The Market Matters morning report

Last week, stocks worldwide experienced their largest rally in nearly two years as the US implied strongly they were in no hurry to raise rates – see chart 1. Interest rates have never been so low in history ($2.8 trillion of assets in Europe with negative yield), driving equities higher as investors stampede into riskier investments in an attempt to receive some coveted yield.

Clarifying my thoughts on the Australian “Big Four” Banks

Last week, stocks worldwide experienced their largest rally in nearly two years as the US implied strongly they were in no hurry to raise rates – see chart 1. Interest rates have never been so low in history ($2.8 trillion of assets in Europe with negative yield), driving equities higher as investors stampede into riskier investments in an attempt to receive some coveted yield. When investors decide to “get off the yield train”, it will literally be a stampede and losses will be incurred extremely quickly, but obviously nobody has any definitive idea when the “music will stop” it’s all about prudent money management from here.

• Investors must remain mindful of where we are in terms of interest of rates in history. We have never been so low in the history of the world and people are saying” rates will be lower for longer” – see chart 4.

I am not saying we should panic, but it does feel like musical chairs with fewer and fewer chairs left for sensible investments. Personally I believe the easy money has gone and it’s time to start reducing “yield play holdings” into strength. We have picked this rally in the Australian Banks to all-time highs and while there are no sell signals, there are some storm clouds forming on the horizon. Where I see the market today which is dominated by the banks that are heading towards 40% of the Australian Market:

  1. The Australian Banks are basically all the same at this moment in time, so I will not waste any effort talking specifics except that ANZ, NAB and Westpac all pay their dividends in May.
  2. March/April is the strongest seasonal period for banks rallying on average 5.7% BUT they are already up 4.4% and are likely to open higher today.
  3. CBA has never been down in April since the “45-day holding rule” was introduced on franking credits.
  4. There are currently no sell signals in the banks and they look good longer term – see charts 2 & 3.
  5. I remain short term bullish equities but I am targeting a “blow-off” top in US equities followed by a 15% correction see chart 5.

Summary

Hopefully the following points will clarify my thoughts on the Australian Banks:

  1. I have been aggressively long the banks over recent weeks, months and years. I will now be reducing my holdings into strength.
  2. My goal will be to lighten banks into strength over coming weeks and rebuy back in 10-15% lower, BUT this is an aggressive strategy.
  3. Investors must consider their individual positions / objectives / tax position etc. before selling bank shares.


*Watch for alerts over coming weeks.

1 ASX200 Daily Chart

2 Australian Banking Index Monthly Chart

3 Commonwealth Bank (CBA) Quarterly Chart

4 Australian 10-Year Bond Interest Rate Monthly Chart

5 NYSE Composite Index Monthly Chart



Overnight Market Matters Wrap:

  • The US Equity markets rallied last Friday, the DOW closed 168 points (0.9%) higher and the S&P 500 up 19 points (0.7%) higher, while the NASDAQ hit a 15-year high, up 32 points (0.7%) at 4,458.
  • While Global Equities finished the week off higher, the investors fear in the markets dissipates. –see ‘fear and greed index’ below. 
  • US Crude Oil futures rallied 2.3% as the dollar weakened and the number of rigs drilling for oil in the U.S. fell for a 15th straight week.
  • The ASX200 is expected to open 25 points higher this morning, testing the 6,000 level (not seen since 2008!).


The Numbers that Matter

June Share Price Index 28, or ( 0.5%) to 5,998
AS200 (previous session) 5,975

AUD/USD 0.7801

Dow Jones 169, or ( 0.9%) to 18,128
S&P 500 19, or ( 0.9%) to 2,108
NASDAQ 100 32, or ( 0.7%) to 4,459

London FTSE 60, or ( 0.9%) to 7,023
German DAX 140, or ( 1.2%) to 12,039

Gold Spot $11.52, or ( 1.0%) to $1,182.6/oz
Nymex Crude $1.04, or ( 2.3%) to $46.57/bbl
Iron Ore -$0.34, or (-0.6%) to $54.66/t
Copper Spot $10.05, or ( 3.8%) to $277.50/lbs.

BHP closing price in the U.S. $0.13, or ( 0.4%) to $30.80

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