The Not So DAILY BULLETIN 20 July 2022 No.491

The Not So DAILY BULLETIN 20 July 2022  No.491
Top Stories
Wednesday, July 20, saw the ASX 200 gain 110 points or 1.6%, to finish at 6759, which is the highest point this month.

Another good day from the US saw its markets gain between 2.5% and 3%. Better than expected profit results from banks and Netflix gave the market a rally but it’s only early in the reporting season.

Some strategists weren’t getting too excited by the jump and considered it to be part of a Bear market rally as turnover was light and maybe short selling covering their bets (short-covering rally). 

I have outlined our current market thoughts in more details in three parts. It’s long-winded but it will help our conversations with you in the coming weeks and months as this market might turn on a number of catalysts or events. 

However, before this, will we see the long-awaited market capitulation where irrational selling occurs and generally provides a good indication of a market bottom. History never repeats, but it does have a good rhythm.  

Still nothing in confession season. 

Still cautious, but hopeful!
ANZ takeover of Suncorp Bank
ANZ has announced a $4.9bn takeover of Qld’s Suncorp Bank.

It will be funded $1.4bn from existing cash reserves and $3.5bn rights issue from existing shareholders. The rights offer of $18.9 per/share is a ~13% discount to ANZ’s last close price of $21.64.

For every 15 existing shares you will have a right to buy another 1 share. You will receive a letter in the mail if you are eligible.  

The acquisition price of $4.9B represents a P/E of 13.8x. ANZ still need regulatory approvals within 12-months (Treasurer, QLD Government, ACCC, APRA). The proposed transaction with Suncorp Bank could see ANZ’s overall market share of total industry assets increase from ~13.5% to 15.4%. ANZ will remain the 4th largest bank.

If existing shareholders don’t want to take up the rights issue, the rights can be sold (but brokerage is payable, which may make the transaction of little value. 

Generally, the brokers are positive about the takeover and noted that ANZ also provided a better than expected 3rd quarter operational update. 
Is the market about to turn? part 1
There is a growing sense that we may see the market bottom and turn UP in the coming weeks or months. Unfortunately, nobody rings a BELL when the market bottoms, so we are looking for signs. 

As previously discussed with many in our meetings, we have made recommendations of where we want to invest cash in the medium term, but due to market weakness and many headwinds, we have been reluctant to implement $$ over the last six months, which so far has been a good call. However, that’s the easy bit. The hard bit is when to implement and invest. That time is getting closer and maybe done in stages as markets are likely to remain choppy. 

There are some interesting observations being made by some major market players that are worth noting. 

1. Bank of America (BoA) Bull and Bear Indicator (1st chart below) has moved to 0.0 from 0.2. This is extreme bearishness & can’t go any lower (as an indicator) & a survey of fund managers showed they were the most bearish since the GFC in 2008.
2. BOA also tracks the cash allocations of global fund managers. The 2nd chart shows that fund managers have the highest amount of cash since the technology bust in 2001, so there is plenty of cash sitting on the sidelines. 

History shows that high cash allocations can lead to market rallies and even the bearish Morgan Stanley suggests that when the market turns it will happen quickly due to the cash on the side. 
Is the market about to turn? part 2
Before looking for the upside, we need to understand why the market is SO BEARISH, and the headwinds markets are facing (these are known & unknown knowns). It doesn’t include the unknown unknowns. 

