Reporting season and equities find support

Period 2nd half February 2016, written March 2nd

Asset Allocation

Since the last report a fortnight ago the volatility has somewhat subsided, with equity markets slowly grinding higher. Pretty typical when markets climb.

The decline so far looks similar to that experienced in September 2015 and October 2014. This year we have been in a sideways pattern for about a month and a half. With those other two declines mentioned it was not long after a month in those cases where the market started to march significantly higher. However late last year the S&P 500 couldn’t make new highs and the market breadth has deteriorated a lot since late 2014 and earnings growth has not impressed either. I now have two open short derivative plays on the DOW around 16,500 and 16,800, this takes my cash equivalents sector weights from 34 to 44%. The stops will be at 17,500 on the March contract, above that level I could be wrong about the decline and we may see more of a pattern as I discussed above matching Sep ’15 and Oct ’14.

Gold has been a regular subject here and this I week I don’t have a lot to say other than it is still behaving very strongly and I let positions ride. I have enough exposure not to have to go searching for more right now. I would be very happy just to see gold remain at 1,200 over March and April, in that case I would be more confident it could be a longer and more sustainable move. At present you can still mount a case that it is just similar spike that we have seen many times during the bear market. However, a consolidation over some months as I mention means it would look quite a bit different. My best guess is that a key difference this year and bullish argument for gold is the lack of yield on global bond markets right now. Many in the investment community are still of the mindset that gold is an asset class to never invest in based on the premise that it does not give the investor an income. Quite often these same investors however still are yet to place this argument against many of the world’s government bond markets. In the short term however Friday’s non-farm payrolls could move gold a lot either way.

 

Currencies

The story this year has been I started bearish on AUD/USD around 73 cents and then when it declined to 69 cents made a number of trades to reduce some USD investments and take profits. The plan was to partially continue to short the AUD by shorting AUD/JPY. This worked effectively on one occasion selling at 84 &86 and taking profits at 80 & 81 respectively. This week I have felt that this story has played out enough for the time being and this week went short AUD/USD at 71.6, and would add another trade on at 72.6. It has struggled to rise above 73 cents for any significant amount of time for a long time now. I compare that now to AUD/JPY which is trading well below recent spikes of above 86. The AUD/USD has made a reasonable bounce from below 69 cents recently to above 72. The 73-74 cents level look to be an awful amount of resistance so I have stops just above 75.1 here. So as I write today my overweight in foreign currencies has climbed from 2 to 6%. This would move to closer to 10% if I get filled at 72.6 also. Currently as I write it feels like there is a lot of hedge fund short covering on the recent report that got so much attention on 60 minutes here about the Australian housing market. I emphasized a lot earlier this year that some trades are crowded, and highlighted shorting AUD/USD which led me to reduce this at 69 cents earlier. I feel this week we are seeing this short covering effect and hence nearing 73 cents that should start to fade now and shorting here the risks are not as great.

 

Individual Stock Decisions

RNY – I was somewhat fortunate on the day to get rid of some units at the high in a rough day’s trading when they reported results, at 18 cents. It was close to half my holding. Refer below about the company’s results.

GNC – I sold this at $7.46 today and took a minor loss after only getting into it a month ago at $7.77. Initially I thought it was correcting to very strong support level of $7.50. At the time the equity indices were getting smashed and the AUD was below 70 cents. I figured it was getting harshly belted at the same time given it still has strategic appeal from offshore. The trade looked good early on as it raced to above $8.50 and stayed there for weeks. Before reporting it weakened and there has been heavy selling down to $7.50 support with investors not liking the earnings outlook after they reported. All this whilst the AUD climbed again and markets very strong overnight. It could well hold this support but I just no longer have the conviction for the time being.

 

Individual Stock News

Reporting season is alive and well. I don’t have the time to comment on every holding I have that reported or to write a lot of details on each. I will provide the odd comment on some holdings that maybe more topical. Some that report very much as expected I will remain silent on.

