In this week's Weekly Insights:

- Where Have Our Leaders Gone?
- A Global Recession On The Horizon?
- More China Pain For Commodities
- Australian Banks: More Questions, No Momentum
- Rudi On TV

Where Have Our Leaders Gone?

By Rudi Filapek-Vandyck, Editor FNArena

We are all learning a few valuable lessons. Never underestimate the odds for a left field surprise is unmistakably one of them.

On Friday morning, Sydney time, Janet Yellen's Federal Reserve surprised by not lifting interest rates while communicating a dovish message. As one expert put it, out of all discussions with colleagues and clients over the past months, not one conversation had even touched upon such a potential outcome.

Don't worry. I know you are all being bombarded with reports, commentary and analyses about what exactly happened on Friday and I am sure you're starting to feel bored, if not nauseous, about it by now (or soon will be). I'll keep this brief.

Though Yellen & Co continue to express their intent to start "normalising" interest rates, exact date unknown, their updated projections revealed below trend growth for years into the future accompanied by lower than targeted inflation for at least the next two years. This suggests there is seemingly no urgency to act at anytime in the foreseeable future, despite labour market data suggesting some tightness should be expected.

Don't be surprised if this worn-out story extends into 2016. December is Christmas shopping month. US GDP has now established a habit of starting off the new calendar year on extremely weak footing (often assisted by terrible weather) and what are the chances, really, for a quick turnaround in Chinese data and conditions in Emerging Markets?

Where Are Our Leaders?

Cutting through all the humbug, the repeats, the conflicting views and analyses and the overload of white noise, I believe that what we are experiencing is the remarkable and painful absence of leadership. When I made my first foray into financial journalism, the world adored Alan Greenspan -quite literally- for being the world's most powerful central bank magician.

Less than half of Greenspan groupies the world around was actually able to decipher what the "Oracle" was saying, and the Federal Reserve under his leadership made a lot of mistakes, as we now know in hindsight, but at least investors felt confident he had their backside covered.

Today there is no such leadership and, as a result, not much confidence. Maybe there are simply too many tectonic plates shifting. Maybe it's simply a sign o' the times. The Fed's ultra-conservatism reeks of indecisiveness, of a circular angst about potential consequences, of handing over the power to act to outsiders.

So who's in power now? Currency markets? Beijing? Robots and momentum traders in global risk assets?

What the world needs are leaders who can both act and communicate, while giving people enough confidence their affairs remain in safe hands. Janet Yellen and the FOMC did neither on Friday. Their message is one of moderate, below trend growth accompanied by spineless inflation, headed by a central bank who sees threats everywhere and is very much worried not to cause any ructions.

Lack of leadership. You can see it in American politics. You can see it throughout the refugee crisis in Europe. Australia has just witnessed the ascendency of its fifth Federal Government leader in as many years. A simple observation teaches us the local share market too has fallen victim to losing any form of leadership.

I have more uninspiring news about the leaders for the local equity market, further below, so prepare yourself. But first...

Chinese Torture

China is slowing because its economy is transforming from being predominantly centred around investments and exports to one that is increasingly based on domestic spending. Such is the official narrative and most central bankers, economists and China watchers the world around stick by it.

Underneath the surface, however, there is a helluva lot more happening than just that. The giga-stimulus post-2009 has led to grand scale misallocation of resources, with many heavy industries such as cement and steel battling serious over-capacity. The housing sector went through a mini-bubble and still is trying to cope with large inventory, in particular in tier-3 and tier-4 cities. And large, major shifts in global currency markets, while the Chinese authorities have largely behaved like honourable global citizens, and have made Chinese exports less and less attractive.

This was perfectly captured by NAB economists (see chart below).





On CommBank economists' calculation, the Chinese currency has over the past year appreciated by some 12.5% on a trade-weighted comparison. Does anyone expect anything different than that China's growth is increasingly facing tougher headwinds for further growth in exports?

This also raises poignant questions about growth in the rest of the world. How much of QE-improvement is linked to a weaker currency? How sustainable is it without a weak currency? Can we ever get rid of QE?

Remember, this is all one big global experiment and we're as yet only half-way through it. At best.

What has caught the attention of some experts recently is that Emerging Economies' central banks' responses to the flight of capital, which undermines asset prices and the value of their currencies, is now effectively in the process of offsetting the central bank balance sheet expansions in Developed Markets. The main culprit on the EM side is, of course, China, but Brazil and Russia are not that far behind.

All it takes is one moment of reflection about how sizeable the balance sheet expansion by the Fed, the ECB and the BoJ has been to date to realise the magnitude of what is happening in Emerging Markets this year. Economists at Deutsche Bank make the point any correlation between global CB balance sheet expansion and the performance of risk assets is not well-established, apart from the obvious question whether all balance sheets expansions are equal (probably not).

At best, observes Deutsche Bank, the tailwinds from global QE will be neutral this year.