1. HIGH INFLATION – inflation hasn’t been seen this high for 40 years, and rates are yet to peak. The reason Central Banks have been keeping it low for so long is that it’s difficult to reduce once “the inflation genie is out of the bottle”. High Inflation can impact profits and costs of living and interest rates. 
2. HIGH-INTEREST RATES – we have been living in a goldilocks economy for many years, “not too hot, not too cold”, which has meant low inflation and low-interest rates. To cool inflation, Central Banks are forced to raise interest rates which increases the cost of money for all borrowers, and while investors receive a higher interest rate, it generally is lower than inflation, so in real terms (after inflation), investors lose. Higher interest rates reduces demand and economic growth and raise the chances of recession.
3. RECESSION RISK – many are predicting a recession in various parts of the world (less so in Aust). A recession is two negative quarters of GDP, but the impact of recessions on the economy and community can vary greatly, as it depends on the severity. At the moment, the market is fearful of a recession. At this stage, most are suggesting any recession is likely to be mild due to low levels of unemployment, but if inflation remains high, CB’s will be forced to push rates higher. 
4. GLOBAL SUPPLY CHAINS – supply problems have impacted inflation due to the pandemic, which is different to a normal high inflation environment (inflation is usually caused by too much demand). 
5. RUSSIA/UKRAINE – the war has caused commodity supply issues for many, including energy, food and other raw materials (impacts on computer chips). It has also fuelled increased spending, particularly defence and caused population dislocation. 
6. COMMODITIES are generally an input into many goods, and price rises, especially energy have fed through the supply chain to increase costs. 
7. CHINA’s ZERO COVID policy. China has been the world’s growth engine for the last 25 years, and the zero policy pressures the Chinese economy. The last quarter’s GDP was virtually flat. Several analysts are questioning China’s ability to grow. There are other subset issues such as China/Taiwan and China’s trade relationships with the US, Europe and Australia and China’s property market. 
8. CENTRAL BANKS (CB) – quantitative tightening (QT). Over the last 15 years since the GFC, Central Banks have supported the economy by increasing the money supply and extra liquidity via quantitative easing (QE) with very little inflation. Unfortunately, CBs are starting to tighten their balance sheets which means they aren’t as supportive of the economy.    
9. STRONG US DOLLAR – the US dollar is strong against all major currencies as investors seek safety. This is causing grief for US companies who are exporting inflation (higher prices) to the rest of the world, and if debts are in USD, then the level of debt has increased, which is putting more pressure on global economies. A strong USD is helpful for some Australian companies with most of their earnings in USD (CSL BHP RIO WDS MQG LLC SHL GMG RMD AMC). 
10. PROFIT SEASON RECESSION – most global markets this year have entered a bear market (20% drop). This is mostly a result of price corrections from increases in Bond rates. However, given the above factors, market strategists are expecting company profits to reduce (especially if the consumer sentiment surveys are true), which could have further impacts on the market.  We are tracking CORE stocks closely. 
11. CONSUMER SENTIMENT In most Western economies, the consumer is 65% to 70% of GDP (economy). Recent Consumer sentiment surveys, particularly in the US, have been at record lows. Meaning the consumer isn’t confident about their economic future, and if this rings true, they will stop spending, which impacts the economy and company profits and unemployment. A vicious cycle!!  
12. And finally, we have FEAR itself. Fear of all the above issues. This makes the markets nervous, and fear is a greater emotion than greed. 

So, if you are still with me. We may be seeing some turning points. Part 3 is below.
Is the market about to turn? Part 3.
While there are lots of negatives out there. There are some signs that maybe the market turn could be close (weeks or months). 

Our best current guess is we are still in a global BEAR MARKET, and the rally seen today is part of a Bear market rally. However, the level of cash and market sentiment being SO BEARISH, as noted in the graphs, are at the extremes; this suggests the market could turn quickly on any positive news or catalyst (s).
We need to remember markets look towards the future, say 6-9 months and if things like brighter, then they could rally while things are bleak.

So what could these catalysts be? We need to revisit the list of headwinds.     

1. INFLATION – there are some signs that inflation is peaking in some areas (US). Recent drops in commodity prices, in particular, energy, could see inflation start to fall. The market would like this as opposed to inflation remaining elevated or plateauing. 
2.  INTEREST RATES – CBs have increased interest rates to reduce inflation by reducing demand. But supply is also causing inflation. If CBs slow the pace of interest rates rise or stop below market expectations, then this will be a very big positive for the market. The market has priced in cash rates to be well over 3% by year-end. Many economists don’t think that will happen. CBs will be reluctant to force a recession. The recession we had to have is not a good look in Australia
3. RECESSION RISK – if interest rates are steady, then the risk of recession reduces and, at worst, a mild recession (soft landing) rather than a hard landing (high unemployment, housing collapse, bankruptcies). Strong job demand and low unemployment make a recession difficult to achieve. NO recession risk, market rally. If we have a mild recession. The market could rally from when the recession is called as any recession is like to be short. 
4. GLOBAL SUPPLY CHAINS – some signs supply chains are improving as business inventories increase. Shipping rates are reducing, which is a positive.  
5. RUSSIA/UKRAINE – a ceasefire would be a major catalyst for a rally. While a long, drawn-out war is increasingly likely. Improved weaponry to Ukraine is putting pressure on Russia. 
6. COMMODITIES prices had a strong spike due to COVID and the war, but in recent weeks dropped in many areas by more than 20% (their own bear market). This will take pressure off inflation and interest rates. Again the energy is the key. If oil reduces to $85, then markets could rally.  
7. CHINA. China can cut interest rates and stimulate its economy. If they do push the growth button again, it will be a major catalyst for markets to rally.  
8. CENTRAL BANKS (CB) – can’t stimulate the economy like they have been doing over the last 15 years; however, if they pause quantitative tightening (QT) or slow interest rates rises, markets will take that as a very positive sign.   
9. WEAK US DOLLAR – if the US dollar starts to weaken, then this would be a positive catalyst for the market as this could mean several things. Interest rates and inflation have peaked, the global economy is improving, energy prices are reducing, and investors aren’t seeking a safe haven.  
10. COMPANY PROFITS – if company profits don’t fall as much as some expect by 10% to 20%, then markets will rally. That is why the current profit season in the US and next month in Australia are so important. We are watching the CORE stocks closely. 
11. CONSUMER SPENDING If consumer spending continues as opposed to the sentiment survey, then this will be good for the economy and companies. Unemployment is the key. Household savings and balance sheets have improved during the pandemic and so are not as leverage as during the GFC. This could cause the market to rally. 
12. And finally, if FEAR is reducing, then the recovery can take place and provide a further catalyst that things are on the up. 

