David Novac – Trading Day – 12 Jan 2017

  • January 11, 2017
  • Kate Sheehan

David Novac on Sky BusinessDavid Novac, Guest Host on Trading Day, Sky Business, Channel 602

Please join David for his insights on the stock market, share investing, companies and local & global financial trends. Listen to David explain about US margin debt to Equity and the overlooked threat to share prices.

Please see videos below:

Trading Day – 12 Jan 2017

 Video 1 of 5  Video 2 of 5
 Video 3 of 5  Video 4 of 5
 Video 5 of 5 –

More reading:  Time Bomb in the Markets

More reading:  Toppy US Market is a Concern

Video Transcripts below

Video Transcript: Trading Day – 12 Jan 2017

Video 1

Host: And now let’s get back to the market, a quick check on how we are faring today. It is a positive session, up three tenths of a percent, 5,788 at the moment. And we mentioned there, materials and energy stock, really doing a lot of the heavy lifting.

Healthcare at the other end of the scale there today. Let’s bring in my guest host, Martin Crabb from Shaw and Partners, and David Novac from Wealthwise Education. David, just to begin with you, a thought on the broader session today, it’s probably no surprise seeing healthcare under pressure, given those comments from Donald Trump overnight.

David Novac: Yeah, absolutely. I was surprised actually to see the rally last night in the US equity market and the Dow getting back to that near 20,000 level, it hasn’t quite closed above it, but, looks like the bulls want to push it above there. But look, there’s no guidance, I’m looking at the Aussie market and seeing us have this stellar run from the lows pre-Trump election result.

And you know, we’ve seen amazing rally, I mean I went away, just got back this week from the Christmas break, I left a week before Christmas, and you know, we’ve rallied what, 250 points in that straight line, ten weeks.

So, I think there’s time to take some profits in this market. Particularly in the financial sector. I think the banks have had a pretty stellar run. And the weekly chart on the ASX 200 is giving me a reversal signal, if it closes down here by tomorrow. That’s what they call a candlestick reversal pattern shooting star, is that what they call.

Host: And I’m sure reporting season is going to be pretty important, coming up in February. Given the big rise that we’ve seen, we’re going to need to see that earnings growth coming through to justify these valuations.

Martin Crabb: Yeah, I think so. I think 5,800 feels about right for the market, and like 20,000 for the Dow kinda feels about right. So, the question is, what’s the catalyst for the thing to move high. I mean obviously, everyone’s come back, the start of FY17, and the mirror image of FY16, this time last year, we were, you know, slashing our wrists, and the world was going to end, and energy was collapsing, and you know, Moody’s downgraded everything, and this year it’s all, your outlook’s very positive. So, reading everyone’s outlook statements and what they see for the year ahead is all very positive. So, not surprising we’ve seen some buying in this market.

But it does kind of feel, most professional investors are saying, well this is looking a bit toppy, in valuation terms. If we don’t get these results, as you said Leanne, in reporting season, then we might have a few, a few minefields so to speak.

Host: Just speaking of Donald Trump and his comments. His inauguration coming up on the 20th of January, so that is going to be so key for the market. We spoke a little earlier with Howard Silverblatt from S&P Dow Jones Indices about the exiting of Obama and the incoming president elect, Donald Trump. Let’s take a quick listen.

[00:02:40 excerpt starts]

Howard Silverblatt: Mr Obama obviously came in at a low point, he is at. Mr Trump, the bar is a lot higher, if he wants to stimulate the economy, which is again, we spoke about the six-year old bull market, he’s going to have to do domestic spending, which is going to cost a lot, create inflation, but could do something for jobs, and the quality of jobs.

The consumer confidence in there, definitely has increased since the election. Even though the election was such a splitting point, within the United States. The idea that he’s going to spend more, and that there will be more jobs and more US domestic has definitely spread throughout the United States.

Whether that’s true or not, we’re going to find out pretty quickly.

[00:03:24 excerpt ends]

Host: Now that is a good point, I think. Look, the markets had a big, big rise since we saw Obama stepping in in 2009. The question is, whether that will continue. Obviously, Donald Trump will be stepping in, when the market is on the up. The economy’s starting to improve. So, he’s stepping in when things are already looking pretty good.

How do you think the market will fare, once he comes into administration?

Martin Crabb: Yeah, it’s the $64 question isn’t it? So, is all the stuff he said pre-election actually going to happen, or is most of it going to get chucked in the bin? Like the wall, and the fight with China etc. So, I think the issue here is, he said last night he wanted to create more jobs than anyone else had as president. So, he’s got his work cut out there, because, during the Obama administration, 9 million jobs were created.

And that would mean every unemployed American gets a job. Right, so that’s probably not going to happen. But, job creation is certainly on the agenda, and infrastructure spending. So, that was absent last night, a few people got carried away to the negative side, saying he didn’t mention any specific, you know, infrastructure spending. So, we would have liked to see that last night.

He obviously stuck the bit into healthcare, but he didn’t talk specifically about, right, I’m going to spend money on the economy, which is what we’re all waiting to see.

Host: Yeah, exactly right. There’s also much uncertainty, as we know, markets don’t like that uncertainty, so look, it’s going to be interesting times ahead. We’re going to bring up a couple of interesting charts in fact, from you David, and this is regarding the levels of margin debt, against US equities.

Just talk us through, what some of these charts are telling us.

David Novac: Yeah, well this one, the first one you see there, you can see the red line is the margin debt. In other words, you know I could go and place $10,000 investing, invest that in the US equity market online, and immediately I’ll get another 10,000 to buy shares. So, yeah, I can buy $20,000 worth of the shares for 10,000 basically. That’s 50% margin.

So, you can see there, there’s a correlation to when a market’s, when we’re in a bull run, especially when interest rates are so low, and there’s free money. A lot of people borrow money, and hence you can see the correlation there, the peak, that first peak was 2000 and the second peak is 2007.

Now you can see where it is now, and the margin level of margin debt, perfectly correlated. And if you just look at the second chart, that’s an interesting one as well, if we could bring that one up it’ll show you the growth of, this one here.

So, you can see the red there, that’s the level of margin debt at the peak of 2000, the first one. And then as the market corrected, you can see everyone moved to cash, which is the green, and then you saw the 2007, which wasn’t quite as high as 2000, surprisingly. For the GFC. And then everyone moved into cash. And now look at the size of the margin debt for equities.

So, you know, people talk about fundamentals, but what’s driving this market, as you see, is a lot of debt, on margin. And if I can borrow free money, and with the SMP up 35% since this time last year, and I can borrow it for next to nothing, I mean, I’m doing very well, you know, that’s free money. And free profit.

So, you’ve got to be very careful looking at those charts, is that that correlation, how much higher it could go, is anybody’s guess. But this is a concern, especially if we’re going to have high interest rates and inflation. And any surprises that come out of the blue, there’ll be a lot of unwinding of that debt.

And that’s where, you know, the bulls are in control right now, the bears have stepped aside, but as soon as there’s any sign of selling or panic, I tell you what, watch out.

Host: Expert spiral, given…

David Novac: It’s just a warning that I saw, just read when I got back, and that was from 1995 up to November, that’s from the New York Stock Exchange data, of margin debt.

Host: Is that something that concerns you, just looking at some of those charts? It’s a bit of a scary situation.

