In This Week's Weekly Insights:

- The Bear Market Diaries - Episode 6
- Beaten By Buffett
- Add Industry Structure To Your Research
- Gold's Main Driver Is Yield
- #NigelNoMates Not Enjoying A Holiday
- Catching Up On The Past
- Rudi On Tour
- Nothing Ever Changes, Or Does It?
- Rudi On TV

The Bear Market Diaries - Episode 6

By Rudi Filapek-Vandyck, Editor

"Plus ça change, plus c'est la même chose".
[Jean-Baptiste Alphonse Karr]

On Friday one of my Tweets on Twitter read:

"The answer to all investor questions - no exceptions".

It accompanied a chart from a National Australia Bank report showing how the world had started selling the greenback ahead of last week's FOMC meeting. After Yellen & Co had surprised most observers by turning more dovish in the face of increasing global risks and challenges, USD weakness shifted into fifth gear.

So up went global risk appetite. Up went share market indices. Up went commodity prices. Up went share prices of producers of industrial metals and energy. Up went the banks. Up went the Australian dollar, and the Japanese Yen, and the euro, yes, even the Chinese yuan.




Weaker USD Brings Relief

The big public debate taking place across the globe right now is whether a surprisingly more dovish Federal Reserve is part of a coordinated central bank effort to prop up risk assets and kill off the deflation dragon, or whether Janet Yellen and the FOMC went solo, vindicating assistant governor at the RBA Guy Debelle's statement made earlier in the week that:

"every central bank would appear to like a lower currency; some say that openly and some don't actually articulate it... but obviously everyone can't have a depreciating currency".

One might even question how long the Fed and the American economy can continue to enjoy the benefits of a weaker USD. By extension, the same question also applies to commodities and other risk assets.

Let there be no mistake: a weaker greenback is what the world needs. It already has alleviated pressure in credit markets, injected new risk appetite into global assets and pushed up prices for energy and most other commodities. Two weeks ago (see Episode 4) I explained how commodity prices returning to levels last seen pre-Super Cycle had been devastating for revenues and growth in producing nations, which is why Emerging Markets are no longer the engine everyone believed they'd be.

The US economy too had found the going tougher as the greenback continued to rise, with corporate profits facing yet another headwind. Now the pressure has gone, everyone can pause, relax a little more and concentrate on the positives.

How Little Has Changed

The quote on top of today's Episode is an equivalent of The Lucky Country in France. It was first coined by critic, journalist, and novelist Jean-Baptiste Alphonse Karr deep in the 19th century. It's meant to be a sarcastic view on day-to-day politics. Literally translated it reads: the more things change, the more they stay the same (alternative read: they make a lot of noise, and talk and gesticulate a lot, those politicians, but at the end of the day, nothing fundamentally changes).

The same can be said of financial markets in 2015 and 2016. We've witnessed the Chinese struggle with their economic transformation and growth. The Federal Reserve has finally made that first rate hike. Global risk assets opened the new calendar year on a tantrum, but the worst opening to a new calendar year since the 1930s has now been followed up by the quickest recovery ...since the 1930s.

If your name was Rip van Winkle, and you'd have slept between the middle of last year and yesterday, you'd be forgiven for thinking nothing has genuinely changed while you were dozing away. The world is still battling low (and slowing) growth. Too much debt and industrial capacity are keeping a lid on prices, on investments, and on growth. Global labour markets are in a better state, but societies are polarising and wages growth remains sub-par. Hence Donald Trump.

Governments are still MIA. And thus central bankers have become de facto goal keepers in a world of constantly changing goal posts, growing increasingly frustrated, having to resort to more and more extremist tools and stimulus. Somebody's got to do something, right?

Rumours: A Shanghai Accord?

In the face of rising doubt and criticism, and a downward sloping trend in achieving tangible results from ongoing monetary stimulus, it cannot be a surprise the latest moves by central banks have sparked rumours about a global agreement having been negotiated at the recent G20 summit in Shanghai. Conspiracy theorists are talking about a secret "Shanghai Accord" with the aim of weakening the US dollar.

Makes sense. Actually, it makes a damn lot of sense. But wait a minute! What about the ECB and the BoJ, as well as the PBoC, not to mention the RBA and Guy Debelle's admission "obviously everyone can't have a depreciating currency"?

If the G20 secret agreement conspiracies are correct, other central bankers have simply taken one for the team. In the end, what is bad for the world is ultimately a bad thing for each individual country too. Right now, a stronger USD is bad, and potentially very, very bad.

Note also: the weakening greenback effectively means China has been able to devalue too. More pressure released.

A temporary reprieve is ultimately just that, temporary. Unless, of course, the world changes for the better while central bankers are injecting monetary oxygen. One can but hope (which is not the same as betting your life savings on a positive outcome).




November Revisited?

All of the above shows how difficult a balancing act central bankers must follow to keep all stakeholders, including financial markets, happy in 2016.

Now that we've had the panic and the mayhem, the sudden switch and recovery, and the unexpected dovish turn by the Federal Reserve (Grand Accord or not), global equity markets are not that far off from where they finished 2015. So whereto from here?

One credible view is that US equities seem in a similar position as they were back in November. Same magnitude of rally after initial sell-off. Same overbought readings on technical momentum indicators. Last year, US equities spent the subsequent three weeks unwinding largely via sideways moves with a slight bias towards weakness.

Many people would settle for a similar unwind now, I am sure. Note this would still mean indices will continue setting lower highs on each upswing, which technically means the broader picture, underlying, remains bearish.

My Personal Indicator

I once labelled it my never-fail indicator, but that was at a time when the share market dynamics were quite different. Regardless, I couldn't help but noticing over the weekend all four major banks share prices are within touching distance of their respective consensus price targets. This would indicate risk appetite has enjoyed the bulk of its run now and a more cautious approach seems but appropriate.

