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: info@fnarena.com or via Editor Direct on the website).

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THE AUD AND THE AUSTRALIAN SHARE MARKET

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.

****

MAKE RISK YOUR FRIEND - ALL-WEATHER PERFORMERS

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 info@fnarena.com

For paying subscribers only: we have an excel sheet overview with share price as at the end of September available. Just send an email to the address above.

In this week's Weekly Insights:

- Smaller Cap Industrials: Re-Rating Or Bubble Threat?
- China Threat Ongoing
- What If Lower Growth Is The Future?
- The Oil Search Valuation Tool
- Rudi On Tour
- Rudi On TV

Smaller Cap Industrials: Re-Rating Or Bubble Threat?

By Rudi Filapek-Vandyck, Editor FNArena

Give a man a number and strange things can and probably will happen.

In his 2011 master piece Thinking, Fast and Slow^(*) (a must-read), Daniel Kahneman showed how judges penalised less or more in court if they had been exposed to lower or higher numbers beforehand, even if the choice of those numbers was completely random.

But researchers of the human behaviour don't necessarily have to go through lengthy peer-reviewed research to prove the all-importance of numbers to the human mind. Keeping one close eye on the local share market could be sufficient.

CSL

In the run-in to the August reporting season -overall sentiment was still reasonably okay- investors' attention was once again piqued by the question: which stock is going through the $100 barrier first? Thus from the moment CSL ((CSL)) shares reached into the high $90s, it just had to be CSL. Had to be.

In a mad frenzy that lasted a few days only -no specific news to carry anything- the share price surged above $100... and then lost all momentum.

Sure, we can blame China, the US Fed and those nasty hedge funds turning negative on Emerging Markets and on Australian shares, but realistically, I think CSL shares would have dropped anyway.

I was watching the share price closely at the time (CSL is in the All-Weather Model Portfolio) and honestly there really was no other reason for CSL shares to jump higher in that first week of August, other than to get the share price on the other end of the $100 mark, answering the question: who will be the first?

The magic of numbers.

The magic applies even more when we're dealing with smaller cap stocks. Lesser research. Lower volumes. More traders looking at a price chart. You get the idea.

Blackmores

CSL might have been the first in 2015 to cross the $100 mark (both Incitec Pivot and Rio Tinto already did it years ago), But it didn't last. Enter food supplement manufacturer Blackmores ((BKL)).

A few weeks after CSL shares briefly captured everyone's attention, Blackmores became the next stock with a three digit share price on the ASX. Imagine the following scenario. Sharp retreat in global risk appetite pushes the Blackmores share price to $84 on August 25. The next day brings a bounce back so the share price rallies to $90.

Then JP Morgan comes out with a revised price target of $98. That very same day Blackmores shares close at $100. The next day it closed at $109. By then some funds managers had been quoted the share price could go as high as $150. Goldman Sachs also updated and introduced a share price target of $143.

Blackmores was always going to reach that $150 mark, I thought. And it did. As a matter of fact, the share price reached as high as $155 last week.

The magic of numbers.

Last week, when I pointed out smaller cap industrials have been the star-performers on the local share market this year, I also added some of the stocks I have been watching seem to be over-shooting to the upside. Blackmores is one such example.

After reaching $155 (twice - intraday on Wednesday and by opening on Thursday) momentum has shifted and the shares have quickly landed in a funk a la CSL. On Monday (today) the shares closed at $132.58, a whopping $22 below where the price was only two sessions ago.

One does not have to look back to 2007 or to tech stocks in 2000 to recognise a "bubble" - it happens in individual cases in the share market on a regular basis. Remember when everybody had to own a piece of mining services providers?

Re-Rating?

Investors like to herd and to cheer each other on. Right now, smaller cap industrials are the Go-To segment in the share market, as I explained last week. Probably the only thing preventing this from getting out of hand too much as yet is the fact that part of the investor and trader community is re-discovering the attraction of resources stocks. Contrary to most industrials, there still seems a lot of undervaluation for mining and energy stocks, and the stars have been aligning for a rally off multi-year lows.

I remain skeptical about the longevity of the rally in mining and energy stocks, so I'd be treating them as trading opportunities only. The present re-alignment of demand and supply will proceed slower than most anticipate, in my view. But every portfolio needs at least a few smaller cap industrials, unless they start reaching for the stars. Like in the case of Blackmores.

As said, there's far less research available for this market segment, but in many cases the research we have at our disposal can still be used to our advantage. What Blackmores has in common with the likes of iSentia ((ISD)), IPH Ltd ((IPH)) and APN Outdoor ((APO)) -to name but three out of many more such examples- is that share prices have rallied beyond consensus price targets, which can be easily checked on the FNArena website (go either to Stock Analysis or to Icarus Signal).

According to my thirteen years of local market observation, this makes these stocks susceptible to a sudden, downward correction, a la what Blackmores has been experiencing since Wednesday last week. In particular if the share market were to be hit by yet another wave of sudden risk aversion.