Martin Crabb: Yeah, look. Certainly, not an issue in Australia. Margin lending is almost kind of dead right? I mean it was a pretty big product pre-GFC, but a lot of people got wiped out. So margin lending hasn’t really been too much of an issue.

I mean, I think it’s natural for the market, as the market moves up, the amount of margin debt moves up as well because people have more equity, therefore they can borrow more money. So, but, you know, as David said, we’re at a cyclical high on that measure, and whenever it gets this high, the market runs into a bit of trouble.

So, it’s another warning sign, or another risk factor rather than a warning sign, it’s a risk factor.

David Novac: I think also in our market what’s been replaced by margin debt is CFDs. Contracts for difference. You know, where I can put 10,000 into a CFD account with CMC or any of the other CFD providers. And buy $200,000 worth of BHP stock, or sell $200,000 worth of it.

And I think that’s certainly driving our market as well, I think there’s a lot of CFD, I’d love to know from CMC Markets, one of those big CFD providers, what the level of the CFDs that exposure, is in the market, in terms of margin.

That would be a very interesting statistic, I would love to know that number.

Host: Well next time we talk to them, we might get into some of that detail. Let’s just move on for a moment, you were seeing some breaking news on your screen, you can see it there at the moment. BC Iron, we are just watching that stock, it’s actually up 22.9%, 21.5c at the moment. And we’ve just seen a little bit of news coming from the company. It’s Iron Valley EBITDA has totalled $8.1 million in the December quarter. It shipments, 2.1 million tons of iron ore from the Iron Valley in the December quarter, and its earnings guidance in the range of 18 million to 25 million, that’s been upped from the 6 million to 16 million, that was the previous guidance.

So, quite a big revision, I guess, in their guidance there, so off the back of that we’re seeing a big, big rise in share price.

Now Fonterra, also coming out with some news around their milk, their December New Zealand milk collection is down 5% on year, their milk production decreasing in Australia and Europe. The US has maintained growth though.

So, over the six months through to December, their milk collection is down 7.6%, so watching Fonterra there. Now this obviously coming into the Bellamy’s story, we are still watching those shares. With a lot of interest there. You can see all of those stocks on your screen.

Bellamy’s is down 13.6%. Following on it from the big, big fall we saw yesterday A2 milk also under some pressure, but Fonterra is up 1.7% at the moment. Couple of broker moves there today, Ord Minnett is taking the knife to Bellamy’s, slashing its price target on the stock by 49%.

Now the infant formula player flagged FY17 earnings as low as $22 million, that was well below the $47.6 million that Ord Minnett had been expecting. The broker sees the risk profile as too great to justify investment, citing significant finished goods inventory on hand, flat sales for three halves expected. Lower longer term gross margins than originally forecast, a weaker balance sheet, and a channel strategy in need of overhaul.

Morgans meantime saying that it has little confidence in the short term forecasts, given a number of uncertainties. Saying the turnaround could take maybe as long as 12 to 18 months. Morgans maintaining its hold call with a price tag it slashed to $4.75 versus the $7.55 that we were hearing a little earlier.

Now just a thought from my panel on Bellamy’s, obviously a big update yesterday, there’s been a huge fall in the share price since then. What did you make of it all? Martin?

Martin Crabb: Oh well it’s been a disaster, unmitigated disaster from a whole bunch of perspectives, obviously, the way the company gave guidance, the amount of detail that they gave. You know, what’s actually, the way the company’s being managed, the way they’ve managed their inventory, the way they’ve read the tea leaves in terms of demand dynamics. They seem to have mismanaged all of that.

Obviously there’s been a board spill. There’s still people in the background trying to change the board even more. But yesterday’s release of information, and there was quite a lot about written this in the media overnight as well. They way that was handled by the exchange and the company yesterday was terrible. People had no time to digest it, so there was a huge volatility in the share price.

So, I think it moved $2 in 20 minutes or something. So the brokers that cover the stock, I’m sure it’s not one of those, but the brokers that do cover the stock have kind of thrown the baby out now, and have said, you know, what did Ord say, not investment grade, now a $3.75 price target. And there’s no confidence about the forecast that they have. They just, they really don’t know. And whether the company can manage its inventory. And Fonterra have some lien over the assets, so what’s going to happen with that?

It really is, it’s become an extremely high risk stock, almost a speculative stock.

Host: And there was very little detail about that agreement, I mean they’d amended that agreement with Fonterra. But I was listening to a couple of, sort of brokers’ analyses saying, that they were almost dodging a lot of questions in that conference yesterday, particularly around the Fonterra agreement.

Martin Crabb: Yeah, that’s right, so I think it’s one of those things that, you know, someone’s delved into it, and brought it to light, and I’m not sure if the company’s a hundred percent across what’s going on either.

Host: What do you make of all of it, David?

David Novac: Very same comments as Martin. I think this was the darling stock the last year of the market, I mean it went from $1 up to $16, now here we are back to $4, almost $4.50. So it’s an avoid for me right now, until the dust settles. But yeah, there’s a bit of work to bring back, direct the board to have credibility again in shareholders. So, I think that’s going to take some time,

Host: Alright, let’s just quickly check in on some more breaking news coming up, with regards to Woolworths. Australia’s competition regulator the ACCC saying that it will review BP’s acquisition of Woolworths’ petrol stations. We are just watching Woolies shares at the moment.

They’re relatively flat, $24.39, just seeing that come out from the ICCC. Time for a break though on that note, when we return, confidence in residential and commercial property at a high, despite high interest rates expected for 2017, we’ll have more details with you, Property Council CEO, Ken Morrison on next.

Video 2

Announcer: This is Trading Day

Host: Hello and a warm welcome to Trading Day live, where we are taking your calls 1300 30 34 35 is the number, if you have any question about what is happening on the market today.

Now this is what we were watching this hour, the ASX 200 is still continuing its rise high up, three tenths of a percent at the moment, helped by energy and material stocks. Speaking of, in the materials space, it is on the rise as iron ore and steel futures hit fresh highs. The sector up point seven of a percent.

Bellamy’s shares are extending yesterday’s losses though, those shares are currently sinking over 15%. Also, making news this hour, the competition watchdog is reviewing BP’s $1.8 million takeover of Woolworths’ petrol stations.

Now joining me in the studio are my guest hosts, Martin Crabb from Shaw and Partners, and David Novac from Wealthwise Education. Let’s also bring in Ben Le Brun who joins us live from OptionsXpress for a thought from him on the broader market today.

Ben, great to see you there, thanks so much for joining us. Now just a thought from you, obviously, energy stocks, materials still underpinning this market. I guess that positive sentiment still flowing through. What are you making of these moves?

Ben Le Brun: – in 2017 thus far. So, I mean, all in all that’s pretty good, and obviously got through the Trump Q&A last night without too many blemishes. Even though there was quite a bit of disappointment I think. So yeah, interesting material sector is certainly up, because we did see some push-pull dynamics in commodity price action last night.

And of course, as I said, that sentiment of the fact that Donald Trump might have disappointed a little bit, but of course we did see an unwind in the US Dollar as well, so I guess some of those moves in the commodity space were made even more interesting by the fact that generally it’s an inverse play on the US Dollar.

But materials having a good day, the energy sector having a good day. The financials have bounced back after two in a row to the downside. So, it’s only a few sectors that are in negative territory. Unsurprisingly healthcare, which obviously again that was a bit of a play on what Donald Trump had to see on some of those healthcare and pharmaceutical companies last night.

