ASX Weekly Wrap 07/11 - 11/11

Welcome to the ASX Weekly Wrap. A weekly email that will be sent out to clients, and also made available on my website, with a brief description of the events that moved the local markets during the week and also what I am watching on an individual stock level. Feel free to provide feedback and alert me to any topics that you may want covered.

Well what a wild ride this week was. I have to say it was one of my top 10 experiences as a shares advisor. The sheer volatility and volume that’s went through our market, and the US, was something to behold. Our move on Thursday of +3.3% was the best day since 6th October 2011. We did huge volumes to end the week. On Wednesday we did $9.3bill, on Thursday $9.3bill and today we did $8.9bill worth of trade. Just as a quick guide we tend to sit around the $5bill mark on an average day’s trade. Obviously the Trump election win is what drove markets this week as we saw the market gain 189.90 points or 3.67% for the week. We had a high of 5,370.70 today and a low of 5,052.10 on Wednesday.

As everyone knows Trump surprisingly won the US Presidential election on Wednesday. I won’t elaborate much more on it as I have already written at length on it in the email I sent you earlier this week. If you haven’t already read it you can still read it on my website here. I will just say that as I suggested the world didn’t end and the markets, once they had divulged the information, decided to rally. As I spoke about in my previous note that a lot of Trump’s policies are bullish for equity markets and also inflationary. This is great for commodity prices as well. We will just have to wait and see how this all plays out and what Trump’s stance is on a few important issues are.

Surprisingly there were a few other tidbits of important economic information out during the week, but they seemed to get lost in the election hype. The main chunk of data released were the Chinese CPI & PPI numbers for October. Continuing a global trend they did beat forecasts coming in at +2.1% and +1.2% respectively (year on year). Once again this further confirms two things 1.) Inflation is creeping back into the global economy and 2.) The Chinese economy is recovering well and could be accelerating.

The inflationary theme also got those 10 year US Treasury yields booming as well. I have spoken at length of the importance of this and how it signals the change in global rhetoric surrounding global cash rates. Yields on the 10yr US Treasuries now sit at 2.07%, up 32bps in the matter of a few weeks from that 1.75% breakout level I spoke of. However the chance of a rate rise in December by the Fed has dramatically decreased. It now sits at a 55% chance of occurring. This is down from the 82% chance touted on Tuesday. Talk is the Fed may be hesitant to raise rates until they are able to grasp what Trump’s plans for the US are. They may not wish to put pressure on the economy if Trump’s policies (such as spending cuts) are going to put pressure on it anyway. If we are to believe the US Treasury yields though it would seem that the Fed will raising rates are inevitable in the near future.

Not much company news out this week but what we got was important. Westpac (WBC) released their full year results, whilst the Commonwealth Bank (CBA) gave their quarterly update. WBC results continued the theme of being underwhelming yet reassuring. WBC’s net profit fell 7% to $7.45billion. Revenue was down 3% to $20.985bill and its final dividend stayed steady at 94cps. Tier 1 capital ratio was strong at 9.5%. In a surprise, compared to the other big banks, its Net Interest Margin was up 5bps to 2.13%. This certainly bucks the trend of the other three and maybe hints at the start of a turnaround. At the risk of sounding like a broken record though the themes were the same. Tough earnings environment with low rates and high competition, and a strong Tier 1 Capital Ratio with no need for further capital. Like I said an underwhelming but reassuring report.

CBA released its first quarter trading update for 16/17 which saw a slight improvement on last year. Net profit was $2.4bill, up from $2.3bill same time last year. Tier 1 Capital was at a slightly lower at 9.4%, but accounts for dividends being paid out. Bad loans made up 18bps of total loans, down from 19bps at the same time last year. Not much we can read into these results but it does seem much of the same story that we have heard over the last 18 months.

Was a big week for most commodities as we saw the rally in Iron ore and Coking Coal continue. Iron ore hit fresh two year highs at $71/t and coking coal continued to soar well past $300/t. These two usually are heavily correlated as Iron ore’s main use is for making steel. Coking Coal’s main use is to produce coke, which is basically pure carbon, this in turn is then used to boost productivity of the blast furnaces to make the steel. Anyway coking coal has moved somewhat more than Iron ore so hopefully there is more legs in this Iron Ore rally. Obviously this bodes really well for the likes of BHP, RIO & FMG as it only adds to their bottom line.

Copper also has a solid week rising to $2.56 a pound. It only sat at $2.15 a pound a couple of weeks ago. I have stated before that it’s expected that copper supplies will be in deficit around 2019/20 as major mines close and no replacement production is due to come online.

As I spoke about in my Presidential edition of the Wrap on Wednesday Gold had possibly the wildest ride of all asset classes. As Trump continued to win votes Gold continued to climb as much as $60 an ounce peaking at $1,337 before closing pretty much flat around the $1,275 mark.