I am not surprised that on Monday, while I am writing this Episode, the banks are retreating and in fact the share market in general is.

To those who are as yet not familiar with my banks indicator: banks in Australia often show the level of investor risk appetite or risk aversion. When share prices move beyond consensus targets this is a sign of irrational exuberance. The relationship has been observed over some fifteen years but went missing during the GFC and during the 2012-2013 rally when "yield" became all that matters.

Assuming the relationship has been re-established (I think this is but a fair assumption to make), banks share prices rallying to near their respective consensus price targets implies this spike in market optimism has now largely run its course.

Viewed from a positive angle: banks share prices did not rally past their targets, so there's no need for a large pull back. (Each paid subscriber can check the gaps via Stock Analysis).

Wishful Thinking?

Sometimes a good conspiracy theory can simply be too good to be true. It's only human nature to see "intelligence", "planning" and "intent" wherever a certain outcome seems to have been achieved. But what if it was due to simply plain luck? Coincidence? Unintended consequences? Are we hoping leaders at the central banks that rule the world have more wisdom, more skills and more market insights than they actually possess? Maybe because the alternative view is too scary to consider?

FX analysts at Brown Brothers Harriman did their best post-FOMC market surprise to rubbish the idea of central bank coordination:

"We suspect that rather than celebrating the success of the secret Plaza-like Agreement, officials are just as surprised and discombobulated as investors by the market action.  In our conversations with various officials, we do not get the sense that the rise of the yen, euro, and dollar-bloc currencies is wholly desired."

Even so, there's always room for that niggling question, given the Fed's inconsistent messaging over the year past: What do they know that we don't? (ANZ Bank)

Or has it just been a case of markets throw a tantrum and comforting Grandma Yellen at the Fed caves in?

Beaten By Buffett

Craig Ferguson, once upon a time an irregular content contributor to FNArena and nowadays running his own hedge fund, has written a book. The kind of book you might like to read if you think my personal views on the world and on financial markets seem rosy and optimistic. The kind of book that tells you to prepare for the you-aint-seen-nothing-yet type of Bear Market.

The full title of Craig's brain child is 'Debt, Defaults, Disinflation & Demographics: How to survive and prosper during the market meltdown of 2016-2017'. Recently I caught Craig boasting about how well his book was ranking in its category on Amazon, which made me realise I have absolutely no idea how my own book is doing. So I revisited Amazon.

Turns out 'Change. Investing in a low growth world' reached into the Amazon top sellers Top 20 in Australia last week in the category 'stocks'. Gotta admit, I was pretty pleased when I discovered my ranking, though it has fallen since.

Interesting to note that best sellers in the 'stocks' category still include all-time classics such as Peter Lynch's 'One up on Wall Street', as well as 'Reminiscences of a stock operator', and lots of books on Warren Buffett. Locally, Matthew Kidman's 'Bulls, bears & a croupier' still seems to be selling copies, as does 'Guppy trading'. Further down the rankings is also Marcus Padley's 'Stock market secrets'.

Thanks to all who bought and read a copy of 'Change. Investing in a low growth world'. Judging by the 5 star reviews on Amazon, you all found it money and time well spent.

Add Industry Structure To Your Research

Credit Suisse quant analyst Richard Hitchens clearly has a different interpretation of "industry structure strength" than I do, but his conclusion this has been a major theme in the Australian share market, separating outperformers from underperformers, in years past is something investors should pay attention to. It also supports my own research that led to eBooklets 'Make Risk Your Friend' (2x) and last year's eBook.

Bottom line: in a low growth environment, a supportive industry dynamic means outperformance in the share market. Of course, this on the premise management doesn't do anything foolish and is able to live up to expectations.

To put a concrete framework around the subject, Hitchens relied on Michael Porter's five forces competition theory model which are:

1. Competition or rivalry in the industry
2. Potential threat of new entrants into industry
3. Relative power of suppliers
4. Relative power of customers
5. Threat of substitute products

The value of all of the above is illustrated in the chart below which clearly shows those companies operating in a strong and supportive environment are the best choice for Buy & Hold investors. Those in a weaker industry structure clearly are not.





This is where things get interesting. Hitchens research into "industry structure strength" identifies stocks such as APA Group ((APA)), Carsales ((CAR)), Ramsay Health Care ((RHC)), Sydney Airport ((SYD)) and Transurban ((TCL)); all stocks most of you who paid attention to my own research post-GFC would be familiar with.

It also includes the likes of Scentre Group ((SCG)), Super Retail Group ((SUL)), Incitec Pivot ((IPL)) and Platinum Asset Management ((PTM)) which seem less logical inclusions. But then the list also includes Syrah Resources ((SYR)), Orica ((ORI)), Newcrest Mining ((NCM)) and Whitehaven Coal ((WHC)); companies I would never include myself.

Bottom line: paying attention to industry structure should be part of any investor's research into what stocks to own and which ones are best to avoid (or at the very least: best treated differently). Credit Suisse's approach to the subject also suggests there is a plethora of different ways to research this theme.

Gold's Main Driver Is Yield

Australian gold producers have created a lot of smiley faces over the year past, but one should never forget this has largely been an AUD-driven phenomenon. Admittedly, USD gold has been one of the best performing assets in the opening months of 2016 (say thank you to Janet Yellen), but its future outlook looks a lot less straightforward, at least once we move past the weaker USD stimulus.