Consumer staples, that’s quite heavily weighted there in negative territory. Rents and utilities, everything else in positive, but sort of, the more heavily weighted sectors are in positive territory at the moment, which is why we’re making some reasonable ground at this stage.

We baulked at 5,800, we went up shortly after the open and challenged that number, I think we ended up, I think the high point of the day was about two points off 5,800 points. I still think that you know, we’re going to need to see some of these earnings coming out of the US. In particular in their financials, but we won’t have to wait too long, inside 48 hours, Friday night, our time they’ll start to trickle in, that’s going to have a big impact on the Dow, can it get to 20,000 points, I’ve still got the jury out on that, to be honest. And obviously, the flow through here is the sentiment for Australia, is it going to have a big, big impact. But obviously, we’re not going to have clarity on that until Monday.

So, I think it’s probably going to be smoke and mirrors until then, until some of these US earnings start to trickle through. We’ve got our own confession season here at the moment, but outside of Bellamy’s it’s been relatively quiet thus far, so I guess that does set us up quite nicely for our own domestic earning season. But of course, that doesn’t happen till February.

Host: I just might get a thought from my panel here, David, 5,788 for the ASX 200 index. We were talking with Chris Conway a little earlier, he was saying we could get to 6,000 points, some of that based off another Trump bump, I guess post his inauguration.

David Novac: I’m not that optimistic, in the short term, that’s for sure. I think we’re due for a pullback here. Maybe it could run up to that 6,000, but just, I think it’s a bit of a stretch myself at this stage. I think the banks have had such a big run, you know 20% plus, straight line, that’s due for some profit taking here. Especially after reporting season, they’ll go ex-dividend.

So, I think, you know, you can get a hundred, two hundred point pullback in the index, and then maybe rally back, test the 5,800 again, if it breaks through that, well then the traders and the bulls will push it up, maybe it could get to 6,000.

I’m not that, right now, short term at least, I’m optimistic, I think there’s caution to the downside.

Host: Of course, Martin, we are in a bull run aren’t we, from those lows we saw in February last year, and as we know the market doesn’t just go up in a straight line. Are we due for a pull back, as well?

Martin Crabb: Yeah, I’m not sure about that, because you kind of think about what the thing’s going to be to derail it. I mean we’re in the process of just upgrading our target prices for all the miners for example. So, if every stock in the index traded at where we think its fair value is, we’d only be three or four percent higher, so what’s that, a couple hundred points, so maybe 6,000 is where we are in a year, I don’t think we get there, you know, shortly.

David Novac: And I think you know, just take Commonwealth Bank, the biggest stock in the market. You’re talking getting back to $96. You know, that’s, what’s going to justify, I mean, the lending growth has slowed down quite a bit. I mean, you’ve got the interest rate concern going forward.

Now, that could be a positive and a negative for the market as well. So all of those factors you know, I just can’t see it myself. You’re talking those levels again, personally I don’t see that.

Host: We’ve actually got a view email that came in, just around this conversation on the banks, so I might just bring it up now. We’ve got, I believe it’s Chris, he’s asking around, the banks, can anyone explain, well firstly on Bendigo and Adelaide Bank shares, why they are rising today, but then more broadly, he’s, well the panel’s thoughts on why there seems to be a belief that Australian banks can benefit from rising rates.

As a former banker myself, I see rising funding costs, potentially higher capital requirements, dividend pressure, and the negative impact of rising rates on housing prices, all as major risks to the banks. And they are top of the cycle, clearly others disagree or at least for now. I’m really keen to know if the panel agrees, or disagrees.

That is an interesting point, isn’t it. Rising interest rates, we’ve been talking about that a lot, the flow through, particularly for the US banks. Would that have an impact for ANZ banks?

Martin Crabb: Yeah, I mean the US banks have got free money from the Fed, so they’re certainly benefitting from rising US interest rates, because they’ve just got so much free cash sitting on the balance sheet. It used to be in Australia that the banks used to have very low cost to funds as well, because we used to have things called chequing accounts, which I’m sure the guys written in there knows about.

The issue would be, as the rates start to move higher, the pace at which they reprice their loan book versus their deposit book, they can get some margin growth out of that. Specifically, in terms of Bendigo and Adelaide Bank, it actually has an exposure to house prices. It has a reverse mortgage product called Home Safe. Where it participates in the capital appreciation of the real estate that’s been lent back to the bank.

So as house prices have gone nuts, and you’ve seen house prices in Sydney up 15% and so forth, Bendigo and Adelaide Bank are actually booking profits on that business. So if you think the housing market has got further to run, Bendigo and Adelaide Bank’s the one you want to own.

Host: Ben, just back to you, a thought on the banks, given the strong rise we’ve seen recently. I mean do you think now is the time to be taking some profits off of the table?

Ben Le Brun: Look, personally I do, just purely, you mentioned there some of the banks up 20%. In a story that has in no way, shape or form come to fruition yet, it is all on expectations of potentially what Donald Trump is going to do, and of course the ramifications for inflation and the ramifications for interest rates, in the US.

And we do know at the beginning of a tightening cycle in terms of interest rates, it’s generally very, very productive and very good for equity markets over all. But in the long-term picture, it’s actually not the best news story. But in terms of the viewer’s question, net interest margins, the impact that the US banks, in terms of their interest margins going up, great for them, for us, it doesn’t really have a big impact.

But when rates start going up here, of course net interest margins will start to expand for our banks, which is good, but again, that’s sort of the short term story. The longer-term story is that more money will sort of find its way into the, chasing the high yields in bond markets, and those sort of things. So, that sort of yield story that the banks have been living and breathing off, sort of since the GFC, sort of, starts to dwindle a little bit.

So, yeah, those net interest rates in Australia are absolutely anaemic, and that’s reported every quarter when they, when the banks update. So, there’s the potential there for, and that’s a complete metric, or a measure of profitability for the banks. So, I’m not sure if that sort of clears it up for the viewer at all, but certainly that’s why higher interest rates can sometimes mean better times for banks.

Host: Yeah sure. Now of course, a lot of the brokers are weighing in ahead of results that are due to come out over the next couple of weeks, or few weeks I should say. Bell Potter, downgrading ANZ to hold. And this comes after the sale of its New Zealand asset finance company, UDC Finance to HNA Group, that was for NZ$660 million, the broker says they did wait for the right time.

Whilst the transaction has no material impact on ANZ’s profit, Bell Potter notes that the UDC business did have higher ROA and ROE relative to the group. The potential divestments of its remaining Asian investments could further improve the capital ratio by about 80 basis points.

Now the downgrade also comes after the very strong rally in ANZ share price in the past year or so, as we’ve just been mentioning. The price target has been maintained at $32.50. Just a thought from you, well I’m not sure if you’re looking at ANZ specifically. Obviously looking to simplify their business.

Is that going to be a good new story for them going forward?

David Novac: Well it certainly improves their capital adequacy ratios for sure, so, but at this lofty level up here, after a what, 35% rally since mid-last year, a bit stretched in my view. But going back to Bendigo & Adelaide Bank, I mean you were talking about a regional bank here, trading on a multiple of 15 times and 5% fully franked yield, compared to say NAB, on 13 times earnings multiple, and 6% fully franked yield.

I mean hello, which one are you going to choose? So, to me, I’ve got valuation just for the viewer, on, and this is not just me, this is a consensus valuation of $10 on Bendigo and Adelaide bank, it’s trading at above 13.