Deutsche Bank's observation highlights the potential dangers and threats from decisions made in Bejing to FX and asset prices across the globe. Is the PBoC going to allow further depletion of its reserves? Probably not, as no central bank can continue to counter-act market movement into eternity. Current reserves are large, but not endless. Hence why further devaluation of the Chinese currency will happen. Some are anticipating the PBoC might abandon the USD-peg. Any adverse movement in the CNY will have a negative impact on currencies throughout the Emerging Markets.

Maybe the FOMC is merely buying more time to assist the PBoC?

One important feature of China that hasn't been mentioned yet is that it shares one key restraint with so many countries abroad: too much debt. Nobody really knows how much debt has been piled up exactly but forecasters at Bloomberg who try to keep track recently estimated China's debt-to-GDP ratio has now surged to 207% as at the end of June. Other forecasts are significantly higher. Apart from the fact non-performing loans are rising too, a number of economists (outside mainstream) believes the point has been reached whereby this mountain of debt simply starts weighing upon the country's pace of growth.

Whatever the cause, economists continue to downgrade their GDP growth numbers for the years ahead. Many with conviction there won't be anything close to a turnaround in the next six months, at least.

A Global Recession On The Horizon?

The global team of economists at Citi headed by the widely respected Willem Buiter has come to the conclusion that the risk for a global recession over the next two years is "high and rapidly rising". Slowing China, as described above, is one crucial factor in the team's assessment that a global recession is not just possible, it is but the most likely outcome (albeit with the caveat "the debate across our broader Economics team remains fervent").

Note there is continuous misunderstanding and misrepresentation in finance because of different meanings and interpretations of what looks like generally accepted common terminology. In Citi's report, "global recession" has nothing to do with negative growth for two consecutive quarters, it simply means "a period of global output below potential output".

Another way of translating Citi's assessment is that the world is steering towards a period of slow-motion growth. The hare has become turtle. It won't involve negative growth and there won't be a financial crisis, but there will be plenty of negatives because of it. And it won't come fast either, with Citi forecasting this period of sub-par growth is set to start from the second half of 2016, and expected to last until 2018.

Note that on Citi's projections, China will continue to grow at relatively rapid pace, but nevertheless at considerable slower pace than has been the case in years past, including in 2015. "Because of China's weight in global production and trade, and because of the high commodity intensity of its production and demand, China's recession is the one that matters most for the global economy".

More China Pain For Commodities

With most commodity markets battling over-supply, it should be but a straightforward conclusion that a slowing China (irrespective of its impact on global growth) is not going to help improve the outlook, unless we start witnessing significant supply cuts.

But there's yet another factor that is also likely to weigh on demand: China's upcoming five year plan covering 2016-2020. It will be China's 13th Five Year Plan and they might as well announce it on a Friday, given the expected impact on demand for industrial metals. According to commodity analysts at Citi (separate from Willem Buiter and Co), a first draft is expected to be released in October with the National People's Congress expected to agree on a Final Draft in March next year.

Citi analysts are expecting a central focus on environmental targets and measures, favouring renewables over fossil fuels, attacking pollution and aiming for further reform, while setting the most aggressive targets to date regarding environmental protection laws and limitations to carbon emissions. Citi is anticipating a carbon trading scheme, an environmental tax and a big push for electric vehicles. The expectation is the strong focus on greener policies and reform will hit demand for industrial commodities.

The Chinese government is also expected to announce the end of its Agricultural Stockpiling System which effectively means it stops providing a floor price to local farmers. The analysts anticipate the phasing out of China's stockpiling system will likely have a significant impact on the market dynamics of agricultural commodities such as cotton, sugar, soybeans, and corn.

Admittedly, further down the track China's One Belt, One Road program should benefit demand for commodities in the medium term. But investors with exposure will still be hoping Willem Buiter and his team have got it all wrong about global growth next year and beyond.

Australian Banks: More Questions, No Momentum

It used to be the case that Price-Earnings (PE) ratios for Australia's Big Four banks fluctuated between 13-15x, unless they got caught in a bear market spiral during which PEs can fall as low as 9. These numbers from the past have acted as a reliable guide throughout the nineties and the noughties, even post-2008. Until this year.

In the past few months PE ratios for ANZ Bank ((ANZ)), National Australia Bank ((NAB)) and Westpac ((WBC)) have all sunk below 12.5, and failed to recover.

So what's happening? The beginning of a new bear market? Certainly PE ratios for the banks are suggesting this might be the case (see Stock Analysis on the website for more details).

One logical explanation is that many an investor has become gun-shy because of the heightened volatility in markets, while most SMSF and mum-and-dad portfolios already are heavily overweight the sector, while local instos are still digesting three large cap raisings from NAB, ANZ Bank and CommBank over the past four months. In other words: everybody now owns plenty of bank stocks, leaving the buying power to foreign investors who are sharply negative about the prospects for the Australian economy and the Australian share market. A case of not enough buyers left? It would appear so.

But there can be another factor in play too. On Monday, bank analysts at Citi issued a detailed and in-depth report on the sector and their conclusion is that current dividend payout ratios will be proven unsustainable. The combination of more capital requirements and more operational headwinds, including the inevitable turn/deterioration in the credit cycle, is going to push up bank payout ratios to 80% and beyond, predict the analysts. This is simply not sustainable.

