Auto Draft Has the bell tolled for the bull run?

You may be aware that we recently teamed up with Percy Allen to launch Market Timing . Percy, the former head of the NSW Treasury, has spent many years working on a methodology and discipline around “timing markets”. He says that a negative yield curve is the most reliable pointer to when a bull market in shares is over or nearing its end. Given what’s going on now, does this mean it’s time to leave the share market or at least lighten up on shares? Percy says you need to ask certain questions first, which he answers in his first article for this Report today.

We are just finishing a website for Market Timing Australia and will shortly have a special subscription offer for Switzer Report readers.

Sincerely,

Peter Switzer

Inside this Issue 02 Has the bell tolled for the bull market? Has the bell tolled? by Percy Allan 05 Short sellers sold short by both sides of Federal politics! Short sellers sold short by Tony Featherstone 08 Buy, Hold, Sell – What the Brokers Say 4 downgrades, 1 upgrade Has the bell tolled for by Rudi Filapek-Vandyck 10 Questions of the Week the bull market? Franking credits by Percy Allan by Paul Rickard 02

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before Switzer Super Report is published by Switzer Financial Group Pty Ltd AFSL No. 286 531 acting, consider the appropriateness of the information, having regard to the Level 4, 10 Spring Street, Sydney, NSW, 2000 individual's objectives, financial situation and needs and, if necessary, seek T: 1300 794 893 F: (02) 9222 1456 appropriate professional advice. Has the bell tolled for the bull market? by Percy Allan

A negative yield curve is the most reliable pointer to The link between an inverted yield curve and an when a bull market in shares is over or nearing its economic recession is almost perfect. See the next end. A negative yield curve happens when shorter chart dating back to 1955. Only the negative yield term official interest rates fall below longer-term ones, curve of 1965 failed to foreshadow a recession. which is unusual.

On March 20, the USA registered its first negative yield curve since August 2006. It occurred not because short-term rates kept rising, but because medium and long-term rates fell further as the outlook for the global economy and corporate earnings soured.

What does this mean? Source: http://www.minackadvisors.com.au/ If the yield curve stays negative, it might suggest the US stock market either peaked last September or it is Time to exit the market? likely to do so before mid-2020. That’s based on the historic relationship of negative yield curves to market So does this mean it’s time to leave the share market peaks and economic recessions, shown in the table or at least lighten up on shares? A cursory view of below. history would say “yes” but there are questions to ask first.

1. Is the negative yield curve firmly established?

An examination of yield curve spreads shows that their present dip into negative territory is very shallow compared with previous occasions. Also, the closely watched (red) 10 year to 2-year Treasury bond spread in the previous chart is still positive. That suggests it’s too early to say that a negative yield curve is entrenched.

Source: https://www.marketwatch.com/story/this-time-an-inver ted-yield-curve-suggests-the-stock-market-has-alread y-peaked-some-analysts-say-2019-03-28

Thursday 11 April 2019 02 2. Is this time different because interest rates are low? Stock analysts are downgrading their expectations for first quarter earnings with the prospect that they could The President of the Federal Reserve Bank of Boston be lower than a year ago and stay so for two quarters says “yes” because previously the central bank lifted or more. The sugar hit from Trumps corporate tax cut the cash rate to fight inflation, which is not a threat is wearing off and slowing global trade and rising now. In his view, longer dated bond yields have fallen wages are pinching profit margins. because foreign investors are chasing US yields since those in Europe and Japan are negative. 4. Is it supported by technical indicators?

But a research paper by the Federal Reserve Bank of For the moment, the US stock market’s (red) 10-day San Francisco concluded that: trend line continues to stay ahead of its (blue) 30-day trend line, which is bullish. And its (green) 12-day “Periods with an inverted yield curve are reliably momentum gauge also remains positive. Market followed by economic slowdowns and almost always Timing Australia’s stock market traffic signal is still by a recession. While the current environment on green too. appears unique compared with recent economic history, statistical evidence suggests that the signal in the term spread is not diminished.”

3. Is it supported by other economic indicators?

The Leading Index for the US economy points to a slowing of growth, though credit creation, which is the engine of growth, still shows no sign of stalling.

5. Is the market top-heavy enough to collapse?

On many fundamentals. America’s stock market is heavily overvalued while other markets are not.