So, I’ve also got a big sell signal up here as well. There you go, I don’t know who’s driving it, why it’s going up, why it’s driven so high. But certainly in comparison to the four majors. I would not be a holder of this stock, I’d be a seller.

Host: Alright, we’re watching Bendigo, up 3.5% today, $13.57 at the moment. Ben, let’s just move on from the banks. I wanted to touch on those nickel stocks because they seem to be taking a hit today. I’m just looking at Western Areas, it’s off 2.5% at the moment, $3.30, was one of the better performing stocks yesterday, in fact. But nickel has come back online and it’s off sort of over 2%, talk us through what sort of moves we’re seeing in those nickel stocks.

Ben Le Brun: Yeah, it was a pretty ordinary night for nickel in particular last night, obviously on disappointment about any infrastructure spend, or details from Donald Trump, a lot of those related commodities were hit pretty heavy last night, nickel being the worst one.

Western Areas is trading at the moment, well off their lows, it had a very strong close to the day yesterday, in the last hour of trade it certainly finished with a flurry of activity, and I think that was on expectations of what we were going to hear from Mr Trump overnight, only to be let down in that regard.

So Independence Group also having a pretty ordinary day, but certainly off their lows, but definitely Western Areas certainly trading significantly off their lows throughout the course of this session. So there’s certainly some desperate moves in that materials space. The sector is up. The gold stocks are down. Those nickel stocks are down.

My only assumption as to why they’ve moved off their lows, I can’t confirm this, because I just don’t have the prices in front of me, is that nickel futures are tracking reasonably well, or rebounding at least from the 4% losses last night.

I can confirm that copper, I did look at those futures in the Asian trading period, they’re doing quite nicely, back at, heading towards $2.61 a pound. So certainly recouping some of last night’s losses as possible, but as I said, nickel’s having a similar performance at this stage.

Host: Alright, now also watching Qantas I note in this session, it’s having a really strong run actually. It’s up over 3%, $3.50 at the moment, quite interesting giving we did actually see oil prices moving higher overnight. What do you think is driving Qantas today?

Ben Le Brun: I think almost since, now they have downgraded their earnings late last year, but they’re certainly off their lows from around July last year, and I’ve just been detecting that, generally it’s an inverse play on the oil price, just due to the jet fuel prices that they have to pay and the impact on margins and profitability etc. that we all know very, very well.

But, since these agreements with OPEC and non-OPEC, Qantas has almost been moving instep higher with oil, which is very interesting, and certainly out of kilter with how it normally trades, or has, historically traded.

Now of course there’s a lot of other factors going on with Qantas, not least of which will all go into earning season, is these cost cutting measures. Certainly Alan Joyce looking to extract a, think I’m going off the top of my head now, I think it was $2 billion a year or so back over the course of the next couple of years.

So, you know, that’s a complete way to increase your profitability, albeit a limited way to do that. But the market still quite interested in terms of what the February reporting season is going to hold in terms of those cost cutting measures, and of course other things like capacity and you know, competition in the space, all sort of, you know, ebbs and flows in terms of the Qantas share price

But that oil price has been no barometer for Qantas. Case and point today, I think I’ve mentioned it a few times in the last couple of months where Qantas is up, when the oil price is significantly higher as well, so just for those reasons, I think it’s losing it’s sort of correlation a little bit, as I said, probably that cost-cutting and a little bit of excitement as to what’s to come in February when they report in terms of what we’re going to see there. That would be my assumption, but certainly Qantas up amongst one of the best percentage performers today. Almost ironically.

Host: Yeah, really ironic, up 3% at the moment, up $3.50, Ben we’ll leave it there, it’s been great having you on, do appreciate your time. Thank you so much.

Ben Le Brun: Thank you.

Host: Ben Le Brun joining us there live from OptionsXpress. Now we are still taking your calls. 1300 30 34 35 is the number. We’ll also get to some of your emails that are coming in.

Let’s get to Tod though, Tod is on the line from New South Wales. Very warm welcome to you Tod, what’s your question for Martin and David today?

Tod: Hi Leanne, just after the panel’s thoughts on Brambles please, on the back of the ongoing US recovery and the favourable exchange rate with the Dollar please.

Host: Sure, not a problem Tod, thanks very much for the question there, and just watching Brambles, it’s up about half a percent at the moment, $12.67. David, I might just get to you first, for a thought.

David Novac: Yeah, look it’s not, Brambles is not overly expensive up here, and I still see some upside in the stock price. You know, the earnings growth is nothing to shoot the lights out, I mean over the past two years it’s had an average earnings growth of 14%. It’s trading on the fairly high multiple on 23 times, but there are valuations around $13.50 on the stock, which is that previous peak that you can see there. It’s had a pretty good bounce, you can see there from those recent lows, around November again last year.

And you know, there will be a little, I can see a little more upside here, so it’ll be interesting to see their half-yearly report and see their numbers. But look, I’m not adverse to it, it’s got a yield, it’s not a big yield, dividend paying stock of 2.5%, fully franked.

Not fully franked actually, it’s only franked 25%, so that’s not, you’re not buying this for yield, that’s for sure. But, look, it looks like it’s got a little bit more growth in it.

Host: Alright, would you agree, what’s your view?

Martin Crabb: Yeah, we’re good to buy at $12.75 price, like I said, it was kind of getting up towards that level. You’re picking up longer term growth, basically palletisation of the world, so, the key economies like the US, the UK, Australia, you know, we use pallets for everything, you see them all the time.

Whereas in developed countries, they’re still not that developed, and so as logistic businesses grow around the world, Brambles is by far the world leader in pallets, so it’s just a play on emerging market development. It’s probably a 10% EPS growth in, you know for the next decade, sort of story. So, it’s a really good cornerstone stock to have in your portfolio.

You are picking up US Dollar earnings here as well though, so if you think the currency is going to weaken, and most people do, then you’ll get an uptick from that. Having said all that, we’d probably prefer Amcor, so we think Amcor’s 15-20% cheaper than Brambles, similar kind of thematics. So we’d like Amcor better, but Brambles certainly a quality stock and one you can keep in your portfolio.

Host: Alright, fantastic, Tod perhaps looking at Amcor there as a possibility, $15.09 at the moment, Brambles $12.66, time for a break, coming up though, still answering your questions, 1300 30 34 35, is the number if you have any questions, give us a ring.

Video 3:

Host: Welcome back to the program, let’s check in on the Aussie market and see how we are tracking. And it’s another good session there up a quarter of a percent at the moment, 5,786 despite a bit of a falter overnight.

President Elect Donald Trump disappointing some degree, with lack of commentary around his fiscal policy measures. But none the less our market is still being underpinned by the rising energy stocks and materials in particular.

Now, just a quick check on markets around the region. The Shanghai Composite is up very slightly, it’s up about 2 points at the moment. Now joining me in the studio are my guest hosts, Martin Crabb from Shaw and Partners, and David Novac from Wealthwise Education.

We are taking your calls, 1300 30 34 35 is the number. Your money@skynews.com.au, if you have any emails. Now we’re going to get straight into a caller, Nancy is on the line from New South Wales, Nancy, very warm welcome, what’s your question for the panel today?

Nancy: I’d like to talk about ERA.

Host: Yes.

Nancy: And Bubs Australia.