Viewed from a pure yield perspective, and "yield" is one key driver long term, believe it or not, there's an argument to be made that gold today looks a bit pricey. Pimco's blog recently published a nice expose on the gold versus yield relationship and I don't think I can add much of value to it:
http://blog.pimco.com/2016/03/11/why-gold-looks-rich/?utm_source=twitter&utm_medium=social_media&utm_content=why_gold&utm_campaign=pimco_blog


Of course, short term there can be multiple supportive factors in play including weakening equities, a retreat in global risk appetite, a softening US dollar, ongoing central bank stimulus and a firmer picture on price charts. Plus there's absolutely no guarantee American rate hikes are going to start anytime soon, irrespective of economists predicting inflation is making a come-back in the USA and elsewhere.

#NigelNoMates Not Enjoying A Holiday

Nigel remains sceptical whether central bank actions in March have now fundamentally re-shaped the outlook for the global economy and for financial assets.



Catching Up On The Past

In case you missed some of the preceding stories, here's your chance to catch up (in reverse order):

- Rudi's View: 2016 is The Year Of Conviction

- Rudi's View: Who's Afraid Of The Big Bad Bear?

- The Bear Market Diaries - Episode 1

- The Bear Market Diaries - Episode 2

- The Bear Market Diaries - Episode 3

- The Bear Market Diaries - Episode 4

- The Bear Market Diaries - Episode 5

Rudi On Tour - Who's Afraid Of The Big Bad Bear?

They seem to come along every eight years or so, the dreadful bear market so many investors detest, causing risk appetite to evaporate and share prices to reset at lower levels. Every time the cause and follow-through are different. So what lies at its origin this time and what's going to be the likely outcome? As a self-nominated bear market expert, I will be sharing causes, explanations, insights and strategies for investors who want more than keeping their fingers crossed while hoping for the best.

I will be presenting:

- To Perth chapters of both Australian Shareholders' Association (ASA) and Australian Investors' Association (AIA) for presentations on Monday 9th May, both afternoon and in the evening.

- To Melbourne chapter of the Australian Shareholders' Association (ASA) in early July

- At the Australian Investors' Association's (AIA) National Conference in August on Queensland's Gold Coast.

- To Chatswood chapter of Australian Investors' Association (AIA) on September 7, 7pm, Chatswood RSL

Nothing Ever Changes, Or Does It?

Yes, of course, investing in the share market is never really different and best working strategies today are the same that worked pre-GFC. Seriously. I tell you, seriously.



Now that we had a good laugh about it, let's get straight to business. This is a low growth environment. Has been since 2010 (it was masked at the time because of the V-shaped recovery from the global recession) and it is not likely to change fundamentally in the near term. I wrote a book about this (see below). This means investment strategies must adapt. You'll be turning your portfolio into a wish list for dinosaurs otherwise (and your returns will be a reflection of it).

Those not afraid to contemplate "this time is different" can subscribe to FNArena and read all about it in our bonus eBooklets 'Make Risk Your Friend' (free with a paid 6 or 12 months subscription) plus the freshly published eBook 'Change. Investing in a low growth world' (equally free with subscription, or available through Amazon and other online distributors).

Here's the link to Amazon: http://www.amazon.com/Change-Investing-Low-Growth-World-ebook/dp/B0196NL3KW/ref=sr_1_1?s=digital-text&ie=UTF8&qid=1454908593&sr=1-1&keywords=change.investing+in+a+low+growth+world

See also further below.

Rudi On TV

- On Tuesday, around 11.15am, on Sky Business, I shall make a brief appearance through Skype-link to discuss broker ratings for less than ten minutes
- Still on Tuesday, I shall host Your Money, Your Call Equities from 8-9.30pm
- I will be appearing as guest on Sky Business's Trading Day, 12.30-2.30pm on Thursday
- Still on Thursday, I shall appear on Switzer TV, between 7-8pm

(This story was written on Monday 21 March 2016. 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).

****

BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena receive several bonus publications, at no extra cost, including:

- The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
- Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
- Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
- Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow. This book should transform your views and your investment strategies. Can you afford not to read it?

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

In this week's Weekly Insights:

- The Bear Market Diaries - Episode 5
- Housing Market Turning
- Be Ready To Be Trumped
- #NigelNoMates Not Enjoying A Holiday
- Australia In Transformation
- Catching Up On The Past
- Rudi On Tour
- Nothing Ever Changes, Or Does It?
- Rudi On TV

The Bear Market Diaries - Episode 5

"To paraphrase the old duck test: if it looks like a bear, growls like a bear and does its business in the woods like a bear, it probably is a bear. A renewed sell-off in the MSCI World index would not be the slightest bit surprising."
[Charles Gave]

By Rudi Filapek-Vandyck, Editor FNArena

Exact three weeks ago today, I wrote investors should prepare for a share market rally (see The Bear Market Diaries - Episode 2).

By no means was I the only one making the prediction and it is but fair to say the strength of the rally since has taken most analysts and market watchers by surprise.

A cynic would say: thank you to all the shorters who got squeezed. An observer of history would add: this is exactly how the play book unfolded in early 2008.

Not that I am predicting an exact copy of the 2008 scenario eight years later, or that anyone wants to be reminded about that experience. October 2007-March 2009 in finance circles today is the equivalent of Lord Voldemort of JK Rowling's Harry Potter series: He whose name shall not be spoken out loud...

Sharply Increased Volatility

One of the easiest observations to make is that volatility has picked up significantly. This is no longer the same share market that confidently ran up to near 6000 by May last year.

Instead we are now witnessing battles between sellers and buyers, reading conflicting signals and economic indicators, and observing lots of short term momentum offset by longer term uncertainties. This rise in volatility can be measured and those who do already are making comparisons with 2008 and with 2009 ("He whose name shall not be spoken"), as well as with 2003, 1938, 1934, 1933, 1932.
 

(Source: Bespoke Research)

A marked spike in day-to-day volatility is, of course, but one indicator that something fundamentally has changed in equity markets. GaveKal's Charles Gave designed his own diagnostic tool to gauge market health and it is his observation we are definitely no longer in a continuation of last year's bull market.

