On listlessness, ‘takeover-time,’ repetition & listlessness

By October 19, 2016Investing, Oil

Firstly some sad news. With all the work we do and all the research we read and compile and regurgitate, were I to write a fresh note I would almost certainly write something nearly identical to last week.

Fed looking like it will raise, bonds getting sold, USD rallying, OPEC deal can’t be trusted, markets are undergoing a sector shift.

No different from before.

So as means of a distraction here’s this from Investec regarding what part of the mining cycle (or “clock”) we are:

jw-19-10-16

If the good people at Investec are to be believed we are now at the M&A part of the cycle and almost in the cash takeovers part of the cycle. There is an early lesson I learnt pre-GFC that barely counts as general financial advice so please take this with a large grain of salt. I learnt that at the takeover time part of the cycle it’s just easier to buy as many potential targets as possible. It’s a shotgun approach to investing that was the norm before the crash and carries great risk. However the serious investor should be aware that there is a buzz in the mining and mining services sector at the moment so don’t discount any stock from being a target or from rising due to the takeover of a competitor.

And now to the US market specifically where a landmark has been passed. Remarkable!

j-w-19-10-16-1

In thinking about the US market, which is currently teetering just below support awaiting a direction, I’m more cautious than usual for now.

For a long time it’s been possible to under-perform expectations at results and still keep your stock traveling higher. Don’t spend money on capex or growth. Just pay dividends or buy back your stock.

The above chart may not be the highest point reached but certainly will not be able to continue in a rising-rate environment.

Now here’s the View from the Hedge with our cameo David Pain- “Thoughts on this very boring market”

“Markets these past few days have seemed bereft of any meaningful direction. Whilst there has definitely been a bearish bias with regards the ASX this doesn’t feel like a conviction sell off (famous last words). A combined rising AUD which is hurting exporters and a sell-off in yield names has led to an almost ‘nervous’ market. In that context a market that drifts to the downside without any meaningful conviction seems appropriate.

Recent market listlessness has not been helped by an equally ‘bored’ US stock market. Similarly to the Australian market the US market seems happy to drift lower without any real conviction. What I believe we are seeing is the result of the market digesting a clear inflection point.

So far Fed member have been cautious of not causing a large scale sell off, such as the one seen on the 9th September when Eric Rosengren frightened markets. Market however can’t seem to work out whether a rising rate environment is a good thing or a bad thing. What is definitely not a good thing is a quickly rising rate environment. Hence the Fed’s ‘softly softly’ approach.

However arguments about the benefits of a rising rate environment are starting to gain traction. Primarily due to the fact that a more profitable banking sector should spur more lending to the wider economy. So far debt has built up in the corporate sector but not the private sector. note the opposite has happened in Australia where corporates have by and large not borrowed and consumers have borrowed world record amounts. Australian consumers, like the fat kid at a birthday party, gorged themselves at the trough whilst rates were low racking up world record levels of personal debt. As such in a rising rate world I believe Australia ends up being the ‘biggest loser’.

Currently Fed futures indicate a 66% chance of a rate hike in December. I believe the Fed will get this to 80% before eventually hiking in December. In the meantime with a lack of any real direction markets feel like they will continue to grind lower. 

All this means that Insurers, US banks, Cyclicals, the USD and other beneficiaries of a rising rate environment should continue their slow grind higher. On the other side of the ledger yield names and bond names should continue to drift lower.”

Who am I to argue?

All the best,

James & David


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