Host: And Bubs Australia, okay. Well of course, Bubs just listing last week, coming on at 10 cents now trading at about 21 cents, so it’s had that big rise. It’s off about 12.8% at the moment. ERA, it’s up 18% there today. David, I just might get a thought from you on either of those stocks if you follow them.

David Novac: Well, ERA, obviously you’ve got to have a bullish view on uranium and certainly the price of uranium has not been bullish, and to everybody’s dismay, especially for stocks like Paladin (which has just been shocking for investors), it hasn’t shown me right now that it’s a buy.

I think it’s spiked up here on expectation on what Trump’s comments of around, maintaining its nuclear, or increasing their nuclear armaments, and using nuclear power.

Seeing as since the Fukushima disaster, you know, the uranium price has just not recovered. ERA is not a buy, just from my like, it’s not investment grade. They’ve been losing money, their balance sheet is under distress, which means they’re in a lot of debt, and I don’t see a strong recovery in the Uranium price right now. But obviously people are buying. There are punters out there who are buying the stock and it’s jumped, as you can see on that chart there.

Host: Yes, huge jump

David Novac: I’d be taking some money off the table on this one, certainly today that’s for sure.

Host: Yes, obviously moving off the back of that Uranium price, but given those underlying fundamentals are you cautious as well on this stock?

Martin Crabb: I think the Ranger mine is closed isn’t it, I mean they’re not mining anything, so, it’s an option on an option. So if Trump starts building nuclear power stations and demand for uranium goes up, then that’s great for ERA, if they can get the Ranger mine back into production that’s great for ERA, but then the share price seems to be already moving ahead of that already.

So, look it’s an absolute speculator, it’s like betting on a number at the roulette table. You need everything to go right for you. So, good luck with it, if you own it, you’ve been a long-suffering shareholder, you know, now’s the time to take the money off the table I think.

Host: Yes, 19.8% high, 66.5c at the moment. Paladin, it’s up about 6% as well, 8.9c. Now, Bubs as we mentioned, an interesting one, 21c it’s trading at. This is the newly listed infant formula and organic baby food company.

Quite an impressive line-up of investors that came in for this, you know this IPO. More broadly, if you haven’t been looking at Bub, I mean, would, is the space presenting opportunities? Obviously Bellamy’s not such a good story, but would you be investing in any of these in this sector?

David Novac: A2 Milk I quite like. But, not Bubs, I’m just looking at this one, it’s just gone from zero to 44c recently, and pull back sharply to around 21. It’s had no positive earnings since 2009. It’s under distress. I don’t know what their balance sheet looks like now, but coming back on line, they’ve obviously recapitalized. I would not be buying this stock until I saw some financials and got some more history on earnings. Looking at their past, shocking. But again, they’ve probably restructured the whole business, and so we’ll just look at it. I can’t give any further comment about it.

Host: Sure. Just on the Bellamy’s story, and tying in, I suppose, with the broader sector. Leo is asking, he’s currently holding Bellamy’s, since the large decrease in stock price. Is it time to sell, wait it out, or accumulate more? Your advice would be greatly appreciated, thanks Leo.

Martin Crabb: Yes, that’s a tough one, that’s a real tough one isn’t it? I mean we were saying what a disaster this company has been, and not just from the share price perspective, but what’s been happening behind the scenes, and it seems the company is sort of mismanaging its inventory, so, you know the balance sheet’s now under pressure, there’s concerns about suppliers having a lien over the asset, can they with the new management, it’s almost like a receiver’s been brought in to tidy the thing up.

So, what should be a good story, i.e. Chinese domestic milk formula was poisoned years ago, Chinese mothers do not want to feed their babies poisoned milk, they buy it from Australia and New Zealand which has a clean, green reputation, that’s the story tight? That’s the story that’s been driving all these stocks including the one we spoke about earlier.

So, I think it should be a good thematic. But I just think there’re so many hairs on this story at Bellamy’s, that you’re best off kind of sitting aside, and I think David used the term, let the dust settle, I think that’s probably the prudent thing to do.

I mean, specifically you need to look at your own personal situation to work out what you’re wanting to do, but as a general rule, just standing aside is probably the prudent thing to do.

Host: Okay, and as we heard earlier, some of those brokers saying look, it could be an 18 month turnaround story, so who knows. Wait for the dust to settle, I think that’s some good advice there.

Let’s take a break on that note. When we return we’ll take a look in more detailed at the local market. We are still taking your calls, 1300 30 34 35.

Video 4:
Host: Welcome back to the program. This is what we’re watching this hour, the local session is still continuing its rise higher, supported by the lift in commodities, once again up two tenths of a percent, BC Iron shares are lifting at 21.4%, as first half shipments from its Iron Valley reaches 4.2 million tons, earning guidance updated to between 18 and 25 million dollars.

And the healthcare space continuing under pressure, following leads from the US, as Trump attacks big pharmaceuticals.

Also making news this hour, the competition watchdog reviewing BP’s $1.8 million takeover of Woolworths’ petrol stations. And dairy decline. Fonterra saying milk production falling across several key markets.

Now on that note, let’s just get back to the Aussie market there, up two tenths of a percent at the moment, 5,784. Right at the top of the list, discretionary stocks are leading the way there, up eight tenths of a percent industrials. Then you’ve got energy and materials, so still seeing that support coming across from oil prices and commodities, however the other end of the scale, we’ve got healthcare, and of course we did see those comments from Donald Trump overnight on drug pricing, and that’s lead to some of those declines in our local session as well.

Let’s bring in Laurence Parker Brown, who joins us live from KOSEC Kodari Securities in our Sydney CBD studio, Laurence, just speaking about those healthcare stocks, down about point seven of a percent at the moment, I mean, any surprises in light of those comments from Donald Trump?

Laurence Parker Brown: As you say the, Donald Trump’s arguments have been overnight that we have to be careful about what’s happening with price discrimination, which is quite an emotive topic, and his position would be selling the same generic product, why is it cheaper in developing countries, and the counter-argument from the industry has always been, it’s very expensive, there’re significant sunk costs in developing drugs, so we need to be able to afford it, and wouldn’t you like the benefits of having greater healthcare options.

So, it’s not good news for CSL and main-pharma and other similar businesses that Trump is suggesting there is going to be a careful look at the prices that are being charged by these pharmaceuticals, and so, as you say, there’s going to be some weighing down on the industry, certainly in the short term.

Host: Alright, excellent, now just touching on some of those healthcare stocks, one that I know you like is Healthscope, and we have a viewer email that’s coming in from Daniel, what’s the panel’s thoughts on Healthscope for the medium term, I might just start with you in fact, in light of I guess, your comments recently Laurence.

Laurence Parker Brown: That’s very kind, so obviously CSL will struggle, but the broader sector, in light of Trump’s comments, there’s no reason that something like a Healthscope will be affected. The big reason we like Healthscope is twofold. I mean it’s not as big or as powerful a company as something like CSL, but it’s possibly under-valued, and there’s two reasons.

One would be that recently, I think in September they gave guidance that they had one weak month in September 2016, and the market took that to mean that potentially every month will always be as, sort of, always tight in terms of performance. Now that isn’t necessarily the case, and we’re looking forward to see what happens in February when we get some more data out of Healthscope.

And the second big reason we feel it’s potentially a great space, is because it’s Australia’s second largest healthcare, private healthcare provider, providing beds at a cheaper rate than the public sector can manage. And they’ve got around 17 brownfield sites that are yet to come on stream, so when they do, we feel that that’s going to be a very much value accretive in terms of earnings, so it’s one to watch.

