Dow Jones – Eve of US Bank Earnings

Posted on | by Leon Hinde | Leave a Comment on Dow Jones – Eve of US Bank Earnings

As investors we rarely need to take much notice of intra-day graphs. However, I’ve attached the Dow Jones 5-day graph which shows the price behaviour rolling over, heading into tomorrow’s bank results.

Short-term traders and index investors, (both long and short), will find the chart and strategy outline shown below of interest. As too, would someone running a dynamic portfolio hedge using futures, index options, etc.

The chart pattern shows the recent “lower high and lower low” selling pattern as the index hit resistance just below 20,000. This big number has little relevance to us and is of no real interest. What’s more interesting is the pattern leading into tomorrow’s US bank earnings.

Traders may form a view that staying short the index as long as the price pattern stays below the 19,980 level is warranted.

From an investor perspective, we remain cautious of global markets based on current valuations and increasing macro risks. We continue to position defensively and use covered calls to deliver returns without pursuing an overweight “growth” portfolio allocation.

Chart – Dow Jones

Australian Bank Profit Announcements – Key Dates

Posted on | by Leon Hinde | Leave a Comment on Australian Bank Profit Announcements – Key Dates

Bank profit announcements start in February with the following key dates worth noting.

SUN 9 February, BEN 13 February, CBA 15 February along with 1Q17 trading updates from ANZ and NAB in February.

Following the recent rally in bank shares, we see the current trading range as full value, therefore, placing the banks at risk of being buffeted by any increase in market volatility.  Although net interest margins have improved, the prospects of earnings growth is modest with the outlook between 1% – 4% growth at both top and bottom-line.

We also remain concerned that the cycle for bad debts is likely to rise from the current historic low levels.

Charts – Aust Bank ETF

 

 

Oil and Metals

Posted on | by Leon Hinde | Leave a Comment on Oil and Metals

Copper prices jumped today as Chinese inflation data picked up last month, sending a reassuring signal about demand from the world’s largest consumer of industrial metals. China’s Producer Price Index rose 5.5% last month, which was better than the market expectation of 3.3%

The forward month red metal was up 2.9% at $2.60 per pound, posting its largest one-day gain in two months on the COMEX exchange in New York. A reduction in copper stocks at the LME will add short-term support to the upside for prices.

We expect to see firm resistance in the $2.74 area, which represents a “double top” chart pattern dating back to November.

A surprise jump in US inventory data extended the recent down move in crude oil prices. We now see solid support around the $50.00 level.

We still like the long side of oil names but feel investors should be adding covered call options to WPL and OSH to enhance the yield.

We’ve allowed upside to $27 in BHP and upside in RIO to $63 before capping out our short term gains.

Chart – BHP
Chart – RIO

 

Woolworths – Valuation Review

Posted on | by Leon Hinde | Leave a Comment on Woolworths – Valuation Review

Woolworths has recently sold their petrol business to BP for $1.8b which helps to underpin the groups balance sheet. As a result, we’re likely to see Woolworths accelerate their store refurbishment program.

In late February we’ll see the earnings update from Woolworths and based on consensus numbers we expect $58b in revenue, EBIT of $2.5b with reported profit around $1.5b.

On a forward basis the underlying earnings growth should track around 4% with FY18 EPS of $1.30 and DPS $0.88, this will place the stock on 3.7% yield.

Any rally in the share price following the Feb result, we feel adding a covered call at or near $25 – 26.50 offers a suitable risk reward payoff.

Chart – WOW

 

 

 

ASX – Earnings Review

Posted on | by Leon Hinde | Leave a Comment on ASX – Earnings Review

Shares in ASX have performed well since the Algo buy signal in early November.  If we look out 12 months, ASX should deliver revenue in FY18 of $850m and EBIT of $600m. The business is growing at around 5% p/a and management are remaining disciplined on cost control.

From an earnings per shares basis,  FY18 EPS will increase from $2.30 in FY17 to $2.45 in FY18, and DPS will increase from $2.10 in FY17 to $2.20 in FY18. This places ASX on a forward yield of 4.3%.

