08 Aug Capital 19 Catch-Up

Weekly Index Movement

S&P500	+0.4%
Nasdaq	+2.0%
Aussie All Ords	+1.1%

After the best July in the post WWII era, stocks had a quiet week, which was fairly impressive in itself as the market shrugged off what could have been bad news. A tell-take sign the bulls are back in control.

We put this down to the falling Oil price that finished the week under $90 and should lower inflation.

We will find out if this is the case on Wednesday when CPI is released. Last month CPI came in at a sizzling hot +9.31%. We are expecting a lower figure this month around +8.5% which traders will like and we could well add to recent gains.

Two things caught our eye last week.

Firstly ISM data was stronger than expected and showed a continued collapse in the supplier delivery index which is a good proxy for global supply chain stress; similarly, the sentiment expressed by service providers regarding their customers’ inventories moved above 50 and continues to normalize in another sign that supply chains are getting put back together.

The second item was the equally red-hot employment figures on Friday. The US added +528,000 jobs last month versus expectations of +250k. Unemployment is down to 3.5% and is the lowest of the post-Pandemic Crisis period.

Wages were up +5.2% versus last year, the 7th straight month where US wage inflation has topped 5%.

This is a sign the US consumer might well have access to discretionary spending power leading into the holiday shopping season despite some significant cost increases elsewhere.

The downside of this strong number is it does give the Fed an invitation to pump interest rates again, but as they don’t meet until the end of September there is little need to concern yourself with this yet. There will be plenty more reports out before then to get a better idea of policy.

This is probably why the market took this huge number in its stride.

Turning to company profits and our friends at FactSet:

• 87% of SP500 companies have reported earnings for Q2
• 75% of those have beaten Wall Street Earnings Expectations.
• Q2 earnings are coming in at $56.82/share and with just a few left to report this should be very close to the final result. According to FactSet this is an all-time high record.
• Q3 estimates are now at $57.02/share after a slight reduction by analysts but companies are still expected to show growth in Q3
• Q4 estimates are $58.97/share
• 2023 estimates are now $244.93/share

If we take that $244.93/share and the long-term average PE ratio for the index of 17, we get an index price of 4163. Pretty much bang on where it closed on Friday.

This leads us to think, at this point, equities are fairly valued, even if they do appear to be short-term overbought.

For my whole career I’ve been looking for the perfect indicator to tell me when to buy stocks and I think I found it this week

All you need to do is wait for a recession and buy stocks then.

This is from Yardeni research

The shaded parts are recessions. If you had bought stocks every time the NBER decides the US is in a recession, you wouldn’t have to wait long for profits.

The NBER hasn’t yet announced a recession but now I’m hoping they do.

That bumper jobs number last week probably means they won’t for some time. It is possible they won’t call a recession, at the very least with jobs like that the timing of it has been pushed down the track, another reason stocks mainly ignored the news on Friday.

Time to check in on our new stock portfolio and see how it is going

	Buy Date	Buy Price	Current Price	Gain / Loss	Stop Loss
MSFT	1 Aug 22	277.82	282.91	+1.8%	240.00
TXN	1 Aug 22	177.94	184.30	+3.6%	145.00

A nice little start to kick things off.

Let’s add another one this week, and something a little different to add some diversification.

Buy Ardmore Shipping (ASC) with a stop at $6.40

In retaliation for having sanctions placed against it by Europe, Russia has cut its supply of gas to the continent to just 20%. That places Europe in a very dangerous situation with winter coming.

From an article in the Financial Times:

“The battle between Asia and Europe to lock in gas supplies is stepping up a gear, heightening the risks of a further surge in prices that would add fresh fuel to the cost of living crisis.

Japan and South Korea, the world’s second- and third-biggest importers of liquefied natural gas, are looking to secure supplies for the winter months and beyond, out of fear of being priced out later in the year as Europe’s demand increases, according to traders. The intensifying competition from Asia comes at a time when LNG, which is shipped across the sea in giant tankers, is in high demand as Europe attempts to replace natural gas delivered through pipelines from Russia.

Natural gas prices in Europe are already up almost five times from a year ago, which has sharply increased energy costs for consumers and dealt a painful blow to utility companies. “What we are seeing is a bit of a scramble to secure LNG cargoes through the end of this year and into 2023,” said the chief executive of an Asia-based gas company, adding that the move was earlier than usual. “

Ardmore Shipping Corp. engages in the ocean transportation of petroleum and chemical products in international trade through the ownership and operation of a fleet of tankers. 

Vessels capable of transporting oil and gas are a valuable asset right now as it takes around 10 years to build new ones and shipping rates are booming because of this new demand from Europe.

Ardmore announced profits on July 27th which came in at $1.42 versus a loss of -$0.37 last year.

Current year earnings are forecast to be $1.85 which means it is trading on a PE of just 4.6 representing deep value.

The longer Russia keeps the taps turned off, the longer Ardmore will be able to maintain these very high rates. There are next to no new players able to enter the market in the next 10 years which provides a good-sized moat around this business.

The risk is a deep global recession lowers demand for energy in Europe. But we place keeping warm high on the agenda of European priorities and see consumers cutting back in other areas before they stop heating their houses.

Warning

Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account.