It’s been over sold in our view, and it’s potentially very good value at its current rate. I mean, look for the technicals, it’s good to buy at exactly the right time, but it’s one to watch for January and February.

Host: Alright, fantastic, Healthscope $2.40 at the moment, so I hope that answers your question there Daniel. Now my panel who joins me in the studio as well, we have martin Crabb from Shaw and Partners, and we have David Novac from Wealthwise Education, I might just get a thought from them on the healthcare stocks, if we just bring them up on the screen, because they are at the bottom of the list there as we mentioned, certainly coming under some pressure from those Trump comments.

You can see there CSL, Ramsay Healthcare, CSL still above that $100 mark, Healthscope, Resmed also down in that list. Martin, just a thought from you. I guess on the broader healthcare sector, whether you would in fact be investing in any of these stocks.

Martin Crabb: Yeah, look it’s interesting that these companies are all now carry political risk as well. We don’t sort of think, we think of political risk around companies mining in Africa and things like that, but healthcare stocks are now carrying significant political risk.

If you think pre-election, everyone thought if Hillary Clinton got in, she was going to decimate the pharma sector, and Trump was going to be good for pharma, so when Trump was elected, the pharma stocks all run, and now he’s come out and said, now I’m targeting pharma as well, because it’s something like 14 or 15% of US GDP is spent on healthcare. It’s crazy, it’s twice as high as everywhere else in the world.

So that, that government is funding healthcare for the rest of the planet, so that’s something they want to tackle. So, if you’re selling anything into the US government, you just have to be careful about the terms you’re going to get. So, I think it’s introduced another risk factor into an industry that’s already pretty well priced, pretty highly priced from a PE perspective.

So, I’m sort of, a little bit cautious in the sector as a whole.

Host: David, what about for you, a lot of them were market darlings sort of last year, Sirtex, main pharma, but they really got hammered towards the end there, given the big falls, would you be looking at topping up, or are you still cautious going forward.

David Novac: Look, the only one on the list there that I like is Ramsay. I think Ramsay is top of the list as far as I’m concerned as an operator hospital, private hospital operator. Expansion overseas, in France, so I see it still, fantastic earnings growth, Ramsay’s had.

Healthscope, not so, I mean the numbers here, as Martin said, it’s trading at a high multiple, a lot of these stocks, and Healthscope is one of those. I’d wait for the interim report, and have a look at it, but it’s not a technical buy on the chart for me.

In fact, none of these are a technical buy on the chart, but out of the, on terms of the fundamentals, Ramsay is one that I particularly like. And I also don’t mind the aged care sector, there’s a couple of opportunities, there’s Estia is one of those. EHE, I think with the change in management, with the new CEO coming in with a good track record. That’s one to keep, I’ve got that on my watch list as well.

So, I like, looking at opportunities in that aged care sector.

Host: Okay, excellent. Let’s get back to you Laurence. Just move on from the healthcare space for a moment. Just touch on the other big headline story that’s still around today, and that is Bellamy’s. It’s still being hammered, it’s down 15.7% at $4.52 at the moment.

We were just talking with the panel a little earlier, look, saying, waiting for the dust to settle is probably the best advice at this stage. Would you agree, what’s your thoughts?

Laurence Parker Brown: Well exactly, it’s a really challenging time to begin your tenure as a CEO. You’ve got quite a narrow profit margin. You’ve not got much cashflow to play with, I think they’ve got a net position of one million dollars, and they’ve got this big inventory they want to sell off, so, you know, anything’s plausible. And it’s not necessarily as bad as we were potentially predicting, or anticipating, I should rather say.

There were a lot of rumours that this was a business that had literally no money, it’s a challenging time to begin a change in CEO, and we’ll wait and see what happens, it’s plausible that 2017 could see some uplift in terms of the performance. It’s obviously, as you say, it’s a stock that’s really captured a lot of people’s imagination for these last five or six weeks.

We anticipate that it might even be sold off again on Friday, when people that have put it in their diary, they might be on holiday right now, they come back and find out it’s trading earlier on than they anticipated.

Broadly, it’s a business that, it had, it was trading throughout 2016 on lofty peas, based on the forward guidance that it was going to keep on growing in earnings. We now know those earnings are not going to grow, and so all these down ratings are entirely logical, and it will be very interesting to see what happens over the next few months.

Host: Yeah, it certainly will, it’s still under pressure as we mentioned there, but to watching A2 milk, it’s also down about 1.6% today. Certainly looks like the Bellamy’s issue are company centric as opposed to the broader headwinds for the sector.

And just looking at A2 Milk, Credit Suisse retaining its outperform rating on the stock. Saying that the stock continues to execute well during the regulatory transition period that’s happening in China. Would you be looking at saying A2 Milk at these levels?

Laurence Parker Brown: Yes, A2 Milk’s a business that we’ve been talking about and recommending to a lot of clients. It’s been up throughout the period we’ve been recommending it, and the good news for anyone that wants to look at A2 milk is that it’s nowhere near as reliant on China as something like Bellamy’s was. It’s got formalised supply chains, and it’s also neatly diversified across, not just fresh milk, but cream and ice-cream.

So, it’s a good quality business that’s probably getting caught up in the contagion again, perhaps unfairly, and we’d potentially council that it’s one to look at. Again, you really want to buy when it’s the perfect, optimum time. I wouldn’t say that that’s necessarily today, but it’s definitely one to watch.

Host: Yes, certainly. Alright let’s just check in on BHP, because I know this is also one that you’re watching, particularly with the news on the extension of the Samarco mine payments and so forth. Around these levels, what is it.

Laurence Parker Brown: Hi Leanne, I’m afraid the audios gone, so I’m not sure I can hear.

Host: Alright, alright, we may have just lost Laurence there, so we might just leave him there, a big thank you to Laurence Parker Brown for joining us. He wanted to touch on BHP, but in fact we are getting an email just, just in relation to some of those iron ore miners, in relation to Fortescue. Interested in David’s view on FMG at the current levels, looks good on the charts.

What is it, still above $6, $6.25 at the moment, what’s your thought on Fortescue?

David Novac: Look, I mean this has been my star pick since November 2015, I did a presentation to the Australian Shareholders’ Association, in November, and I said my stock pick for the next 12 months is Fortescue. When it was about a $1.50.

Now, at these levels, you’ve got to be optimistic on the bulk commodity front, with iron ore being around $80 at the moment, which is quite amazing really. Nobody predicted that it would get to $80, in fact, Goldman got it wrong by predicting the average price was, like six months ago, or mid last year, that it was going to average 35.

So, nobody’s got a crystal ball, it all depends. Look if the iron ore price remains up here for the next, you know, at least six months, then yes, Fortescue will definitely move higher, because their costs, they’re the lowest cost operator.

Their margins are fantastic, they’ve reduced their debt. So they’re now investment grade, where a lot of people were concerned. But look at this stage I’d wait for their interim numbers. It’s going to be good, there’s no question about that. And just a little bit of caution going forward in the bulk commodities space, so, I mean, yeah, you’d think there might be a pullback there, and plus the slowdown in steel production with the Chinese new year as well.

But look, I like Fortescue, I have no reason to see it as a sell at all, and again, with that caveat about the iron ore price remaining elevated where it is. Even if it pulls back to about $60, 65, Fortescue’s still got upside from here, but you know, you could see an interim pull back.

