Gold shines

Period 1st half February 2016, written Feb 13th.

 

Asset Allocation

Since the last report a fortnight ago we have seen some decent volatility on a daily basis but the market has not really moved a great deal either way over the period.

The only real change to the top down asset allocations was bumping up the gold exposure a percent or two to be fractionally overweight the commodities sector targets, but really all through gold and agriculture plays. The comments on the indices are really unchanged from last time so I am still looking to reduce exposure by shorting the DOW around 16,500 & 16,800 if we bounce from here. The main story arguably since last report has been the gold price so I will discuss this mainly. Last report I commented about some bullish signs from gold. Unfortunately, it didn’t hit my level of 1,080 to add some exposure it simply moved virtually straight up higher. As I recognized the possibility of this I at least wanted to add exposure in some ways to the sector given my previous bullish comments. So at the time I thought it was prudent to at least get set on OGC just in case I couldn’t go long through derivatives at 1,080 level. So although I thought I was paying up a bit at the time to get filled in the high 2.80s it does look fortunate now. Despite my bullishness and having done well with gold stocks in the last year I really want to have a well-defined exit plan with these. We certainly saw how fickle things can be if you fell in love with gold stocks during the last bull run up to 2011. They can be very volatile and I don’t have a great deal of faith in management of any companies to be honest, but in particular the resource sector. They have a knack of making acquisitions at the worst possible time to expand their empire and inflate their egos. I have held RMS, NST, EVN for about a year and have already taken some profits on these at times. Some buy levels have been at 8 cents (RMS), $1.80 (NST) and 80 cents (EVN). With these and the recently acquired OGC I will basically let these run whilst they remain above their 200 moving day averages. When valuing these to look at my exposures I record them at these levels much lower where I will stop out. Because I am not looking at the paper profits at all at current levels I can calmly liquidate at the stops when the time comes. Of course I hope I am correct in my thoughts that the environment for gold continues to look good and that these 200 mda levels are much higher when eventually the stocks break down below them. But it means my gold exposure is probably a few percent higher than what I indicate.

 

Currencies

My overweight in offshore currencies finished at just around 2%. As mentioned I had some exposure previously with ACL holding some of its cash in USD however now they have AUD for the capital return coming up. In the last fortnight however this was briefly extended through to over 8% via effectively going short AUD/JPY at levels of 84 and 86 as previously discussed. I closed these at 80 and 81. This was a pleasing trade, the BOJ made noises to try and weaken the yen and this certainly had a big effect the few days after which got me set. The fact that this reaction only lasted around a week makes me pretty comfortable to put the same trade on again if it edged up to the same levels. So from earlier updates you can see effectively I expected that the Yen had more upside than USD which has turned out well as is quite evident in looking at graphs of the USD/JPY.

 

 

Individual Stock Decisions

OGC – As mentioned above I was hoping it would pull back to the low 2.70s to buy however then I thought it was not very prudent to try and be cute by BOTH waiting for the gold price to drift back to 1,080 for a derivatives long trade AND wait for OGC to maybe go back to $2.70 given I discussed at length the potential upside for gold and mentioning I should probably be holding a little more exposure. So I bought at $2.88 and obviously the environment has been good recently so they are $3.74 on Friday already.

Individual Stock News

NAGACORP (3918:HK) – This has been a HK listed company I have watched and owned at various times since 2010 and have even visited this casino in Phnom Penh in Cambodia. It has an interesting recent history as I remember buying at around $1.20 and selling above $3.50 within about 3 years and collecting large dividends on the way and it was a star performer for me at the time. I then felt like a goose as I watched it climb to $7.50 only a year or so later! It is now on the nose though and at the time of writing is$3.88. It reported results early Feb and dropped nearly a $1 since. Its forward P/E of below 8 will be below the dividend yield now and ironically I remember when I purchased it originally I was saying exactly the same thing around 2010. The market seems to be scared about growth in China and their exposure to gamblers from there. The company is well managed and has a monopoly licence for the casino in Cambodia for a long time into the future. Firstly, it is a very cheap destination for Chinese gamblers so the fear may be overdone. Secondly much of the business is not necessarily Chinese gamblers but those based in neighbouring South East Asian countries. I have a bit of a rule not to rush in and dollar cost average more in companies when I am already satisfied with my exposure. However, if anyone wanted to buy this for the first time today at $3.88 they will outperform me as I was comfortable buying it when it fell below $5 a few months ago! Will be interesting to watch it.

AGF – I made good gains on this a year or so ago partially as an NTA discount play but also with the premise Chinese stocks were a huge underperformer versus nearly all other global markets and that they would try and pump prime the economy and market. Probably more fortune than anything saw me bank the gains and it has now gone down sharply with the market. They have been subject to activism and this week at least confirmed they would stop the automatic DRP which is a huge turnoff to retail investors. As I am not looking for high beta plays I would be a fair way off buying this. But I mention it as down the track I think the methods to reduce the gap to NTA will probably fail in the short term and discount stays over 25%. The activists on the register will eventually get a big share buyback through and other measure such as maybe a capital return or very high dividend guidance. Could be up to a year from now but might eventually create an opportunity if we go into a decent bear market.

NGE – Their cash flow report was higher than I expected and the cash backing is near 2.3 cents where you can still buy the stock at 1.8 cents many days.