Below is the price chart of APN Outdoor which, as you can clearly see, is now acting purely on ongoing upward momentum, as if there were no fundamental limits to what the shares are actually worth. UBS downgraded last week and that seems to have had only a temporary impact.




For those not yet familiar with FNArena price charts: the greyish zone indicates the consensus price target. The share price respected this target as its upper limit, until this month arrived. Now the share price is well and truly above it.

One scenario wherein the market could be right, and analysts covering the stock wrong, is when investors as a collective decide that stocks such as APN Outdoor, growing at high pace and seemingly with the wind in the sails, deserve to trade on a sustainable higher Price-Earnings (PE) multiple, because they are rare to find in a market that is mostly "growth challenged".

In that case a PE ratio of 18.3x on 2016 forecasts plus a dividend yield of 3.3% on a payout ratio of 60% doesn't seem outrageous at all. But that is the open question that remains as yet unanswered for the super-stars of 2015.

Equally important is that FNArena shows all individual price targets that make up the consensus target in Stock Analysis on the website. The importance of this is it allows investors to remove the laggards and so correct the automated consensus which includes all. In some cases of strong momentum, such as Blackmores' until Thursday last week, I tend to simply focus on the highest targets available.

As per always, and in particular for these types of stocks, there are no universal truths, no rules or tools that work always & all the time. I did notice, for example, Bellamy's ((BAL)) shares never really made it to stockbroker Morgans' $8.50 target, but they have been on a slide downwards since, Blackmores-style.

I certainly will be keeping a close eye on further developments. There's plenty to watch too.

See also last week's "Small Cap Industrials In Focus"

Morgan Stanley's Favourites

After I published last week's special on smaller cap industrials stocks, analysts at Morgan Stanley released a report on Friday explaining why they believe investors should focus on mid-cap stocks showing "cycle-agnostic growth" and "defensive qualities".

While proclaiming "it is different this time", the analysts believe such stocks are likely to outperform the traditional blue chips (I like it when investment banking analysts support my own research).

Morgan Stanley's top picks are:

- Offering cycle-agnostic growth: Mantra Group ((MTR)), Domino's Pizza ((DMP)), Burson Group ((BAP)), Aconex ((ACX)) and Corporate Travel ((CTD))

- Offering defensive characteristics: Aveo Group ((AOG)), InvoCare ((IVC)), Japara Healthcare ((JHC)), TOX Free Solutions ((TOX)) and CSG Ltd ((CSV))

Citi's Favourites

Citi analysts updated their Big Ideas in Small Caps:

Top Calls amongst Industrials are Aconex, Charter Hall Group ((CHC)), Karoon Gas ((KAR)), McMillan Shakespeare ((MMS)), MYOB ((MYO)), News Corp ((NWS)), NextDC ((NXT)), Super Retail ((SUL)) and Tower ((TWR)).

Top Calls amongst Resources: Oz Minerals ((OZL))

(*) I once dedicated one Weekly Insights to Kahneman's career defining Thinking, Fast and Slow; FNArena Book Review: Thinking, Fast and Slow, March 2012.

China Threat Ongoing

Deutsche Bank analysts just returned from a trip to the USA and their conversations indicated one thing above anything else: US investors are far from convinced the world's second largest single-country economy has rescued itself, and other Emerging Markets, from the persistent growth slow down that continues weighing on forecasts for 2016.

To be fair, Deutsche Bank analysts also note the experience from past years shows US investors tend to be more bearish on China than peers elsewhere. That exact same sentiment was echoed by analysts at Macquarie, also back from a US visit. Macquarie analysts did pick up a switch in negative focus. "Unlike previous trips when clients were more concerned about structural issues like debt and property, this time questions are concentrated on short-term hard landing and RMB devaluation risks".

For good measure, Macquarie does think fears for a hard landing and capital outflows in China are overdone, even though the house forecast is that China's GDP growth will continue slowing to 7% GDP growth this year, to 6.5% in 2016, and to 6% in 2017. This is despite expectation for further stimulus. Put a gun against their heads and Macquarie analysts will tell you the biggest threat from China is not a short term "hard landing", but a reduction in China's growth pace over the medium to long term as capital is being misallocated to support short term policy outcomes.

Meanwhile, China experts on the ground for CLSA have issued a warning the Chinese authorities might go full throttle in trying to put a stop to capital outflows. This, warns CLSA, can lead to major consequences for Australian companies. Not only is James Packer's Crown Resorts ((CWN)) heavily invested in Macau, and Chinese success in limiting capital outflows should be gravely felt via lower money flows at Macau casinos, but also in Australian property markets as Chinese investors have become a force to be reckoned with in places such as Sydney and Melbourne.

At this stage, CLSA is only assuming relatively modest success in Chinese authorities' clampdown attempts, which should affect the apartment building cycle in Australian cities; an asset Chinese property investors have liked very much in years past. While any impact on companies such as Lend Lease ((LLC)), CSR ((CSR)) and Boral ((BLD)) is believed to be relatively modest for the next three years at least, CLSA has grabbed the opportunity to take a more bearish stance on Australian banks.