Host: Martin you mentioned earlier that you’re changing the makeup of your resource stock portfolios. How does Fortescue fit into that view.

Martin Crabb: It doesn’t. So, Fortescue’s out, Whitehaven’s out, South32 are out, so, they’re all basically Rust Belt, so it’s all stuff to do with making steel, so whether it’s iron ore or manganese, or metallurgical coal, those are the three stocks that have run, those are the commodities that ran last year, those are the commodities that are pulling back.

So they’re all supply side related, so there’s been a shortage of iron ore, manganese and metallurgical coal through 2016, the Chinese have been cutting back production, and trying to clean up their industries and get rid of oversupply, etc.

That won’t persist into 2017, so we will get those prices moving backwards. And the share prices are highly correlated to the commodity prices. So as the commodity prices come off, and we’re already seen it with met coal, it’s off 30%, those stocks will come down as well.

So, Fortescue has been a cracker, everyone’s made a lot of money out of it, smart people have made, you know David and his followers have made money out of it, it’s been great, but it’s not going to continue into 2017.

Host: Alright, there you go, Fortescue $6.25 up four tenths of a percent at the moment, time for a break. Ahead on the program though, some details on what to expect once Trump is inaugurated. Laura Fitzsimmons from JPMorgan is joining us next.

Video 5:

Announcer: Sky News Business, this is Trading Day.

Host: It’s just on 2PM here in Sydney for Thursday the 12th of January, this is Trading Day. Our top stories this hour, the ASX is continuing its move higher, up at two tenths of a percent at the moment, supported by the uplifting commodity prices.

Japan’s Nikkei is currently down nine tenths of a percent, as Trump fails to provide clarity on future fiscal properties. And the ACCC reviewing BP’s takeover of the Woolworths petrol operations, so shares currently flat.

Also making news this hour. BC Iron are updating its full year 2017 Iron Valley guidance to between 18 and 25 million dollars. And dairy decline, watching Fonterra it sees milk production falling across several key markets.

Now joining me in the studio is my guest hosts, are I should say, Martin Crabb from Shaw and Partners, and David Novac from Wealthwise Education. Look, we’ve talking a lot about commodities, underpinning their support at the moment, looks like we are still seeing some buying though, in the banks after the recent run up. What are you, just a quick thought on the broader session today, David?

David Novac: Look, it’s a bit softer, you can see that it’s come off its highs. It’ll be very interesting to see where it closes today. If it pulls back and actually, I wouldn’t be surprised, and closed in the negative, well then there’s a sign for you to watch out for.

So the close is going to be very interesting today. I would not be buying this market at the moment. Only selectively, in certain stocks in the energy and even the commodities space, I still like gold, the gold sector.

But, you know, you can’t be too bullish on gold right now, it’s not showing, technically it’s not showing its bullish sign on the gold price. But look, still plenty of opportunities, but in terms of the banks, I would not be, definitely not be a buyer, or here I’d be a seller, taking profits. I mean if you’re a retail investor, I’d probably just hold for the div, but, you know, there’s been a lot of investors, or I should say traders in the banks, I can see that clearly on the charts, and so you know, there could be some profit taking soon, and that’s going to draw back the index.

Host: With a couple of key factors coming up, we’ve already touched on them, Donald Trump’s inauguration, upcoming reporting season, would you sort of be sitting on the side-lines at this stage?

Martin Crabb: I think so, I mean the market’s just behaving like a fairly valued market at the moment, I mean, I think one of the catalysts to lookout for is just the US reporting season, which really kicks off with Wells Fargo and JPMorgan on Friday night, and then you’ve got Goldman and Citigroup and Morgan Stanley the following week, so you get the investment banks, so that will give us some animal spirits, which I think is important.

Host: And that’ll be an important read through from a Quarry Group perspective.

Martin Crabb: Yeah I think so, yeah.

David Novac: Well that’s going to be a big lead, those US banks. Because we’ve just followed them up, so that’s going to be very interesting as well.

Host: And I think the bar’s been set pretty high for those earnings.

Martin Crabb: Yeah well Goldman’s share prices are up 50% in the past 12 months, and Quarry have an operation briefing on the 7th of Feb as well, so you’ve got this kind of rolling news flow from [00:03:07 inaudible] , so we quite like that one.

Host: Okay, excellent, well we were talking a little earlier about those moves in the US Dollar, sort of coming off after those comments, or lack of comments you could say, from president elect, Donald Trump. Let’s bring in Markus Helsing of Alpha Broking who’s live in our Melbourne studio.

Markus, a very warm welcome to you, thank you so much for joining us, now as we know, it’s been all about the US Dollar move overnight in response to president elect Donald Trump’s comments there, and really, I suppose, lifting the Aussie Dollar, and that’s also helping to lift the commodity prices more broadly. What are you making of the moves?

Markus Helsing: Well, hi Leanne, look, really the overall US Dollar run is now in its eighth year which is a historically, normally, quite an expanded type of rally scenario in any currency, particularly the main one, the US Dollar. So, really, we think this is the final hurrah for the US Dollar and it might last for the better part of this year, it might peter out over the next six months.

I think in the middle at the moment, if you look at the Aussie Dollar for example, it’s obviously strongly supported by the terms of trade that have been massively boosted by iron ore and coking coal doing what they’ve done over the last four, five months.

We really believe, this probably, as long as iron ore stays between 70 and 80 dollars a ton, which we think it’s got a fair chance to do so in the next three to four or even six months, will basically be an ongoing support in terms of trade, together with coking coal, which we think will hold up in this broader 15-20% range as well.

So, look, generally as we said a few months ago about the Aussie Dollar, we actually a lot more bullish than many others, mind you we had a bit of humble pie with the correction of 77 to 72, however, our broad technical and fundamental view remains, as long as China is nothing really upsets, gives us any big upsets out of China, we think the Aussie Dollar will retest 77c against the US Dollar soon enough.

Ultimately, we have a target range over the next 12 months between 72 to 82, with a risk to the upside. For many reasons, and I think the US Dollar in itself, is a reason to believe this whole bull run, as I said earlier, could run out of puff sooner rather than later, giving underlying support to currencies like the Aussie Dollar, even more.

Host: Just around your comments on iron ore there, you mentioned look it could be well supported here, China’s obviously continuing to import high grade ore from us here in Australia. And obviously still supporting their steel industry over there. So, I guess we do have that underlying support, Australia though, the longer term outlook from, the government, is that we could see those prices falling back towards the $50 level, do you think, I mean we are due for a pullback, $80, it looks pretty toppy at these levels.

Markus Helsing: Very much so, and as I said last week, I think this is as good as it gets. This is a bit of a Goldilocks revisited, and sometimes good news can last a bit longer than we think, and hopefully they do so. But look, as I mentioned many times, the actual backwardation, which is the difference between your spot price in iron ore versus the forward prices one year out, are currently at $18, which is a massive backwardation.

So, there’s a lot priced in the forward prices, for the forward hedges of your Rios and BHPs. So, so that’s already sort of built into the forward prices, however, if , as I said earlier, China remains status quo, as is, you’ll find, there’s not, as yet, any main reason to see a major sell off, on top of that your Trump factor is your big unknown, your big risk, and ultimately that may well be one of your triggers that will ultimately be the end of this particular run.