Citi analysts expect the major banks will need to recast their "headline" dividend payout ratios back to between 60-70% on top of ongoing DRP take-up. Although the share price retracements since May have made valuations for Australian banks much cheaper, Citi analysts suggest this uncertainty about future dividends is likely to keep a cap on share price performance in the medium term.

To be continued (no doubt).

I wish to point out it is pure coincidence I reported on three separate research reports from Citi this week.

Rudi On TV

- on Wednesday, Sky Business, 5.30-6pm, Market Moves
- on Wednesday, Sky Business, 8-9.30pm, Your Money, Your Call Equities (host)
- on Thursday, Sky Business, midday-12.45pm, Lunch Money
- on Thursday, Sky Business, between 7-8pm, Switzer TV

(This story was written on Monday, 21 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).

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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.

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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.

In This Week's Weekly Insights:

- September Uncertainties
- Five Key Questions
- Still Plenty of Room For Surprise
- Freelancer: A Model For The New World
- Rudi On TV
- Banks: Two Charts

September Uncertainties (And Five Key Questions)

By Rudi Filapek-Vandyck, Editor FNArena

There are still three more months plus two weeks until 2015 ends, but already calendar years 2014 and 2015 have something in common that may have escaped many an investor's attention: at the time the seasonal pattern of weakness of mid-September kicks in, local equity indices are in negative territory for the year. At least if we forget about dividends for now.

As many among you will recall, return ex-dividends for Australian equities over 2014 did not reach higher than 0.35% between the first trading day of the year and the final session in December.

There is one notable difference: last year US equities did not dip into negative territory. US investors had a reasonably good year in 2014. This year, however, US equities are also in negative territory. Time to get worried?

Past Fifteen Years

Usually by the time September arrives, share market investors have had a good time, with capital gains and dividends pushing total return up for the year and with temporary weakness in September-October setting the scene for a closing rally into year-end. At least, such is the standard playbook during the good times.

Between 2003 and 2007 share market indices in Australia in each year were up for the year by the time the calendar reached mid-September, and they stayed up for the year rolling into December and into the next calendar year. A true blue, solid bull market is so much more fun, isn't it? All that changed in 2008, when post September yet another crushing leg downwards took that last bit of hope away by the time 2009 arrived.

Prior to 2008 we have to go back to 2002 and 2001, in the midst of the post-Nasdaq meltdown bear market, to witness local indices dipping into the negative by mid-September. In 2002 the trend remained south and indices closed in December below where they were in September. But in 2001 weakness in September-October was followed by a late year rally securing small gains for the year as a whole.

One easy to draw conclusion is thus that a negative return (ex-divs) by mid-September does not automatically imply a negative return for the calendar year. There is always still the prospect for a late-in-the-year surge. But calendar years that see September pulling indices below first of January level are rather modest return years at best.

This can hardly come as a surprise. Post mid-October when in most years the seasonal weakness has run its course, there are only two months left until Christmas and only a few extra trading sessions until the new year.

What might come as a surprise is that negative returns (ex-divs) by mid-September have become a common occurrence post 2009. It happened in Australia in 2010, then again in 2011, then again in 2014 and now again this year. The pattern overall has not been that much different in the US.

To some, this might serve as a indication of how weak this post-2009 "bull" market has been. Others might point at the over-ruling impact of big macro-scares, such as the fear of a potential implosion of the European Union and a hard landing in China.

What cannot be denied is that September-in-the-red events occur both during bull and bear markets and the past fifteen years have shown no indication other than that it happens in rather modest performance years, regardless whether US indices are also in the red or not.

Christmas Rally?

All of the above simply further emphasises what everybody already knows: unless we get this interest rate uncertainty in the US out of the way, as well as more confidence that China is not pulling back growth in the rest of the world too far, there remains but little hope for a bright and joyous finale to calendar 2015.

Within this context it might be opportune to remind everyone last year didn't look particularly flash either with the share market merely exhibiting short rallies that ended up lacking enough oxygen to last and in December indices temporarily fell below the low point of September. It was only then the market started to anticipate the RBA might deliver one or two more rate cuts and a big swing to the upside started building.

But First...

Whether the current set-up in global risk assets is either a platform for the next upswing or a harbinger of more negative developments that will eventually pull prices much lower is very much dependent on whom you ask the question of these days.

Granted, the majority of experts and market watchers remains firmly convinced it is the former, but then what do they know, really? You don't have to be a cynic to remind yourself that back in 2007, on the eve of what was about to turn into a truly shocking and devastating world-changing series of events, the large majority of today's experts were not only the same people, they also were voicing the exact same opinion as today.

Remember subprime is a small problem in the world's largest financial market, it will have no effect on Australian banks?

Lucky were those investors who paid heed to our warnings here at FNArena instead.

This time around, however, I have no conviction either way. It's what we don't know that is going to shape the future and right now there's a whole lot we don't know. Which is why I have been suggesting investors should stay nimble and cautious, not automatically assume that falling share prices present a bargain, stay cautious and re-connect with your own comfort regarding the risks your money is exposed to.