Though Gave's market technical tool can emit a false signal (never happened within the current context, the designer adds), Gave is leaning towards the admission that we are following the play book of a bear market.

The crucial question for investors then becomes: what type of bear market are we talking about? Is it going to be a repeat of the devastation suffered between late 2007 and March 2009? Or will it remain a gentler bear market, the version that has been described by strategists at Credit Suisse as the "gummy bear" versus the "grizzly bear"?

Credit Suisse prefers the gummy bear version, but Charles Gave remains as yet unconvinced, arguing it remains too early to make that prediction in a conclusive manner. The difference between the two is in the gentler version, most if not all of the damage has already occurred. In the more severe version we could only be half-way, or worse.

One of the key observations made by Gave is that a severe bear market ("Ursus Magnus" as he calls them) usually coincides with a US recession, though there have been recessions linked to more benign bear markets and in one case (1980) a recession in the USA did not cause a bear market at all.

On current market conditions, represented by a negative reading in his proprietary bear market indicator, Gave suggests investors should remain defensive, not be fooled by this sudden outburst in apparent investor optimism and not add more risk to portfolios.

Resources Back In Spotlight

One of the spectacular come-back stories witnessed over the past three weeks has been a significant revival in beaten down resources stocks, both miners and energy producers, as well as their second derivatives, engineers and services providers.

Capital gains of between 50-100% are not out of the ordinary and, yes, there's been an 18% jump in the price of iron ore in one single day.

But beyond the extreme low valuations prior, the short covering and the preparedness by value investors to take a long term view, what does this mean exactly? Will it prove sustainable?

The question in particular seems all-important because back in 2008, resources stocks were the last to hold up until money abandoned that sector from September onwards. This time around, the sector has already endured a relentless bear market since 2011. Better to be cheap than expensive when the grizzly howls, right?

These questions have led to intense soul-searching at Goldman Sachs, the house that gave us a failed US$200 a barrel crude oil prediction in mid-2008 (everyone knows about that one), as well as a five year long negative view on commodities post 2011 (literally nobody quotes that one - ever).

Goldman's response has been a resounding negative.

Yes, there's an argument to be made that resources stocks had been pushed too low; there had been too many shorts in the same, small fish pond; the relative valuation gap between High PE stocks and low PE stocks had blown out to historic proportions; there are signals of a long overdue supply response; China is back on the growth stimulus route, et cetera

At the end of the day, so goes the argument from Goldman Sachs, it all seems way too soon, too quickly. Investors shall have to be patient for longer, not misinterpreting seasonal changes as a fundamental market recovery. In other words: it's a false start, similar to the ones witnessed in 2015. This is about sentiment, and a weaker US dollar, and about investor positioning, not about sustainable market deficits.

Oil Better Not Rally

It looks like the abyss has been avoided for global oil markets, but over-supply still rules and oil companies globally, not only the fracking industry in the USA, are keeping a close eye on the price and futures' forward curve to re-start facilities and spend on new projects again. Hence, concludes Goldman Sachs, it is imperative the price of a barrel of crude does not move higher from here.

Goldman Sachs has a relatively upbeat vision for the outlook for crude oil prices beyond 2016, but this requires more pain now to make sure global oil markets are staring at a pending deficit at the start of calendar 2017. Too high a price today or in the weeks/months ahead has the potential to distort this scenario. Higher oil prices offer producers the chance to hedge at higher levels, virtually guaranteeing more production for longer.

Ideally, energy prices go through a significant sell-off again. The second-best scenario is flat lining for the next three months ahead. Under no circumstance should oil rally above US$45/bbl, argue the analysts. It will be a self-defeating move and reduce the rally potential for 2017.

For what it's worth, Goldman Sachs is currently forecasting crude oil will re-settle in a range between US$55-60/bbl in 2017 at which point there shall be a resumption in lost production. So there is your built-in market volatility. There too is your natural ceiling, ceteris paribus.

Investors looking to play the above scenario are being advised to take selective exposures. An advice that seems but apt in the Australian share market too where many a share price inside the energy sector already appears to be reflective of Goldman Sachs' proposed oil price range for the coming years.

"We do not believe the recent rally, or even our 2017 outlook, will lift all boats."

Abandoning Panic

Credit Suisse is one of market participants who relies on its own gauge for investor risk appetite. No surprise, the Credit Suisse Global Risk Appetite Index moved firmly into negative territory ("Panic Mode", according to CS) in January but it has now swiftly bounced back.




History shows a retreat in general optimism is but to be expected, but this by no means assures we are going to revisit the lows/panic seen earlier this year. Taking a closer look at the history of this Index shows all kinds of scenarios are possible. During the bear market of 2000-2003 there even was a temporary reprieve back into exuberant optimism before sentiment retreated back into panic mode. This is the reason why the period is displayed as two separate negative phases on the Credit Suisse time line.

Just goes to show: there is not one definition, not one indicator, nor one blue print when it comes to an equities bear market. The best advice for investors thus remains: have a plan, be patient, value your cash and stick to your convictions (try not to be bamboozled by short term movements, no matter how convincing they seem).

In my first story for the new calendar year, I declared 2016 will be the year for investor conviction. I still stand by that statement.

Probably apt to repeat the quote of the fund manager I used in that same story: "we cannot predict the future, but we can manage risk".

Housing Market Turning

Australian builders are erecting more premises than there is demand. Add another twelve months or so and pretty much every state, except New South Wales, is going to be faced with over-supply.

Such was the message from last week's Building Forecasting Conference by BIS Shrapnel. The Sydney-based forecasters under supervision of Robert Melor and Frank Gelber recently found themselves in hot political water when they entered the national discussion on negative gearing, but when when it comes to paring supply against demand, the data-crunchers at BIS Shrapnel can usually be relied upon.