CLSA's resident banking specialist is sector veteran Brian Johnson, previously of JP Morgan fame, who points out approximately 38% ($565bn) of the $1.49tn Australian housing loan portfolio relates to investment property, "where speculators bear the brunt of a significant post-tax negative carry trade in anticipation of future capital gains – take away the expectation of a capital gain and correlated selling by this cohort could be problematic".

Johnson also points out CommBank ((CBA)) and Westpac ((WBC)) are the bigger housing banks in Australia, "and CBA is overexposed to WA".

Analysts at Morgan Stanley updated their own set of data and China insights and concluded, yes indeed, it appears things in China are stabilising, albeit at relatively subdued levels. Yet this might well be fantastic news for everyone who'd like to see a rally into year-end, with the analysts pointing out: "More financing is becoming available and the central government is pledging to take back funds for projects that have not yet been started by local governments. This suggests a late-year increase in infrastructure spending, which would be positive for materials and industrials".

The same sentiment was expressed by commodity specialists at Citi who are now anticipating mining stocks to put in a rally into year-end, but also that at some point in 2016, we'll be right back where we were last month. But that'll be a worry for next year.

Those speculating on yet another all-in, awe-inspiring stimulus program to put this trend of slowing growth to bed once and for all would not have liked to read the latest analysis by GaveKal which concludes "more of the same" is more likely to persist for much longer.

"This is not the disaster scenario that some fear, but neither is it hugely reassuring. Heavy industry is already in recession, and as business conditions stay weak, financial stress on a significant swathe of corporate China will intensify. Though the labor market is overall in good shape, conditions will still worsen and there are already layoffs in some regions and industries. As a result, “more of the same” looks unlikely to reverse the prevailing trend as growth takes another step down towards 6% in 2016."

What If Lower Growth Is The Future?

One of the key questions haunting today's politicians and investors is whether the world has now entered a prolonged new era of slower growth. If the answer is affirmative this will have major consequences for just about everything; from government policies to interest rates, to financial assets, to corporate investment hurdles, you name it.

But not everybody is on the same page on this. Far from it. Place four economists in an isolated room to discuss the thematic and you'll get four different views and predictions. Five if one of them studied at Harvard. (I had to use this old joke at least once in my life time).

As you would expect, I'll be mentioning a few things about it in my upcoming eBook (watch this space). One of the analysts who has no qualms about admitting he is on the side of the secular stagnation forecasters is Satyajit Das. He just published a whole new book about it: A Banquet of Consequences.

Even if you are rather skeptical about it, any self respecting investor should at least familiarise with the pros and cons, and potential consequences, for the years ahead.

Das's latest video on the theme: https://youtu.be/zHlbFh9QnEk

Direct link to his newest publication: http://www.booktopia.com.au/a-banquet-of-consequences-satyajit-das/prod9780670079056.html

The Oil Search Valuation Tool

I like it when analysts come up with an easy-to-apply tool that doesn't expire overnight. I like it twice as much when I am able to share it with subscribers and members at FNArena.

Last week, UBS analysts increased my happiness by releasing the chart below. It not only shows that, on their assessment, Oil Search ((OSH)) is incorporating a higher oil price in its share price (take-over premium), but also what the share price should be if investors want it to reflect a higher or lower USD price per barrel.





Analysis by the same analysts also revealed most share prices in Australia already suggest a price recovery next year is more or less "baked in" so to say with even "cheaper" priced sector minnows such as Drillsearch ((DLS)) suggesting an oil price above US$50/bbl will be the norm in 2016.

Rudi On Tour

- My next presentation will be to clients and contacts of Affinity Wealth (affinitywealth.com.au) on a boat in Sydney Harbour, Friday,October 16.

Rudi On TV

- on Thursday, Lunch Money, noon-1pm

(This story was written on Monday, 12 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: info@fnarena.com or via Editor Direct on the website).

****

THE AUD AND THE AUSTRALIAN SHARE MARKET

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.

****

MAKE RISK YOUR FRIEND - ALL-WEATHER PERFORMERS

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 info@fnarena.com

For paying subscribers only: we have an excel sheet overview with share price as at the end of September available. Just send an email to the address above.

In This Week's Weekly Insights:

- Small Cap Industrials In Focus
- Audio, No Video
- Bob Farrell's 10 Rules of Investing
- Charts To Ponder About
- Rudi On Tour
- Rudi On TV

Small Cap Industrials In Focus

By Rudi Filapek-Vandyck, Editor FNArena

Look beyond the global worries and the day-to-day volatility and you see that something's different in the Australian share market this year.

That something might have consequences for how investors are going to perceive "risk" and "opportunities" moving forward.

Consider the following:

The ASX200 lost 3% in September, but the Small Ordinaries Index only lost 0.5% during the month.

This observation becomes even more intriguing if we add that the Small Resources index lost 10% in September, with total losses accumulating to -24.9% over the past three months and to -37.6% year-to-date.