Most financial experts are simply playing the odds. One does not need an in-depth historical data-analysis to realise that most times, these grave market scares end up not materialising, and thus they offer excellent longer term buying opportunities. Until that one rare moment arrives when things turn out differently, like in 2007 and in 2000.

Maybe the world will look a lot less clouded in five weeks' time? At least we'll have the seasonal pattern of share price weakness behind us by then. Also, I do sense that analysts and economists are becoming more comfortable with slowing Emerging Markets economies, on the assumption, of course, that China will stabilise, soon-ish.

...A Warning From Gartman

But first... a warning from Dennis Gartman, seasoned trader and thick-skinned observer of financial markets. Gartman is "very worried" about US equities in particular, because the S&P500 has carved out what looks like a classic, text-book example of a pennant formation. Such a technical set-up, informs Gartman, almost always resolves itself in the direction the market was heading into prior to its formation, which in this case means the market is likely to break lower.




If Gartman's worry proves accurate, the next target for the index should be at 1725-1750; some 200 points lower.

Making matters a little more confusing (a sign of the times?), Gartman also believes most commodity markets are in the process of establishing a long term base, from which the next upswing can take place. Putting one and one together, it appears experts like Gartman are happy to observe from the sidelines, in anticipation of better entry points ahead.

Gartman: "If the recent “pennant” consolidation does indeed give way to the downside, as we fear/expect that it shall, then sometime in October shall come one of the great buying opportunities of the past several years. Hopefully we shall be prepared for precisely that."

Success not guaranteed, of course.

Five Key Questions

Economists at Paris-based Natixis not only lined up the five most important questions all investors should be asking right now, they also provided the accompanying answers.

1. Will China use a significant depreciation (e.g. 15-20%) of the RMB (CNY) exchange rate to boost its economy?

If the answer is yes, explains Natixis, investors should expect a "considerable fall" in share prices in OECD countries alongside a "significant depreciation" of emerging countries’ currencies. Luckily, the economists believe the answer is "no".

2. Will Saudi Arabia reverse its strategy and reduce its oil production to push up the oil price, increase its revenues, and reduce its fiscal deficit?

If the answer is yes, there could be quite some financial mayhem, explains Natixis, as the resulting rise in the oil price would lead to rising long-term interest rates, falling share prices and an appreciation of the euro. No confident response to be found here, other than the observation that Saudi Arabia doesn't seem to have given up on its strategy to inflict maximum pain on US shale producers and so reduce oil production.

3. Will the ECB increase the size and the duration of its quantitative easing programme?

Natixis explains, if the answer is yes, long-term interest rates will remain very low in the euro zone for a long time, and the euro will be weaker against the USD. The economists believe the answer is "yes".

4. Will euro-zone growth actually be stronger in 2016 than in 2015?

Natixis points out this is what just about everyone has been forecasting and if this turns out not the case, share prices will likely correct on the downside, credit spreads will widen, long-term interest rates will fall and the euro will weaken. No straight answer to be found here. According to the economists, pretty much all progress thus far this year is due to cheaper oil and a cheaper currency. How is the refugee crisis going to impact?

5. Will the global situation where private savings exceed investment persist?

Natixis says "Yes". Global private savings are increasing due to the prospect of ageing; investment is declining as a result of deleveraging and uncertainty, the decline in the weight of industry and the increase in the weight of services in the global economy. This remains an important argument in favour of "lower for longer" interest rates; and a potential major factor for global asset prices as the excess of savings over private investment has to go somewhere.

Note that, despite all the hullabaloo about the Fed will/won't, US interest rates don't even deserve a mention on Natixis' list.

Still Plenty Of Room For Surprises

Never underestimate the potential for surprises, good and bad. We are all reminded of this as news is breaking [Monday afternoon] there will be a leadership challenge inside the Federal Government in Canberra. Fun and Games, n'est-ce pas?

Freelancer: A Model For The New World

Despite the lack of real growth or innovation at the top end of the Australian share market (more banks anyone?), the ASX remains home for a plethora of genuinely interesting and exciting business stories, albeit many of these are situated in the small cap space, don't have much of a track record just yet and remain largely unknown to most investors.

They don't always immediately take off by rewarding shareholders handsomely either, as evidenced by the brief history for Freelancer ((FLN)) as an ASX-listed entity. Despite the share price picking up sharply this year, there is still some catching up to do with the levels witnessed after listing in late 2013, early 2014.

Freelancer operates the world's largest online market place for businesses seeking contractors ("freelancers") looking for paid work. As such, it is not far a stretch to regard the company as a symbol for the New World tomorrow, one wherein technology works to the benefit of both businesses in developed economies and their flexible workforce. Too bad Freelancer is but a small cap, still, with no prospect as yet of joining one of the leading indices. Similar to the examples I mentioned last week, this company too deserves a lot more research than it currently enjoys.