Needless to say, the dynamics in Australian housing are turning. The frenetic activity levels from 2015 should not be extrapolated into the coming years. Economists at UBS too believe industry data should be carefully watched with recent momentum indicators weaker than anticipated. UBS does not think this is the start of something sinister. The economists talk about a "housing moderation rather than a downturn".

BIS Shrapnel from their part wish to emphasise  prospects of over-supply are going to translate into slower activity for builders and for building materials suppliers, but not necessarily for property prices. BIS Shrapnel is working off a flat outlook for prices and if there will be any weakness it'll be shallow, according to Melor & Co.

Damn! say all the offshore hedge funds that burnt their clients' money, and their short term performance, by taking on short positions against Australian banks in February.

Be Ready To Be Trumped

He's been moving like a gorilla through the American political landscape and showing no sign of losing steam. Donald Trump. Europeans already see their prejudices highlighted, but soon, one assumes, everybody else will start paying attention too.

(Source: Fairfax Media)

Can The Donald really make it to till the end and declare victory in America's presidential race? You can trust the Americans to elect the dumbest, shallowest marionette, one hears the Europeans sigh. But can The Donald pull it off? Really?

#NigelNoMates Not Enjoying A Holiday

It's amazing what a few weeks of rising share prices does to general market sentiment. All of a sudden the same questions keeps popping up in communications with investors: have you sent Nigel home yet? Is he on holidays? Is it time to buy a stuffed bull?




We all like to pretend we're capable of forming medium to longer term visions, but share prices moving into one direction short term nevertheless remains a decisive factor as to how we feel about the market. And this is where things get "interesting". Technical analysts see resistance levels approaching. Sceptical strategists, such as the ones at Morgan Stanley, stoically maintain this is not a time to add to equities exposure (instead they advocate now is the time to sell shares that had a good run).

Technical analysts at UBS, whom I have quoted from before, had previously anticipated markets would rally from their February bottoms into April, but the swiftness of the upswing has made them shorten that call. Instead, equities are now expected to run out of puff before the end of this month.

Assuming these forecasts prove accurate and global equities will soon be trending lower again, though not as violently and as fiercely as earlier in the year, then a comparison with 2008 looks all the more striking (not that anyone wants to see a repeat of that experience). Bottom line: wild upswings do not deter Nigel. He's not going anywhere. Better not forget he's sticking around.

Australia In Transformation

It has been one of the key themes in my own analysis of the Australian share market (see my eBook Change. Investing in a Low Growth World) and now Morgan Stanley has added its own voice to the subject as well. "Australia in Transition: Ten Winners from Five Structural Themes" was released last week; 72 pages of research into how best to approach the future through the lens of an Australian equities investor.

The underlying thesis: favourable trends that have underpinned investment returns from the Australian share market have either peaked, or are under threat from structural change in China's growth model or disruptive competition.

The five themes identified as a road map for the structural change at work are:

- Global expansion
- New economic infrastructure (think household solar and batteries, NBN, physical infrastructure, etc)
- New export economy (agri/food processing, education, tourism/gaming, and healthcare/biotech)
- Technological disruption
- Demographics (Health and aged care versus housing and consumer-related industries)

Morgan Stanley identified ten potential winners, but the list is on the analysts' own admission, by no means exhaustive or static. Winners selected are Domino's Pizza ((DMP)), Goodman Group ((GMG)), Virtus Health ((VRT)), Lend Lease ((LLC)), Vocus Communications ((VOC)), Mantra Group ((MTR)), Treasury Wine Estates ((TWE)), Aconex ((ACX))), Aveo Group ((AOG)) and Sonic Healthcare ((SHL)).

Catching Up On The Past

In case you missed some of the preceding stories, here's your chance to catch up (in reverse order):

- Rudi's View: 2016 is The Year Of Conviction

- Rudi's View: Who's Afraid Of The Big Bad Bear?

- The Bear Market Diaries - Episode 1

- The Bear Market Diaries - Episode 2

- The Bear Market Diaries - Episode 3

- The Bear Market Diaries - Episode 4

Rudi On Tour - Who's Afraid Of The Big Bad Bear?

They seem to come along every eight years or so, the dreadful bear market so many investors detest, causing risk appetite to evaporate and share prices to reset at lower levels. Every time the cause and follow-through are different. So what lies at its origin this time and what's going to be the likely outcome? As a self-nominated bear market expert, I will be sharing causes, explanations, insights and strategies for investors who want more than keeping their fingers crossed while hoping for the best.

I will be presenting:

- To Perth chapters of both Australian Shareholders' Association (ASA) and Australian Investors' Association (AIA) for presentations on Monday 9th May, both afternoon and in the evening.

- At the Australian Investors' Association's (AIA) National Conference in August on Queensland's Gold Coast.

Nothing Ever Changes, Or Does It?

Yes, of course, investing in the share market is never really different and best working strategies today are the same that worked pre-GFC. Seriously. I tell you, seriously.



Now that we had a good laugh about it, let's get straight to business. This is a low growth environment. Has been since 2010 (it was masked at the time because of the V-shaped recovery from the global recession) and it is not likely to change fundamentally in the near term. I wrote a book about this (see below). This means investment strategies must adapt. You'll be turning your portfolio into a wish list for dinosaurs otherwise (and your returns will be a reflection of it).

Those not afraid to contemplate "this time is different" can subscribe to FNArena and read all about it in our bonus eBooklets 'Make Risk Your Friend' (free with a paid 6 or 12 months subscription) plus the freshly published eBook 'Change. Investing in a low growth world' (equally free with subscription, or available through Amazon and other online distributors).

