It’s mid-morning Friday and the ASX200 looks likely to post a very modest gain for the week, after some pretty strong days of buying started on Wednesday.
On the month we are now +5.2%, and from the low point at end September, we are +7.3%.
MINERS – up on thin air
Mining stocks continue to be well sought, though they didn’t stand-out the way they did earlier in the month.
In BHP (BHP), Rio Tinto (RIO) and Fortescue (FMG) there is precisely zero fundamental improvement in the dynamics for iron ore, so this rally is basically akin to letting the lid off the pressure cooker – the selling had been overdone, and the stocks have found respite as the short-sellers cover.
Any additional strength in the miners – let’s say to the tune of another 5% or so, and we would more than likely look to be sellers again, for those with larger positions than they should.
FMG in particular has to be a name in the frame to shoot for those with remnant positions, and my best guess is in the vicinity of $2.75+. The company will still carry $9bn of net debt at FY16 end (June next year), and though it is doing an impressive job on reducing cash costs, so too are the big boys like BHP, RIO and CVRD in Brazil.
The reality in iron ore is that this is simply a race to the bottom on price, and with new supply prevalent in both Australia and Brazil, and steel production in China flat to down, iron ore prices have little room to rally. If production costs are falling, so too are selling prices.
I said last week that this is the ideal time to turf any left over mining and oil service names into the rally – Monadelphous (MND), Worley Parsons (WOR) and any other service providers to the mining and energy sector are going to be doing it tough for at least the next 12-18 months.
BANKS – capital raisings now well understood and anticipated
Westpac (WBC) came to market with their $3.5bn capital raising this week, seemingly looking to take advantage of the market rally this month.
You will get a note from us on this on Monday I expect.
Given the price action in the sector after this news hit, it seems quite apparent this was entirely expected and planned for by institutions – we flagged it multiple times this past month.
The capital raising puts WBC back in-line with its peer group on a core Tier 1 capital basis, north of 10%.
WBC also took time to pre-release its FY15 profit figures, which were there or thereabouts relative to market expectations.
Perhaps the biggest news however, was the decision by WBC to raise mortgage rates on owner-occupier loans by 20bp. This is a big deal.
We had already seen the majors raise investor lending rates, but now to raise on traditional mortgagees is a material change in tact and one that will surely have ramifications on housing markets and consumer confidence subtly.
After interest rate cuts and a booming housing market, the worm has now turned for housing. Rates are now rising modestly, and prudential supervision of lending to both investors and foreigners is sharpening.
The housing cycle has turned.
TELSTRA – a frustration
We had flagged time and again that TLS was a potential issue for us and our client portfolio’s as we hold a significant weight here. Sadly in some sense, we flagged it but didn’t do anything about it, and TLS has regrettably lagged the market by around 10% in the past month or two.
It’s a frustration for me.
Competition is picking up in the mobile space as we thought, but perhaps more credibly the reason for the TLS pullback is the capital raisings in the bank sector.
Banks and TLS are both seen as big, dumb, safe yield-payers, so when the banks got slammed in the fashion they did through August and September, they became a lot cheaper relative to TLS. Now as they rebound, it is TLS’ turn to suffer in a relative sense.
With local 10-year bond yields back down at 2.60% again, yield plays like TLS will re-assert themselves in the weeks ahead I think – TLS equity relative to its own corporate bond yield is now the cheapest it has been in over 2 years, so I am expectant of some support soon.
However, if we do get the bounce in TLS, I will be looking long and hard at using that bounce to reduce the over-exposure we have in that stock as the need for such a large overweight is diminishing.
OTHER STOCK STUFF …!!
Some good news this week in two of our names, Crown Resorts (CWN) and Insurance Australia (IAG).
CWN continued its big rally this month after brokers continued to turn more favourably towards the Macau gaming sector, in a belief the bottom had been seen in visitations.
Further, it seems very likely that CWN’s Studio City property (launching on October 27th) will receive a more favourable table allocation from the Macau gaming authorities, helping the potential for increased revenues.
In IAG, the stock jumped 7% this week after making the formal decision to abandon its Chinese aspirations.
I actually thought the remark was an innocuous one, but it seems I was pleasantly wrong, as investors scrambled for the share, encouraged in the belief the companies excess capital position would not be squandered on questionable growth plans, and instead returned to shareholders in the form of dividends.
IAG now yields 6%+ as dividend forecasts were upgraded, and I am very comfortable (and thankful) with the news.
The Oil Search (OSH) / Woodside (WPL) dance continues, tantalizing me.
This week the press focused long and hard on the PNG Governments role in the acquisition of 10% of OSH shares last year, and the potentially costly terms if agreed to. This is undeniably a gambit of WPL’s to force OSH and the PNG Government to the negotiation table, and makes me feel MORE not LESS comfortable a deal can be agreed.
But until then, we wait.
RESMED (RMD) continued a good run, and we are hopeful for their 1st quarter profit figure next Friday morning.
Lastly, next week we start seeing a lot of AGM’s occur, so alongside that we should see some trading statements and commentary from management and boards.
On that note, have a great weekend team.
Key Dates: Australian Companies
Mon 19th Oct
Dividend Pay Date: Vanguard ETFS (VAS, VGB, VGE, VGS, VAF & VAP)
Tue 20th Oct
AGM: Cochlear (COH)
Wed 21st Oct
AGM: AMCOR (AMC), Crown Resorts (CWN), Insurance Australia (IAG), Medibank (MPL), Super Cheap (SUL)
Thu 22nd Oct
AGM: APA Group (APA), Spotless (SPO)
Fri 23rd Oct
AGM: Carsales.com (CAR), QANTAS (QAN)
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