Host: Can we talk gold, because obviously the Trump story plays into this very much, and we saw I suppose, that uncertainty on how the incoming US administration will implement its plans, that was very much reflected in the gold price overnight, I think it soared to a seven week high.

We’ve spoken to you a lot about gold, I know that you do like it, but with all of this uncertainty in sight, would you be a buyer of gold?

Markus Helsing: Well, absolutely. To me actually, the whole last 12 months technically is an ideal setup, I heard earlier that by some comments that maybe the technical picture might not be as clear, well, I guess we could put one chart in front of ten people and you get ten different views.

Our view on the macros is that the whole setup of the likes of platinum, silver over the last 12 months, after the four-year correction we had, in gold, silver and platinum, the bottoming out of the last 12 months is an ideal technical setup as a matter of fact, and we just ended up, doubled up, all of our holdings in relation to gold stocks, and physical gold and silver.

We also added on investments in shareholdings in gold [00:08:02 inaudible] ETFs, we got basically buy signals all over the place in the precious metal sector and that, if you compare that to coming back to the Aussie Dollar, had a little bit of an overlay there, and you’ll find if you do see platinum close again above a thousand dollars an ounce over the next four weeks, which we expect, and gold above 1,200-1,220 we’re already quite close, that’s against the US Dollar.

Now, I really believe there could well be an underlying support for the Aussie Dollar. But generally, when I look at gold, silver, platinum, technically, fundamentally, this is now an absolute must buy. If anyone is not in there yet, or a double up for someone who has current holdings. We think this is the beginning of a major move, it might take years, but who cares, as long as you buy the good value, and have a great diversification, to your traditional assets, we believe we’ll have a major peak coming up this year.

Host: Alright, fantastic, I might just get a thought off the back of those comments, from my guest hosts, David, just a thought from you, would you be a gold, buyer of gold stocks?

David Novac: Well I was a buyer of gold stocks in August last year, so I’ve done very well in that sector, and I’m still holding. I’m taking some money off the table, Ramelious was one of my top buys, that went from 11c to, you know, trading around or hit about 65c recently. And you know, I’m still holding gold stocks. And look I agree with Markus, the long-term picture outlook I like gold, short term though, the technicals that I’ve been watching here, I mean if you look at the price of gold, and the technicals looking back on the chart here, from early January 2013. Gold has been in a really broad range between 1,400 and has got down as low as 1,050.

Now, it pulled back to that low of 1,130 and it’s rallied to this resistance level of 1,200 which is a pretty strong support level before. So, it’s got to break convincingly above 1,200 to get back up to maybe those recent highs around 1,350.

But, on the technical, it’s going sideways, it’s been going sideways for the last two, three years, since 2013. To get really bullish on gold, it’s got to break 1,400. Now, for that to happen you’ve got to see a collapse in the US Dollar. I can’t see that happening just yet, down the track, you know, it all depends on the Trump policies and you know, who knows, but this will be a safe haven play, you know, depends what the central banks do, there’s just so many ifs and maybes, but from a technical perspective, they’re the levels that I’m watching, their upper level is 1,400, could gold get back there? Absolutely, but, you know it has to break convincingly above that upper level, but in the meantime it’s got to do deal with the 1,200 level here. If it fails here it could pullback, test those previous lows and then we’ll see where it goes from there.

But, it’s in a sideways trend and has been for three years.

Host: Martin, are you as bullish on the outlook for gold, would you –

Martin Crabb: Look, we see gold as something that you trade as opposed to own, so we think now the risk reward favours gold stocks, so we’ve added Northern Star to our model portfolio, but we could have just as easy added Evolution or Newcrest, the other two stocks that we cover. And it’s really there to hedge against the 3AM tweet.

So, if and when Donald Trump tweets something crazy at 2AM, or 3AM, which he will do, in the next 12 months, you’re going to want some gold stocks in your portfolio.

David Novac: And the other factor is, look, Aussie gold producers, I mean, at 1,600 dollars Aussie, if you’re producing at 1,100 or sub 1,100 ore in sustaining costs, I mean they’re making $500 an ounce right now. So that’s very profitable for the gold sector, that’s why I still like it.

And as you said, even though it’s one of the big boys, I mean I like Evolution in particular, Saracen is another one, there’s a whole host of them. So, I do like Aussie gold producers in the margin that they’re getting, which is better than 30%.

So, it is a space that I like, but I’m just talking about the techincals. So, even though the US Dollar gold price has moved up, you see the Aussie Dollar’s moved up, so that sort of offsets it a bit, but 1,600, hey, you know. Aussie gold producers are earning a lot of money, they’re very profitable.

Host: Alright, Markus, I just want to get back to you and switch focus for a moment and get a thought from you on oil, because we are watching those energy prices moving up. Signs of support I guess, the market, getting, you know, these indications from Saudi Arabia and Russia that they will be complying with these production cuts. That’s what it’s about at the moment, whether they will in fact stick to that agreement. Do you think they will and where do you foresee the oil price moving?

Markus Helsing: Well, yes I think they will to a large extent, because simply they have no other choice. I think there obviously will be the odd one out, they will obviously not stick to it. So yeah, so basically I think there’s going to be an underlying support for the oil price. I can’t see it running away at this point in time, so we still give it a $50-60 range, over the next three to four months. It might even be a $45-60 range.

I mean it’s interesting to note that you had a rising stock in the US, mainly due to imports, and on the back of this news the oil market actually bounced last night. So look, I think generally it’s well supported, between $48-50, on [00:13:21 inaudible] and immediate crude. And we think at some point, by March, April, when we have a clear picture of the [00:13:32 inaudible] and the stock levels in the US, you could see oil move towards $60, and have a $55-65 range, between March and September, hence buying the likes of Santos and Woodside and holding, that makes sense.

And they will perform, in our view, over the next 12-18 months. Potentially quite strongly when you look at Santos.

Host: Alright, fantastic, and we’ll leave things there Markus, but it’s been wonderful having you on, thank you so much for joining us.

Markus Helsing: Thanks Leanne.

Host: Markus Helsing there from Alpha Broking, just around those thoughts on Santos and the energy plays, and your reallocation of your portfolios, how do you see some of the energy plays. Obviously Santos doing a few good things at the moment to sort of, sure up their balance sheet, how does that fit into your –

Martin Crabb: Yeah, we’re staying away from Santos, it’s not one we cover, so Origin is the way we play the energy sector. But sort of more broadly within the resource portfolio, so we’re not necessarily saying, you know, the resource rally is over, we just think it’s time to rotate, so the, as I was saying earlier, the good money’s already been made out of the steel making, raw materials companies. But what hasn’t been fully valued is the large miners, BHP and Rio.

So, we’ll be rotating into those stocks, and then we’d be taking some peripheral money and putting it into the base metal companies. So, we like Western Areas in nickel, we like Aus. Minerals in copper, we like Aluka, and we like Alumina.

So, I suppose we’re rotating out of those companies that have done incredibly well, where they’re priced to net present values, sort of getting up towards the top end of the range, the commodity prices all look like they could probably come back a little bit from where they are.

But, we think you know, broadly that global growth is going to continue to expand, which we think it is, then we think copper, nickel, aluminium, those are the stocks to be in. And those stocks haven’t run nearly as hard as the former group has, so I think there’re some real opportunities.

Host: Alright, excellent, we’re going to have to leave things there. We will pick that conversation back up after the break though. When we return, we’ll be speaking with United Networks CEO on the company’s ASX day boost. Stay with us.

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