Here's the link to Amazon: http://www.amazon.com/Change-Investing-Low-Growth-World-ebook/dp/B0196NL3KW/ref=sr_1_1?s=digital-text&ie=UTF8&qid=1454908593&sr=1-1&keywords=change.investing+in+a+low+growth+world

See also further below.

Rudi On TV

- On Tuesday, around 11.15am, on Sky Business, I shall make a brief appearance through Skype-link to discuss broker ratings for less than ten minutes
- I will be appearing as guest on Sky Business's Lunch Money, 12.30-2.30pm on Thursday
- On Friday, around 11.15am, on Sky Business, I shall make another appearance through Skype-link to discuss broker ratings for less than ten minutes

(This story was written on Monday 14 March 2016. 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).

****

BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena receive several bonus publications, at no extra cost, including:

- The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
- Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
- Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
- Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow. This book should transform your views and your investment strategies. Can you afford not to read it?

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

 In This Week's Weekly Insights:

- The Bear Market Diaries - Episode 4
- Reporting Season - Before And After
- WorleyParsons Rallies - ETFs & Shorts
- Oil - When Everyone Sees Recovery
- #NigelNoMates: Sticking Around
- Rudi On Tour
- Nothing Ever Changes, Or Does It?
- Rudi On TV

The Bear Market Diaries - Episode 4

By Rudi Filapek-Vandyck, Editor FNArena

"Investors should brace themselves for a challenging year ahead with markets likely to continue to be both volatile and low-returning".
[Vanguard Asia Pacific head of investment strategy, Jeffrey Johnson]

Quite amazing, if you think about it.

US equities are within a whisker (circa 2%) away from a positive return year-to-date and only 6%+ below the all-time high.

If Australian equities keep going at the pace they've been rallying since the start of the month, they'll soon be able to show positive numbers for calendar 2016 too.

Makes one wonder, what was all the fuss about at the start of the year?

Brief Recap

Last year I wrote a book^(*). One of the main themes in it is that global growth has steadfastly disappointed post GFC. GDP growth in the number one economy, the USA, has averaged 2% over the past six years which is the slowest pace post a recession for as long as statisticians have kept records.

Then there's China, where growth has been slowing, and still is slowing, no matter what the exact numbers are. China's slowing in particular has been weighing on other Emerging Markets too. The result has been a steadfast deceleration in global trade and growth.

Not so well understood is that the five-year decline in commodity prices has also become one of contributing factors to struggling global growth. This seems counter-intuitive. After all, companies like Amcor, Ansell, Qantas, Coca-Cola Amatil and many others in Australia and the rest of the developed world are benefiting from cheaper input, but in most Emerging Countries, beaten-down commodity prices have had a devastating impact on government revenues and on private sector activity.

Picture Western Australia as a country on its own, now struggling to keep people in the work force, while property prices in mining regions have collapsed and producers of metals, bulks and energy have but one goal: lower costs and generate enough cash flows to stay in business.

When I visited Africa over three weeks in December-January, I witnessed first hand how poorer countries like Malawi, Mozambique and Zimbabwe have struggled in recent years. Gone are the international headlines about Africa, the next frontier or even the next engine for global growth. Instead, newspaper columnists now look back to 2011 when such headlines appeared regularly in Europe and elsewhere, and then follow up with a self-deprecating joke or simply with the question: what went wrong?

Africa remains the world's prime display of corruption and incompetence. Nothing is too crazy for it not to be happening somewhere on the continent. Now low prices for commodities are genuinely having a noticeable impact.

It's easy to dismiss this as "but that's just Africa", a side-show in the global economic mix, a potential that seems never ready to move beyond future promise, but the situation on the ground in Africa provides me with a better understanding when I read reports on Brazil, Russia, the Middle East, Emerging Asia, commodities regions in China, et cetera.

It's tough out there, and for big chunks of the global economy it's not getting any better soon unless we see much higher commodity prices, sustained.

Slowing Growth

Financial markets tend to operate on narrow vision and short attention span, but nothing you just read has been spectacularly new. So why the global sell-off in January and February?

Fingers have to be pointed at sovereign wealth funds, many of whom had to make a mental shift from what else am I going to buy next to what do I need to sell in the short term? A little panicky, perhaps, many decided to offload equities across the globe as soon as the new year started. It may well have been a case of sovereign wealth funds in a similar conundrum think alike - all at the same time. Many of these funds are linked to a government whose expenses and income depends on commodity prices.

However, the real culprit, I believe, has been the USA, where the oil and gas industry has been one of few steady pillars beneath the 2% GDP growth, plus, of course, small entrepreneurial frackers who've helped create global over-supply and by now represent a sizeable portion of the American high yield bond market; enough to put the fear into investors who've experienced the subprime fallout post 2007.

Most of all, higher rates and a stronger US dollar when corporate earnings growth ex-buybacks seems in Struggle Street, is not conducive to further Price-Earnings ratio expansion. In particular not when some economic indicators are rolling over, raising doubts about economic health and whether the next recession could be on the horizon.

In other words: global sub-par growth, which is likely to remain with us for longer, only started to genuinely affect financial markets when US investors started to take notice and became concerned about whether all of the above might well be starting to impact on the US economy and on US corporate profits.

USD  & The Fed

For now, all seems forgiven. The market has priced out prospects for a rate hike move by the Federal Reserve in 2016. Thus the US dollar is, on a trade weighted basis, some 2-3% lower than at the start of the calendar year and it has been a lot lower in February. Hence why gold put in a double-digit percentage rally over the month. But also why commodities and equities globally are now erasing all the losses from the opening weeks.

Risk assets love a weaker greenback. This has thus far been surprise development number one.

How long can it last? Surely, the Federal Reserve remains ready to continue "normalising" US interest rates?

Maybe not.