I only know of Patersons and Canaccord Genuity actively covering the company and the latter last week released an update, effectively reminding investors Freelancer should be a major beneficiary of the weakening Aussie dollar given its international focus. In the analysts' words: Freelancer has emerged as one of the fastest growing company's listed on the ASX, however its growth profile is set to accelerate as the AUD continues its harmonious depreciation.

While some 70% of the company's costs are anchored in AUD, Canaccord highlights 67% of total sales are USD correlated, 10% is in GBP and 6% in CAD.

Freelancer is a bit of an odd duckling on the ASX. It does predominantly business offshore (90%), has a gross operating margin of no less than 88%, knows to date of no genuine corporate nemesis and has so many growth options and possibilities available that management is happy to reinvest most profits into future growth potential.

Everything that's being penciled in for the years ahead, at least as far as positive EPS numbers are concerned, are completely at the discretion of company management who says it has full support from major shareholders to continue making as many investments as possible in order to fully capture the opportunity at hand.

Canaccord's philosophy behind it all is that if a weakening Aussie dollar results in more profits, which are then mostly invested, this means future growth potential expands, and this deserves a higher share price. Canaccord has a twelve month price target of $1.75. Plus a Buy rating, of course.

Banks: Two Charts

Australian bank shares look cheap, both in comparison with past averages and with the broader market, believe it or not. All that is captured in Deutsche Bank's latest update from which the graphs below stem from.







Always remember: naked data seldom tell the whole story. ANZ Bank is the cheapest because it has more exposure to Asia's emerging economies and that's where investor angst lives and thrives in 2015.

Rudi On TV

- on Wednesday, Sky Business, 5.30-6pm, Market Moves
- on Thursday, Sky Business, midday-12.45pm, Lunch Money

(This story was written on Monday, 14 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).

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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 August available. Just send an email to the address above.

In this week's Weekly Insights:

- August Reporting Season: The Verdict
- China In Charts
- More Charts (All Ords in 1990s)
- Hansen Technologies: Under-Researched (And That's A Pity)
- Blackmores: Still Under-Appreciated?
- Predictions Are Like Noses
- Rudi On TV

August Reporting Season: The Verdict

By Rudi Filapek-Vandyck, Editor FNArena

The local August reporting season was mostly dominated by an outburst of volatility on the back of a swift return of risk aversion as global growth concerns combined with the prospect of the first Fed rate hike decision in, how long has it been exactly, nine years?

But there was a lot more happening than yet more upgrades for Domino's Pizza ((DMP)) and a shock disappointment from Ansell ((ANN)), or further confirmation from Woolworths ((WOW)).

Earlier on Monday, my personal analysis and observations from the sidelines of the August reporting season were published on the FNArena website. The story is packed with lots of tell-all graphs and charts.

Make sure you don't miss out. Or even better: make a print out so you can highlight items and add notes. To go straight to the story, click HERE.

China In Charts

Two charts that didn't make it into the reporting season analysis were published on the weekend by Glushkin Sheff's David Rosenberg and I think they both strikingly show how a different angle can create a vastly different impression.



For good measure: I am leaning towards more caution than rejection when it comes to assessing the negative trends and potential impacts from a slowing Chinese economy. Authorities in Beijing are currently juggling ever more balls and it is not inconceivable they will drop one or two in order to keep the others up. Let's hope they don't drop too many.

My research into China this year has taken me to the point where I believe China is best viewed through the lens of "too much debt". Once you start looking from this perspective, a whole lot starts to make an awful lot more sense.

And that transformation from infrastructure investment into a consumer-led economy, that is a gradual, small step-by-small step, long term prospect, not something that's going to occur this year or next. The latest report I saw on this subject predicts 2020, at the earliest.

More Charts (All Ords in 1990s)

My flash back last week to the 1990s as a broad framework for what may well lay ahead now that the Federal Reserve is readying itself and the world for that first official rate hike has triggered a response from subscriber Wing.

FNArena and certainly myself are always in favour of feedback and active participation from readers and subscribers. So if anyone else feels the urge, don't hold back!

The first chart clearly shows the decoupling between the Australian share market and the tech boom-bust cycle in the US. The second chart shows how volatile the Australian market became through the period with the index in 2003 not far off from where it was at the three peaks in 1999.







Hansen Technologies: Under-Researched (And That's A Pity)

Those familiar with my post-GFC analysis of the Australian share market are no stranger to Hansen Technologies ((HSN)), which has been part of my selection of All-Weather Performers (see also further below) since my early writings on the subject.

At face value, this company has many factors working in its favour. Consistent stable cash flows. Some 75-80% of annual revenues are recurring. A stable, international client base in (predominantly) telecommunication and utility sectors (gas, electricity and water). Solid, reliable dividends. Plus management does acquisitions really, really well.

If I had to choose one dislike it is that annual dividends seem to be stuck at 6c, which means the yield on offer declines as the share price rises, with no catch-up in sight. Trading volumes can be a little thin during times of risk aversion, which is one major additional barrier (but nothing for most SMSF operators to worry about). Market cap is circa $0.5bn, which is neither here nor there in terms of small cap/large cap distinction.

One thing that is seriously lacking for this company is stockbroker research.

On my knowledge, only BaillieuHolst and Patersons Securities officially cover Hansen, and that truly is a pity as many an investment portfolio would have benefited greatly had it included some Hansen Technologies shares instead of, say, Santos, Atlas Iron, Woodside Petroleum, BHP Billiton or Myer, to name but a few.

Now Ord Minnett has initiated coverage, with a Buy rating, of course, setting a maiden price target of $3.20, representing a big premium vis-a-vis the stockbroker's base valuation for the stock. On Monday, as I write these lines, the shares are trading around $2.67. Hansen shares are up some 46% since the start of the year, but this is not a short term, fly-by-night phenomenon and I am happy to see Ord Minnett analysts fully agreeing with me.

Following years of double-digit growth numbers, Ord Minnett's projections imply that, post FY16, the pace of growth will decelerate to low single digit % only. Which is why acquisitions will be front and centre of management's attention, the stockbroker suggests.

Ord Minnett analysts are so convinced about the timing and quality of upcoming acquisitions, it underpins their reasoning for putting a premium valuation on the stock. Which brings me to one of my favourite rejections when it comes to investing in the share market: a seemingly high Price-Earnings (PE) ratio does not mean a stock is "expensive" (and vice versa).

On Ord Minnett's forecasts, Hansen Technologies shares are trading on FY16 PE of 30, which, common perception tells us, is rather expensive with the broader share market around 14.9x and the likes of Fortescue and Santos on low single digits. But assuming projected growth will be achieved, the PE declines rapidly into the low 20s and that's without incorporating any of the future acquisitions.

The same principle applies to stocks like Bellamy's ((BAL)) and Blackmores ((BKL)), see further below for the latter.

Ord Minnett estimates management is going to spend $100m on new purchases over the next four years, to be financed out of operational cash flow plus bank facilities. Assuming management executes well, Hansen Technologies should enjoy EBITDA growth of 20-23% CAGR through FY15-19, on the stockbroker's projections. Compare this to the rather tepid forecasts that dominate the outlook for most ASX-listed stocks, and it is not difficult to see why Ord Minnett believes this stock deserves a premium valuation.

Hansen Technologies offers its clients customer care and billing software solutions, including intelligent customer services, hosting, technical support, software-as-a-service, cloud and security. Annual sales are now firmly above $100m and should be steadily climbing towards $150m in the years ahead.

Blackmores: Still Under-Appreciated?

The recent share price performance for producer of vitamins and food supplements, Blackmores ((BKL)), head office not far from where I am writing this story, can be summarised by two of my recent messages on Twitter:

1. JP Morgan this morning lifted its target to $98 but at this pace Blackmores (BKL) shares will be there in 35 mins or so #ausbiz #stocks

2. @GoldmanSachs has upgraded Blackmores (BKL) to Buy with revised price target of $143 as market yet to properly account for growth potential

In between these two messages ("tweets"), Blackmores has grabbed the number one spot for most talked about stock in the Australian share market, pushing former holders of the crown Sirtex Medical ((SRX)), Slater & Gordon ((SGH)), CSL Ltd ((CSL)) and Santos ((STO)) firmly into the background.

One number that has been mentioned by fund managers earlier with regards to how far this journey can lead Blackmores shares is $150. So far, the price has been as high as $118. Analysts at Goldman Sachs updated on Monday and their new price target now stands at $143. No surprise, Goldman Sachs has a Buy rating for the stock and has it now included on its "Australia/NZ Conviction Buy List".

Similar to my arguments about the likes of Bellamy's ((BAL)) and Hansen Technologies ((HSN)) -see above- Blackmores' FY16 PE above 30 does not imply this stock is overvalued and overdue a sharp correction. If anything, Blackmores shares continue rising on most days, even with large parts of the Australian market under continuous and strong selling pressure.

This doesn't mean Blackmores shares can only rise from here onwards. Consider the shares entered the new calendar year in the mid-$30s. By now, every trader worth his salt is on the band wagon, or at least considering it.

When I last updated my list of All-Weather Performers in the Australian share market, back in December, I suggested one potential barrier for owning shares in Blackmores was that volumes had shrunk quite considerably.

Well, that has changed since, and very dramatically so. A daily trading session for Blackmores now involves some $10m changing ownership between 10am-4pm. No wonder this is (finally) a Top-200 stock. The first one to break down the $100 per share barrier, and stay well above it.

And yet, Goldman Sachs analysts believe investors are yet to fully understand the growth potential that is opening up for the company. eCommerce in China is facilitating access to offshore products and Blackmores is very much a beneficiary of this appetite for high quality foreign produce, argue the analysts. On their own assessment, Goldman Sachs' FY16/FY17/FY18 EPS forecasts sit 34%/41%/45% above market consensus, implying the PE of seemingly 30-plus is in reality a whole lot lower.

Predictions Are Like Noses

Reading through dozens of opinions and research, I came across a pointedly formulated communique from hedge fund owner Douglas Kass, whom I have quoted here before. Below is a fragment that does not need any further comments. It is strong enough to stand on its own.

