A Top in the ASX 200

Today, we saw the “top”.

An old Wall Street proverb goes “nobody one rings the bell at the top”.

I am happy to go on the record to say today’s action in the ASX 200 registered the high of this rally which commenced March 23, 2020.

My work and signals suggest todays high of 5,780 shouldn’t be breached +/- 20 points within this immediate timeframe.

With humility, I was equally pleased in calling the 4,400 low on the ASX 200, which incidentally occurred on March 23, 2020.

– May 26, 2020, by Rob Zdravevski

It’s not me, it’s always them

Let’s blame Greece for a swoon in Aussie equities.

Now that the Shanghai stockmarket has declined 20%, let’s blame them too.

China is trying to stimulate their economy. Yep, that’s another thing to pick on.

Hang-on, isn’t Australia also cutting rates? Aren’t we in a monetary easing phase too?

Perhaps other countries should blame us for doing something as preposterous as cutting rates and weakening our currency.

When the Chinese equities market doubled in the past year, we should have blamed them too, ‘cause the Aussie market didn’t follow.

Greece’s woes has nothing to do with the decline in the shares of an Australian company such as Boral, Computershare or Alumina.

Australia needs to looks at itself before blaming others for its stockmarket gyrations. It has a high cost labour force, high taxes, internationally uncompetitive manufacturing, higher cost of money and a high cost of living.

Subjectively, our politics of late, hasn’t exactly been clear, stable and welcoming either.

We’ve not had an economic recession for 23 years and we’re still not happy. Always ready to blame somebody else.

Forget the blaming of the other countries. Many of them are performing much better than Australia’s. Our hubris has not prepared us for the reversion that the Australian economy will suffer during the next cycle.

Can You Smell The Deception & Misdirection

This is a periodical post about things that I see in the financial press, which I tend to interpret differently. When managing investors money, you need analyse the news and not just simply read it because you can’t assume you are getting to the truth.

Firstly, Jakarta warns Australia they are prepared to “clash” over border violations incurred by the Australian Navy. Australia best heed their warnings and wipe that smirk off your face because 300 million Indonesians should send your xenophobic fears into overdrive. I hope our government isn’t pinning all of our defensive hopes on U.S. Marines stationed in Darwin?

But equally Telstra is looking to form a 50/50 venture with Telekom Indonesia. Can David Thodey please be our next foreign minister?

I can’t believe why any company in the world wants to pay that much for a small insignificant business such as Warrnambool Cheese & Butter. Good luck to them.

Panic, Panic – protestors block Bangkok streets and the Thai Prime Minister is suspected of corruption. The Thai stock market has risen 9% in 10 days since this story picked up steam.

Alex Waislitz’s Thorney Group raises $68 million. Now I’m not sure what their raising target was but from a distance, their reputation could have easily raised 4 times that amount. My point is, would-be stockbroking firm geniuses should keep in mind that it’s difficult to raise money from the public.

With 65% domestic market share, Qantas still thinks it plays on an uneven playing field.

Franchisee of Australia’s 370 Burger King stores, Competitive Foods Australia, posts revenue of $1.03 billion for fiscal year 2013 and makes $21.4 million profit. That’s a lot of invoices and money to handle in order to make a 2% net profit margin. Last year, revenue was $935 million and profit was $8 million. Hey Jack, I see that cost cutting program is working?

Australian rail operators (in the Pilbra, Western Australia) are complaining that truckers have got an unfair price advantage when they transport iron ore. If trucking iron ore is cheaper than by rail, then the iron ore giants should then give their competitors access to their railroads. Umm, I didn’t think they would.

Various interviewees in newspapers are wishing for a weaker Australian Dollar. Be careful what you wish for. When you see commodity prices rise, it is usually accompanied by a higher Australian Dollar. In Australia we mainly export commodities, ’cause we don’t manufacture things such as cars, televisions or clothes anymore. So if the AUD remains weaker, we can sell US Dollar denominated commodities and receive a lot of AUD once its converted but it’s also good for overseas money to buy up Australian assets (see Australia is “on sale”).

Australia’s stock market falls due to weak Chinese data. Yup, heard this one before. Just like other brokers who actually ask me if I’m staying up late to watch the U.S. unemployment numbers. It doesn’t really affect the earnings of the shares in the companies that I and my clients own but if you need to justify a movement in the stock market with some sort of news, good luck and be my guest. Please continue to manage your investments on the basis of “jumping at shadows”.

Finally, this week, not a single economist who provided an estimate on the Australia Consumer Price Index reading got it correct and Deutsche Bank posted a “surprise” $1.15 billion quarterly loss.

Whether these professionals continually get their ‘calls” incorrect, can’t make money themselves or continue to pay fines for manipulation & price rigging, yet people still give these investment firms their money to manage.

Price Is A Problem In The Absence Of Value

The CEO of AMP is resigning, so I had a look at how the stock price has performed under his tenure.

Since being CEO, AMP’s stock has fallen 7% compared to the ASX 200 Index, which has risen 168% over that same time.


BHP’s recently retired CEO oversaw a total stock return of negative 17% while the benchmark index broke even.

Qantas’ current CEO can brag that his company’s stock price has declined 46% during his watch vs. the index return of + 55%.

Myer’s stock price has left shareholders 14% poorer (and I am counting dividends)  under the current steward but the index has climbed 28% over the same time period.

English: Why Pay More?, No. 112 The High Stree...

But I can hear the cries already. They’re in a tough industry, it’s cyclical, they inherited a bad egg from the previous boss, it’s competitive and margins are tight.

Perhaps the board is equally to blame for poor stock price performance as much the management team that is charged to execute the strategy?

