This week we look at the following topics: Monthly portfolio review, sell in May? We update our three portfolios with outlook summaries. Bank earnings season underway, ANZ overvalued? Australian banks are reporting this month. Are they priced to perfection? We explore. Update on US corporate earnings season We look through the key numbers and pinpoint where we think the US markets are heading. Technical update on the copper price The most important industrial metal. We tell you where it is going. Key gold price forecast webinar on this week A great opportunity to hear from our own Senior Technical Strategist on where the yellow metal is heading.
Monthly portfolio review sell in May? All three of our portfolios continue to track in positive territory despite the huge volatility on the Australian market. As the iron ore price falls from around US$120-130 per tonne to US$105 per tonne. Many investors have seen the value of their mining shares follow the same direction lower. None of our portfolios hold any direct mining shares and this has been intentional throughout the year.
We continue to see our most conservative portfolio the Drawdown Phase portfolio performing above target. The Wealth Creation portfolio remains a little disappointing but still remains in positive territory. We added three new stocks last month which we think will be excellent profit generators into the future. We took losses on some positions earlier this year because we have a firm stop loss policy. This helps minimise any nasty surprises which is necessary for any growth investor. Quote of the week Ive missed more than 9000 shots in my career. Ive lost almost 300 games. 26 times I have been trusted to take the game winning shot and have missed. Ive failed over and over and over again in my life. And that is why I succeed. - Michael Jordan
Back to the Drawdown Phase portfolio and the excellent results! Its not every day that you see the most conservative portfolio shooting the lights out but it is a feature of how we think about portfolios at Invast we dont benchmark to an index, we just etc expectations and try to deliver on them at an absolute basis. The Wealth Preservation portfolio has seen some stability return with standout performances from Woolworths and Woodside Petroleum both star performers over the past few months.
We were also fortunate to book a nice fully franked dividend from Woolworths in two of the portfolios while the share price has rallied. Westfield is starting to rerate slowly, still below our entry level but the market is finally starting to see what we have been talking about over the past few months. We think Westfield shares can continue to rise above $11 per share and should hold that level as dividends are paid in the next few months.
Wealth Creation Portfolio (May Review) Security Units Entry Market Profit/Loss Position Value Long Tandou (Shares ASX) 20,000 $ 0.460 $ 0.480 $ 400.00 $ 9,600.00 Long Capilano Honey (Shares ASX) 1,905 $ 5.300 $ 5.550 $ 476.19 $ 10,000.00 Long Clearview Wealth (Shares ASX) 13,350 $ 0.750 $ 0.760 $ - $ 10,146.00 Long Oz Forex (Shares ASX) 3,125 $ 3.200 $ 3.150 $ (156.25) $ 10,000.00 Short S&P500 (A$) 6 $ 1,831.10 $ 2,023.68 $ (1,155.49) $ 9,831.11 Cash $ 1,215.21 AUDUSD at time of calculation 0.9290 $ 1,244.62 $ 50,792.32 Total return as of May 2.5% Annualised since inception 4.3%
We wrote an article last week about stocks likely to enter into our three portfolios. If you missed it, you can read it by clicking here. The key priorities are Toll Holdings and Macquarie Group. We are inclined to take profit on Woodside Petroleum and add some Macquarie to the portfolio. We are also contemplating adding Toll Holdings because of the solid 5% fully franked dividend yield to the Drawdown Phase Portfolio as the TAHHA mature this month.
We will have around $9,8000 to invest in Toll. We think the business is stable and leveraged to a turnaround in the domestic economy. The AMP and Goodman notes are holding steady and providing a nice income stream, its a shame that we didnt take on board the additional risk a few months ago via the Healthscope notes (the business now looks to be subject to a takeover with plenty of interested parties) but our focus here is to be comfortable. The Drawdown Phase portfolio is running at an annualised return rate of 8.3% which is above target and might even rise higher as more dividends are booked.
So in summary, we plan to replace the matured TAHHA notes in the portfolio with Toll Holding shares at a price of $5.28. Well hold off selling Woodside in favour of Macquarie until next month. Macquarie has just reported a solid set of numbers and will be buying back shares on market as of the time of writing. We need to spend a little bit of time digesting the earnings numbers and response to shareprice before making the switch. With the Toll Holdings position, we need to act quickly since the TAHHA notes have matured as of the beginning of May. Stay tuned for more updates, but for now all looks well on the portfolio front!
