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Friday, 23 June 2017
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Sector by Sector

THE AUSTRALIAN MARKET

This is the ASX 200 chart on a weekly basis. We have had a few scary days in the last couple of weeks with a 92 point drop on Wednesday this week. As you can see from the chart the bottom of the trading range is around 5600 and the top is above 6000 if we were to break the recent high at 5956. We are clearly testing the bottom of the uptrend trading range that has been in place since February last year and a drop below 5600 would begin to ring some alarm bells. Investors should be awake and on guard, there is no safety in the market. It would probably take a significant drop on Wall Street, which seems to be able to whether anything at the moment, to crack to the downside on our market and considering the banks have already corrected, and the big resources have already broken the uptrend, the odds are probably against significant drops in those sectors without some outside catalyst. Bottom line, we are testing support but the odds are on it holding. 

The recent volatility is unwelcome it has to be said. I had an email from one member this week that expressed frustration at the lot of the small investor in a world that promotes shorting, sees 92 point falls in the market for no obvious reason, and is confused by institutional motives of windowdressing and tax loss selling, all of which term stock market into a bit of a mockery for “us small time suckers”.

My candid reply was along these lines:

Hi XXXXX - This end of the industry always glosses over the bad bits of the market because they really aren’t as invested as they make out (so don’t actually get hurt as the clients do). Most people who work in this industry have to because they do not have money - half of them are under 35 anyway and likely have no assets to lose. But you “small time suckers” (who are actually more wealthy than almost all the talking heads and advice givers, are supposed to jolly along and suck it up with the message that its “the market”.

But there is a solution perhaps. It’s the volatility that upsets people and I think if I was a retiree looking to take advantage of the usual long term uptrend in the equity market, but not take a lot of risk, I might trade, in slow motion, the vastly lower volatility indices through an ASX listed ETF or an LIC like AFIC or WAM.

The index game is to try and cut the good bits out and sit in cash (and sleep soundly) during the bad bits. So all you are doing it making 0-5 decisions a year to buy the market or sell the market. You will achieve a lot less volatility but still hopefully achieve better than market returns. And its a lot less hassle and paperwork.

Meanwhile don’t expect anyone on this end of the equation to recognise your pain. Because very few of them are experiencing it themselves. Hopefully between us we can find a good end result, but we will only do that by lifting our gaze above our feet to the horizon and by finding good stocks in the medium to long term not short term. The short term is nothing but a distraction….I sometimes think I should write one newsletter a year!

Ultimately there is no point if you don’t enjoy it XXXX. Maybe consider the slow motion index trading alternative. Otherwise feel comforted that there are many thousands of people in your position all of whom are thinking “Am I the only one not enjoying this?”

Regards

Too honest…?

THE US MARKET

This is the S&P 500 index on a daily basis - no change here. Despite the PE of the US market being 25% above the long-term average there is no sign (technical sign) of the US market selling off. In fact there has recently been a MACD buy signal. RSI at 45 is hardly overbought either. The Trump rally has now taken their market up 16.7% since November last year and it continues to hit all-time highs. There is simply no point calling the top until it starts so for now all we need do is simply watch and enjoy.

In our financial planning business we bought Amazon this year (what a pain executing those orders) but are up around 17% for our troubles. We note the recent “flash crash” in tech stocks in the US which are up about 30% so far this year and note the fact that the US technology sector is now back to the same level it was a peak of the tech boom. Goldman Sachs recently wrote a piece of research suggesting we are in the middle of another tech and the sector sold off. This time of course it’s backed by big companies with serious earnings. But there is clearly a vulnerability with stocks like Amazon on 67x. That’s where their market could crack, the tech sector is a massive growth element of their indices which would significantly damage the market if sentiment turned. Again no sign of that yet, so we are just noting that if sentiment runs from 0 to 10, we are at 8 at least in the US and that’s in the sell zone given any excuse. Since 2012 the S&P 500 index is up 100%. Amazon is up 363%. This is a chart of the Amazon share price and the Forward PE ratio. They have it on 110x against an average of 53x.

SECTOR BY SECTOR

Below are sector comments and tables of fundamentals and performance numbers of the stocks in each sector.