Taking all of the above into account, the Small Industrials index has shown itself a beacon of strength with a gain of 1% in September. Over the past three months the index is up 0.3%. Total gain since January 1st is 3.1%.

The difference in index performance is backed up by anecdotal observations. Grab a price chart for Japara Healthcare ((JHC)) or for Burson Group ((BAP)) and you'll be hard pressed to see any evidence of the extreme volatility that has plagued the local share market over the past two months.




Then there are the extremely strong performances by the market darlings du jour, including Bellamy's Australia ((BAL)), Blackmores ((BKL)), Hansen Technologies ((HSN)), IPH Ltd ((IPH)) and iSentia ((ISD)). No doubt, I am forgetting a few. If you are not following any of these stocks, do not look up their performances as it is going to hurt.

Of course, to complete this picture I should also include the fact numerous small cap industrials have proved far less resilient throughout the market turmoil. Infomedia ((IFM)) comes to mind. And Ansell ((ANN)). Freedom Foods Group ((FNP)). Thorn Group ((TGA)). And many others.

Regardless, I think an important point has been made: at a time when many of the local blue chips are lacking growth and/or investor confidence, quality small cap industrials are providing an alternative.

More Growth, Less Worry

While a one-off outperformance does not automatically imply a new trend, there's a lot to be said in favour of small cap industrials. For starters, when panic hits global trading desks and the Australian share market is being hit with large orders, either Buy or Sell, there is little, if any, focus on minnows that do not even feature in the major index, or only represent negligible weight. Those maligned High Frequency Traders also are more interested in high volume stocks, such as the Big Four banks, BHP Billiton ((BHP)), or even CSL ((CSL)) instead of ARB Corp ((ARB)) - who?

But this is by far not the whole story. The market's main concerns are/were continued slowing in Emerging Asia and that first rate hike by the US Fed. Arguably, such concerns are more appropriate for Australian banks, for BHP and Rio Tinto ((RIO)), for Amcor ((AMC)), Brambles ((BXB)) and Ansell rather than for Hansen Technologies, IPH Ltd or even Bellamy's Australia.

This is also the market segment that offers targets for foreign suitors, as again proven by local tech company UXC Ltd ((UXC)) receiving a non-binding, indicative offer from US-based CSC. We already have an offer on the table for Veda Group ((VED)), with the initial indicative price now raised, as well as for PAS Group ((PGR)), and others.

Insofar as "growth" is concerned, how does 32% and 26% sound for this year and next for Sirtex Medical ((SRX))? I'd say it sounds a lot better than -0.9% and 2.8%, the current consensus expectations for CommBank ((CBA)), or the -52% and +2% currently forecast for Rio Tinto.

Equally important, the above market growth forecasts for many of the small industrials mentioned seems to be locked in through recent acquisitions or they are simply backed up by very favourable market dynamics. In other words: market confidence towards these companies remains high and investors perceive the risk to their forecasts as a lot less than one might be inclined to think given overall shaky market sentiment and the much smaller size of these companies.

Note also, none of the small cap industrials I have mentioned so far is trading on a low or even medium high Price-Earnings ratio. iSentia is on 23.6. Sirtex is on 34.8x. Bellamy's is on 38.6. I wouldn't chase any of them at present prices, but the point I am trying to make (again) is that while investors and funds managers remain inclined to search for value amongst beaten down, low PE stocks, they miss out on the superior growth stories the share market has to offer if automatically deterred by a high PE.

Admittedly, trading volumes can be a concern, in particular if risk appetite would retreat significantly. I think I saw one day's total volume shrinking to circa 12,000 shares for 3P Learning ((3PL)) the other day, but on average there's plenty of volume. Stocks like Sirtex, IPH Ltd and Blackmores are firmly on the radar of funds managers too.

Different Dynamics

I am by no means suggesting investors should sell all their large cap shares and replace them with small cap industrials only. The objective observation is that a well-picked portfolio of small cap industrials would have outperformed in 2015, but also that most of the stocks responsible for this outperformance appear to have had a good run. Smaller cap industrials, on my observation, are often less constrained by stockbroker targets and valuations. It only takes a little of positive momentum plus a little of growing popularity to push share prices well above what seems justified on broker estimates (if there are any).

See for example Ansell above $30 earlier this year (now around $18). I worry a little bit about Blackmores shares now they've reached $150 (like a rocket, dare I say it). iSentia trading above $4 looks fully priced too.

So even if investors are prepared to cast an eye over this particular segment to add extra growth/performance potential to the portfolio, Harry Hindsight is probably not your best guide. Do note that FNArena is running a special news section on the website, called "Small Caps", where we have recently highlighted stocks like Japara Healthcare, Costa Group ((CGC)) and Mantra Group ((MTR)), among others.

Stockbroker Favourites

Small Cap specialists at JP Morgan (they call it "emerging companies") recently highlighted two stocks: one positive, wet wear retailer SurfStitch ((SRF)) which continues to grow strongly and certainly the stockbroker is expecting more and more, which seems at odds with recent share price weakness. The second one is a negative nomination in that JP Morgan believes the risks attached to UGL Ltd ((UGL)) shares remain way too high, because of Ichthys and what appears too optimistic guidance for FY17.

