Good afternoon,

ASX200 up pretty strongly last week, adding 1.6%. Banks recovered from lows with CBA the out-performer, assuming because it’s cum-dividend relative to the other 3. Telco also had a decent bounce on the back of TPG (+5.5%) and TLS (+6.5%).

I thought it was pretty interesting that over the last 3 months, resource company prices are up 14%, whilst earnings have only been revised up 5%. Meanwhile, industrial company prices are down 3.3% whilst earnings have been revised up 7%.

This upward revision has been partially due to Industrials (+2%), Consumer Discretionary (+2%) and Staples (+3%). Health (+7%) has however, seen the strongest revisions out of the non-mining sectors.

There are 206 stocks on the ASX with more than 3 current EPS estimates and a market cap over $300m. Of those, the most upgraded stocks are below, with 3 month price performance.

And the most downgraded stocks are below, with 3 month price performance.

Just proof that knowing earnings revisions is not enough, you must understand the context of that revision to make money.


How to avoid the next market collapse

As you know by now, I’m a simple man. I just stick to what I know, what makes sense to me and I try to fit more and more into that ‘lane of competence’ every year. So when I’m talking about global macroeconomics, I like to find really solid, clear markers that point out what I need to know.

I’ve banged on about PMI/ISM data as the marker for where we are in the business cycle. Knowing how these surveys are calculated and common sense tells me that things can continue to expand at accelerating rates forever so I know high-50’s/low-60 PMI readings can’t be the steady state. For those who haven’t seen it, here’s the year on year returns on the S&P 500 with the Manufacturing & Non-Manufacturing ISM survey data with the recession periods in grey.

There’s clearly a correlation between stock returns, the condition of the economy and this survey data.

The other fantastic predictor of negative returns has been the yield curve inverting. To understand this you need to understand some key financial concepts. What is a bond? Why is a government bond considered to be ‘risk free’? What is a yield? How do yields and prices relate? Why should you receive more for a 10 year bond than a 2 year bond? (If you don’t understand these concepts and think you know enough about investing in markets to go it alone… well lets just say I’d beg to differ.)

Anyway, when the return offered on the US 10 year treasuries has been LOWER than the return offered of the US 2 year treasuries, we’ve seen US recessions and stock market collapses begin shortly after. This differential (10y minus 2y) is known as a “yield curve” and a reduction in premium (yield of 10’s over 2’s) is called a “flattening of the yield curve”. When the premium grows, it’s called a “steepening of the yield curve” and when the premium becomes a discount its called a “inversion of the yield curve”.

Why is this relevant now? Well, unfortunately, the yield curve is the flattest its been since the GFC. It’s trading around the 28bps mark, which, whilst still not inverted, its getting mighty close. Couple this data with the likely decline in the rate of economic expansion (ISM can’t stay at 60 forever) and you’ve got a pretty decent case for increasing bearishness.

So whilst all the other commentators and talking heads on Sky Busyness (see what I did there) like to waffle on about “Trade Wars” and “Trump”, ignore that rubbish, turn off the TV, save on your power bill and pay attention to the data that historically is proven to matter. Data over daytime TV my friends. Data over daytime TV.

And I can hear my phone ringing already “should I sell my whole portfolio?” No. No. No. Have I taught you nothing over the last 5 years? Probabilities and process people! Is there a rising chance of meaningful draw down in markets over the next 6-12-24 months? Yes. It’s late stage business cycle, there’s catalysts and complacency. But does that mean its certain? Of course not. Should you be a bit more judicious with your capital allocations? Probably.

Now is the time to get your investment process in order in my view. It’s going to get a lot harder to make money and if you/your adviser isn’t right on top of what’s going on with each company in your portfolio, it’s going to cost you a lot of money. I’d just be taking really good hard look in the mirror and asking yourself:

  • Do I really understand the companies I’m invested in?
  • Does my advisor have a genuine care and concern for me and my families best interests?
  • Are they top-notch educated, motivated, diligent, disciplined?

Because now is the time when I earn my money and clients actually capture the majority of the value. Bull markets make everyone look smart, but when you start with a $2m portfolio today and under your sh*tty advisers guidance that turns into $1.5m at the bottom of the bear market… what you do during that period will affect your returns and life for the next 10-20 years. Just like the GFC is still impacting people today.


Retail Spending, Housing

Retail spending stats were out last week, up 0.4% m/m, but slowed to 2.5% y/y the
weakest since Jan-18 (after 2.7%), to remain below the ~3% average over recent years.

The most interesting bit was the decline in car sales, -2.5%.

I reckon this is pretty consistent with the thesis I’ve been banging on about lately. No wage growth, pretty dodgy employment numbers (lots of part time work, not much full time) and house price declines/rent declines are starting to bite the consumer. First thing we stop doing? I’d put “buying a new car” right up there. Electronics +1.3%, furniture +0.6% were also weak and add weight to our argument (no new TV’s or sofa’s when your disposable income is $0.00 and your access to credit is negative!)

On a positive note, supermarket and liquor were pretty strong, +4.2% and in line with expected industry growth forecasts YTD of 3%. With the weak consumer environment, we are still happy to spend on good food and drown our sorrows at Dan Murphy’s (liquor +6.9%).

Oh, and in case you are living under a rock, Online is killing bricks and mortar.

As a reminder, property prices are down for the 9th month in a row nationally.

Apartments are now performing relatively better than detached houses, declining only 1.2% over the last 3 months relative to 3.7% for house and land. Melbourne the worst performing capital city over last 3 months.


Movers & Shakers

Bit of action in the mining sector last week when I eyeball this list. Otherwise, aforementioned slight bounce in telco and the banks and a few really beat up names getting a touch of love (see Ainsworth, Isentia and Vocus.)

On the wrong end of the popular vote this week was Silver Chef, which fell 20% on the back of the dreaded ‘trading update’. Elsewhere a lot of the high-PE stocks got hit.


Where’s the value?

Well, as I said, I’m being cautious. Here’s a table of stocks trading with above-market EPS growth over the next 3 years with buy-ratings, according to the friendly vampires over at Goldman Sachs. They’ve excluded all firms that have had downgrades to earnings over the past 12 months and the top quartile valuation stocks on the ASX200. All numbers are Goldman Sachs, not consensus.

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.