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Capital 19 Catch-Up

Weekly Index Movement

S&P500+3.6%
Nasdaq+4.0%
Aussie All Ords+1.2%

After three straight weeks of losses, US stock markets put in a positive week which makes us ask the question “why did stocks find their feet last week and what does this portend for the rest of the month?”

As you can see in the chart below, the peak in mid-August came right at the top of the S&P’s downtrend channel (which was also the 200-DMA).  The recent low made on Tuesday represents a 2nd “higher low” since mid-June, so now bulls will be looking for a “higher high” to be made with a takeout of the mid-August highs.

We are now watching the August highs, if the market takes this out then it would signal a full recovery is on the cards. But, should this rally fail and we take out the lows of last week, then the next stop would be the June lows.

Each of those levels represents pretty big moves from where the index is currently trading, so it might take a while for this to resolve.

Since the markets have been sensitive to changes in interest rates all year, one might think the gains last week were due to lower yields, but that is not the case.

The US 2Yr yield rose from 3.40% on September 2nd to 3.56% on Friday, a new post-pandemic crisis high.

But what did support markets last week was the fall in Oil, down to US$83 a barrel. This is a significant drop from the $120 a barrel highs we saw in June.

We have been saying to keep an eye on oil and we believe it is this drop that has caused stocks to rally.

But we are not convinced that the oil story is over just yet. Bear with me here while we do some maths……

According to the University of Calgary, one barrel of oil contains 1.7MWh of energy. That 1.7MWh costs US$83.

Natural Gas in Europe is priced in Euro/MWh and is presently EUR207 per MWh.

The Euro is trading pretty much at par with the USD

So what makes more sense to you, burn natural gas at a cost of $352 to get 1.7MWh of energy or burn 1 barrel of oil at a cost of $83 to get the same result?

Now, this isn’t strictly correct because you would need to refine the oil into heating oil first, but with such a disparity in pricing it has got to make more sense to use oil.

Surely it can only be a matter of time before the residents in Europe get fed up with being woke and put being warm as a more important need.

They are going into Winter and they will require gas for energy production. So the eurocrats had an amazing idea to limit the price of gas. They placed a price cap on Russian gas. That upset Putin who needs to fund his war so in retaliation he cut off their entire gas supply.

That caused gas prices to rally 64% in a single day.

So much for reducing the cost.

Europe is a complete basket case and we recommend you avoid all investments there.

Mind you, Britain doesn’t seem much better.

Their new prime minister, Liz Truss, just enacted a new program where energy prices to retail will be capped. The energy producers will be allowed to continue to sell at the same margins, and the government will fund the difference.

Already, the suppliers to those producers are planning on jacking up their prices because the government is going to cover any overs.

It really is an astoundingly stupid move. At a time when inflation is at 10% and the central bank is struggling to contain it, the government decides to print more money and effectively pump it into the system.

No doubt voters will like Liz for this move. At least for now, but wait until the impact is 10% interest rates and we will see what they have to say then.

Back to the oil price. With gas at these levels, $80 oil will not last. At some point they will switch to using more oil to save money.

Load up on oil stocks now while they are cheap.

Along this theme here is another idea for you.

Buy International Seaways (INSW). They own oil and gas tankers that will be required to transport the gas that Russia is no longer supplying. It is currently trading on a forward PE of 6 and analysts are expecting sales growth to be 166% higher this year than last.

Moving on from the mess in Europe to the surprising health of the US economy.

The US has posted 2 quarters of negative GDP growth (-1.5% in Q1 and -0.6% in Q2)

Some market watchers would say they are in recession. But the US does not agree because they have a different definition. Regardless of what definition you use, it now looks like Q3 will post a positive GDP figure.

The Atlanta Fed GDPNow model is saying GDP will come in at +1.3% in Q3. This model isn’t too far off usually.

If this does happen then the US economy will be expanding again. That will hurt the bears who believe a recession is coming.

To avoid a recession we need inflation down and another Fed member is on the forecasting bandwagon for this.

The Cleveland Fed has their Inflation NowCast.

It is forecasting a modest drop in inflation in August. The July figure was +8.5% and this model is forecasting August to be +8.2%.

So we have GDP heading in the right direction, inflation heading in the right direction, what about company profits?

The first two quarters of 2022 saw the S&P500 earn $54.02/share (Q1) and $56.87/shares (Q2). This averages to $55.45/share which is almost exactly what the S&P earned in Q4 2021 ($55.38/share). S&P earnings power has therefore been very stable for almost a year and at record/near record levels.

The latest estimate for Q3 is $56.19/share. That would be 1.2% less than Q2, but they also expect Q4 to be $58.63/share for a full-year result of $225.71. They also expect 2023 to be 243.73/share.