Goldman Sachs' Small & Mid Cap Focus List gained 2.1% in September which is noticeably better than the Small Industrials Index. The list has twelve constituents: Austbrokers ((AUB)), Amaysim Australia ((AYS)), Blackmores, Costa Group, Dick Smith ((DSH)), EBOS Group ((EBO.NZ)), Genworth Mortgages Insurance Australia  ((GMA)), OzForex Group ((OFX)), SAI Global ((SAI)), Sirtex Medical, Super Retail Group ((SUL)) and Tassal Group ((TGR)).

In addition, stockbroker Morgan's Model Growth Portfolio contains a number of smaller cap industrials (alongside the usual suspects such as Macquarie Group, Ramsay Healthcare and CSL) including IPL Ltd, Corporate Travel ((CTD)), Beacon Lighting ((BLX)), Kina Securities ((KSL)) and Lovisa ((LOV)).

In addition, technical analyst Violeta Todorova, has provided a list to Morgans clients advising which companies look oversold. The list includes Capitol Health ((CAJ)), Credit Corp ((CCP)), Cedar Woods ((CWP)), Collection House ((CLH)), Decmil Group ((DCG)), Fisher & Paykel Healthcare ((FPH)), IMF Bentham ((IMF)) and Seven Group ((SVW)).

Stocks that look overbought include Bellamy's, Blackmores, Gateway Lifestyle Group ((GTY)), IPH Ltd, Murray Goulburn ((MGC)), Mantra, Nufarm ((NUF)), Recall Holdings ((REC)), SMS Technology & Management ((SMX)), Spotless ((SPO)) and Tassal.

All-Weather Performers

For what it's worth, the FNArena/Pulse Markets All-Weather Model Portfolio had a positive performance in September, beating the ASX200, the Small Ordinaries and the Small Industrials Index, though Goldman Sachs' Small & Mid Cap Focus List still performed better.

Audio, No Video

Earlier in the year I gave a presentation to clients of financial services provider Invast in Sydney. My underlying thesis was the current bull market for equities looks a lot different from what we've experienced in the past. Investors better not assume business as usual.

I was promised a video recording would become available, but something somewhere in the technical process has gone wrong and, apparently, the damaged file cannot be repaired. So no video.

Invast has put the audio recording on its website, which is not quite the same, but for those who don't mind, here's the address:

http://www.invast.com.au/research-analysis/live-events/Australian-Market-Outlook-Opportunities-Rudi-Filapek--Vandyck

Bob Farrell's 10 Rules of Investing

While reading through a number of overseas reports on the weekend, I came across Bob Farrell's 10 Rules of Investing. Since I have been quoting a few domestic experts in recent editions of Weekly Insights, I simply felt an obligation to now repeat the gospel by this market icon who became famous and legendary while at Merrill Lynch, in much different times, it has to be said.

See below. Enjoy.

1) Markets tend to return to the mean over time.
2) Excesses in one direction will lead to an opposite excess in the other direction.
3) There are no new eras – excesses are never permanent.
4) Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.
5) The public buys the most at the top and the least at the bottom.
6) Fear and greed are stronger than long-term resolve.
7) Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.
8) Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend.
9) When all the experts and forecasts agree – something else is going to happen.
10) Bull markets are more fun than bear markets.

Charts To Ponder About

Credit Suisse's latest selection of valuation charts gives investors plenty of material to think about. Such as be careful when you assume that US equities are now "cheap" -see second chart below- as this only seems to be case in a relative sense vis-a-vis exceptionally low government bond yields.

Australian equities are still priced above the long term average (chart 1) but, as we all know, the index combines "cheap" looking banks with beaten down resources and expensively priced industrials. The third chart is where things get interesting (see also story above).








Rudi On Tour

- My next presentation will be to clients and contacts of Affinity Wealth (affinitywealth.com.au) on a boat in Sydney Harbour, Friday,October 16.

Rudi On TV

- on Wednesday, Sky Business, Market Moves, 5.30-6pm
- on Thursday, Sky Business, noon-1pm, Lunch Money
- on Thursday, Sky Business, between 7-8pm, Switzer TV

(This story was written on Tuesday, 6 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: info@fnarena.com or via Editor Direct on the website).

****

THE AUD AND THE AUSTRALIAN SHARE MARKET

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.

****

MAKE RISK YOUR FRIEND - ALL-WEATHER PERFORMERS

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 info@fnarena.com

For paying subscribers only: we have an excel sheet overview with share price as at the end of September available. Just send an email to the address above.

In this week's Weekly Insights:

- Aussie Banks: Important Questions, Few Answers
- Vale Yogi Berra
- Angst Versus Hope; China Versus USA?
- Lessons Learned, Lessons Shared
- Rudi On TV

Aussie Banks: Important Questions, Few Answers

By Rudi Filapek-Vandyck, Editor FNArena

Australian banks are the largest sector in the ASX200 with the Big Four currently weighing 27-28% of Australia's major index, depending on relative price movements on any given day.