RNY – RNY is first of a few coming up that are not that great to talk about. I wanted the blog to also try and focus as much on things that are not working also. You can often learn more on the losers. There are also far too many bloggers or twitter gurus just painting the positive harry hindsight trades. RNY initially traded well after buying at 26 cents to over 35 cents a year or so ago. The price action is a bit worrying someone seems keen to sell. I mentioned previously the refinancing was positive and the AUD/USD is still working out ok even though we are off the lows of 68.5 cents. Time may tell when they report soon. An asset sale this year is what is required and my base case is something should get done, even if below NTA a bit that would still help the stock I believe. It is trading now under half the NTA; it just needs to repair its balance sheet through an asset sale rather than capital raising.

BSL– BSL upgraded its profit forecast this week which is very rare in the market right now! It put a rocket under the share price going from $4.40 to $5. I exited this recently at $4 for a tidy quick profit after getting into it around $3.20. At the time I figured it is more of a cyclical stock and thought it could get dragged down by a general stock market downturn. Whilst I was correct in markets moving down this year this has performed fantastically. The only consolation is I invest in Sandon Capital who are big shareholders in this which bought it to my attention.

S32 – I was also concerned S32 could make new lows in a general market downturn so sold this in the low 90s probably close to the bottom! They announced many job cuts, took huge impairment charges and the stock has climbed to $1.08. One premise for this initially was how often spinoffs perform well in Australia and there has actually been much written that this has occurred in the US over long periods of time. In this case investors in BHP are left with a small shareholding in a company they don’t spend the time to understand so often tidy up their portfolios by eventually discarding it at any price. It is encouraging how this stock did not make fresh lows with negative announcements in a market that was moving down sharply. For that reason, I wouldn’t rule out getting back in this down the track.

APW – I got a bit lucky with this a year or so ago when buying for 8 cents they had a positive legal announcement a bit out of the blue. I sold half my holding at 14 cents because the position was large. The NTA should be 19 cents so it has been disappointing to see the stock get back to 12.5 cents. One director sold a large parcel of shares a week or two ago which is a bit of a worry so I will watch their profit results with interest. The balance sheet is conservative and the pay an ok dividend in the meantime.

SSM – Another very good new contract win for SSM. The stock didn’t really go higher and has pulled back since. There was a surprising sharp jump recently from 40 cents to 50 cents so maybe some had a “hunch” of good news to come.

RMS – announced very good profit guidance and interestingly did some hedging of the gold price (they actually got their timing bad in the sense it was within a week of the really bike spike in gold). I would probably be disappointed with their hedging normally however in my case it may be of help. I sold some shares at 23 cents not long ago because the position size was too big. I mentioned even after selling my remaining position was still very important in my portfolio and now that it has touched 40 cents this week it has become more so. At the same time ideally I would like to remain in this up to August at least where I would have held this parcel a year for the CGT discount. So if the company can reduce a bit of risk internally for me through a bit of hedging it is probably ok.

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 it gaps down be patient with buying until US indices are at least in bear market territory.

In regards to the above I may not be looking for a bear market in the US that runs too deep, i.e. 30% plus. One should note that a small number of stocks is making the US stock markets appear better than it seems. So a 20% pullback in their indices would probably mean the average stock is down 30% plus anyway. Also I may look at other markets in the world. If we look at markets globally things have probably been sick since early 2013. One area that might be of interest to me for example is India which has been one of the few places to record some OK growth the last 3 years. There is a Morgan Stanley closed end fund on the US exchange where the discount to NTA you might be able to pick up at close to 15% being wide historically. The share price has already corrected by 30%, I am just not ready to pull the trigger yet but that might be an example of the type of trade to go long in later this year.

  • Bank shares – I thought this is worth a comment as so many people want to know about the big 4 in Australia. I have not owned a bank stock since about 2010 and I vaguely remember selling ANZ at $24 then, having a large position having also bought in their rights issue the year before. Another one where I felt silly seeing them above $36 last year. Christopher Joye from the AFR has been one of the few in the media who has had a reasonable understanding of bank risks and their valuations in a global context and has called them lower correctly. So when he wrote last week NAB and ANZ “MIGHT” be approaching levels representing value I do take a bit of note. They at least have come back to looking a bit sensible on a price to book basis, but global banks have still traded much cheaper using that comparison in recent years so am not comfortable buying here. It is also interesting that it is still easy to come across many wanting to stick their neck out and say ANZ a strong buy at $30, $27, $24 etc etc. There is a huge obsession with current yield in the Australian market, particularly with retail investors. One needs to try and block that out of your head and focus more on the dividend perhaps in 5 years’ time. i.e. what earnings growth can they achieve up to 2020, what the dividend might look like and where does that put the dividend payout ratio? I even read stockbroker reports as late as September last year recommending BHP as a strong buy at $27 as a dividend yield play! Maybe in a year there will be many mainstream newspaper articles saying never have more than 5 % of your portfolio in bank shares, that may be the time to buy. But take my comments here with a strong grain of salt. It is partly based on expecting Australian house prices to fall from here, and I like many have generally severely underestimated the strength of Australian house prices in the past. Although the political landscape is getting interesting with seemingly Labor wanting to campaign with removing negative gearing on existing properties.
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