Good afternoon,

I told you all not to be so bearish! The market has gone from 5750 to 6100 since the end of March and we’ve seen a fantastic reporting season over in America. Banks have reported locally and many companies have updated the market via presentations at the Goldman Sachs or Macquarie conference. ASX200 up 1.84% for the week.

The upshot of which is that everything is fine. We’ve had a few companies disappoint or not meet their shareholders’ expectations, a few sporadic earnings downgrades or “trading updates” but by and large, earnings have been revised up (see below short term year-on-year % change in 12 month forward earnings estimates).

If you were wondering why the market is up, earnings estimates (in AUD) are the whole and sole reason.


End of Financial Year

EOFY is just around the corner and this is when I need clients to get their act together, take a look at their portfolios and think about their wider financial position. ALL clients need to get in touch and discuss your wider position. Each year we work with everyone’s preferred accountant to give our clients the optimal positioning come end of financial year and try to minimise tax and maximise forward expected returns.

Something else to consider is margin lending. In my experience, prepaying interest on the loan can be an effective way to reduce your tax bill and something worth considering. Seneca have a nice working relationship with Leveraged and Commonwealth Bank who both offer competitive interest rates and first rate service. Get in touch if you’d like to know more.


The Data Exchange Network (DXN)

The team put an Investor Presentation out to market this morning. No new information from my persepective, but might be of interest to you. You can read it here.


Macquarie Hybrid
Macquarie are issuing $600m in more capital and if you’re in the market for another hybrid, this one should come in at 4%-4.2% over the swap rate. If you have any interest, bids due ASAP, no later than Wednesday COB. Funds due 7 June, commencement of trading on 14 June 2018.  You can read more about it here.


House Prices 
And whilst earnings are being revised up, house prices are falling. On Wednesday we had the nation wide housing stats out, Morgan Stanley did a nice chart pack so below charts courtesy of MS.

First, house prices fell for the 7th consecutive month. If I ever, ever hear “house prices never go down” at a barbecue ever again, I swear, I’m going to memorise the link to this chart.

And before you try and tell yourself that this doesn’t apply to your house because <insert your irrational bias here>, here’s the breakdown by capital city.

Now don’t get it twisted, I’m not against property as an investment or as an asset class. I just like to have objective, real conversations about investing with my clients. I’m not interested in anecdotes, I’m interested in data.

You can buy Westpac (WBC) after the result today for example, (which was just fine IMO) on an 8.6% dividend yield with a cost of ownership of $0.00. Or you can buy a house in Melbourne on 3.0% yield before costs. You’ve gotta pay the agent, the maintenance, the strata’s, the stamp duty, the agent when you sell, the taxes. Yeah you get the deprecation tax write off but are you trying to play defense, save and avoid tax but still earn a low overall return OR are you trying to pay the biggest tax bill you’ve ever seen and make money! I’m not saying take crazy risk or speculate, I’m just trying to encourage people who are irrationally scared of the stock market to emotionally detach themselves and think objectively about their investment options.

Because, I mean, it’s not like your rent returns look like getting much better any time soon. Rent inflation still less than 1% per annum. My landlord doesn’t read this note (I hope!), but at the end of my lease, I’m asking for a rent reduction… there’s too many nice, brand new, never lived in apartments going up in my area with rent incentives!


What I’m worried about
I’m not worried yet, so don’t go and do anything silly. In fact, don’t do anything off the back of what I write in this note, ever! The only people who should be acting on what I say are my clients, the people who pay me to put their interests ahead of my own.

Anyway, I digress. The #1 macroeconomic indicator, the US manufacturing and non-manufacturing ISM survey’s were reported last week and are perhaps starting to roll over. Whilst the upward trend remains, a ‘lighten off’ signal for me will be when these survey results come in at 55 or lower.

Below is a chart of both these survey results, averaged over the previous 12 months (so remember this is lagging reality). I want to see both numbers come in ahead of where they did this month, next month, to confirm continued expansion of the US economy.


Banks, should you be worried?
Maybe. Like I’ve said since the dawn of time, banks are a leveraged play on the economy. Say it with me “banks are a leveraged play on the economy”. And the Australian economy is going OK.
Are the banks cheap relative to history, yep.
Are they growing less than normal, yep.
Is the dividend sustainable, yep, for the foreseeable future and subject to avoiding a significant collapse in housing market.
Should you buy them? Maybe. I don’t think they are able to sustainably outperform the index. But if you want to own a protected species with a dominant market position, and are happy with 8% return and probably sub-market capital growth….

My concern post results is just bad debts only have 1 place to go. And that’s up. And that’s likely up due to house price data we went through earlier in this note.


Movers & Shakers
This is my least favourite part of the weekly note to write each week. I hate talking about the price of stuff. It’s so lame. Anyway, I’m thinking of scrapping it. If you love it/hate it could you let me know via email/social media.

Seven (SWM) playing share price catch up to Nine (NEC) as the rally in ‘old media’ continues. Sorry to our TV networks, but you aren’t the The Boston Globe or The Washington Post… I’m not buying that you have a brand that means anything to anyone in 2018. No doubt these stocks were cheap, cheap for a reason. They aren’t cheap now. But that reason still is valid.

Challenger (CGF) bouncing back last week. It’s a capital intensive beast, with a real stranglehold on the annuities market here in Australia and a significant opportunity in Asia. It’s traditionally been a well run business, be surprised if they don’t at least have some success over there.

Macquarie (MQG) surprised nobody and beat guidance for the 5th year in a row. MQG has added 84% total return (div + capital) over the last 3 years and remains Seneca’s #1 holding across our portfolios.

Other good performances: Integral Diagnostics (IDX) +10% for the week, Gage Roads (GRB) +18% for the week, Ooh! Media (OML) +3.8% for the week… clients should be pleased!

JB HiFi (JBH) now back at $23.30 post trading update. Good Guys integration issues, slow sales. Only one thing more important than being right, it’s being first. We bought JBH in the depths of Amazon induced despair and sold it at $27-28. I wouldn’t be in a hurry to own it again. You don’t want to dance with Jeff Bezos twice.

Ainsworth Gaming (AGI), Invocare (IVC) and Gateway (GTY) all also provided “trading updates”… you can see how well they went down.
Have a good week,
LL


The information contained in this email is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.