Bank earnings season underway, ANZ overvalued? Three of the big four Australian banks will report their earnings in May. Commonwealth Bank is the exception, it has a June balance date for its financial year and tends to report its earnings with most other industrial companies in February and August. Our preference in the space remains ANZ for the following reasons:
* ANZ is one of the few Australian organisations that is legitimately leveraged to the growth of Asian economies. Its not just about having a branch or office in Asia, its about cementing business relationships. ANZ has been working hard on this over the past decade, its not an easy achievement. It takes time and as a bank which is in the business of pricing risk, there will be losses in Asia which we havent yet seen on a large scale. ANZs business in Asia has grown at a compound annual rate of around 36% over the past few years which is a multiple of the growth rate in the much more mature Australian market.
* ANZ not only has business assets in Asia but it actually gets Asia. What we mean by this is ANZ understands the culture, the business realities and the situation on the grown. Many western companies have tried to impose their way of doing business in Asia as a means to generate profit. In the banking space this leads to disasters western financial institutions can make profit for a short period of time but when things heat up and the economy cools, they are often the largest depressed sellers. We feel that ANZ understands what it takes to be successful in Asia and has built its business around the Asian market environment as opposed to exporting its Australian bank into Asian markets.
* ANZ understands the benefits of integrating its Asian growth strategy into its core Australian market. Your author was recently walking past an ANZ branch in Hurstville a suburb of South Sydney which has a very strong Chinese speaking population. He noticed the branch was designed, positioned and aimed at facilitating Chinese speaking business. The signs were written in Chinese, the ATM machines were multi lingual and the staff were all trained to deal with the realities of dealing with the Chinese speaking market. Your author spoke to the bank managed who said that ANZ is one of the few (need to confirm this) Australian banks that actually lends to Chinese investors who wish to purchase assets in Australia. This integration is key to building regional relationships, the same way that HSBC for example has become a truly global organisation with portability in its services.
* The above is one anecdote only but the numbers dont lie either. In markets it is dangerous to just base ones investment conviction on a single anecdote. We admit this firmly and accordingly, we analyse ANZs recent report card below.
The first thing we look at when a bank reports its profit is margins and asset quality. The earnings of a bank can be distorted by many different factors. Banks earn their money different to a super market. A super markets earnings are a function of how much product it sells, the balance sheet adjustments are limited to certain inventory treating items. For a bank, the numbers can really be subject to many elements at managements discretion.
Your author covered the Australian banks during the global financial crisis in a previous role, we saw just how quickly earnings can change for a bank based on certain balance sheet risk items arising. For example, a banks management team may determine a certain corporate loan is a performing loan. But if the company files for receivership tomorrow, even though the account is up to date, the reality might mean that the bank would need to immediately take a write down on that loan if it thinks that it cannot recover a 100% of its face value. Thats why here at Invast we spend so much time on asset quality.
Most of the financial press and analyst community focus on earnings and dividends. We think this is a secondary issue. If I take $100 from you and pay you $5 or $6 return, the difference between the two amounts is 20% ($1/$5*100) and so I could report this as a 20% increase in the amount of money I am paying you back. But what really matters is that $100 which I have taken from you. If the value of that $100 is now worth $90, the profit that I have paid you is completely offset by the $10 destruction in value to your investment. Banks tend to have a habit of increasing their earnings gradually the $5 to $6 example while slashing the value of their loan book overnight in market downturns the $100 to $90 example. So just be aware of this, the global financial crisis has taught us to never blindly trust any global banks ever again.
The good news for ANZ is that the loan book looks reasonable as of the end of March this year. Impaired assets (bad loans) as a proportion of the loan book at low at only $3.6bn. There seems to be good provisioning set aside for problems, individual provisioning currently covers around $1.5bn or 41% of all bad loans. ANZ can get away with us as long as things down turn sour quickly. One of the
best ways to see where loan quality is heading is by looking at mortgage arrears. This is a good lead indicator for problem loans. A loan might be in arrears but doesnt necessarily turn into a bad loan unless the bank things that the chance of it being repaid falls below a certain probability event. Loans which have been in arrears by more than 90 days have actually increased from $1.8bn in September to $2.0bn at the end of March. We dont know how many of these loans are from Australia or from the Asian business.
What we are seeing though is loans in arrears between 30 to 60 days rising from $1.5bn to $2.0bn. This needs to be watched closely, we dont think the majority of this is due to the Australian business given record low interest rates, low unemployment and rising house prices. ANZs total loans which are in arrears totals $13.0bn compared ti $11.8bn at the end of September. To put this into perspective, ANZ has only allocated $4.3bn for all bad loans those which have already gone bad and those that are in arrears but not yet in default status.