Here is a chart that projects future returns for 20

Thursday 11 April 2019 03 countries based on their existing stock market still on Green so there is no current signal to exit the capitalization to GDP ratios adjusted for historic stock market. Nevertheless, it would be prudent to experience. Note that Australia’s outlook is much review one’s overall investment portfolio to see if it’s brighter than America’s because our market is not as sufficiently defensive to cope with a bear market. overstretched. For thoughts on the last point, read chapter 7 of my book Crash Proof, Share Investing without the Roller-Coaster Ride. A free PDF copy can be downloaded from http://markettiming.biz/crash-proof/

Important warning & disclaimer: This content has been prepared without taking into account the investment objectives, financial situation or particular needs of any individual. It does not constitute personal advice. Consider the appropriateness of the information in regard to your own individual circumstances. Before acting on a Market Timing Australia buy or sell signal for a managed Source: investment scheme or financial product (for example, https://www.gurufocus.com/global-market-valuation.p an exchange traded fund), you should read the hp Product Disclosure Statement. You should also obtain your own financial or other relevant advice Hi-tech stocks make up a quarter of the value of about the appropriateness of Market all-American stocks compared with under 1% of Timing Australia’s trading signals. Australian stocks. Hence a market downturn in America could be felt less here as was the case with the dot.com bust of 2000, as illustrated below.

My conclusion

We should be alert to a bear market, though not yet alarmed. The negative yield curve needs to become deeper and wider to confirm that it’s more than a temporary blip.

Market Timing Australia’s share market traffic light is

Thursday 11 April 2019 04 Short sellers sold short by both sides of Federal politics! by Tony Featherstone

I follow short-selling data for two reasons. One, to company trading too far below its intrinsic value – and know which Australian companies are in the bears’ benefiting from short-sellers who got their idea wrong. sights, understand why and test their view against the bullish case. For clarity, the reported short position in Invocare was one of several factors that went into the idea. I would Two, to identify positions that look wrong, knowing have identified the stock for this Report regardless of that good company news will force short-sellers to the short position and the prospect of quick price buy back the stock to cover an open short position, or gains if short-sellers were forced to buy. close it out and book losses. Also, plenty of savvy short-sellers (often local or US For the uninitiated, short-selling involves the sale of a hedge funds) have good ideas. As analysts gush security the short-seller has borrowed. When about a high-flying stock, the shorts are identifying someone is “short” a stock, they expect its price to holes in its earnings, governance or management fall. For example, a trader borrows 1,000 shares, sells credibility. It pays to understand when and why there them at $30 and buys them back at $25, pocketing is a large short position. the difference. To my thinking, most stocks in the short-sellers table Suffice to say, short-selling has higher risks and suits deserve their spot. experienced traders. Retailers in short-sellers’ gaze Latest short-selling data shows poultry producer Ingham’s Group is the market’s most shorted stock. Unsurprisingly, retailers hold several spots in the top About 17% of Ingham’s stock is reported as a short 30 short positions. JB Hi-Fi is fifth, Super Retail is position, according to the Short Positions Report 13th, Myer Holdings is 19th (what a short that was), Table from the Australian Securities and Investments Holdings is 19th and Kogan.com is Commission. 23rd.

Galaxy Resources, Syrah Resources, JB Hi-Fi, Don’t get Gerry Harvey started on short-sellers; , NextDC, , , BWX and some have had Harvey Norman in their sights for Bellamy’s Australia round out the top 10 most years over perceived reporting or governance shorted stocks. shortcomings, and he detests them.

Funeral operator Invocare is the market’s 13th most The retail sector is an obvious target for short-sellers. shorted stock. I outlined a bullish view on Invocare for Retailing gloom abounds as commentators fear the the Switzer Report in January 2019 at $11.65. The house-price correction will cause consumers to feel stock rallied to almost $15 within four weeks of that less wealthy and more inclined to cut spending, so story, before easing to $14.93. Short-sellers were they can pay down debt. Other risks include squeezed, amplifying Invocare’s rally. Amazon’s effect on Australian retailers, growing online competition and rampant price discounting. Invocare was a good example of identifying a quality