The US population will vote for a new president later this year and the Fed usually stays far removed from politics, hence it is traditionally very reluctant to change interest rates when political campaigns reach fever pitch. Does this mean the second half is off the radar? We're already in month three of the first half and March is seen as not a viable option for a rate rise, by just about everyone.

No rate hikes from the Federal Reserve is likely to keep a lid on the US dollar, which benefits global risk assets. A lot will thus depend on how determined Janet Yellen & Co are to continue lifting US interest rates with financial markets putting on a tantrum every time the Fed moves rates (or is about to).

Making matters even more uncomfortable for Yellen & Co is that Japan seems to have moved into full "madman panic" mode, with the BoJ having joined the ECB, the Swiss, the Danish and the Swedes by pushing short term interest rates into the negative. Extreme stimulus by large central banks such as ECB and BoJ pushes up the relative value of the US dollar. Witness how the USD Index in February first fell from 99.5 to 95.5 as investors priced out any Fed rate hikes, but then swiftly rose to 98.5 as the ECB confirmed its "whatever it takes" stance, and the BoJ introduced negative rates.

The big question mark for global markets now is: how feasible are further rate hikes by the Fed with two major central banks already pushing the greenback higher?

A weaker US dollar also reduces the need for China to possibly further devalue its own currency.

Commodities & Currencies

The potential fall-out from the international currency battle ground for Australia may well come through a higher Australian dollar. A weaker greenback stimulates commodity prices which -all else being equal- feeds into a stronger Australian dollar (as well as supporting currencies for other commodities producers such as CAD, NZD, SAR, RUB, BRR, et cetera).

Australia also still offers world-leading bond rates and they will continue to attract attention within a context of negative rates in major economies, exacerbated by any hesitation/postponement on behalf of the Federal Reserve. Already I heard one fund manager predict AUDUSD can possibly revisit 80c later in the year. It was supposed to be at 65c by now.

All of a sudden, two more rate cuts from the RBA later in the year, as predicted by some, don't seem completely out of the question. In particular not if the 3% GDP growth reported for the final quarter of 2015 proves too flattering for Australia's true performance in the quarters ahead, as suggested by many.

The end of the yield trade? Really?

The Big Switcheroo

Risk assets have put in a quick switcheroo over the past two-three weeks. In short: assets that had performed earlier in the year are now being abandoned for those that had sold off. The result is a world in reverse from the scenario followed earlier in the year.

Shares in Fortescue Metals ((FMG)) have more than doubled in price since closing at $1.62 on February 12, can you believe it? In the same breath, Burson Group ((BAP)), one of the most solid and attractive growth stories in the Australian share market, whose shares had risen no less than 18% since the start of the year, has lost 10% in recent sessions.

The choice between these two options seems easy to short term oriented market participants (follow the momentum), but for an investor with longer term horizon, the crucial question will be whether the current market switch will prove nothing but a temporary burst in an unchanged longer term channel, or whether this time there is more substance to support the revival?

The world is still awash with over-supply, and there's debt and sub-par growth everywhere, yet some analysts/investors believe there is sufficient improvement in conditions on the horizon to make this a rally to join. Since this is also a time when seasonality is favourable for key commodities (crude oil, iron ore, et cetera), we won't be able to establish whether this is correct until much later in the year.

The bigger picture of a growth-constrained world, with central bankers mingling and interfering, most companies still on the defensive, currencies all-important battle grounds and politicians pretty much absent in the face of deflation/disinflation and polarising societies, I cannot help but think the current bout of euphoria is going to run into the same headwinds and questions that put the fear into the global community at the start of January.

In Australia, analysts, commentators and investors have covered a lot of ground since May last year, but the share market as represented by the ASX200 is still moving inside the same range as it has done since; between 4700 at the bottom and 5350 at the top. We're somewhere in the middle right now.

Apart from the understandable reflex action to secure profits after the strong run up since mid-February, this is probably a bad time to become too positive/complacent about the market's outlook. After all, the world hasn't changed much over the past four months or so. It's just that the market mood has.

All that has happened, really, is someone shouted banks and resources look oversold and a few others thought the guy might have a point. Next thing they knew, they'd initiated a stampede.

Mood swings are what will determine the way forward.

See opening quote of this story, taken from the AFR from the weekend past.

^(*) Change. Investing in a Low Growth World. See further below.

Reporting Season - Before And After

It's a pity Macquarie waited this long before releasing its own assessment of the February reporting season, otherwise I would definitely have included the table below in my own analysis, which can be accessed here.

Macquarie's analysis is not different from my own: the Australian share market is faced with its second consecutive year of negative earnings per share (EPS) growth, but take out miners and energy companies and it doesn't look too bad. The big question mark from here onwards is whether the anticipated recovery in FY17 & FY18 will need to be scaled back, and by how much. If recent experiences are anything to go by, both numbers will look a lot less by the time companies get ready to release their actual performances.

Macquarie is the only one one who has published a nice table with an overview of the changes that occurred over February. Sine the inclusion of the table didn't happen with my Reporting Season Review, it has been included below.




Macquarie's conclusion: "At the half way point for 2016, Industrial earnings growth now sits at 0% (market ex resources at 1%) which means if history is a guide, it is going negative (it is difficult to think that 2017 will be the first year in 12 where analysts underestimate earnings and actual growth ends up being above where expectations began). Relative to our own base case, the 2016 earnings trough is unfortunately getting deeper and the 2017 recovery riskier/shallower unless we begin to see conditions for stronger sales growth emerge. At this stage there is significant downside risk to 2017 growth estimates."

Bright spots during reporting season, as identified by Macquarie, were Airlines ((QAN)),((VAH)), Health Insurance ((MPL)), ((NHF)), Retail ((JBH)),((NCK)), ((TRS)), Outdoor and Online Media ((CAR)), ((OML)), ((SEK)) and Paper and Packaging ((AMC)), ((ORA)).