To contrast, the current ANZ’s boss has presided over a 42% total stock return whilst the index fell 3%, Westpac’s stock performance has been an impressive 90%, which handsomely beats the 15% return that the index managed and last of all, had you owned that boring old power utility, AGL when their present CEO took over, your total return is 55% versus the ASX 200’s negative 3%.

Some commentators talk about what legacy a departing CEO has left or the systems they put into place.

Whilst they are being rewarded handsomely (which I don’t object to), shareholders rewards should be somewhat aligned.

Don’t even get me started on their “golden handshake” severance pay.

Why Am I Buying This Stock Today?

What a contrast.

Generally, retail investors didn’t seem too interested buying equities in September or October 2012. After all, with all of the world’s looming problems….

Today, anecdotally, investors are chasing stocks at higher prices even after seeing an advance of approximiate 13% in many indices and individual stocks.

Why do investors feel more comfortable buying when prices are much higher?

Is is because there is less risk in equity markets today?

Are they “technical” traders and feel better buying on the “break-out”?

They feel more “comfortable” if the herd is doing the same?

Or perhaps they have a Fear Of Missing Out (FOMO)?

At the beginning of February 2013, the market capitalisation for Commonwealth Bank of Australia (CBA) nears that of Bank of America.

CBA has one-quarter of the revenues while domiciled in a country with one-fifth’s of Bank of America’s home turf. Hmm, not sure if this is deserved.

I think investors in Australia are not only worrying about the FOMO but also upset that they are “only” earning 3.5% on their cash savings.

They are starting to exhibit “needs-based investing”.

Ever heard of anyone being a “forced buyer”?

This is where an investor “needs” to invest because they feel aggrieved by their paltry bank interest returns.

Recently, I have had conversations with investors who wish to buy CBA’s stock (even though it has risen 14% in the past 3 months and 165% in past 4 years) because it’s paying a 7% dividend. They are happy to buy assets that present a headline dividend yield for the sake of yield alone, without any regard for any capital risk that they may be taking.

The sadness for Australians who only invest in Aussie shares, is that they have a lack of quality companies from which to populate their portfolios with.

This is not a post about CBA’s valuation but rather behaviour. I am encouraging retail investors to observe the biases that they may have when making decisions.

It seems every investor is armed with the same defence.

Many say, “I’ll only own blue-chips”. And they do, often without any regard for valuation, because if you call a stock “blue-chip”, then you are apparently safe and immune from losing any money.

If you’re an Australian whose equity portfolio only consists of domestic shares, ask your friends to describe their portfolio to you.

You should find that they will start by bragging about their “blue chips” and amazingly, you’ll probably own the same 12 stocks.

3 out of the 4 banks, BHP, Rio Tinto, Telstra, Wesfarmers, Woolworths (they’ll usually say something like “’cause everybody has to eat” after mentioning this one), Westfield, maybe an insurance company, some other sort of mining company that they think is blue-chip ’cause of the mining boom and CSL. Some investors still hold a pearler such as Qantas or Toll Holdings for they are confident that they will “come good” sooner or later.

Investing behaviour never ceases to amaze me.

Australia’s Inverted Yield Curve – Update

Today, the RBA’s cash target and overnight rate is 3.50% compared to the yield on the Australian 10 year government bond of 3.33%.

The yield curve remains inverted. If the RBA cuts rates another 25 basis points to “un-invert” the curve, they risk a weakening of the AUD (which should be desired in order to make Australian exports competitive) as global capital will earn less on their carry trade and perhaps sending a signal that the economy actually needs a larger kick of stimulation that what was thought.

When I combine our observations in the credit markets, the analysis is suggesting (which is being confirmed with action seen Asian equity markets) that the short-term trends in the AUD and the ASX 200 are shifting into weakness.

It is worthy to note that the yield curve is close to being normal again.

At this stage, I view this short-term correction as an opportunity to accumulate selected Australian equities. I feel that the Aussie equities index (together with Shanghai) will see it’s low for 2012, a couple months earlier than the yearly lows that I anticipate to occur in the U.S. which surrounds the November period.

ASX 200 Is Oversold

Today, the ASX 200 Index has moved into oversold territory.  See the chart below covering Oversold Moments over the past 4 years.

In a recent client note, I illustrated my prediction of the ASX 200 falling to 4,170 around the mid-July 2012 timeframe.

This level was breached today, 2 months earlier than I expected.

My work suggests that the ASX 200 is now creating a base before embarking on a new tactical rally. I have found this current “set-up” similar to previous occurrences where the ASX 200 and the Shanghai Composite indices have troughed 2-4 months before other Western markets.

Combining the “oversold” reading with increasing bearish sentiment, consensus estimates for the ASX 200’s fiscal year 2013 include a P/E ratio of 10.6, a dividend yield of 5.5% and a Price to Book ratio of 1.5.

The ASX 200 is now in a range that I refer to as a “fertile investing habitat”. The Forecast Earnings Yield of the ASX 200 is 9%, which 6% above the 10 Year Aust. Commonwealth Government Bond (ACGB) yield.

Recently, I have written that the Australian equities market is not an “outright” nor a “raging” BUY whilst the 10 Year ACGB yield remains below “at-call” deposit rates and especially the Reserve Bank’s Cash Rate.

Currently, the RBA’s Cash Rate is 3.75% and the ACGB yield is 3.27%. Should the RBA cut rates by another 50 basis points, this yield curve will soon become normal again.

With all this theory and probability, I am only expecting a “tactical” rally, which may zigzag its way higher into November 2012.

Beyond this timeframe, our longer-term cycle work will see us lighten positions as the end of the calendar year nears.

Sometimes, markets move to where they can do the most damage and presently, that direction may very well be UP!

Oversold ASX 200 Moment – 4 years

%d bloggers like this: