ASX Weekly Wrap 11/09 - 15/09

In a quiet week void of any major economic and company news we saw the XJO inch ahead by 22.40 points or 0.39%. It was welcome relief as we recovered some of the losses from the week before. Our high was 5,744.30 on Wednesday and our low was 5,669.80 on Monday.

In the US we had their monthly CPI reading show a surprise tick up in inflation for August. Calls were for a +0.3% month on month read, but the reading came in a +0.4%. This was not expected at all and may be the first signs of inflation returning to the world’s largest economy. The US 10 year Treasuries jumped to a yield of 2.20% after falling back to 2.02% a week earlier. We also saw the US Dollar climb off the mat and finish the week higher as expectations of another rate increase before the end of the year started to consume the markets again. This saw the AUD sink below 80c and commodity prices ease off. Its only one set of data, but it is encouraging. The consensus view had changed to the thought we may see a period of stable rates in the US, however if we get a few back to back inflation reads, that sees data on the rise, that could quickly reverse.

China reported its monthly retail sales, industrial production and fixed asset investment figures and whilst all were solid, they did come in below forecast. Retails sales came in at +10.1% v +10.4% expected, industrial production at +6.0% v +6.6% and finally fixed asset investment at +7.8% v +8.2% expected. This data was slightly concerning as this is the second straight month with softer figures, but lull periods are to be expected. China is heading towards a traditionally stronger period for the economy thus we will have to wait and see how that plays out. My views on China have not changed and I still see their economy remaining healthy and dragging us up with it.

The final lot of data came locally, in the form of our August jobs figures, and continued their bullish trend. For August we added 54.2k jobs after just +15k was expected. The unemployment rate remained steady at 5.6% after the participation rate ticked up to 65.3%. Breaking down the numbers further we saw 40.1k full times jobs added and 14.1k part time jobs added. Obviously these are very strong numbers all round and we have now added 250k+ jobs to the economy in 2017. They also highlight the slack still appearing the in jobs market as people who previously said they were not actively looking for work, look to join the work force again. This is reflected in the participation rate, which has climbed from a historical low of 64.7% to last week’s result of 65.3%. The jobs boom looks set to continue with strong data still coming through for figures such as ANZ Job ads.

Myer (MYR) released their full year accounts for 16/17 last week and they were not pretty at all. Net profit fell 80% to $11.9mill, but if you take out one offs such as store closures, restructuring and redundancies it fell 1.5% to $67.9mill. Sales fell 2.7% to $3.2bill and MYR noted that the start of 17/18 has not gone to plan and is below expectations. The chart above tells the story, as it’s a similar story played out amongst most retailers facing headwinds from international entrants into the market, low wages growth and online competition. MYR did note they were closing three under performing stores and increasing their online presence to help compete with Amazon, but to me it looks as if they are fighting a war they cannot possibly win.

I wrote some time ago (Sep/Oct 2016) that Australian retail was an avoid and that it was wise to get out at that time. This was on the back of rumours, which eventually lead to confirmation, of Amazon entering the Australian market. Since then companies such as Harvey Norman (HVN) -28%, JB Hi-Fi (JBH) -24%, Super Retail (SUL) -24% & Myer (MYR) -50% have lost tremendous amounts of shareholder value. It was a call I am very proud of and copped a bit of flack for at the time as a lot of retailers were hitting all time or mutli year highs. In almost the twelve months since it has proven to be a very wise move, but one I could clearly see the writing on the wall for. My thoughts on the retail sector have not changed one bit and I still have an avoid on the sector. There will be a price I feel its safe to enter the likes of HVN and JBH again, but they are still a long way off.

In some more positive news Macquarie Group (MQG) released an upgrade to its earnings for the first half of their fiscal year and expects it to be in line with the second half of 2017. This was mainly on the back of stronger than expected performance fees. It also confirmed previous guidance for the full year to be flat and in line with 2017. One would think though, with a better than expected first half we could see a beat on the full year earnings, especially as they often skew to the second half. MQG do have a recent history of under promising and over delivering and despite equity markets in Australia being very timid, many around the globe are reaching new highs. This could lead to continued strong performance fees. We also know that 70% of earnings come from annuity style sources so are very stable and predictable. Many of you are already in MQG at much lower levels. This announcement continues to give me confidence in their model and to keep holding the stock. Would also be a buyer on any significant dips.

Over the last week there has been a reversal of the trend we had seen for the last six to eight weeks before it. We have had a rotation back into financials and property trusts and out of resources and industrials. This is probably due to the higher USD and lower commodity prices and how beaten down the banks are from their highs within the last twelve months. We also have a period of reporting to come from ANZ, WBC & NAB at the end of October and start of November. There could be a few funds positioning themselves for this and traditionally we do have a bullish run up on the banks in the weeks before they report.

As I mentioned earlier commodity prices had weakened over the last week or so, hence the rotation out of them. This could continue for a few more weeks yet, so we have to be cautious in this sector. I had spoken about copper quite a bit in previous wraps as it had made some significant gains. Copper hit highs of close to $3.18lb but has finally paired back to the $2.97 range. It may come down further to test that 50dma (blue line), but I’d expect it to respect it and continue to move higher. There are significant supply shortages of copper on a global scale and increased electric vehicle demand is only making that worse. Out of the industrial metals I remain most bullish on copper longer term. Oil continued to inch its way towards $50 a barrel again whilst iron ore fell into the low 70s. Gold also paired back off its highs as tensions eased in regards to North Korea. I feel this softness in the resources space is short term, so there will be some decent buying when it has bottomed.

On a technical basis the XJO is forming a wedge pattern. Level 5,650 (orange line) is very important at the moment as we are still trading below the 200dma (red line). Any break below that would confirm a move down to 5,400 (green line). I still feel there is a bearish movement coming in the short term. Since we bottomed in Feb 2016, and including that day, there has been two big shake outs in the XJO before a corresponding bullish move upwards. The second coming in November 2016 when Trump was elected. To me it seems we need one more shake out in order to break above 6,000. The XJO lacks conviction at the moment and rallies are being sold into. This tells me a break downwards is imminent. I want to stress my longer term view is bullish and I feel a break of 6,000 will be a mere formality after the next sell off. I will be aggressively buying if the market does indeed dump into that 5,400 level.

Very quiet week this week with little economic data to speak of. I wanted to do a follow up article to my lithium segment I did a couple of months ago. There is a lot of ground to cover and it would be more focused on brine lithium production this time as we covered hard rock last. There have been a lot of developments within the lithium and electric vehicle industries since that article, hence I feel an update is warranted. It may be part of next week’s wrap or I might just put out a single stand alone article covering it. I just need to find the time.

I had a really enjoyable weekend just gone. We took our son to the museum for the first time. To my surprise he was fascinated by it all. We spent the rest of the weekend doing bits and pieces of shopping and odd jobs around the house. This weekend coming is a big one. Crows play for a spot in the grand final on Friday night v Geelong. I will be there and am confident of getting the win. Will be a close one either way and regardless if we win or lose I dare say I will need the weekend to recover. Following a footy club can be stressful work! Hope you all have a wonderful week. Please stay safe and I will speak to you all soon. Go Crows!

heath@hlminvestments.com.au

0413 799 315

Important Notice

Any advice in this article should be considered General Advice only and does not take into account your personal needs and objectives or your financial circumstances. You should therefore consider these matters yourself before deciding whether the advice is appropriate to you and whether you should act upon it. I am happy to assist you in this process. To do so, I will need to collect personal and financial details from you before providing my recommendations. Please note the author may own shares in the companies mentioned in the above blog.