While this is considerably less than the numbers that are often quoted elsewhere (never check a good sounding number, right?), every market observer knows as go Australian banks, so goes the index. Since share prices for the Big Four have reset since May, up to 20% lower, it won't surprise anyone the ASX200 is in negative territory for the year.

Compared with share prices in May, Australian banks looks "cheap". In fact, they look equally "cheap" when compared against historical valuations, as well as against the broader market in a relative sense.

This is the intriguing fact that is currently plaguing the minds of investors in Australia. If Australian bank shares are now genuinely "cheap", how come the sector is not overflowing with investors' money?

Solid, Though Not Immune

It's probably a fair assumption that, post multi-billion capital raisings by three of the Big Four this year, domestic investors already own plenty of bank shares. Hence the onus was on international players to step up to the plate, but internationally the ruling view is that "Australia is toast" because of the noticeable slowdown in the Chinese economy. Such was the personal observation from a NAB economist returning from an overseas trip earlier this month.

As a major exporter of commodities located in the vicinity of Asia, the impact on the Australian economy from a Chinese hard landing seems obvious and straightforward. It doesn't take too much imagination to connect the dots between a recession in Australia with rising unemployment, falling property prices and a rise in bad debts and from there onwards to banks' leverage, financial reserves and share prices.

The last time Australian banks were under threat and forced to cut their dividends was because of international developments, as everyone still remembers, back in 2009. Prior to the GFC, it was during Keating's recession Australia had to have, which, it can be argued, was also greatly inspired by international developments such as a recession in the US on the back of the American Savings & Loans crisis. Prior to that, there was the sudden stock markets crash in 1987 ("Black Monday").

It's a big testament to the solidity and the reliability of the Australian financial system that Big Four Banks have only been forced to cut their dividends three times since the eighties and on each occasion it took some serious damage to the downside to trigger such cuts. Which is why most retail investors treat banks as a no-brainer, staple component of their investment portfolio.

Share prices can move up and down in line with investor sentiment, but twice a year a steadily increasing cheque in the mail provides a lot of comfort. And as long as those dividends continue to grow, the share price will ultimately take care of itself.

Short Term Versus Medium Term

Apparently, this has become the most asked question from retirees and from so-called "mum and dad investors" to their trusted stockbroker or financial planner: are Australian banks able to maintain their dividends? What are the chances they have to cut dividends in the years ahead?

Well, history shows it takes a major crisis, not simply some operational and regulatory headwinds, to force Australian banks into lowering their dividends to shareholders. History also shows that when the banks are forced to cut, the initial impact is noticeable. Dividends were cut, on average, by 23% during the GFC. Bell Potter analyst TS Lim reports in the early nineties the cuts averaged 35%, while back in 1987 dividend reductions proved a less severe 15%.

Unless we succumb to forecasts of doom and gloom, many of the factors that could inflict a lot of damage to the banks' ability to sustain ongoing dividend increases, such as sharply higher interest rates, large numbers of company defaults or significant falls in property prices, seem at this stage rather unlikely. Probably the biggest challenge for the banks comes from the regulatory side and here it appears regulators, both domestic and international, are still far from satisfied.

Hence why the UBS banking team under stewardship of highly regarded sector analyst Jonathan Mott published the following warning last week:

"While we believe the banks now offer more attractive valuations, we think the medium term outlook remains challenging. Capital ratios are continuing to drift higher (we believe 10% CET1 is the new minimum). Basel 4 and Leverage Ratios are on the agenda. Funding costs look likely to rise as banks increase term-deposits and term wholesale mix to meet the NSFR. This may force the banks to continue to re-price their asset books to prevent further NIM erosion."

It's a battle between short-term and medium term likelihood with the mentioned Net Stable Funding Ratio (NSFR), essentially the new framework for banks' capital requirements under Basel III, scheduled for 2018. Banks re-pricing their asset books amounts to monetary tightening and might well pull the RBA out of its policy inertia next year (hints also the team at UBS).

Bear Market Valuations

Prior to the GFC I was an avid observer of bank share prices. As some of you might remember, I developed my own market indicator which essentially matched consensus price targets for the Big Four with share prices to see whether investor sentiment was overheating. It worked. Until the GFC came along. Things have since never been the same.

Valuations for banks moved above historical averages (and broker price targets) in 2012 and they pretty much stayed there until May this year. Now they have been significantly de-rated to the sector's long term Price-Earnings ratio (see Deutsche Bank chart below).

As the chart also shows, banks seldom trade on long term average PEs. Most times they hit the average on their way up or on their way down. The old adage was the long term average PE was 12.5, but banks would trade on PEs between 13-15 during good times and on PEs between 11-9 during bear market periods. The long term average between both periods became an average that almost never showed up in real time practice.