Thursday 11 April 2019 05 I’m not as bearish on the retail outlook as most or their credit card. commentators. To be sure, it’s tough in retail and likely to get tougher, amid immense structure and At the same time, another rate cut this year will help cyclical pressure on the industry. Selling cars, pricey retailers and slow the property downturn. I’m not furniture and fashion in this market is hard work. suggesting a retail recovery is imminent. Far from it. Rather, there’s significant stimulus ahead in the next Watch for more retailers to go bust this year and for six months that will support JB Hi-Fi and select listed property trusts with lower-quality shopping retailers. centres to be pressured. A lot of retail space will become vacant as Big W and other key anchors exit Recent data supports this view. February retail trade underperforming stores. figures, released earlier this month, showed 3.17% year-on-year growth and were better than expected. The key question is how much of the retail pain is Don’t get too excited: seasonal factors and already in share prices and whether the market is “one-offs” partly explain the result, but talk of retail looking sufficiently forward, or focusing on current “Armageddon” looks overdone. Particularly with and past conditions. And if some retailers are better record-low interest rates and solid jobs growth. placed to weather the conditions, yet hurt by sector-wide sentiment. Amazon’s much-hyped arrival in Australia has so far not had the impact the bears feared. Only a fool Consider what’s ahead. The Federal election would discount the Amazon threat to local retailing, outcome in May will remove uncertainty and perhaps but the market was initially too bearish. give people a bit more confidence to spend. It will follow the New South Wales election in March and Again, I’m not discounting the effect of sluggish return of the Berejiklian government, which should wages growth, rising cost-of-living pressures and high help confidence. household debt on retail stocks. My hunch is most will underperform the market over the next 12 months Both sides of Federal politics have promised billions and only a handful of quality retailers will outperform. of dollars of tax cuts and handouts. Millions of workers who earn $48,000 to $90,000 a year will My view on JB Hi-Fi (JBH) benefit from a doubling of tax offset to up to $1,080-plus in their next tax return. A household with I struggle with JB Hi-Fi’s ranking as the market’s two people earning in that range will have a maximum fourth most shorted stock. Some bears I know have a $2,160 windfall in the next few months. On some short position in JB Hi-Fi based on an expected estimates, $3.5 billion in hit the economy in the next deterioration in retail and Amazon rapidly increasing few months from these tax cuts. its market share in electronic devices. The bears say JB Hi-Fi’s profit margins will fall as Amazon and local Economists estimate this return is equivalent to two player Kogan.com increase their market share. 25 basis-point interest-rate cuts from the Reserve Bank of Australia, such is the potential stimulus. The In fairness, the bears have been right on JB Hi-Fi in fiscal handout might encourage the RBA to remain on the past three years. From almost $30 in September hold with rates this year, although I expect at least 2016, JB Hi-Fi has fallen to $24.43. one cut, probably in November as the budget stimulus fades and the reality of falling house prices In my view, JB Hi-Fi is one of the retail sector’s and returns. stock market’s higher-quality mid-cap companies. It is superably leveraged to growth in electronic gadgets The “cash splash” should give retailers a decent and its in-store service and price-matching strategy boost in the next six months. History shows many have it well placed to take on Amazon’s threat. consumers spend their government handout on flat-screen TVs, gadgets and eating out – that is, on Against that, JB Hi-Fi’s Good Guys division could themselves as a treat rather than paying energy bills struggle if lower house prices affect white goods

Thursday 11 April 2019 06 demand. considering your objectives, financial situation or needs. Before acting on information in this article An average share-price target of $25.39, based on consider its appropriateness and accuracy, regarding the consensus of 12 broking firms, suggests JB Hi-Fi your objectives, financial situation and needs. Do is moderately undervalued at the current price. further research of your own and/or seek personal Macquarie Wealth Management has an outperform financial advice from a licensed adviser before recommendation and $28.80 12-month price target. making any financial or investment decisions based on this article. All prices and analysis at 9 April 2019. If Macquarie is correct, JB Hi-Fi could deliver a 12-month total shareholder return (including dividends) of just over 20%. I’m not as bullish as Macquarie and favour the consensus view that JB Hi-Fi is moderately undervalued.

My hunch is the market will get more optimistic on JB Hi-Fi this year as it focuses on consumers who have an extra $1,000 and the potential to spend some of that income on electronic devices.

Kevin’s Rudd $900 handout during the Global Financial Crisis found its way to the retail sector and, sadly, some went to casinos and poker machines. John Howard’s 2004 Baby Bonus and tax cuts showed how even modest government lump-sum cases can boost retail sales, in that case buying flat-screen TVs, popular at the time.

If the tax bonus eases headwinds towards JB Hi-Fi and other quality retailers in the second half of 2019, short-sellers may be forced to cover their positions. The well-run JB Hi-Fi has an excellent market position, good record and habit of proving the short-sellers wrong, over time.

Chart 1 JB Hi-Fi

Source: ASX

Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without

Thursday 11 April 2019 07 Buy, Hold, Sell – What the Brokers Say by Rudi Filapek-Vandyck