Our point here is this ANZ may have reported a nice headline growth rate in cash earnings of 11% which caught all the news headlines BUT its loan arrears are rising and perhaps not rising in the Australian market which is its core business. Eventually if the arrears continue rising and snowball into problem loans, there will be a need to raise provisioning and take some pain. Profits will be impacted, this is a big IF event but its one that needs to be factored into any scenario analysis. Well get a better idea of why ANZs arrears are rising when we see number out of Westpac, if the trend is similar then we can assume this reflects the dynamics of the Australian mortgage market. If Westpacs loan arrears vary from ANZ, we must draw the conclusion that arrears are rising in Asia.
So we dont doubt the Asian growth strategy, we actually like it and think ANZ is well placed in the next decade to capitalise from Asian growth. But we are nave enough to just accept everything a bank tells us. We are a little cautious on the rising arrears profile and think that eventually ANZ will need to take some pain from a slowing rate of growth in Asia. It might make some bad decisions along the way have book loan losses thats life in banking. This will come as a surprise to the market but not as a surprise to us. We protect ourselves from this probability but factoring in a margin of safety into the price we are willing to pay for ANZ. The best way we think to value a bank is by using a Price to Book ratio. The price the market is willing to pay for the bank compared to the value of equity the bank actually owns in its business.
On this measure, ANZs total book value (total value of its equity) as of the end of March was valued at $47bn. In contracts the market is valuing ANZ shares at approximately $93.5bn. We calculate the latter by taking the ANZ share price and multiplying by the total number of shares on issue. The result is a Price to Book ratio of around 2x. Its not a big number but it definitely isnt cheap either. ANZs total arrears make up about 30% of its total equity value. This is before any large, risky corporate loans blow up. Perhaps they wont eventuate and things will go along smoothly. Given the experience of other banks during the global financial crisis, we just dont feel comfortable taking this plunge. We think ANZ probably deserves to trade at a Price to Book ratio of 1.5x 50% premium to its equity value. This would equate to a share price of around $25-$26.
In the past we have said we are willing to wait for ANZ to fall back to around $27-$28 per share before we start adding it to the portfolio. This might never eventuate but its a risk we are prepared to take. We dont see an immediate reason to buy ANZ even though ANZ is our preferred pick among the Australian banks. There is a big difference between a preferred pick within a bunch of stocks and an investment worth buying. One is a relative measure, the other absolute and we think absolute choices are what our clients should be focusing on. With that in mind, we are happy to sit back, relax and see how the Australian banks perform over the coming few years. We wont hold any of them in the portfolios because we want to be able to sleep at night. When we see over reaction in the market, we will take the opportunity to jump on board and buy them. We arent bearish, we are just being prudent in our investment approach.
Update on US corporate earnings season We published a report on the Invast blog and subsequent Invast Insights report on 7 April 2014 previewing the upcoming US reporting season. We made the point that the risk reward ratio was making it difficult to be long the Dow Jones Industrial Average. Since then the Dow has fallen but also recovered in recent sessions to be fairly flat, in the vicinity of where we initially advised taking a short position. We still think we Dow is set for declines and the risk reward characteristics make it difficult to go long here, in any case we have always held the view that our stop loss level would be set at 16,650 which is about 100 points away from the current price as of the time of writing. We maintain our short view. For those that missed the initial post, here it is. We take this opportunity to provide some running commentary on the key Dow Jones Industrial constituents and how their earnings numbers have come in. Most of the names have no reported and so we thought this would be an
appropriate opportunity to update the market on the numbers. We published the chart below in early April.
We focus our result analysis on the shaded names Visa, 3M, Boeing, United Technologies and American Express.
* Visa The stock is down for the month as the result missed expectations on the revenue front. Net income for the three months ended March 31 rose 26% to $1.6bn, or $2.52 a share, from $1.27bn, or $1.92, a year earlier, Foster City, California-based Visa said yesterday in a statement. Adjusted earnings per share, which exclude a tax gain, were $2.20, two cents better than the average estimate of 31 analysts surveyed by Bloomberg. Revenue climbed to $3.16bn, missing the $3.18bn estimate.