We think ASX shares are trading at the top end of the valuation range given the compressed yield and moderate EPS growth. The upside still remains the potential of a take-over bid as global exchanges look to consolidate.

Chart – ASX

 

 

Export Surge – First Trade Surplus in 3 Years

Posted on | by Leon Hinde | Leave a Comment on Export Surge – First Trade Surplus in 3 Years

Last Friday, Australia posted its first trade surplus in nearly three years.

The surplus of international goods and services was $1.2 billion for the month of November, which was much better than the market forecast of a $500 million deficit.

The Australian Bureau of Statistics said exports surged 8% in November, while imports were flat. The main drivers for the gain in exports were iron ore and coal, which rose 11% and 25%, respectively.

This is positive for the fundamental picture in the Aussie Dollar. We see solid support in the .7290 area with the scope for a move up to the .7430 level in the near-term 

Chart – AUD

Chart – XJO

Healthcare Algo Buy Signals

Posted on | by Leon Hinde | Leave a Comment on Healthcare Algo Buy Signals

At this point in the market we prefer healthcare names as a sector allocation for new money. Here are the recent buy signals generated by our Algo Engine.

With SHL, CSL and ANN we’ve added covered calls to boost the annualised cash flow to over 10%, whilst still allowing for capital growth if exercised at the strike price of the sold call.

 

Chart – SHL
Chart – COH
Chart – RHC
Chart – ANN
Chart – CSL

Dow Jones Index – This Warrants A Closer Look

Posted on | by Leon Hinde | 1 Comment on Dow Jones Index – This Warrants A Closer Look

We’re interested in the large pickup in traded volume over the past few weeks in the Dow Jones Index. By any measure the volume is abnormal, even compared to prior end of year volume traded.

The conclusion we draw from this is: whilst ETF’s are helping to accelerate index volumes, it seems a reasonable conclusion that it could be part of a series of indicators which are helping to suggest that we’re near an exhaustion point in the US equity rally. We’ve seen market tops coincide with big volume distribution patterns like this before.

Chart – Dow Jones

 

 

 

Dow Jones – Where is Fair Value?

Posted on | by Leon Hinde | Leave a Comment on Dow Jones – Where is Fair Value?

Both the Dow Jones 30 and SP 500 finished the first week of 2017 in positive territory gaining 1% and 1.5%, respectively.

Many market commentators are suggesting the potential for overbought conditions as the major US stock indexes have added about $2 trillion in share value over the last 8 weeks.

There’s no question that the Bulls are currently in charge. However, with earnings season just a few weeks away, investors need to be cognizant of the index earnings required to maintain these lofty price valuations.

Earnings over the last three years have been in a tight range between $116.50 and $118.00. Based on our calculations, if US companies don’t post EPS growth of 10% and only deliver a flat $120.00 of average annualised EPS, the Dow Jones 30 is worth 16,500 points with 10-year bond yields at 2%.

Although energy and commodity companies should help to lift the average from the prior 12 months, bank earnings should also be up in the fourth quarter. With this in mind, the middle ground may result in 5% average EPS growth ($125 per share), which then supports the Dow Jones Index trading at or near 18,000 points.

Dow Jones

 

Update on the Yield Trade

Posted on | by Leon Hinde | Leave a Comment on Update on the Yield Trade

In late 2016 we began highlighting yield names which were oversold and were likely to bounce back coming into the year end. Our preferred names in the yield basket were WFD, SCG, GPT, SYD and TCL. On average, these names have rallied over 10% from their November low.

The consolidation of US yields, (bond prices no longer falling & yields no longer moving higher), along with the oversold condition in our domestic yield sensitive companies, were enough to generate the rally.

From here we feel  these names will remain supported, especially if volatility picks up in the broader market during the Jan – March period. With this in mind, we continue to hold our yield basket and overlay covered calls to boost the cash flow to 10%+ on an annualised basis.

Chart – SCG
Chart – WFD
Chart – TCL
Chart – TCL
Chart – GPT
Chart – US10YR