In the good books incremental improvement and low single-digit growth is considered the most likely outcome for housing 1. SENEX ENERGY (SXY) was upgraded to Hold starts in 2019. Home builders remain cautiously from Lighten by Ord Minnett optimistic entering the spring selling season. Meanwhile, Australian housing starts are estimated to Ord Minnett adjusts oil price forecasts for the March fall to around 150,000 in 2020. The broker quarter which leads to a lift in forecasts for the June downgrades CSR to Neutral from Outperform as the quarter to US$70/bbl, and US$65/bbl for the rally in the stock has rebalanced the risk/reward. remainder of 2019 and 2020. The broker upgrades Target is $3.45. Senex Energy to Hold from Lighten based on valuation. Target is raised to $0.40 from $0.34. This 3. DOMAIN HOLDINGS AUSTRALIA (DHG) was stock is not covered in-house by Ord Minnett. downgraded to Underperform from Neutral by Instead, the broker whitelabels research by JP Macquarie Morgan. Macquarie downgrades Domain to Underperform In the not-so-good books from Neutral. This follows the recent rally in the stock. The target is $2.70. The broker notes properties are 1. BLUESCOPE STEEL (BSL) was downgraded to taking longer to sell on average and the combination Equal-weight from Overweight by Morgan Stanley of school holidays, a late Easter and then Anzac Day will mean activity in April is likely to be very subdued. The recovery in steel prices at the beginning of 2019 Beyond this, the broker finds the market difficult to has stalled, Morgan Stanley observes. The broker still call. The main focus going forward will be execution envisages steel prices will support strong earnings in Victoria, in the broker’s view, and the company’s and cash flow but in the short term are unlikely to ability to leverage the broader platform of Nine trend higher. The broker adjusts estimates for Entertainment (NEC). earnings (EBIT) across FY19 and FY20, raising by 3.4% and downgrading by -7.1% respectively. One 4. (OSH) was downgraded to Hold event that may provide a positive catalyst is a formal from Buy by Ord Minnett announcement of a North Star expansion. The broker considers this highly likely to proceed as the returns Ord Minnett adjusts oil price forecasts for the March are potentially attractive. Rating is downgraded to quarter which leads to a lift in forecasts for the June Equal-weight from Overweight, and Morgan Stanley quarter to US$70/bbl, and US$65/bbl for the would look for steel price momentum to re-start remainder of 2019 and 2020. Based on valuation the before becoming a buyer again. Target is reduced to broker downgrades its recommendation on Oil $17 from $18. Industry view: Cautious. Search to Hold from Buy and raises the target to $8.65 from $8.60. The broker suggests the sector is 2. CSR (CSR) was downgraded to Neutral from now becoming fully valued. This stock is not covered Outperform by Macquarie in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan. Macquarie notes the US market is experiencing

Thursday 11 April 2019 08 The above was compiled from reports on FN Arena. The FNArena database tabulates the views of eight major Australian and international stock brokers: Citi, Credit Suisse, Deutsche Bank, Macquarie, Morgan Stanley, Morgans, Ord Minnett and UBS. Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.

Thursday 11 April 2019 09 Questions of the Week by Paul Rickard

Question 1: I was reading an article this morning at is fully franked, so franking credits are smsmagazine.com.au that stated: “ALP franking $21,428; policy doesn’t abandon self-funded retirees”. It $50,000 of other income from term deposits, states the policy “is not a scorched earth policy and unfranked dividends, overseas shares, exempted pensioners, those on government property etc; allowances, and those in accumulation phase within $25,000 concessional contributions. their superannuation”. So for an SMSF with $100,000 Total income for the SMSF of $146,428; in dividend income including say, $25,000 franking Tax at 15% is $21,964; credits would have a tax bill of $15,000. So would Less franking credits of $21,428; there be a refund of $10,000 simply because they are Net tax to pay of $536. in accumulation phase rather than pension phase? This fund will not be impacted by the ALP’s proposed Answer: You need to be careful about what you read change. because there’s a lot of misinformation on this subject. The article is partly correct in that the ALP Question 2: Will franking credits received by an exempted individual taxpayers in receipt of a SMSF from managed funds (e.g. Perpetual Industrial government benefit, and SMSFs where one member Share fund) be dealt with the same way as franking was in receipt of a government benefit as at 28 March credits from direct shares under the proposed 2018. The latter was estimated to be around 13,000 changes by Labour? SMSFs and was not prospective. The ALP did not exempt SMSFs in accumulation mode (the article is Answer: Yes. incorrect). However, most SMSFs in accumulation will not be affected (or not badly impacted) because: Question 3: I have an SMSF and I’m going to retire shortly. I also have investments in my own name. If 1. They are paying tax at 15% on all investment my income on my personal investments is under the income, including investments in term tax free threshold, will that still be tax free, noting I will deposits, overseas shares, property and also be collecting a pension from my SMSF?. unfranked shares; 2. They are paying tax at 15% on super Answer: If you are 60 years or over and are not over contributions; and your transfer balance cap, then your pension income 3. They will be able to use the franking credits to from your SMSF will not be assessable and you will offset the tax payable. be able to access the tax free threshold of $18,200 for other investment income. Remember, it isn’t a ban on franking credits – it’s a ban on the cash refund of excess franking credits. Question 4: In regard to the Woolworths share buyback, could you please advise on the relative Take this example for an SMSF in accumulation merits of participating for shareholders whose super mode: funds hold shares in excess of the $1.6 million cap ?

$50,000 dividend income, which we assume Answer: Please see my article here which looks at

Thursday 11 April 2019 10 the situation funds in pension or accumulation modes (0% and 15% tax rates). Assuming not segregated assets, you will need to apportion the buyback proceeds, depending on the amount over $1.6 million.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.

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