The way I would use these tables is from the top down:

  • Think about the drivers for each sector and the themes. I have tried to comment on that for some sectors but only where the sector has big drivers. Some sectors for instance are simply a collection of individual stocks grouped together by the ASX, but looking at ‘the sector’ is irrelevant. Instead you drill down to the stocks straight away.
  • Identify positive and negative sector themes, decide if the sector has good drivers and the ‘tide is running’ up not out. Some sectors have sentiment running against them (banks, retail). Just go through each sector and where the sector grouping is legitimate and represents a homogenous group decide “Yep” or “Nope”.
  • For those of you who have some respect for trend look at the performance numbers. You will quickly see stocks that have “blue” performance numbers across every time frame. These are clearly proven long term performers and the odds are that they will continue to be so.
  • Traders and investors, look at the performance figures and identify stocks with red numbers on the left in the short term and blue stocks in the other longer timeframes. These are potentially quality stocks presenting a buying opportunity.   

The basic idea is that you can scan the market by sector and then stock by stock. Maybe I’m the only one that likes things ordered in this way but hopefully over time we can revisit the debate on each sector and highlight the opportunities in the underlying stocks.

THE BANK SECTOR

We are a little tired of the bank sector’s underperformance. Retirees in particular. I have declared the recent sell off (in my humble opinion) as an opportunity to buy the sector but it has yet to bounce.

AS you can see from the numbers there is value appearing. The sector bounced 5% recently when the US introduced a 150 page report suggesting the Basel IV capital requirements were too draconian and needed to be mellowed. The prospect of capital being released rather than required would take a lot of angst out of sector sentiment and allow margins to finally rise again. That sugar hit is being tested again and as you can see in the chart we are at the lower end of the trading range if those boundaries are half legitimate.

I had an email from a Member today asking me to do some numbers on the banks and work out whether we would make money consistently buying them for the run up to the dividends, not collecting the dividends but selling them just before results (which is when they usually peak), and come back and buy them again after they have gone ex-dividend, had their usual two months of disinterest and bottom ahead of the traditional run up to the next results. I’ll have a look at that. (Thank you for the idea).  

Here is the seasonal chart of the Bank sector again:

The white line is the average performance of the bank sector since 2000 day by day month by month. The orange line is this year. The sector usually peaks before the results and dividends in May. May and June and half of July are the worst months to be in the sector (apart from November) and on that basis you might wait until July then buy for the results run up to the end of October. This chart suggests that we have already had our annual correction this year. Every year I point it out that the sector peaks just before results and dividends and every year I do nothing about it and every year it happens again. All retirees get caught saying "we can't sell just before the dividends go ex", but we should. But this year it is not just about the seasonal trend topping the sector out, for a number of reasons the sector has fallen into a sentiment hole. This chart says it is overdone. The sector usually starts to rally in early July. From this level it could bottom at any time. Hoping for that. Either way if I was an institutional fund manager that was underweight I would be thinking about coming up to a neutral waiting on these yields with a view to going overweight if the sector actually starts to trend up again. 

The numbers on the sector:

The performance numbers:

RESOURCES

This is the chart of the resources sector on a daily basis -
it is still in downtrend after the “big top” at the end of January but if anything is looking bottom of the most recent downtrend trading range. It is on an RSI of 35 which is approaching oversold levels, levels that have only been hit a couple of times in the last year. This is obviously a trading sector and performance is highly dependent upon commodity prices. You can do all the fundamentals you like, some people even think there are some income stocks in here (laughable), but this is a sector you need to be in the right time not all the time at the moment, in this trend this is the wrong time. Having said that some of the best trading stocks are in this sector including FMG is a play on the oil price. This recent downgrades to Chinese GDP numbers have kept the sector in a cloud and it’s hard to see the catalyst for that to change at the moment. So, “Ready to buy for a trade” but not buying yet.

BHP:

Fortescue:

Iron ore:

ENERGY

Oil price:

Oil price lower for longer – The oil price is down 20% since February. One US broker says “its lower for longer…sell the rallies”. On the flip side the Iraqi oil minister has predicted an oil price recover starting in July with a target of $54-56 by year end. Oil stocks are there to be traded, they are so correlated with energy prices. You can do all the fundamental research you like on stocks like WPL but when you see this chart (below) you realise that the detail really doesn’t matter to the share price, it is a proxy for the oil price and for the moment the oil price has broken its recent OPEC inspired uptrend:

http://www.marcustoday.com.au/webpages/images/report/20170623/agfqscod3413367869870451650.png

This is Woodside on a daily chart over two years – you can see the broken uptrend. Unfortunately the support is around $20-25. It is now oversold on RSI.

http://www.marcustoday.com.au/webpages/images/report/20170623/hmimrgzq109485153442194915.png

 

REITS

A sector that benefits from falling interest rates. My one observation here is that the long term outlook for retail malls, particularly in the US has to be compromised by the disruption in the sector and the growth in online retail. I’d be cutting WFD and SCG long term, they are low growth at best.

