Stabilzation, for now..

Period 2nd half January 2016, written Jan 27th.

 

Asset Allocation

I deployed a little bit of physical cash in the period but it didn’t meaningfully change the asset allocations. Agricultural stocks got swept down in the January weakness so I got filled there and in an overseas property play.

My cash equivalents holding is about 34%, and my property sector exposure nudged up a couple of percent to be at 28%. So as discussed recently on the blog I do not view the current weakness as anywhere near panic as many have described it, implying a great buying opportunity of high beta equities. The indices are showing tentative signs of stabilization as I wrote may occur a fortnight ago. The support levels I was mentioning we did actually comfortably break mid-session, and slightly closed below which doesn’t give me a lot of confidence for bulls. For that reason, my targets to reduce exposure via the Dow are a bit lower now at 16,500 & 16,800. The stops are at 17,600, if we get hit my cash weighting would climb from 34% to about 43%. I am in no rush to accumulate high beta exposure on the downside as discussed recently on the blog. There could be some chance the commodities exposure I lift via gold plays in the short term. The Wednesday night session I was quite encouraged when the US stock indices were initially down a couple of percent and gold moved strongly to 1,120. However not only that despite equities retracing all those losses the gold price held onto the strong gains. Therefore, a boring retracement to 1,080 I would like to lift exposure via derivatives with a stop under the recent lows (1,025sh). OGC may also be on my shopping list.

Currencies

Whilst I am still about 5-6% overweight my target in offshore currencies this does hide some considerations and decisions I have had recently. I am certainly nowhere near is bullish as I have been on the USD for about 5 years now! Everyone is till believing the Fed and their tightening plan (or wishes) I should say. The Fed has wished to normalise rates for about 5 years at least but haven’t got very far! My worry for investors with huge USD bullish bets is if the Fed have to abandon their wishes amidst market volatility and if the market got comfortable with forgetting about the tightening plan they would be very quickly thinking about QE4. This could also produce a big rally in gold. The premise with gold is pretty much a form of currency or cash, it does not have to be particularly useful outside of that, nor need to offer a yield at present. The piles of money stashed in currencies earning no yield could be deployed in gold in the future. An about face turn by the Fed in 2016 would cause investors to ask serious questions about holding currencies where a supply tap can be turned on overnight, as opposed to gold.

At the same time, I am certainly not very optimistic on the Australian economy. Residential property price growth is almost the only positive recently concentrated in Sydney and Melbourne. However, the affordability is so much worse than 10 years rather than have a positive wealth effect I fear there is a deflationary effect. Even at high prices, because so much money has to be directed at a deposit or mortgage payments it is sucking spending power out of people’s wallets. The message has sunk in unless you are one of the very few (I have rarely met any), who wish to downsize your property exposure, then the high prices slow your spending down. In short, the RBA could easily be cutting again at the end of year.

The way to play my thoughts above is to maintain my underweight of the AUD for now but have less exposure in vehicles that rely heavily on USD appreciated. This has led to recent moves that will be discussed such as selling GVF, CEF, WIA. Then entries into AAC, GNC, NUF, GJT that still are assisted by a weak AUD. The Yen tilt was discussed last time on the blog. We got filled on GJT and I look to still sell AUD/JPY at 84 & 86 with a stop at a bit above 88. Another thing to note is soon I expect some USD exposure via ACL will convert to AUD as they prepare for the capital return.

 

 

Individual Stock Decisions

GVF – This was pretty much my largest holding and has performed very well with very little volatility. A part of the premise of the investment as their large concentration outside of AUD exposure. As some of my entry was when the AUD was well into the 80s I decided it is time to reduce my weight in this at $1. This was when the AUD was trading near 69 cents. This still however is a large holding for me in my SMSF in particular where the company is recently being very generous with fully franked dividends. The discount to NTA on this can range from (ex-bonus dilutions) maybe 12% to nothing. My sale was probably 5% discount. I did pick up a parcel once close to 10% discount.

WIA (USD exchange) – This happens to be a big play from GVF itself. The discount to NTA is still about 15% when I purchased it but the USD has probably strengthened nearly 5% in a few months since I bought so I have decided to exit this as it still may take a long time for this discount to narrow. If it does it is good for my investment in GVF.