Bank shares had been de-rated once the recovery from GFC-depths had been completed (2010-2012) so that the average PE, despite elevated valuations between 2012 and May this year, has now fallen to 12.16. In broker target terms, the Big Four are now trading at a discount of between 15-22% (Monday afternoon as I am writing this story).

The relative cheapest of the four, ANZ Bank ((ANZ)), offers 6.8% in yield (ex-franking). In line with my earlier analysis about how share market investors have cramped in most dividend paying stocks on the ASX inside a yield range of 4-6%, this suggests credit troubles throughout Emerging Asia or similar scenarios are now being discounted in Australian banks share prices.

Deutsche Bank: The Benign View

Leaving any scenarios for a potential China induced Asian crisis aside for now, the question whether Australian banks represent a good buying opportunity at current prices remains linked to the outlook for Australian housing markets. On international comparison, Australian banks are relatively overweight mortgages.

Here bank analysts at Deutsche Bank issued a rather re-assuring sector analysis on Monday. The analysts acknowledge the outlook for economic growth domestically looks a tad soft, probably softer than expected, and there is likely going to be a rise in bad and doubtful debts for the industry, if only because numbers have been exceptionally low in recent years (remember: extreme low interest rates), but it'll all remain below historical averages, the analysts believe.

Deutsche Bank sees multiple factors supporting such a "benign" view, including:

- Overall, lending growth has been anaemic in recent years

- Gearing levels of large corporates are well below historical levels

- The banks' book mix has improved since the GFC

- Banks' provision coverage looks "reasonable for this point in the cycle"

Deutsche Bank suggests Australian banks are facing a steady, though gradual rise in bad and doubtful debts over the next three years, with the "normalisation" in BDDs more weighted towards businesses than to mortgages.

Incorporating such view in their modeling has led the analysts to reduce forecasts, now sitting below market consensus, and to cut price targets for Australian banks.

The good news? Deutsche Bank's revised price targets are all still above current share prices (see Stock Analysis for details), though they are lower than consensus targets.

Morgan Stanley: The Housing Downturn

Analysts at Morgan Stanley are a lot less confident about Australia's economic performance in 2016. As a matter of fact, the house view is the RBA will be forced to deliver two more 25bp rate cuts next year, so then you know the underlying view is one of disappointment, weaker-than-anticipated growth and the need for additional stimulus.

Under such a scenario, a Pandora's Box will open and release a multitude of dangers and threats to both the Australian economy and Australian banks. All of a sudden the R-word, as in "recession", makes a come-back.

Morgan Stanley's underlying premise is that residential construction essentially is the economic cycle. Australia has successfully coped with two housing downturns since the 1990s recession and in both cases the economic impact was being offset by rising houshold incomes and a Commodities Super Cycle, respectively in 2003/04 and 2008/09.

The reason the domestic housing cycle is turning is because demand for properties has to a large extent been carried by investors and now all of government, APRA and the banks have focused on limiting investors' involvement. Slowing population growth and increasing supply will do the rest, so is the underlying assumption.

Morgan Stanley is firmly of the view that house prices are too high ("bubble") and Australia's geared exposure to housing means Australian wealth is highly sensitive to house price growth. Hence a weakening of house price expectations, material or benign, will impact on consumer sentiment through "wealth effects". Hence the conclusion: "we think the risk of a recession is elevated".

Citi: Payout Ratios Too High

I mentioned Citi's latest research update on the banking sector in last week's Weekly Insights. In essence, Citi analysts conclude that, dividend payout ratios for three of the Big Four banks will be approaching 80% from fiscal 2016 onwards (ANZ Bank remains the exception) while, across the sector, the major banks will only have circa 3.5% of balance sheet core equity, the lowest capital support for future growth in 20 years.

Citi leans towards Deutsche Bank's assumption of a benign turn in the credit cycle, but the analysts predict all banks will need to set aside more cash earnings to fund growth and keep the balance sheet strong, hence rising pressure on dividends and dividend payout ratios.





Australian banks do not need to immediately respond to these challenges and pressures, and their boards may well throw everything in the mix in order to avoid lowering payout ratios or -heaven forbid- not raise the dividend, similar to supportive dividend policies adopted by BHP Billiton and by Rio Tinto, but it seems but logical, nevertheless, that share prices will reflect this increased risk, just like has happened in the case of BHP and RIO.

I think the main question for investors is whether these increased risks have now already been priced in, or whether more de-rating will be required. The answer to this question may not present itself until we've figured out what exactly 2016 has to offer and whether the overall credit environment will be closer to the assessments by Deutsche Bank, Citi and others, or whether it'll be closer to Morgan Stanley's scenario.

Until then, Australian bank shares are likely going to be "cheap" for longer, though not necessarily as "cheap" as they are today.

In the words of Citi analysts: "the uncertainty of future dividends is likely to keep a cap on share price growth in the medium term".

Vale Yogi Berra

Baseball legend Yogi Berra passed away on Tuesday last week, ninety years old and across the globe renowned for his typical Berra-isms (of which I am a big fan myself). For those not familiar: a typical Berra-ism is a rather colloquial expression that seems valid and worth repeating, until you have a think about it.