We look forward to whatever catalyst(s) turns the markets higher. It’s likely to be choppy and uncertain (as the future always is). 

Please note that this is our current best guess!  
Financial Planning Snippets
– SGC is increasing to 10.5% from July 1
– The work test for those over 67 is removed from July 1. Meaning you can be retired and make further super contributions (if appropriate).
Any questions, please let us know.
Other Stories (research since last Not So)
– Global computer chip shortage is still ongoing and the main reason is the Russia/Ukraine war as a high percentage of required gases such as Neon and Krypton come from these two countries. 
Broker Target Price changes 

Ord Minnett/JP Morgan 
ANZ decreased from $25.10 to $24.20
BHP decreased from $44 to $43
JB Hi Fi (JBH) increased from $42 to $44
Origin Energy (ORG) increased from $6.10 to $6.15
Rio Tinto (RIO) decreased from $100 to $99

JBH increased from $48 to $50 (highest broker)
RIO decreased from $114 to $113

Morgan Stanley
ANZ decreased from $24.30 to $23.10 (lowest broker)

BHP decreased from $50 (equal highest broker) to $48 

Bell Potter/Citigroup
ANZ decreased from $30.75 (highest broker) to $29
BHP decreased from $50 (equal highest broker) to $44.50
JBH decreased from $53 (highest broker) to $47

JBH increased from $38 (lowest broker) to $42
RIO decreased from $98 (lowest broker) to $92 (still lowest broker)
Today’s ASX sector Movements
Best –   IT +3.8%
Core Watchlist Index 
The CORE Watchlist is a collection of 30 Australian shares, predominantly “Blue Chip”. We obtain research from up to 6 brokers on each share. Each broker provides a Target Price (value in 12 months) which then provides us with an average for each stock. We then compare that average to the current price as a percentage. IE BHP price $38.56   Av. Target Price $39.73= 97.1% (meaning 2.9% upside over next 12 months) + income 7.11% (including franking).

To get the CORE Index we take the average across the 30 stocks. This provides us with a market average as there are up to 80 teams of analysts providing the research and target prices. The CORE Watchlist stocks represent more than 55% of the ASX 200 and so provide us with a good indicator of the market value. When it’s at 100% then the market is fully priced. We have seen that when the index is below 90%, then it’s good buying, but that doesn’t happen very often. Should you have any questions, please let me know.  

The Core index increased from 87.46% to 88.54%. Trading well below 90%. Will the market rebound? or will the analysts cut their target prices? Maybe a little of both 

Overall Earnings Per Share (EPS) 

FY22 increased from 19.68% to 20.09%. 
FY23 decreased from 7.69% to 7.35%.  

Most expensive – CBA 110.2%   
Least expensive – Nine Entertainment (NEC) cheapest at 58% 

I haven’t updated the rest since last Not So
The CORE Watchlist has 1 (1) stocks trading above 100% lowest (0) while 11 (12) are trading below 85% (highest 18). ALL ANZ BHP GMG LLC MQG NEC NXT SEK STO WBC (Figures in brackets is last Not So).   

Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past). 15 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24. 

ALL current price $36.70     Broker range $41 to $46
ANZ current price $21.64    Broker range $23.50 to $30.75
BHP current price $36.97    Broker range $38 to $50
CSL current price $296.66   Broker range $312 to $330
JBH current price $40.88     Broker range $40.90 to $54
LLC current price $9.50       Broker range $11.40 to $14.37
MQG current price $173.33 Broker range $187 to $234
NEC current price $1.89      Broker range $2.20 to $3.80
NXT current price $11.52     Broker range $13.01 to $15.00
ORA current price $3.43     Broker range $3.70 to $4.20
RIO current price $95.27     Broker range $98 to $120 
SHL current price $34.20    Broker range $36 to $40
STO current price $7.16      Broker range $8.60 to $11
TLS current price $3.95       Broker range $4 to 4.85
WBC current price $20.15     Broker range $22 to $29


Removed  ORI
Banking Index 
Like the CORE Watchlist index, the Banking index is the four major banks’ average target price based on research from up to 6 brokers. The percentage below 100% is the potential upside over the next 12 months (not including income). If at or over 100%, then this indicates the Banks are fully priced. 