Add company profits going in the right direction to our list.

Finally for this week, let’s talk about productivity. Our theory is employees are much less productive at home than the office on average. Yes, there is a whole new blooming industry of monitoring systems for remote workers. But the reason workers like working from home is because they don’t do much of the “working” bit.

Offices have managers and multiple levels of structure to keep an eye on employees. Take this away and you reduce productivity per employee. To keep business travelling at the same level you, therefore, need more remote workers than office workers. This helps explain why the unemployment level is so low.

But, significantly, we have seen comments about the New York metro being crowded since their labour day holiday.

TomTom puts out congestion data and it showed that last week, traffic congestion was higher than 2019 and 2021 levels. This validates the return to work idea and productivity will follow. Then companies will be able to better monitor output, cut the deadwood, raise profitability and ease the Feds inflation concerns at the same time.

Whilst it is easy to listen to the negative stories about coming recessions in the media. We find it hard to agree, certainly for the foreseeable future. Maybe this data changes, but right now everything is improving, which is why stock prices are doing the same.

CatchUp Stock Tips

If you have been buying these stocks you would have received a dividend of $0.425 from Willams Companies and $1.65 from United Health last week.

We saw an interesting article this week about more offshore renewable energy plans. Japan has built a huge turbine and will anchor it to the floor of the ocean. It will then use ocean currents to generate energy. This is just another example of countries looking to their territorial waters for energy generation. Of course, all these projects require special ships to get them up and running and this is another reason that validates our GMS theory for liftboats.

Buy DateBuy PriceCurrent PriceGain / LossStop Loss
MSFT1 Aug 22277.82264.46-4.8%240.00
TXN1 Aug 22177.94170.74-4.0%145.00
ASC8 Aug 228.529.85+15.6%6.40
CDNS15 Aug 22188.83174.68-7.5%130.00
UNH22 Aug 22541.39524.34-3.1%450.00
WMB29 Aug 2235.0032.77-6.4%29.50
GMS5 Sep 226.506.38-1.8%4.00

Buy Apple (AAPL) with a stop at $130

Apple needs no introduction. We have been planning on adding it to our list for some time and have been waiting on an attractive price, but now fear this is as good as we are going to get.

According to Counterpoint Research, the Apple iPhone now makes up 50% of the total US smartphone market and 16% of the world market.

Experts point to a number of reasons why Apple’s flagship device outperforms in the U.S. compared to other markets.

  • Apple has the highest brand loyalty of any major smartphone maker. 9 in 10 U.S. iPhone users plan to purchase an iPhone as their next device.
  • iPhones appear to depreciate at a slower rate than other devices
  • Broadly speaking, consumers in the U.S. have less price sensitivity than consumers in many other countries.
  • Apple has been vocal in its messaging about protecting user privacy and data, and that message appears to be resonating with consumers.

This last point is worth digging into in more detail.

Personal data protection and cybersecurity have become mainstream concerns in recent years, and Apple has made security a priority.

Of course, security breaches can and do occur, regardless of what device is being used. That said, a recent survey by Beyond Identity indicates that iPhone users were less likely to be victims of security breaches, and were more likely to recover data in the event of a breach.

Simply put: whether or not iPhone is more secure than other devices, Apple has used its marketing muscle to sway public opinion at a time when Americans are focused on privacy. And based on these latest installed user base numbers, that strategy appears to be paying off.

Apple currently trades on a PE of 26, which although a bit rich, we can understand for a company of this quality.

The entire ecosystem locks users in and enables Apple to resell them higher margin products on a recurring basis.

It is one of the best business models in the world and deserves to be in everyone’s portfolio

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.

Disclaimer: Capital 19 Pty Ltd ABN 17 124 264 366 AFSL 441891 (‘Capital 19’) believes the information contained is reliable, however, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. This communication is for general information only and was prepared for multiple distributions and does not take account of the specific investment objectives of individual recipients and it may not be appropriate in all circumstances. Persons relying on this information should do so considering their specific investment objectives and financial situations. Any person considering action based on this communication must seek individual advice relevant to their circumstances and investment objectives. Subject to any liability which cannot be excluded under the relevant laws. Any opinions or forecasts reflect the judgment and assumptions of Capital 19 and its representatives based on information at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future. The investment manager certifies that all the views expressed in this document accurately reflect their views about the companies and securities referred to in this document and that their remuneration is not directly or indirectly related to the views. Capital 19, its directors, representatives, employees or related parties may have an interest in any of the companies and securities in this document and may earn revenue from the sale or purchase of any financial product referred to in this document or any advice. Past performance is not a reliable indicator of future performance. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this document is prohibited without obtaining prior written permission from Capital 19.