Many of such Berra-isms lend themselves for open philosophical debate about deeper meanings, and they often apply to finance and investing too. Probably the most popular Berra-expressions are "If you come across a fork in the road, take it" and "it's like deja vu all over again".

My personal favourite is one that didn't originate in Berra's brain, but it's easy to make that assumption: Prediction is very difficult, especially about the future (Nobel-scientist Niels Bohr has been accredited with that one).

A few gems from the portfolio of Berra-isms that can serve their purpose in a financial context:

- You can observe a lot, just by watching

- We made too many wrong mistakes

- You better cut the pizza in four slices, because I am not hungry enough to eat six

- The future ain't what it used to be

- You've got to be very careful if you don't know where you are going, because you might not get there

- If you ask me anything I don't know, I'm not going to answer

- If the world were perfect, it wouldn't be

Angst Versus Hope; China Versus USA?

Plenty to fret about in a world that is still coming to terms with the fact that Yellen & Co really want to get started raising interest rates while China is rebalancing away from infrastructure investments and exports. The easiest observation to make is that forecasts are still dropping; for growth in China, in Emerging Asia, and for the global economy which then translates into ever lower forecasts for commodities prices.

But are we too focused on the dangers and threats in China/Asia -which are real, no doubt about it- while forgetting what a powerhouse the US economy driven by the US consumer still is?

The question was asked by Glushkin Sheff Chief Economist & Strategist, David Rosenberg over the weekend and the answer came in the form of some interesting stats and data.

Total consumer spending in the USA, if it were a country on its own reports Rosenberg, would still be the largest economy in the world, larger than the current number two in the world, which is China. US imports, if they were a separate country on their own, would still be the world's fourth largest economy, bigger in size than the UK, France and India, and only beaten by China, Japan and Germany.

The underlying message is the US economy still represents 25% of global GDP and it should receive more recognition for its importance and its role in keeping the global economy ticking. Rosenberg advocates investors should draw more confidence from the fact the US economy is strong and its positive impact on global trade and demand may well prove of a larger -positive- contribution than China's woes on the negative side.

Another observation to make is that while forecasts and price targets for resources stocks have come tumbling down, in most cases the share price already sits significantly lower. Investors don't have to look any further than the two diversified heavyweights on the Australian share market, with the lowest target for BHP Billiton ((BHP)) shares in the FNArena database $26 (Citi) while the shares are trading below $23. The lowest target for Rio Tinto ((RIO)) to date is $54.60 (Morgans) with the shares trading close to $48. Amongst smaller cap stocks the gap between share price and broker targets can be much wider.

The same theme applies to oil and gas stocks, albeit in lesser extreme fashion. Woodside Petroleum ((WPL)) shares are trading near $29 while Morgans is the only broker with a price target below $31.

It's not difficult to see why value-seeking fund managers are again casting their eye over these beaten down stocks, or why share prices on occasion can display sharp movements higher (even without the shorts covering). Investors should note, cheap valuations are usually bad indicators for "timing" and the trend to date still remains to the downside, at least for now.

Lessons Learned, Lessons Shared

Fund manager Auscap used the September edition of its newsletter to share a few lessons with shareholders that have been "re-learnt" in recent months. I'd say, use to your own benefit:

- The golden rule: the best way to generate returns is to focus first and foremost on not losing money

- Poor management has the ability to ruin any business. If management appears not to be operating in the best interests of shareholders, or if ego and personal reward seem to be a focus, it’s best to avoid the company. If you don’t trust the team running the business, don’t invest in the business

- Companies with structural headwinds are best left alone until the headwinds subside. It is better to invest in a business after its earnings have resumed an upward march than it is to attempt to anticipate when a company’s decline in earnings will stabilise

- A company that is conducting an initial public offering needs to be incredibly compelling to warrant participation, and a justifiable reason for why the stock is being sold cheaply. A stock being sold by informed, intelligent and knowledgeable owners to uninformed, inexperienced and undemanding shareholders is rarely a recipe for success if you are part of the latter group

- If you don’t like the business, don’t buy the stock, irrespective of how cheap it looks on paper

- When you realise you’re wrong with an investment, cut it immediately (and enjoy the feeling of relief!). Holding onto bad investments can cost investors more than the money they end up losing on them, because they often cause investors to miss great buying opportunities in great companies because they are so focused on the energy-sapping mistakes that haven't been cut from the investor’s portfolio

Rudi On TV

- on Thursday, Sky Business, noon-1pm, Lunch Money

(This story was written on Monday, 28 September 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: info@fnarena.com or via Editor Direct on the website).

****

THE AUD AND THE AUSTRALIAN SHARE MARKET

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.

****

MAKE RISK YOUR FRIEND - ALL-WEATHER PERFORMERS

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 info@fnarena.com

For paying subscribers only: we have an excel sheet overview with share price as at the end of August available. Just send an email to the address above.