Good afternoon,
The ASX 200 fell 0.65% this week as the recent outperformance of small and mid caps came to a fairly abrupt halt.
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Risks from what looks like a second wave of Coronavirus in the US saw investors switch from high beta cyclicals to defensive sectors like healthcare or the gold stocks (VanEck Global Gold Miners ETF up 5.92% this week).
Chart below shows US active cases (10 day moving average, percentage change) and the S&P 500. What I've done is reverse the active cases axis, so if the dark blue line is going down the rate of growth is increasing.
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While I'm sure the spike in Coronavirus cases has something to do with it, I suspect fiscal/monetary policy might be more important. See how its stopped growing...
M0 Money Supply %ch for the US vs the SP500 Price Index over the past 12 months
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I don't know how the governments of the world turn off the stimulus tap though.
As far as I can tell, low interest rates, quantitative easing and rubbish policy like the PPP (aka. a handout to corporate America to buy votes) primarily go to increasing asset prices while having little to no impact on wages.
Conservative politicians (generally speaking) will try and convince voters that the stockmarket = the economy, and that "The Wealth Effect" will benefit everyone as lower costs of capital, business capex fuelled by cheaper access to debt and rising asset prices. This all allows for employers to create new jobs and put upward pressure on the price of labour (wages). Higher wages results in more consumption, tax revenue and, eventually, budget surpluses.
This is utter nonsense in 2020.
For a litany of reasons, no longer do higher asset prices translate to higher wages. Blame technology, aging populations, globalisation of the workforce... it's a confluence of imperfectly measurable reasons. Regardless, its a fact.
So while the rich get richer, the middle class and the poor are at a greater and greater disadvantage as asset prices go up at a pace that wages will never catch. It sounds crazy, but the model to get ahead as a middle class family is earn as much as you can, try and save every dollar that you have spare, leverage it up to the max and invest it in risk assets. The government won't guarantee your job, but they'll underwrite property prices and the stockmarket! Minimise your reliance on wages (not advice, just in principle).
Eventually, the chickens come home to roost and this government debt bubble will have to be popped - through civil unrest (the poor outnumber the rich and vote to fix inequality), protectionist policy (i.e. trade wars, anti-immigration, xenophobia) and/or we just go harder and harder at money printing (MMT) / universal basic income-permenant Jobkeeper type policy.
But for all you perma-bears out there, remember, the market can remain irrational for much longer than you can fund your shorts.
For the record, I don't think a second wave really changes much. I reckon it's hard for them to put the economy back in lockdown (in all jurisdictions) from a political standpoint and even if it does (health wise) the policy response will be twice the size.
All I'm paying attention to is the currencies, it's all "cooperative" at the moment, but whoever figures it out that devaluing your currency is the fastest and most tolerable way out of this is going to get an advantage - at which point you'll be thanking your good graces you were born/live in the lucky country!
Oh, and here's a tip, I reckon this movement for Western Australia to secede will start to gain momentum.
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Bloody hell, this note is taking way too long! I'm wasting a perfectly nice Saturday in the sun inside rambling about stuff you probably don't even care about!
Anyway. Here's some stocks:
Freedom Foods (FNP)
Sounds like they've got some problems. CFO sacked, CEO probably on the way out, 14 day suspension requested to work with lawyers and auditors to get to the bottom of what sounds like a bit of "capitalising what should have been expensed" book-diddling.
I like FNP. I reckon they've invested in some valuable assets, stable raw materials supply, some good-to-great brands (MilkLab), category-leading distribution and fantastic products. They are supported by the structural trend towards healthier eating. As well as the increasing popularity of gluten, dairy, organic and meat-free eating + Asia's confidence and desire for Australian food and beverages. It's majority owned by the founding family who recently bought stock on market.
I don't think these accounting dramas are likely to be immaterial. But unless its a catastrophic, I reckon this might be an opportunity to get set in a potentially good company that will surely be "squeaky clean" going forward. They got whacked by COVID (cafe's not buying MilkLab) but as long term, I can't help but be bullish* (*pending the investigation results - as I said, could be a disaster... doubt it. but could be.)
Vulcan Energy Resources (VUL)
Our sophisticated investor clients participated heavily in the placement this week at 40c. Shares have run since, closing at 62c on Friday or $33m market cap. I reckon this is a $100m + business based on peer comp co's and got scope to be a billion dollar company. VUL have the rights to the biggest lithium deposit (JORC Resource of 14MT LCE) in Europe, located in a great strategic location (Germany). The USP is they reckon they've got a process, utilising the geothermal energy from the hot brine the lithium is contained to produce lithium at zero-emissions. This would be very attractive to supply-chain conscious electric vehicle manufacturers and lithium-ion battery gigafactories.
VUL still needs to prove up this process and get the process through PFS (late this year) - at which point it'll be comparable to the peers with >USD100m valuations.
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New media
Did a little article for the fashionable folk over at DMARGE last week. You can read that below: "OUR EXPERT’S SCOOP ON THE BEST AUSTRALIAN SHARES TO BUY RIGHT NOW"
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I also had a nice long chat with Leigh Travers from ASX listed Blockchain consultancy Digital X (ASX:DCC). Leigh and I talk about how our lives and behaviour on the back of COVID-19 has changed forever, and imparticular, "the digitisation of everything". Full interview is over on Seneca's much-neglected YouTube channel.
For those who prefer the podcast, I'll turn this into audio a whack it up after I finish this note.
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Movers and Shakers
The week was really about defensive healthcare (RMD, FPH) and gold/metals as I said. Risk off. A bit of value hunting in the non-bank financials (PPT, AMP). The worst named company on the ASX, Orora (ORA) also completed its Fiber Australiasia sale allowing for a $600m capital return to shareholders.
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Don't ask me about Mesoblast (MSB) way outside my zone of competence/one of the many stocks on the ASX I simply ignore.
Travel stocks got whacked, as did Energy/Oil or anything high beta/growth.
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REIT's ex-dividend this time of year. A lot of uncertainty around their future so yields are more attractive than they otherwise would be.
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And a quick look at the changes among the short sold stocks:
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Luke Laretive
CEO & Investment Adviser
T +61 3 8639 1601 | M 0451 122 656 | lukel@senecafs.com.au
Level 2 Professional Chambers
120 Collins Street Melbourne VIC 3000
AFSL No. 492686 |
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