly bear market (or meltdown). On average, the year following the 76 prior melt-ups has generated a return of 6.8%, which is below the US market's long term average of 8.1%, but nevertheless a far cry from a potential meltdown.

In addition, notes Deluard, market volatility has been extraordinarily low. Combine this with the double digit gains recorded thus far, and the current share market rally sits in the 0.3 percentile of the best times in history. Put otherwise: conditions in the US stock market are now better than 99.7% of all times since 1900.

He thinks there's still a chance some of the funds currently invested in bonds might switch into equities. This would prolong the current rally.

All in all, Deluard is cautious but not yet straight up negative on US equities, arguing he'd rather be a bond bear than a stock market bull.

This is probably as good as any other time to remind investors: this too shall pass. You usually read this when times are tough, but it equally applies when times are exceptionally good.
 
Last Ticket For Sale!

I'd like to report the upcoming An Evening With Rudi in Sydney's Paddington is sold out, but there is still one available ticket/seat left. Who's going to grab it?

As explained last week, 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. One more ticket is available. You can still secure your presence via the following link:

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

Everybody Wrong! (Almost)

Two observations about the financial news agenda in Australia should have every investors' attention.

Firstly: how small is the group of journalists and experts that sets the national agenda when it comes to financial matters. Secondly: how eagerly this select group of illuminati has been to jump on board the "RBA is ready to start hiking rates" bandwagon.

There have been times over the past year that I literally felt I had to pinch myself really, really hard in order to make sure I was awake and not caught into some bad dream, as daily newspapers were announcing "the end of the yield trade", bond market mayhem and much higher rates soon, and financial television was reeling out a battery of talking heads who were all parroting the same theme.

Of course, just like with other matters in life, repeating the same mantra over and over again doesn't make it necessarily more accurate. It just means more people get used to it, and more parrots will repeat the same message.

To be fair: there will always be divergent views and predictions, especially in matters of economics and finance, but even Blind Freddy would agree mainstream news media in Australia have been leaning towards RBA tightening in a much too heavy handed manner, without incorporating the usual checks and balances, including opposing views.

Quite embarrassing, really, that Westpac chief economist Bill Evans had to go out on his own initiative and address the nations one-sided reporting regime whereas noted hawks such as HSBC's Paul Bloxham were given excessive opportunity to prepare mortgagors and the rest of this nation of debtors for much higher interest rates ahead.

Never mind, also, the RBA through governor Philip Lowe and others, repeatedly tried to play down all the dominant media talk about rate hikes soon.

All that talk instantly died down with the release of the Australian Bureau of Statistics' September quarter consumer price indices. Despite the big jump in electricity bills and higher taxes on alcohol and tobacco, there is no inflation threat to speak off today in Australia. And it seems rather unlikely that such a threat is about to reveal itself in the coming quarters.

So sit back and relax everybody. Hopefully nobody made too drastic changes to the portfolio on the basis of this mass hysteria. Bill Evans has been more right than Bloxham and Co, and while more economists are predicting tightening than not, this never has been an accurate measurement. Remember how often the majority gets it wrong on the Aussie dollar. Or on the share market.

Last week I reported current market views were pretty much defined by Bloxham on one side (RBA hike in February) and Evans on the other end of the spectrum (nothing happens in 2018 and 2019), but I had forgotten about Credit Suisse who still hasn't given up on the RBA further cutting the cash rate.

Silly me.

Luckily for me, Credit Suisse repeated their view last week, with some new insights thrown in, which provides the ideal opportunity to correct last week's omission. Credit Suisse acknowledges the labour market has tightened, reducing spare capacity. This is the platform used by others to suggest the RBA should be tightening soon.

But Credit Suisse is of the view this is as good as it gets. CS economists built their own forward indicator, using retail sales, business confidence and the depth of the infrastructure spending pipeline, which, CS believes, has been significantly eroded. This index points to a sharp slowing in the labour market ahead.

Translation: no growth in wages lies ahead.

Credit Suisse sees more disinflation in wages on the horizon, and thus potentially two more rate cuts by the RBA in 2018. Here's the paragraph that sums it all up:

"…we think that the infrastructure impulse has merely delayed an inevitable slowing, and indeed, the infrastructure impulse is now fading. Also, we think that downside risks to housing from reduced Chinese buying have been underestimated by many commentators. Therefore, we see material undershooting in the economy in 2018 compared with our base-line forecasts. We push out our rate cut forecasts to 2018. We see the RBA cutting twice next year.

Our outlook supports bonds and a weaker currency."

For good measure: I remain with Bill Evans and if there is an earlier RBA rate hike on the horizon, at some point, it won't mark the start of a steep tightening process. Recent analysis by economists at National Australia Bank revealed some 40% of CPI components in Australia has fallen in price over the year past.

Now, is it too much to ask for a more balanced reporting on this matter from the main media channels in Australia?

Rudi On BoardRoom.Media

Audio interview from last week:

https://boardroom.media/broadcast/?eid=59eea45eb08d2638bd14fa26

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, Noon-2pm, Trading Day Live
-Thursday, between 7-8pm, interview on Switzer TV
-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 30th 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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