Macro Investor Volume 1, No 5
Macro A pivot point for Europe?
- Markets remain in a state of flux, but who can blame them when political uncertainty in Europe is so apparent?
- We may have arrived at a pivot point however, as Europe’s contagion moves from the periphery to the core.
- The question remains. What will the EU and ECB do to stem the crisis. Only then can we reach some certainty.
Data Northern economies still heading south
- Australian inflation quiescent.
- US trouble deepens.
- Germany too.
Technicals Volatility reigns
- Risk markets are jumping out of resistance levels and moving across the board.
- King US Dollar is falling and US bonds are being sold off in a likely reversal to broad market moves.
- Australian stock market is looking quite bullish, with probability of sustained breakout very likely.
Stocks
- After a difficult half to December 31, future prospects look better for this fast-growing legal firm.
- A move into Britain opens up a litigation market four to five-times larger than Australia’s.
- Acquisition-led growth however may find its limits domestically through lower return on equity.
- While many small cap miners and service providers have done well, the big Aussie keeps falling.
- A proxy for fears that the Chinese investment boom is coming to an end, BHP now looks cheap.
- While we share such fears, BHP offers exposure to the chance of a near-term stimulus package.
- At the pointy end of Australia’s mining boom SXE has risen high on contract engineering demand.
- But as that boom slows down, this low-margin services provider could be among the first to fall.
- SXE’s shares are pricing only the upside, experiencing few of the declines yet seen in the sector.
- This owner of coffee and fast-food franchise systems is resilient in a disleveraging retail market.
- As consumers increase spending on affordable luxuries in lieu of big-ticket items, RFG benefits.
- Risks of outer-suburban decline and leverage for acquisitions nonetheless bear on our valuation.
Trades
(Gaining from the mining boom’s end)
- This long/short pair trade is based on the deceleration in the commodity boom in the long-term, but with the chance of Chinese stimulus in the short-term.
- The trade’s premise is to go long on the best commodity stock – BHP – and to go short the lowest margin mining services stock.
- Following a move in the underlying fundamentals of these stocks and proxies such as iron ore spot, this trade will be reweighted.
- The GBP/USD ‘Cable’ is getting stretched, reflecting economic weakness on Britain’s recession.
- Both medium and long-term term patterns are bearish for Sterling, and vice versa for the Greenback.
- In addition to our EUR/USD short, we will open a GBP/USD short should the 1.54 level be breached.
- Beyond the ASX200 index, Aussie stocks are moving, presenting some interesting trade ideas.
- One long trade of a closely-watched gold stock has been initiated, with a short possibly to follow.
- Two more financial stocks have also piqued our interest for medium-term long positions.
Fixed Interest A 7.75% opportunity phones in
- The RBA – what some say is the best central bank on earth – might be getting too good at its job, with CPI falling to 1.2%.
- With inflation now at the low levels experienced across the developed world, this gives ample room for further rate cuts.
- For income investors it’s imperative to lock-in fixed rates early and for as long as you can. Here’s one 7.75% opportunity.
Property
The links between China and property
- Housing was spared from a painful correction by the sharp boost to terms-of-trade between 2004 and 2011.
- Robust tax collection on the back of the boom allowed a strong fiscal response during the GFC and crisis was averted.
- Any second round of housing stimulus based on Chinese weakness will be modest and less effective.
Classroom Give me a lever and I will move the world
- Leverage is a double-edged sword: use it wisely and it can increase your returns; use it wrongly and it can destroy you.
- The availability of leverage to retail investors in property, CFDs, forex and shares is tremendous, but what do the pros do?
- The best investors don’t use much leverage at all and when they do it’s used for tiny trades as a percentage of their portfolio.
Portfolio