RNY – This probably needs pages to write about! I commented briefly earlier in the year about some handy refinancing that can pave the way to get their leverage down by selling some properties. In my comments I inferred that sales may be lower than current NTA but a bit below could see the shares rise as the stock was at 23 cents versus NTA in the high 50 cents. Now the company has reported a huge drop in NTA to only 35 cents! Maybe I should have seen this coming with the large persistent selling the last few months. That is with hindsight as sometimes that can be selling by an institution that could be still extremely positive on the stock however is simply rebalancing from redemptions. I am in the process of examining what lessons I should learn out of such a poor investment. Some of my poorer investments over my career have actually came from property NTA plays with reasonably high leverage so maybe I need to avoid these type of investments. Complicating matters is I have had some big success stories also. Looking at the bright side earlier in my career I am sure I would have made the mistake of dollar cost averaging boosting my stake to very large levels below the 25 cents level. At least I didn’t do that, and getting away luckily some units at 18 cents has made this position quite small now and doesn’t cause me a lot of stress or distraction. That is probably important as now with its high leverage it is the type of investment that even has some chance could go to zero if things get a fair bit worse, but at the same time maybe management have revalued the assets too low just to encourage buyers and quickly reduce debt. So the brave could still double their money at these prices also. Using this tax loss for me will kind of make my partial sell effectively around 20 cents. I figured this to be prudent given the bipolar nature of outcomes here. The results indicate management really want to sell some properties and if they are to believed then they said revaluations are now close to verbal offers already received. However, with the high leverage now even selling at a bit of a discount to NTA can dilute NTA further. I think they will be able to get the leverage down to reasonable levels over 18-24 months assuming things do not worsen a lot. So in that timeframe they can probably climb back to maybe low 20 cents level when their debt will be manageable and the “real” NTA might be 30 cents or so at the time. Therefore, I don’t intend to dump my remaining units at the current price of 15 cents.

Pleasingly that looks to be my only dog of the reporting season and now can go onto to discuss more pleasing results or results roughly as expected!

 

SSM – Not often you see a company not only increase their dividend but then give a capital return of 10% of the market cap also! SSM did this, a capital return was favoured because of limited franking to pay a really large dividend. They are simply generating huge amounts of cash right now. The entry price here was 25 cents and they are getting close to 60 cents now cum this dividend and capital return. The metrics do not look too challenging in justifying a price of 60 cents. This has all been in the space of 9 months for me so I wouldn’t get the CGT discount even if I wanted to take profits. Some years ago this company previously ran up to $1 here in quick fashion when it was getting things right. Partially for that reason this is one I will cling on to the trend whilst it remains above the 200MDA, and record it in my portfolio at that lower level. Sometimes when you are fortunate to get on a winner with a relatively small market cap it is better to try and let it run rather than take profits too early. It moved very sharply from 40 cents this year to high 40’s when I said the same thing here and so far happy I held.

AIQ – This has been one of my longest and largest holds at times in a stock and has been very successful being in wind up since the GFC paying out capital returns. It now has 28% in cash but maybe 50% in investments that can take a few years to realize as they are not that liquid. There can also be value here as a shell company for someone to create another LIC with as there are large prior tax losses. Geoff Wilson’s private company has a large stake here. This should either pay a decent capital return soon but also could be subject to some corporate play. Twenty percent of the company changed hands on Friday as far as I can see so stay tuned for more info.

GOLD HOLDINGS – RMS, NST, OGC, EVN – These investments are probably more of a momentum nature now as I described last update I will hold until they break below their 200 MDAs. So I will just comment in regards to their price action since all reported recently. RMS, NST, OGC, EVN are probably order of best profit results according to market action lately. The market seemed very happy with the first 3 and a tad more muted with EVN.

NUF – This was purchased this year around $7.50 and has been a tad disappointing. On their results the stock gained that day trying to go back over $7. They have at least bounced a bit from low $6 recently and are a hold for me.

PTB – Have spoken about PTB this year, results excellent. Maybe the muted reaction some wanted a dividend earlier but their pattern is to announce later in year so that should probably occur.

AGF – I discussed this last time even though I have been out of this for a while, highlighting it could be handy to have on the watch list If markets fall further as it is till ripe for activism to succeed in the longer run. There are actually some meetings for the company in April where it needs to show it has reduced the NTA gap to 15% or there could be more changes, so this could develop quicker than I mentioned last time. In the last week Wilson Asset Management bought a lot of stock at a discount to NTA nearly 25% so now even more activists are on the register. It will be an interesting battle in the media with more activists than I can almost ever remember pushing for change in a company, against the big financial giant AMP who hold a huge blocking stake. Unfortunately for me in terms of being a potential buy since I last wrote, the presence of Wilson on the register has cut the NTA discount from 25% to 19% just by itself. If it widens back to 25% and the price and Chinese stock market is at recent lows or lower, I may well get involved in the lead up to April.

APW – My history in this I wrote about earlier this year and pointed out some recent director selling. That was a concern but on that info alone I could not make a case to sell at 12 cents. They reported and from their results I now don’t have concerns over the share sales, as I said sometimes they are innocent enough. Directors get paid so well they occasionally have to sell assets to pay for their ego boosting toys and lifestyles. The NTA was 20.2 cents. The dividend payout ratio they have forecast to lift and they have room to do so safely. One thing holding the share price back I feel was that the dividend yield was not as high as it could be. Whilst commercial property in Australia is not a sector I really fancy in itself, their properties did well occupancy wise and they basically have no debt. So I don’t mind if patience is required here the dividends look good and safe for some time yet. I would prefer they do a more aggressive stock buyback though. I am not as critical as some on this because I held the stock a couple of years ago when they were very aggressive with a buyback so giving management a little benefit of the doubt.

