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Good afternoon,

ASX200 up 59pts today (+0.91%) as energy, resources and healthcare bounced. Strong afternoon trade. Market plus 1.38% for the week and about square for the month.

It’s been a busy week, I thought I’d start by updating on DXN on the back of their fully underwritten rights issue announcement.

DXN Ltd (DXN), last trade 7.1cps

The company is offering existing shareholders an opportunity to increase their shareholding by 25% (1 for 4) at 5.5cps with a free attaching option at 10cps. The offer is fully underwritten and once finalised will deliver the company c.$5m to upgrade the power at Sydney and put some working capital aside for some of these bigger Module contracts that are in the pipeline.

Look, this has been a disaster. Previous management had exceedingly poor cost control, over-promised on what could be achieved from both a timelines and budget perspective and were removed by shareholders as a result.

The board has been partially refreshed, the new CEO, Matthew Madden, is doing a stellar job so far in my opinion and the quality of the people in the business is improving every day. If the company can start to consistently deliver sales in both the colocation and modular business units, this stock should significantly re-rate.

If you’re buying shares at 7c now, up until the 16th October, you’re still buying the stock cum-entitlement. So that means you can average down your position with 25% more stock at 5.5c and a free attaching option at 10c…. not a bad deal in my book.

Good afternoon,

After 10 days away, I’ve been back on the desk since Monday, feeling refreshed and thinking about things with that special kind of clarity that only comes from breaking the routine of day to day life.

ASX 200 fell 2.5% while I was sipping coconuts. Well actually, it fell yesterday 2%, so not much happened while I was away.

Markets continue to be driven by interest rates (which as you probably are aware, were cut in Australia by 25bps on Tuesday). It’s not cheap by any metric except relative value to bonds. An earnings yield of 5% and a dividend yield of 4% vs bond yields of 1% means that anything with minimal earnings risk will catch a bid.

Equities sold off this on Thursday after some fragile survey data (PMI’s) out of the US. As regular readers of this note would know, these surveys have historically had a good general correlation with year-on-year equity market returns. Below is the long run (20y) Manufacturing and Non-Manufacturing ISM for the US with yoy% returns on the S&P500 (just for the uninitiated).

Good afternoon,

ASX200 added a few points this week, +0.29% to 6667pts as I type this. Financials, Energy and Materials led the way as bonds sold off and global growth concerns eased.

Value Investors Rejoice

I thought the interesting take away for the week was the rotation from Growth to Value. There’s been a lot of talk about the “death” of value investing as growth names have outperformed for the last 5 years or so (S&P 500 Pure Value ETF vs Pure Growth ETF below).

I thought the interesting take away for the week was the rotation from Growth to Value stock. Same chart, now zoomed in for last 6 months. You can see the September rally in value.

What’s causing this? I think it’s got something to do with the yield curve and relevant growth and inflation expectations. My thesis is value stocks should outperform higher-quality growth stocks when ‘growth’ is readily available. If everything is going up, buy the cheapest stuff. This idea intuitively makes sense and matches up on the chart below. 10-2 year US yield curve vs Value/growth index (going up = value outperformance) over ten years.

Good afternoon,

ASX 200 had a pretty solid week, adding 0.65%. A few decent gains today as the Trade War tea leaves drift from bullish to bearish.

To utilise a phrase from my good mate and colleague Zac Angove over in Perth, today “I’m getting active!” and getting stuck into some results, some specific companies and some ideas for the next 3, 6, 12 months or so.

As an aside, Zac is an absolute gun financial planner. He has a deep understanding of superannuation, transition to retirement and cash flow management in retirement. He’s also been helping clients refinance their investment properties, kids’ mortgages, farm equipment, you name it. If you want an introduction to the great man, drop me an email.

The caveats on what is to follow:

1. The top 1% of stock pickers on planet earth get 40% of their stock selections wrong.
2. I’m probably not one of them
3. And neither are you

So, just like when I’m putting together portfolios for clients

1. Diversification – 15-40 stocks in a portfolio is optimal according to the studies
2. Understand correlation/covariance
3. Understand that in 2019, it’s challenging to outperform (fair) benchmarks if you don’t have a longer than average time horizon and a higher than average tolerance for volatility.
4. Understand probability: Assuming (a big assumption) you can measure it accurately, unlikely/improbable things happen every day. Hence why you need to make enough bets (see 1. Diversification).

Oh, and one final one. If this trade war worsens, which could cause the US to slide into recession, we’ll see commodity prices fall, and iron ore price drops. Australia will be next to fall into recession, resulting in all reasonable earnings forecasts collapsing. Look, it’s a scenario we’ve discussed over the past few weeks, but it’s still a real and present risk. I’m not going to go into again, but for mine, I’m watching that US Dollar Index closely.