WorleyParsons Rallies - ETFs & Shorts

According to Goldman Sachs' analysis, some 4.5% of the shareholder register in oil sector services provider WorleyParsons ((WOR)) is being held by passive high dividend ETFs. The company announced on February 24 there would be no final dividend payout for shareholders. One would think this would be the trigger for the stock being removed from indices and ETFs, which in practice means more selling thus a lower share price.

WorleyParsons shares have more than doubled in price in just over two weeks, and they were still rallying strongly on Monday (+10% on the day).

Erm?

It gets more confusing with Goldmans research signalling 30% of all trading volumes since the company reported December half financial numbers has been linked to those passive ETFs who were supposed to be selling. WorleyParsons is also one of the most shorted stocks on the ASX. According to the latest available ASIC data on this subject, short positions represent some 12.5% of all outstanding shares.

Not sure what to make of all this, other than future updates by ASIC are likely to reveal less short positions. I also note, Monadelphous ((MND)), once upon a time the undisputed star in the sector, is still carrying nearly 18% of short positions on its register. (See also daily & weekly updates on shorts on the FNArena website).

Oil - When Everyone Sees Recovery

This would have surprised many, if they'd given it some attention. Deutsche Bank downgraded Origin Energy ((ORG)) on Friday to Hold as the share price post recent rally is now, on the analysts' calculations, incorporating an average crude oil price of US$58/bbl.

Yes, you read that correctly. Origin's share price, which was decimated from $13 in Q2 last year to below $4 earlier in the year, now trading above $5 is already anticipating a big rise in the price of crude oil which was last seen trading below $40/bbl still.

Deutsche Bank's assessment seems to corroborate similar research conducted by analysts at UBS and at Credit Suisse whose calculations also suggested most oil & gas stocks are already assuming a sizable recovery in energy prices, notwithstanding the fact share prices are still at depressed levels. Here are the two illuminating paragraphs from the most recent update by Credit Suisse on this matter (keep in mind this was published some ten days ago now:

"On purely producing/sanctioned assets we estimate Woodside is pricing in ~US$62/bbl, Oil Search ~US$70/bbl and Santos ~US$58/bbl. At US$50/bbl oil they have -30%, -49% and -52% downside, respectively. At US$70/bbl they have 17%, 1% and 67% upside, respectively.

"On our risked NPVs we estimate Woodside is pricing in ~US$59/bbl, Oil Search ~US$61/bbl and Santos ~US$55/bbl. At US$50/bbl oil they have -27%, -31% and -40% downside, respectively. At US$70/bbl they have 22%, 29% and 88% upside, respectively."

#NigelNoMates: Sticking Around

The big rally has arrived and so have the emails asking whether now it is time to bury Nigel in the back garden and forget he paid a visit in the first place. Nigel thinks it is way too soon to leave the stage. He reminds everyone his is a longer term approach, not to be deterred this easily by a week-long of shorts covering and fund managers recalibrating their portfolios.





I am keeping the world up to date about #NigelNoMates' endeavours and adventures through my Twitter account @filapek.

Rudi On Tour - Who's Afraid Of The Big Bad Bear?

They seem to come along every eight years or so, the dreadful bear market so many investors detest, causing risk appetite to evaporate and share prices to reset at lower levels. Every time the cause and follow-through are different. So what lies at its origin this time and what's going to be the likely outcome? As a self-nominated bear market expert, I will be sharing causes, explanations, insights and strategies for investors who want more than keeping their fingers crossed while hoping for the best.

I will be presenting:

- To Perth chapters of both Australian Shareholders' Association (ASA) and Australian Investors' Association (AIA) for presentations on Monday 9th May, both afternoon and in the evening.

- At the Australian Investors' Association's (AIA) National Conference in August on Queensland's Gold Coast.

Nothing Ever Changes, Or Does It?

Yes, of course, investing in the share market is never really different and best working strategies today are the same that worked pre-GFC. Seriously. I tell you, seriously.



Now that we had a good laugh about it, let's get straight to business. This is a low growth environment. Has been since 2010 (it was masked at the time because of the V-shaped recovery from the global recession) and it is not likely to change fundamentally in the near term. I wrote a book about this (see below). This means investment strategies must adapt. You'll be turning your portfolio into a wish list for dinosaurs otherwise (and your returns will be a reflection of it).

Those not afraid to contemplate "this time is different" can subscribe to FNArena and read all about it in our bonus eBooklets 'Make Risk Your Friend' (free with a paid 6 or 12 months subscription) plus the freshly published eBook 'Change. Investing in a low growth world' (equally free with subscription, or available through Amazon and other online distributors).

Here's the link to Amazon: http://www.amazon.com/Change-Investing-Low-Growth-World-ebook/dp/B0196NL3KW/ref=sr_1_1?s=digital-text&ie=UTF8&qid=1454908593&sr=1-1&keywords=change.investing+in+a+low+growth+world

See also further below.

Rudi On TV

- On Tuesday, around 11.15am, on Sky Business, I shall make a brief appearance through Skype-link to discuss broker ratings for less than ten minutes
- I will be appearing as guest on Sky Business's Lunch Money, 12.30-2.30pm on Thursday
- Also on Thursday, I will appears as guest on Switzer TV, Sky Business, between 7-8pm
- On Friday, around 11.15am, on Sky Business, I shall make another appearance through Skype-link to discuss broker ratings for less than ten minutes

(This story was written on Monday 7 March 2016. 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).

****

BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena receive several bonus publications, at no extra cost, including:

- The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
- Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
- Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
- Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow. This book should transform your views and your investment strategies. Can you afford not to read it?

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