Obviously investors sought the safety of Gold with the fear and uncertainty that Trump brought to markets. Once the dust settled and wiser heads prevailed it seems most jumped out of Gold again and back into equities. In what is a move that concerns me is Gold has now broken down below its base trendline (green). If it cannot reclaim this soon then I fear it’s going to head towards $1,200 and then $1,080 after that. Gold’s worst enemy is higher interest rates. It now looks to be the case rates will be turning up over the next few years. With Bond yields rising as they are and the fact Bonds are a safer asset class than gold what case is there to be in Gold?

With all the uncertainty around markets at the moment I will skip the technical analysis of the XJO. Wild swings in the market like we have had this week make it hard to read the charts at times. Will let the dust settle and let markets trade for another week before the next update. Important points to note are that we bounced and held above the two import support levels at 5,150 and then 5,225.

In what has been a while between drinks I have a new stock I am focusing on and have already started accumulating for some clients. I am trying a new format with this so let me know what you think.

Name: Cooper Energy Limited

ASX Code: COE

Sector: Energy

Last Price: $0.34

Market Cap: $223mill (@ $0.34)

Share on Issue: 658mill

Risk: High/Speculative

Timeframe: 2 – 5 years

COE is in the energy space and traditionally focused on Oil. However the company is now transforming itself and focusing on domestic gas here in Australia. It has signed an agreement with Santos (STO) to purchase numerous Gas producing assets for roughly $82mill. It is funding this via a $62mill rights issue, cash on hand and existing debt facilities. Now normally I would be wary of such a move as there is quite a bit of dilution to come from this raising, but these new assets total transform COE. Currently COE are producing roughly 300,000 barrels of oil a year. With these new assets they will increase that to 1million in 16/17 and then 1.7million equivalent in 17/18. They will also take their oil/gas reserves from 1.3mill barrels to over 11mill barrels oil equivalent, hence you can see the big transformation. It will also give them exposure to the lucrative South-Eastern Australian market and they will now have production being fed into VIC, SA, NSW & QLD.

COE management have decades of experience under their belt are savvy operators. Their main focus is on simple, low cost production and it took them 4 years to identify the right deal to bring into the company. In the mean time they have stripped out any non-core assets and aim to focus on their Australian production. After the acquisition they will sit on roughly $50mill of cash, $8mill in debt (with a further $30mill available for drawdown) and will be producing at roughly $AU27/28 per barrel. I can see further smaller projects/acquisitions being brought in over the next 12 months after the STO deal is done.

Now I am bearish energy in general over the long term. I believe in lower for longer oil prices mainly due to improvements in tech (ie solar roof tiles, longer life batteries etc) and the fact there is just a glut of oil out there. However COE will be operating in the domestic gas space here in Australia. These sort of arrangements are done via long dated contracts with the likes of AGL, Alinta etc. At the moment domestic gas prices in Australia are very high due to short supply and COE is in a great position to take advantage of this. This also means their share price shouldn’t be as correlated to the oil price as it has been in the past.

COE is hardly for the faint of heart and does carry a high amount of risk with it. In the end it is a small cap stock and in the energy industry. It’s as risky as they come. However I believe it’s on the verge of going from that small cap producer to a mid-cap producer and one that could attract the interest of more than one energy company as a takeover target.

Well after the week we have had we all deserve a breather. We won’t get that next week as we get a raft of data from overseas to digest and it’s all important. Monday has Japanese Q3 GDP and Chinese retail, industrial production and fixed asset investment figures out. The Eurozone has their Q3 GDP and Trade balance out on Tuesday and the UK has PPI and CPI out as well. The week ends with US CPI figures out for October on Thursday night. No domestic company news scheduled for next week but ANZ goes ex-dividend on Monday. HVN, BHP, BXB, RMD etc. will all have their AGMs next week so the market will look to them for tid-bits of info such as market conditions and earnings updates.

A busy weekend is in store for me as I will be taking my 5 month old son to his first Christmas Pageant tomorrow morning. Will be an early one but it will be well worth it. Hopefully the rain stays away as there is some forecast. Of course today is Remembrance Day and I hope you all took time to reflect on what this means to us. I will be forever grateful to those brave Men and Women who sacrificed so much for us, so that we can lead the lives we do today. I am lucky enough to never have experienced war first hand and hope I never will have to, hence why I think it’s important to remind our youth on days like to today how lucky we really are and what the atrocities of war bring so they, may never have to experience them.

‘They shall grow not old, as we that are left grow old; Age shall not weary them, nor the years condemn. At the going down of the sun and in the morning We will remember them.’

heath@hlminvestments.com.au

0413 799 315

PO Box 6014

BURTON SA 5110

Important Notice

Any advice in this article should be considered General Advice only and does not take into account your personal needs and objectives or your financial circumstances. You should therefore consider these matters yourself before deciding whether the advice is appropriate to you and whether you should act upon it. I am happy to assist you in this process. To do so, I will need to collect personal and financial details from you before providing my recommendations. Please note the author may own shares in the companies mentioned in the above blog.