VNL:LN (London AIMS exchange) – Above I tried to analyse what to learn about the RNY mistake and discussed maybe that REITS with higher leverage and offshore assets have given me headaches in the past. However, this week I noticed VNL, or Vinaland is in this category but continues to perform from my entry price. It has required patience but looking back now has returned me over 80% over 3 years, some being from the price trades in USD and the AUD has declined a lot. It holds a mix of properties throughout Vietnam. Vietnam had probably a larger asset boom around the GFC and subsequently assets were still languishing in 2012 even though many other world markets had rebounded strongly. This attracted me initially along with traveling there frequently. The oversupply of properties has taken a long time to deal with. I mention the stock this week because it is the first time in years that the NTA has shown any life. I bought at a discount to NTA of over 60% but the discount was wide because the NTA was still declining. The last update the NTA has climbed from 92 cents to 94 cents, and the outlook is much more upbeat. They have, and will continue to buy back a lot of stock. It got attacked by activists some time ago and forced them to slowly do this. There was a key clause that the fund needed a unit holder vote to continue I think around 2013 which meant the hedge funds could then say how things should be run otherwise management would lose their jobs, management fees got slashed and large buybacks of stock occurred. They are now trading at 61 cents versus NTA of 94 cents and I have no plans to sell.

GJT – this looks like an awfully quick result on how the classic discount to NTA activism can result in management selling the assets and winding up the company, how the RNY playbook was meant to read but hit obstacles! GJT which I bought only a month or so ago in the high 1.90s will sell the property portfolio mostly in about August and distribute the proceeds to unitholders. One buyer will raise capital to pursue this so that could be small risk from here. Likewise, AUD/JPY movements because the trust will not convert back to AUD until the sale proceeds come in perhaps August. If those two factors do not change much it is expected unitholders from this point should be in line for at least $2.65 and in the meantime another dividend of around 8 cents. The stock is at $2.45 now so looks like a return of perhaps 40% in around 8 months should be the probable outcome.

 

Lesson from the REIT sector – I have written about a shocker in RNY, yet some fantastic successes in APW & VNL:LN & GJT. I think the conclusion is I will still look for opportunities just as much, but at the margin perhaps stay more diversified in terms of companies owned, particularly with higher leverage. Perhaps the potential outcomes are more variable (both in a negative and positive way) than I imagined a couple of years ago.

 

THINGS I AM WATCHING

 

  • Looking to effectively short AUD/USD if it continues rising to 72.6. On existing short targeting 69.10
  • Watching DOW shorts with stops at 17,500, targets of 15,900.
  • 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 are 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. Another example could be AGF, which as discussed is ripe for activism that can eventually succeed in narrowing the 25% discount to NTA. There is a Singapore closed end fund at a discount and that market has also had a large correction. Likewise, with a Russia closed end fund, this could be a way to play an oil price recovery and also a NTA/wind up play at the same time. I have seen Templeton funds management, a big player in EM winding up their Russia fund recently. I have read books and articles that have back tested going into equity markets in a diversified global manner that have suffered 2 years of declines can be very rewarding. Particularly markets that stand out on “value based” indicators as I am finding with some discussed such as Russia, Singapore, Vietnam. This has influenced my thinking in the “about me” section of the blog where I talk about rebalancing into out of favour markets in a diversified disciplined manner.
  • Oil sector, this is a new discussion I wanted to add since reading recently about Warren Buffett and Kerr Neilson recently have already been tempted to invest in the sector. On the very simplistic analysis as a contrarian that it has fallen 73%, the largest decline ever pricks my ears up. Am still watching thus far and broadly thinking perhaps in June when the Australian market often sees some tax loss selling could be time to start looking seriously. Also prefer to see it bump along sideways more. As I did with the gold sector however, I would only have quite a few exposures once the stocks have and oil price has seen more stabilization, which may take towards the end of this year. June I could put my toes in the water a little. I find it difficult personally commencing buying altogether once the trend has been up for some time, though I acknowledge most “traders” who are successful operate this way. Russia’s stock market is worth having on the watch list also as mentioned above, if you were to get bullish on Oil later this year.

DISCLAIMER

This information should by NO means be taken as financial advice. It does not represent general advice or specific advice, particularly as I am unaware of the personal financial circumstances of readers. It is written purely for the purpose of an investment diary, to look back on, self-reflect and try and improve my own accountability for the investment decisions I make. It is for fun, and I am not a financial advisor. I try to be as accurate as possible but cannot guarantee I avoid mistakes. If making decisions with your own money, please do your own research and seek personal/professional financial advice.

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