The sector is inversely correlated to the 10 year bond yield. When rates start going up (as they did in November last year), sell the sector.

INSURANCE

I see an opportunity in NHF which has fallen on the back of an ACCC ruling. Brokers have quickly seen this as a buying opportunity. Unfortunately the yield doesn’t quite qualify it for the income fund but it could possibly be included in a growth fund. The bounce has begun.

UTILITIES

The sector has topped out and a few brokers downgraded some of their recommendations. A rise in interest rates will kill the interest but the lastr RBA Meeting makes it clear they are a touch cautious on the economy so a rise looks extremely unlikely. Keep an eye on the sector. The yields are getting a bit skinny and there is little to no franking. You can see a few income funds collecting the next dividend (in August) then having a good think about it. Or just taking the top off now.  

HEALTHCARE

Look at the performance numbers. This is a sector that has seen the big end perform and the small end disappoint. No income here. A lot of stocks that would benefit from a fall in the A$ (that isn’t happening).

IT

TELECOMS

This sector chart is completely dominated by the Telstra market cap. So here’s a chart of Telstra. It’s still heading down.

FINANCIALS EX BANKS

RURAL – FOOD – STAPLES

No point putting up a sector chart. It’s a stock by stock sector.

SERVICES COMPANIES

Again- no point putting up a sector chart. It’s a stock by stock sector.

GOLD

A trading sector depending on the Gold Price. NCM if you want to move in slow motion, NST is a favourite for the trader, but you can see from the performance numbers…they move pretty much as one in trend if not in magnitude of price movement.

CURRENCY AFFECTED STOCKS

Some brokers have been highlighting the need to invest in stocks in Australia that are exposed to the US economy which is recovering and we have written about that in our recent article:

http://www.marcustoday.com.au/webpages/images/report/20170623/pxmgtacs2586167525779081323.png

International stocks are mostly flying although all of them are already on high PE’s, over 20x with skinny yields and the share prices in all cases except BXB are hardly bottom of range.  This is a theme that is clearly ‘running’. We already hold CSL, JHX, MQG, RMD, TWE. Stocks that I’d like to add to the portfolio long term include COH (PE almost 40x), REA (PE 36x) but the timing doesn’t look right and the PEs make them vulnerable to any market sell off. CWN and ALL are in a solid industry (but we don’t invest in gambling). 

For international exposure, AMC, SHL but they are also on PE’s over 20 with skinny yields. The one stock that does offer “value” relative to the rest is CCL. They are on a PE of 16x, yield of 6.7% and all the brokers hate them…out of 13 brokers only one has a BUY and that was a recent upgrade. It is one for the watchlist. You need a catalyst to buy it (good results maybe). At the moment its friendless.

RETAIL

No chart available here – but you know the story at the moment. Amazon fear continues:

Amazon has announced it will sell Nike products directly through the Amazon platform. Nike had refused for years but have now cracked. It is a move that will anger their existing retailers. Both Super Retail (SUL) and RCG Corp (RCG) fell heavily on the news. In reaction to the news in the UK and the US Footlocker fell 11% and JD Sports fell 2.6%.

Another sign of the online onslaught came from Sears in Canada – they are cutting jobs and closing ¼ of its stores quoting a steady decline in sales and competition from online. They are closing 59 of 225 stores and cutting 2900 jobs out of 17,000. They are also seeking legal permission to suspend monthly payments to their pension plan which is running low on cash, and stopping payments to post retirement benefit plans which provide life insurance medical and dental benefits to ex-employees. Analysts suggest they are going to struggle to stay in business and might be better to sell their assets now then run the company until liquidation. The company has a market capitalisation of just C$62 million down from $2 billion four years ago.

The retail industry, like the media industry before it has to adapt or die to the changing retail landscape. Whilst some of the stocks are offering value in the short term, it looks like a low odds investment sector longer term. And as we know from the likes of TEN and FXJ and other media companies, some companies simply won’t adapt, they don’t know how – we have exited all retailers and retail exposed REITs and will only now trade the sector on the occasional bounce.

I think I’ll be looking for a turn in some of the bigger players (JBH and HVN in particular) – Amazon fears are probably overdone, the next results are likely to be good (unaffected by Amazon yet) and JBH for instance gave us earnings guidance (upgraded it) just a month ago. I think there’s money to be made from this sentiment hole although it is a cyclical ‘trading/timing’ sector not an investment sector. The structural issues for WES and WOW remain and WOW still, even now, looks expensive. There is some trading to be done in this beaten up sector. But not yet, there is no sign of the bottom yet.    

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