* 3M - The stock rallied nicely last month, one of the key names dragging the Dow back higher. Earnings were in line with market expectations with revenue up 3% to US$7.8bn and earnings at US$1.79 per share. Sales in the healthcare unit rose nearly five per cent and were also higher for the
industrial, safety and graphics, and electronics and energy divisions. Sales dipped in the consumer business, which ranges from stationery and office supplies to home care products.
* Boeing - A fairly flat month for the stock, trading within a very tight range between US$120-130 per share. Rising jet production helped Boeing post a 14 percent rise in adjusted net profit in the first quarter, beating estimates, and the company notched up its full-year forecast. The first quarter results reflected a weak comparison with a year ago, when Boeing delivered just one 787 Dreamliner in the first quarter of 2013. Deliveries were halted that month after two incidents in which batteries on the planes burned, prompting regulators to ground the global Dreamliner fleet for three months.
* United Technologies Poor month for the stock, stock drifting lower following the results. Nothing really there to get the market excited. New equipment orders at Otis, a division of United Technologies and the worlds biggest maker of elevators, escalators and other people-moving products (like moving walkways), increased 9% for the quarter due to 27% growth in Chinese orders. United Technologies said that new equipment orders in its climate, controls and security segment increased 1% organically with growth in HVAC (heating, ventilation, and air conditioning) products as well as fire and security products offset by a decline in demand for container refrigeration products in the Transicold brand.
* American Express Another stock which has seen a poor month, market totally unconvinced by the earnings numbers. Struggling to rise back above US$90 per share. The company reported net income of $1.4 billion for the period, a 7.7% increase from last year, on the back of increased spending by card members. The card payment networks net income margin expanded to 17.5% from 16.2% in the same quarter last year. Earnings per share (EPS) for the quarter were $1.33, a 16% increase compared to $1.15 in 1QFY13. The market needs to see this type of growth given the high price to earnings ratio which we highlighted in our chart above. Lacked the strong conviction some were looking for!
Our Senior Technical Strategist Vito Henjoto has just re-run his numbers and provided the following analysis with respect to the Dow Jones position. His points are: * Key resistance located at 16650 in line with our previous comments above * Immediate support located at 16350 followed by 16150. * Trend changing support located at 16000
* Medium Short term is neutral as long as price is within this 650 points range (16000 16650). * Stochastic also indicating potential overbought market in the short term.
Image: US30 daily chart via Invast MT4 platform
Technical update on the copper price The brief copper rally over the past month faces tough resistance close to the 61.8% (around US$3.14/lb) off its fall in February March this year. As can be seen on the Daily chart below, copper has also failed to close above the Ichimoku cloud. The combination of 61.8% retracement and the inability to overcome Ichimoku cloud resistance suggests a potential for downtrend continuation. The level that could stop this from happening is at the key US$3/lb mark. Any daily close below this level could trigger further selling in copper.
The Stochastic Oscillator is also supportive of this view at time of writing as price comes off the overbought condition. Even though technical levels are pointing for a move lower in the medium short term, we like to be on the positive side of things that the move lower will likely be less aggressive compared to the drop two months ago. Downside support below US$3/lb is located at US$2.98/lb and US$2.93/lb both of which are Fibonacci retracement of the recent recovery. We do expect these levels
to hold any further drop in Copper prices should US$3/lb fails to support the market. Position traders could look to re-enter the copper recovery on bounces from either US$2.98/lb or US$2.93/lb.
Chart courtesy of TradingView.com Key gold webinar on this week We launched our Gold Forecast guide two weeks ago with resounding success. Demand for the outlook on gold has been significant. For those that missed it you can download the document by clicking here. The guide goes through our fundamental way of thinking about gold and shares some insight into the factors that we think about when trying to project a long term gold price. We focus on the supply side of the equation while many other in the industry just focus on gold demand which is very subjective and difficult to quantify. We spoke about gold extensively in one of our daily morning meetings last week plenty of Insights from some of our senior traders and Institutional Sales managers. The general feel around our trading desk is that gold is currently consolidating but could surprise the market on the upside in the coming few months.
When? How? These are the two key questions that many are asking. We remind you that our Live Market Analysis webinar on the 7 th May 2014 will be focused on the where we believe the gold price is going based on the very latest technical analysis by our Senior Technical Strategist Vito Henjoto.
We have laid out the fundamentals in the guide and this webinar is the best opportunity to position your trades for the next few months. Click here to register directly into the webinar, an event not to be missed! The beauty of our webinars is that clients get to see exactly how we place trades, how we construct our analysis and how we manage trades as the market starts to fluctuate. The webinars are also an excellent opportunity for you to ask questions there arent many brokers out there that give you full access to their senior analysts while they trade the market.