Doug Kass (from seabreezepartners.net):

"I have frequently warned about the self-confident views (both bullish and bearish) of glib talking heads. This statement might be the single most important lesson taught from the last five weeks.

"Too many talk fast, are often three miles wide and an inch deep, rarely manage real money (they are usually virtual), are not rigorous in their analytical process or have none at all, never say "I don't know," talk with authority through sound bytes and are usually trying to sell you something. They are "Hoovers" who too often quickly forget their investment boners  and/or act like deer in headlights when losses quickly mount.

"I also remain ever critical of those talking heads who are rigorous in their approach but deliver their bombastic investment messages with self-confidence. There are simply too many adverse outcomes possible for such a delivery without qualification.

"If I ever conduct myself in that manner I want you to chastise me and slap me around silly in the Comments Section.

"Keep those commentators far away from your children and from your investment portfolio. Instead, weigh all opinions, read as much as possible, keep your losses under control, stay independent in view and always evaluate reward versus risk in every investment or trade.

"Remember as well that, at inflection points, the consensus fails -- sometimes spectacularly.

"It is fine to listen to talking heads (I include myself and our contributors in this class), but make sure you understand their investment process and weigh their value and integrity of analysis on an objective basis.

"Above all, always define and understand your risk profile and timeframes; never stray from them, despite the protestations and assurance of others. It is your capital to make or lose, not theirs."

Wise words and I hope readers of this weekly commentary and analysis put me on the right side of Kass's share market commentary analysis. Another one of his observations I found too hilarious to not repeat this week:

"Predictions are like noses (anatomical part has been changed to get through my editor!) – everyone has one!"

Rudi On TV

- on Wednesday, Sky Business, 5.30-6pm, Market Moves
- on Thursday, Sky Business, midday-12.45pm, Lunch Money
- on Thursday, Sky Business, between 7-8pm, Switzer TV

(This story was written on Monday, 7 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 if you are interested.

Is There A Recession On The Horizon?

By Rudi Filapek-Vandyck, Editor FNArena

It's kinda funny. Markets land in turmoil and experts the world around start looking at the past to find any clues about what possibly might lay ahead.

At least those once popular references to the 1930s are proving a lot less popular this year.

Also remarkable: bears are looking at 2007, as that was the precursor to the last bear market, while bulls (much larger in numbers) are looking back at 2011 when global market turmoil proved temporary and but a blip in an ongoing uptrend.

Now that we are looking back at history, the late 1990s might be a much better precedent to take guidance and draw conclusions from. For multiple reasons.

Fed Looking To Raise

Back in the 1990s, the US Federal Reserve under Alan Greenspan (pretty much considered The Almighty & Divine Oracle at that time) was done with cutting interest rates at 5.50% by early 1996 and in March the following year the first 25bp hike was announced.

Three months later Thailand had to abandon its USD-peg and a currency crisis developed that gradually affected the whole region. Financial markets volatility spiked and Greenspan & Co sat on their hands for a while (despite being in "tightening mode") and eventually delivered three rate cuts throughout 1998, before resuming their tightening in 1999.

What initially started as one country's failed policy (Thailand) triggered riots in the streets throughout South-East Asia, ending the reign of president Suharto in Indonesia, forcing Russia into default and Long Term Capital Management on the wrong side with losses rapidly accumulating to US$4.6bn. That was when the Federal Reserve Bank of New York organised a bailout to the tune of US$3.625bn. And Greenspan and Co delivered three rate cuts.

Nowadays, we are all used to see trillions here and there, but those were big numbers back then. And one can just imagine the fears that gripped the global investment community. Contagion? A global recession?

While the Fed was busy fixing the mess at LTCM, the crisis spread to Brazil and Argentina with the latter ultimately defaulting on its debt, in 2001.

Those were "eventful" days, to say the least, but take a look at the chart below picturing the S&P500 throughout that period (I simply grabbed it off the internet).





There was a sizeable pull back in mid-1996 and two more closer to the Fed's first rate hike (after which US equities rallied), followed by a a bigger correction in 1998 (when LTCM hit global headlines), but all merely punctuated, instead of killing off, the underlying uptrend.

US Economic Resilience The Key

While some overseas markets melted by 50% as scary events unfolded, US equities proved far more resilient and the reason, explains Glushkin Sheff's chief economist and strategist David Rosenberg, is the US economy proved far more resilient than its detractors feared at the time.

If you're looking for additional colour, and even more parallels with 2015, consider that:

- 30% of global growth was in crisis
- crude oil prices fell by 50%
- industrial commodities prices fell by 25%
- trade-weighted USD rose by 10%
- US real GDP growth averaged 4%
- US jobless rate fell to near 4%
- US inflation fell to 1.4%
- US corporate profits went flat, but investors responded by pushing up PEs
- The VIX index jumped from 18 to near 46 at the peak in October 1998

To be clear, Rosenberg does believe all of the above merely postponed the inevitable with the US economy awaiting recession in 2000, triggering a genuine bear market for global equities in March that year. By then the Federal Reserve had pushed up interest rates to 6.5%.