The Banking Index increased from 87.5% to 92.7%.

Based on today’s bank prices, the table below shows the estimated dividends (c) and yield. The expectation is for increased dividend payments and still very attractive yields. PLUS FRANKING.  

FY20 % FY21 % FY 22 % FY 23 %
ANZ 60.0 2.77% 142.0 6.56% 142.0 6.56% 150.6 6.96%
CBA 298.0 3.10% 350.0 3.65% 376.0 3.92% 403.4 4.20%
NAB 60.0 2.02% 127.0 4.28% 148.0 4.99% 162.2 5.47%
WBC 31.0 1.51% 118.0 5.75% 119.4 5.82% 130.6 6.36%
MQG  430.0 2.47% 470.0 2.70% 627.2 3.60% 617.2 3.54%

Interest rate rises are slowing commodity demand and this has seen a reasonable reduction in most commodity prices in the last few weeks. However, commodity prices are elevated and provide good cash flow and profits for producers.  BHP & RIO quarterly production numbers have seen a reduction in dividend forecasts but are still very healthy.  

FY21 cps % FY22 cps % FY23 cps %
BHP 334.17 9.00% 426.20 11.48% 374.00 10.08%
RIO 1444.00 14.76% 1043.80 10.67% 940.40 9.62%

Plus franking. Please note RIO is Calendar Year (CY). Cents per share (CPS)  
Other Indicators (change since the last Not So)
US VIX Index increased from 24.23 to 24.28 In a rising interest rate environment, the new trading range is likely to be 17-28. Over the last 25 years, market bottoms have seen VIX reach a minimum of 48. We are still waiting for this event! 
Iron Ore increased from $96.60 to $105.26 Brokers expect an average in 2022 to be $135 but falling to $112 in 2023.  ALL-TIME HIGH of $237.57. 
Copper increased from $3.28 to $3.33 It hit an ALL-TIME HIGH $5.03 at the start of Russian invasion. Now fallen 35%. 
Gold decreased from $1713 to $1706. Climbed above $2000 at the start of the Russian invasion. Record high $2063.  
AUD/USD increased from 68c to 69.11c. Some early signs of the USD weakening a little. USD still strongest it’s been against all currencies for 20 years.   
USD/CNY remained at $6.75.  Lowest $6.31 Highest $6.80 USD stronger. Chinese re-opening may see a stronger Yuan.
Asian markets – UP STRONGLY  
US 10 year Bonds increased from 2.93% to 2.99%. Higher inflation is pushing rates up, but we could rates drifting lower as growth expectations fall. The recent high is 3.48% (8 year high). US 30 year Bond increased from 3.10% to 3.15% The highest level was 3.50%. US Federal Reserve increased rates by 0.75% with more to come. Plus BOND selling of $95bn per month (QT).  The US 2 year rate has increased from 3.14% to 3.2%  The gap between the 2 yr and 10 years an inverse -0.21%. It remains at -0.21% but still inverted which historically has suggested a recession. Widest inverse gap was -0.24%   
German Bonds increased from 1.15% to 1.24%. The highest point in eight years 1.71% as the ECB is likely to start raising rates, maybe this week. Higher spending, higher inflation.  All German rates are now positive.
Japanese Bonds remain at 0.24%     0.44% highest in some time. Bank of Japan (BoJ) are buying Japenese Govt Bonds and now own 54%. Some are questioning how long can they keep rates suppressed.   
Aussie Bonds 10 year Bonds increased from 3.47% to 3.56%.  Recent high is 4.20% 
Other Aussie Bonds 1 year 2.65%  2 year 3.04% 4 year 3.31% 5 year 3.37% 15 year Bonds 3.70%.  
Oil prices increased from $98.74 to $102.40.  It reached $125 at the start of the invasion. Now dropped 21% into bear territory. Will help settle inflation 
Tungsten – Baltimore & Rotterdam $345-$350 mtu.. Demand is expected to grow 10% in part due to increased defence spending.  A study by UK firm Nyobolt shows tungsten assists lithium-ion batteries to be safer and charge quicker. This has seen Vietnamese tungsten refiner HC Starck invest $45m in Nyobolt.  
This week & next week 
Last “Not So” opened in 5 Aust states (excl NT Tas ACT) US 4 states (California, Massachusetts South Carolina & Connecticut), Sweden and UK, 

This week – Out of office with COVID – Chris P also has COVID. Maddy and Kevin are in the office. Ashleigh Tues and Thursday
Next week July review meetings.   

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