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Capital 19 Catch-Up

Weekly Index Movement

S&P500-4.6%
Nasdaq-4.6%
Aussie All Ords-2.7%

Down and down she goes, where she stops, nobody knows. Global equities are tanking as interest rates surge at what, in some cases are unprecedented rates.

Last week, Sweden’s central bank raised rates by a full 1%. The Bank of England raised by 0.5%. The Swiss central bank raised by 0.75% and Japan intervened in the foreign exchange market to buy Yen for the first time in 24 years to ease growing pressure on its currency.

Not to be outdone, Fed Chair Jerome “Hike it ’til you break it” Powell also increased rates by 75bps. That was widely predicted but it was his comments in the press conference that sent US stock markets into a tailspin.

Powell stated that the Fed expects rates to top out around 4.4% this year. Presently they are 3.25% so there are more large sized hikes coming. Next year he thinks rates will go to 4.6%.

That is very different to the market that was hoping for rates to drop at some point next year.

The reality is – rates will be higher for longer.

And so US Stock prices adjusted to that new reality by falling over 4%. They are now very close to the lows we saw in June.

The fact they are still above the June lows is very impressive. When I compare conditions to June, the picture looks worse for stocks. Earnings forecasts are 4% lower, 2yr rates are 4.20% vs 3.16% then and the USD is 8% stronger against the Euro, 12% against the pound and 8% against the yen.

Under these conditions, I would expect stock prices to be lower than June. But they aren’t. That either means they will be soon, or there is a reason I am missing.

Maybe it is because analysts are still forecasting earnings growth over the next 12 months. Regardless of what the economic backdrop is, US companies are generally managing to grow profits.

Take Costco (COST). Last week it reported a 15% jump in sales this quarter and an 8% increase in profits, despite costs also increasing 8%.

The same cannot be said of Europe. It is truly amazing what idiotic decisions they have made. Take Germany. Somebody had the wonderful idea of closing down their nuclear-generated power. Closing down coal-generated power and expecting their Gas powered stations to pick up the slack. All that gas comes from one place – Russia. After a series of stupid decisions, they thought they would make some more and slapped sanctions on their only source of power generation. So Russia turned the gas off.

The result? German PPI (that is wholesale costs for industries) was up 48.5% on last year. There is no way industry can absorb those cost increases. They will be forced to pass it on to consumers. 20% inflation is coming for Europe.

Get out of any European positions you have. The place is going to implode.

My mother country is just as bad mind you. The UK has a rampant inflation problem, just like every other country. So to battle that they have decided to pay the extra costs of retail electricity so their population doesn’t have to and have just lowered taxes by the largest amount since 1972.

If I was Andrew Bailey, Governor of the Bank of England, I’d just resign now. I’d send the keys to Liz Truss and say “here, you have a go at this then”. He is trying to fight inflation and the government has just caused more inflation. You cannot make this stuff up. This is stupidity on a level not seen before.

Sell all your GBP assets too.

The world has now decided we are going to have a global recession. I agree. It is going to happen. The only question is how bad will be it.

That is why your Australian stocks are very much in the red today. Our mining sector is highly reliant on global economic growth.

The problem we have is that inflation is here because of commodity price increases caused by sanctions against Russia. No amount of interest rates will fix this.

It is also here because employees got a taste of working from home and now will not return to the office. That is forcing companies to increase wages which in turn defeats the interest rate increases.

The S&P500 is presently 9% higher than its pre-pandemic high. Back in 2019 S&P earnings were $160. Forecasts are for $230 in 2023. Even if we have a bad recession in 2023 and earnings fall 25%, that still puts them around $170.

So, S&P stocks are getting to the point where they are factoring in a recession. It means there shouldn’t be too much more downside. Yes, sentiment will cause us to overshoot the target, but it will be short-lived.

When I look at individual stocks now, I can see many that I want to buy. It might be difficult watching your portfolio fall at present. But it won’t continue to fall forever. Stocks will find a level where they discount all the bad news and once that happens, a long-term low will be in place and the gains that happen next will be large.

CatchUp Stock Tips

Unfortunately, Microsoft (MSFT) hit our stop last week so has been removed from the list. This is an amazing company so we will see if we get an opportunity to buy it lower in coming weeks. It is a similar story for Williams Companies (WMB) which has fallen along with Oil.

Buy DateBuy PriceCurrent PriceGain / LossStop Loss
TXN1 Aug 22177.94161.29-9.3%145.00
ASC8 Aug 228.529.15+7.4%6.40
CDNS15 Aug 22188.83160.97-14.8%130.00
UNH22 Aug 22541.39513.61-5.1%450.00
GMS5 Sep 226.506.64+2.2%4.00
AAPL12 Sep 22159.59150.43-5.7%130.00
CRK19 Sep 2218.2216.22-11.0%12.00

Buy A J Lucas (AJL.AX) with a stop at $0.09

We first brought your attention to Aussie company A J Lucas back in April of this year when it was around 6.8 cents.

Our theory back then was you could own the company for the value of its assets but get a free hit at the shale assets it owns in the UK.

They had previously cancelled all plans to expand exploration in their Lancashire, Bowland asset, when the UK banned fracking.

Despite this, AJ Lucas held onto the licenses.

Well the UK government has done another backflip and decided fracking is ok now that half their population can’t afford gas to heat their homes going into winter.

The share price initially spiked to over 20 cents but has since come back to a much more reasonable 13 cents giving us a good second entry point for those that missed it the first time around.

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.