We hope to see you there. If you have any questions that you would like to be specifically addressed in the webinar ahead of time, feel free to email vhenjoto@invast.com.au or pesho@invast.com.au directly.
Glossary of previously covered topics What the RBA can learn from the RBNZ Stocks likely to enter our portfolios Invast launches ST24 platform Gold outlook webinar must attend event April portfolio review Aussie dollar outlook post RBA meet Gold technical update charts & levels Upcoming essential webinars Russia and the situation in the Ukraine Monthly portfolio review Property vs. shares and gold performance Focus on the Yen crosses What does the future hold for Qantas? Australian earnings review US jobs report, this weeks key event Why BHPs result is a turning point Aussie set for a bull market run Gold risk/reward levels AUD/NZD the start of a major reversal? Reporting season buy & sells Technical outlook & key level updates Book review The Demographic Cliff Can Turkeys economic situation recover? Monthly portfolio review and changes
Forge Group (FGE) example of fragility Educational trading video Nassim Taleb Weekly live market analysis sessions Gold price review latest technical update ETF performance post currency moves Australian inflation numbers boost A$ Hollywood films and market performance Client question portfolio methodology CEO chit-chat ELX Key takeouts from ECB monthly report A$ direction following jobs report Welcome to a year of opportunity Oil & comments from Stratfor Gold price outlook Market outlook via our CNBC interview NASDAQ 400 winners & losers Geopolitics and impact on markets Indonesia & Australias generational struggle Iran & the USA Impact on oil Educational videos stocks and forex Why Free Cashflow is king Oil price revisited Is the carry-trade alive? Ellex Medical - Keep an eye on this small cap stock Preview: Is the carry-trade alive and kicking? Our takeout from the RBA decision Our initial impressions on the Westpac result Is Europe about to dive again? Book review Who moved my Cheese? A look at the Australian banks ANZ and NAB worlds apart How we think about banks Technical analysis to filter market noise Understanding Beta in Forex markets Social media & trading Melbourne Cup tip Where interest rates may be heading in Australia? What this means for the Aussie dollar Feedback from our Gold seminar Monthly portfolio review Proposed portfolio changes BHPs quarterly production report Why it may be time to start buying mining stocks Reasons to start buying mining stocks The future of Chinas railways Rio Tinto deserves a pat on the back Which stocks are worth buying? Initial impressions on the Telstra AGM Revisiting the 15 hidden gems September jobs report new release date Telco stocks update how our picks have fared US reporting season preview Earnings beat rate Market correlations Currency Triangulation Using correlation to detect market anomaly Gold & A$ divorce Client question and answer Exchange traded products on the ASX International exposure & opportunity Caution and research is important A closer look at the DAX Germany the growth engine of Europe Introduction to Fibonacci Invast Gold Seminar About our guest speaker Gold interview worth watching October portfolio performance review Portfolio changes and additions Trends in upcoming AGM season Gold price in light of Fed meeting How we think about gold Book review The 4 Hour Work Week The Federal Reserve and the future of money printing How does the September decision impact Australia Quality of assets for Australian banks The key data set to watch Brent crude back to "normal" trading range Pivot points explained Client question and answer - liquidity What is happening in China? How we think of China Why steel production matters Fortescue Metals expresses its views China in a medium term timeframe We all need a little Vision
What do Vision's numbers look like? Key priorities going into 2014 Vision's outlook and guidance Forex pairs outlook for targets Client question and answer Copper price key for mining sector Who are the key consumers of physical copper? Where copper stockpiles are trending Where the copper price goes from here Nokia & Microsoft deal puts mobile sector in spotlight Australian small cap stocks leveraged to mobile growth Where Telstra fits into it all AMP going into China - what does it mean? Risk management for traders Book review - The Black Swan by Nassim Taleb Launch of our model portfolios The three portfolios explained What does Syria mean for your investment portfolio? Invast's initial impression on the Qantas results Invast's initial impression on the Woolworths results Building a trading plan from scratch Who we are and what we plan to offer The 15 hidden GEMS that recently came up on our screen Woodside Petroleum - Not all about the earnings Super Retail & The Reject Shop - Initial impressions ANZ needed a good trading update to maintain momentum Vito Henjoto Global Market Outlook and Technical Analysis
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