The message for US share market investors is clear: do not fear foreign turmoil unless it pushes the US economy into recession and the latter is far more likely to occur when the Federal Reserve is at the end of its tightening cycle, not at the beginning.

A De-coupling In The Making?

The situation is not quite the same for investors in the Australian share market, of course. If 30% of global economic growth melts down again, both the Australian economy and the local share market will prove far less resilient. As was the case in the 1990s.

I couldn't find a nice looking chart for the All Ordinaries index for the period, but suffice to say, things were a lot more volatile on the ASX. As a typical commodities oriented economy, Australia also largely missed out on the euphoria followed by complete disaster that followed the global Y2K/technology boom-bust cycle that came next.

It was here, of course, but more on a micro scale. The All Ordinaries merely went sideways between 1999-2003 while the Nasdaq in the US, to name but one contrasting example, rose to an all-time high pinnacle and then crumbled all the way down again.

As NAB economists put it on Monday afternoon: Should the global/local growth outlook deteriorate significantly the RBA will not hesitate to cut again and they could cut aggressively. But with their hurdle to cut again quite high, it's also unlikely they will pre-empt this possibility.

In contrast, NAB, and many others, expect the Federal Reserve to finally deliver that long-awaited first rate hike later this month. Because the US economy is in good shape and it looks like it can cope with such a minor change in monetary dynamics. And as the above example suggests, the Fed won't hesitate to reverse course, if need be.

One of the lessons that can be drawn from the past is that in times of Asian troubles, US and Australian financial markets cease moving in lock-step. It happened in 1999 and it again makes a lot of sense this time around since US investors can fall back on what is likely to be a fairly resilient economy.

The RBA simply does not have the same clout.

China Is Slowing

Which brings us to the enigma that led to August's sudden spike in global markets turmoil. There was no crisis in Thailand or anywhere else, so what was it all about?

In essence, ongoing downward trajectory for global growth forecasts and China sits at the centre of it. Not only because China has become the world's second largest single-country economy, it also is the largest contributor to global annual growth. Plus a slow-down in China directly affects its neighbouring countries, so it has quite a profound impact on global growth and on growth in Asia in general.

This process is still ongoing.

On Monday, my Twitter feed told me Goldman Sachs has cut GDP growth projections for China to 6.4% from 6.7% prior for next year, and again lower for subsequent years. Do not believe the nonsense that is steadily repeated about 6% is still a high number and China's economy is now larger in size.

Instead, ask yourself did BHP Billiton shares require a "hard landing" in China to fall below $23 or was a continued slowing in the pace of growth sufficient?

Economists at ANZ Bank keep a close watch on global growth indicators. Their latest update states: "The ANZ global lead index (GLI) fell in July and looks set to do so again in August. The slowdown is being led by China as activity in other major regions is stabilising. Our inventory pulse measure suggests that global momentum may weaken further in coming months, led down by China again".

It is this ongoing deterioration in China's economic momentum, coupled with significant loss in investors' confidence on the back of share market incompetence, that is leading to a noticeable retreat in global risk appetite. And as history shows (see 1997-98 above), when put under pressure, sooner or later the weakest link will break and create the next confidence-shattering event.

Is there enough pressure already? Who's going to be the next weak link to break? I note Indonesia is once again on many an Asia watcher's list. Most times, trying to predict the next event is but a futile exercise.

Pared Back Expectations

What comes next is all about whether economies -locally, in the US or even globally- are facing recession or not. Thus far, there is little evidence we should expect negative growth in Australia, let alone elsewhere or in the US. Investors worried about a repeat of 2008-2009 or 2000-2003 should note in both cases the US economy landed in recession.

This doesn't mean the events from August won't have any impact on financial markets next. The Australian share market has lost 15% of its value over the past six months. On Monday, strategists at Deutsche Bank issued a report in which they identified 15 similar events over the past 55 years.

At face value, markets can fall a lot further still and they can rally all the way back. History shows plenty of examples for both scenarios. However, if we exclude the possibility of a recession, then a positive picture emerges with Deutsche Bank reporting only on one occasion did the share market not rise over the subsequent twelve months. On all other occasions markets ended higher on a twelve months horizon, with the average gain 10%.

The report also sees Deutsche Bank strategists, previously among the most optimistic bulls locally, pare back their projections for the ASX200. Instead of their earlier target of 6200, the strategists now see the ASX200 at 5600 by year-end, at 5800 by mid next year and -finally- at 6000 by late 2016.

Post a rather meek and disappointing local reporting season, these projections still require above average share market valuations so Deutsche Bank clearly is banking on investors keeping the faith in central bankers' abilities and in central bankers further feeding this confidence. Lower bond yields shall play their part too. Governments probably not.

[With local reporting season now done and dusted, I shall publish a detailed analysis/assessment later in the week]

Rudi On TV

- on Wednesday, Sky Business, 5.30-6pm, Market Moves
- on Wednesday, Sky Business, 8-9.30pm, Your Money, Your Call Equities (host)
- on Thursday, Sky Business, midday-12.45pm, Lunch Money

(This story was written on Monday, 31 August 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 if you are interested.