15 Aug Capital 19 Catch-Up
Weekly Index Movement
|Aussie All Ords
After a strong jobs report last Friday reignited fears of an overheating economy, markets were edgy heading into a busy week for inflation data. It doesn’t happen that often, but bulls hit the inflation superfecta. It started with Monday’s release of the July Survey of Consumer Expectations which showed a continued decline in inflation expectations. On Wednesday, the big bad CPI report for July was released and that came in lower than expected for a change. The weaker than expected CPI was followed by a weaker PPI Thursday and then a weaker than expected report on Import Prices Friday. After months where it seemed as though every inflation report was coming in hot, this week’s data on prices was cold, cold, cold, and cold. The heatwave has been broken! Markets responded positively to the news with the S&P 500 finishing the week up over 3%.
If, and it’s still an if, inflation really has peaked, stocks do well during periods of falling inflation. While investors were excited about the news, Fed officials took a more sober view. Four different Fed officials were on the tape between Wednesday’s CPI and Friday, and they all stressed the fact that inflation is nowhere even close to under control. So, why the positive reaction from the market? Well, have you looked at the Fed’s record of forecasting inflation or the economy in recent years?
Speaking of the economy, most of this week’s data was all inflation related, but overall, we’ve started to see a slight improvement in the pace that economic indicators come in relative to expectations. We’re still seeing more reports miss than beat estimates, but economists have started to ratchet down expectations to a reasonable degree.
The main inflation report for CPI came in at +8.5% (exactly where we said it would). The month before was +9.1% and markets took this to mean inflation has peaked and is now heading down.
It is obvious inflation has peaked because oil has peaked. After getting as high as $120/barrel it is now down to $91/barrel.
For the American consumer, this means a gallon petrol has fallen from $5 to under $4. They will notice this and it will change sentiment. No longer will they worry about how they are going to afford new purchases and is why the stock market got so excited last week.
If a bear market is defined as a 20% fall from highs, then surely a bull market is a 20% gain from lows?
That idea puts the Nasdaq index back into a bull market after the June 16th lows (+22% to Friday’s close).
BTIG technical strategist Jonathan Krinsky says, no bear market rally since 1950 has cut its losses in half and then returned to its lows. In other words, history says the bottom is in.
If you are sitting on the sidelines it is time to start adding exposure. Missing good up days like we had last week can have a profound impact on your long-term results.
The Australian market was much more muted with small gains for the week.
BHP made a play for Oz Minerals offering $8.1billion for them. We are in two minds with BHP.
The bull case is – this is a world-class miner that is positioning itself for the electric vehicle future and divesting assets that do not align with this strategy. Earlier this year we were expecting hefty dividends from BHP as it booked excess profits from high commodity prices. But now our expectation has changed.
In getting rid of its oil assets to Woodside it has lost a major cash contributor (In Woodside’s quarterly report they owned the new assets for just one of the three months yet that one month doubled their quarterly profit).
Now BHP is on the acquisition trail it is likely to keep hold of cash to buy new assets. We suspect they will up their bid for Oz Minerals after the Oz board rejected the offer.
The bear case says this concentration into one sector (electric vehicles) places all eggs in one basket and will make the stock more volatile. But it will make BHP shares more appealing to the ESG crowd and big superfunds.
The expected reduction in dividend might also find it loses interest with retail investors searching for better yields.
BHP is difficult to value because of the volatility in commodity prices and changes to their business. We suspect as a 5+ year play on electric vehicles it will turn out well, just don’t expect big dividends along the way.
Talking of dividends, CBA announced its final dividend of $2.10 bringing the full-year dividend to $3.75.
As you know we don’t like the Aussie banks at these prices. At $100 and adding the franking credits in you get a return of 5% on CBA.
If you want yield you could invest in a term deposit at 3.5% with a guaranteed result.
Quite why anyone would buy CBA for an unknown result and a 5% yield is beyond us.
That being said, it did manage to increase its cash profit by 11% this year, mainly driven by growing market share. Well done CBA.
Of course, the emerging risk is the likelihood of bad debts in future.
If you believe Australia is heading for a recession, best to sell your CBA now.
For the week ahead – express a bit of caution. Markets are short-term overbought on many measures and one of our favourite turning point indicators, the VIX, just flashed a short-term high warning.
If we do get any kind of dip, it will be a great opportunity to pick up those stocks you should have bought in July.
CatchUp Stock Tips
Things have been going very well with our stock tips lately. Our tip from last week, ASC, was up almost 13% last week alone and our prior tips added to their gains also.
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|1 Aug 22
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|8 Aug 22
US President Joe Biden on Tuesday signed into law a bill providing $52.7bn in subsidies for US semiconductor manufacturers and research, in a landmark effort to boost United States competition with China’s scientific and technology initiatives.
There are lots of US semiconductor manufacturers such as AMD (AMD), Micron (MU), Qualcomm (QCOM) and Marvell (MRVL).
We like to think outside the box and so to take advantage of the growing trend of on-shore semiconductor manufacturing…..
Buy Cadence Design Systems (CDNS) with a stop at $130
Cadence Design Systems makes software used by the semiconductor industry to design microprocessors, and help with software integration. The business is extremely profitable from the ground up. Current gross margins are 90%. Operating margins are 28%. And free cash flow is up 77% since 2020.
The San Jose, Calif.-based firm is capably led by Lip-Bu Tan, a graduate of the nuclear engineering program at MIT. Tan is also the founder of Walden International, a venture capital firm that makes early-stage investments in chip design firms, a facility that serves Cadence well. Relationship Science, a Silicon Valley analytics firm, has consistently named Tan among the most connected executive in technology.
Cadence touches every part of the semiconductor sector, small and large. The company builds the software those businesses need to scale new processes, and to integrate with ever-evolving software applications.
Its software will be crucial as semiconductor manufacturing in the US grows and with margins at 90%, nearly all of every new sale drops straight to the bottom line.
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.