CEF – (USD exchange) A similar story to WIA, the discount to NTA has not moved much but I have some USD gains with it. Therefore, I exited this and prefer to play the gold price here from just the gold price in USD perspective via derivatives or another gold company, or maybe QAU.

AAC – I bought this recently at $1.29 after selling not long ago near the recent high when they reported their results. Nothing in the macro environment that has caused the share market jitters recently should hurt AAC. In fact, the AUD weakness should assist.

 

GNC – I mentioned before there looked to be good support $7.50-$7.80. I got set at $7.77 and they have bounced strongly to $8.30 since. I was a little unlucky not getting filled at $7.50 at first, a broker put out an upgraded recommendation which made it bounce sharply from the low 7.50’s. The weaker AUD could arguably boost the probability of a takeover here.

 

GJT – I was filled here around $1.96, I had to pay up a little when the AUD/JPY went below 80 for a day or so. The stock suddenly actually spiked to $2.15 the next day but now came back to $2 as the AUD/JPY is 83 now. This is paying a high tax deferred yield and slowly getting the debt levels down by realizing assets at better than NTA. The NTA is probably around $2.55 but volatile I suppose with the exchange rate volatility of late.

 

Individual Stock News

CYA – This one was on a potential buy list after owning this in early 2015 and thought it was worth commenting on now. The premise was Geoff Wilson would not sit on his 29% stake forever and there was bound to be some upside from a restructure. It occurred this week and the stock spiked up 10%. I was ideally hoping to get back into this perhaps later this year if the markets continued down. Whilst I miss out on this week’s jump on the news, I did exit the stock when the ASX was about 5,500 so think my decision was fairly prudent regardless. A shame that this is not a potential buy for me anymore. So who are Wilson’s next moves? Well HHV & KBC he has decent chunks in. I own both but could buy HHV more down the track if markets weaken from here. Wilson’s personal SMSF has bought a decent amount of AIQ which I own. The CYA move this week highlights how rewarding and in many cases transparent these NTA plays can be to take advantage of. Particularly when an activist is already evident on the register. You didn’t have to be Sherlock Holmes to work out a move here from Wilson Asset Management.

OGC – After looking at this recently I wrote it wasn’t particularly cheap, however it was near the recent highs at $3.20. Soon after it retraced to the $2.50s it caught my eye because at the same time the gold price was marching higher to 1,120. Unfortunately ( I almost bought the session prior), they announced quite good production figures which saw the stock jump 10% one day again. The day before I thought that the $2.50s looked very good support and this stock will have a big ramp up in profits and cash flows in a couple of years. If it can pull back to $2.70 after these good production reports, I will consider entry.

TWH – I don’t own (unfortunately), but another reminder that company spin-offs can be rewarding! They announced a profit upgrade and the stock surged. So I wouldn’t for instance completely rule out entering S32 in the future. With my macro view though sometime in June is probably the earliest I would look to enter more cyclical resource plays outside of gold and agriculture plays. June may at least provide some opportunities as it does historically with investors overly keen to take tax losses on their dog investments to write off against gains before the end of financial year.

THINGS I AM WATCHING

 

  • Looking to effectively short AUD exposure for Yen if it continues rising above 84 AUD/JPY.
  • Looking to short the DOW on a bounce of 3-5%, would be a bounce in context of what looks like a downtrend in the index.
  • If gaps down be patient until US indices are at least in bear market territory. In meantime perhaps could reduce more the USD o/w at towards 65 level and pay down any leverage facilities.
  • Oil, I have not commented on this yet but the magnitude of falls has to at least spark some thought as a contrarian. My comments above about June leading to investors dumping their dog investments for tax reasons at least makes me want to do some more preparation in this sector before then. It would also potentially coincide with a stock market falling for over one year which is potentially another trigger point to partially excite a contrarian investor. For the time being though I can’t see compelling reasons to get involved in the short term. Whilst the vast majority are considering recessions in the world very unlikely (despite a US expansion that is currently very long) it would still mean a shift in sentiment could make the sector even more vulnerable. Once again maybe if we got to June and many in the investment community have arrived at the conclusion a recession is taking place or imminent then that can often be the maximum point of pessimism and provide buy opportunities.

 

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