The Month In Review: May 2009

Shannon Rivkin

The market recovery took a breather over May, but more signs emerged that suggest the world is not about to end after all.

‘Sell in May and go away’ is an old saying that seems to have tried its best to rear its ugly head over the past month, but continued signs of a recovery in the global economy rebuffed the bears and kept the bulls in charge… for one more month at least. There is little doubt that May will be remembered as the month when battered companies took their opportunity to raise as much capital as the market could stomach in an attempt to cure their sickly balance sheets. Recovering credit markets have accompanied (and likely contributed to) recovering equity markets, and Australian companies now have options available to them (I won’t say a wealth of options, but certainly more than over the past eighteen months) when only three months ago, it felt as though Armageddon was upon us.

Honestly, I can’t see markets retesting their March lows without a scare akin to Lehman Brothers’ failure in September, and I just can’t see where it could come from. With further positive data flow and confirmation that the worst is behind us, I would not be surprised to see markets continue to recover, but just don’t expect it to be as quick as we have seen since March. Despite a recovery of 23% from its lows, there is still value in the market, so now is the time to position yourself for the inevitable, eventual global recovery.
Despite my expectation that we have seen the bottom and a recovery is under way, one attribute I expect the market to maintain is the increased volatility of the past eighteen months or so, and it is for this reason that we have continued over the past month with our new policy of issuing short term trading recommendations. Even though the Chicago Board Options Exchange Volatility Index (VIX), one of the accepted measures of volatility for the US market (and hence a proxy for global indices), is down from levels above 80 seen in late September and early November of last year, it is still at 32 points, which is historically a very high number (it was as low as 12 just under two years ago, right before stock markets began their meltdown). So we continue to think that trading momentum in quality companies with strict stop losses will reward traders looking for quick profits.

Over May, we did unfortunately see a few of our short term trading recommendations go against us (specifically Wesfarmers (WES) and AMP (AMP)), but our 5% stop losses limited damage and we were able to bank a substantial profit (as high as 21% for some members) on WorleyParsons (WOR) in one week. We are still holding Tabcorp Holdings (TAH) and Rio Tinto (RIO), with expectations of banking quick profits.

Back to the market in general… since the beginning of May, we have seen such big names as Stockland Group (SGP), GPT Group (GPT), Santos (STO), Bluescope Steel (BSL), Dexus Property Group (DXS), ANZ Banking Corp (ANZ), Seek (SEK), Macquarie Group (MQG), Alumina (AWC), Nufarm (NUF), Primary Healthcare (PRY), Billabong (BBG) and Pacific Brands (PBG) come to the market for more capital to take advantage of renewed investor optimism, and although there has most certainly been cash coming in off the sidelines, undoubtedly some of these capital raisings have been funded by selling equities. Between the names mentioned above, well over $10bn has been raised and when one considers that average daily turnover on the ASX over the month of April was a mere $3.6bn, clearly the sheer volume of capital raised has given the market a little indigestion. The fact that the S&P/ASX 200 still managed a flat return despite such obvious selling pressure is a strong sign of investor confidence.

On the same topic, it is worth pointing out that towards the end of the month, some of the equity issues were starting to be made at smaller and smaller discounts to market… a very good sign I must say. Indeed, PRY actually has the distinction of issuing new equity at a small premium in the last week of May, which is the first time I have seen that for quite some time, and I was not surprised to see the stock open strongly once it completed the placement.

We have tried to take advantage of the better environment for capital raisings through some of the arbitrages on offer, with some advice regarding OneSteel (OST) and Bluescope Steel (BSL), which has panned out very well for members following the commentary through our ‘What I’ve Been Buying’ articles. Additionally, we recommended Graincorp (GNC) as an excellent low risk arbitrage opportunity, which is looking like it will be an extremely profitable result for members.
One obvious trend emerging since markets bottomed in March (and continuing for the month of May) was the outperformance of the so-called risk sectors, such as the cyclical miners and retailers. Again, I feel that this is an obvious sign that the investment community is switching out of poorly-yielding cash into sectors that will benefit from a recovery in global growth. Just compare the defensive Consumer Discretionary (with Woolworths (WOW) as its biggest component) and Healthcare sectors, which were flat and down 8.6% respectively, to the cyclical Energy and Metals & Mining sectors, which were up 6.5% and 6% respectively, a clear diversion in a market that was flat for the month.

On our existing portfolios of member recommendations, we finally placed a ‘sell’ recommendation on Crown (CWN) at $7.49 (including dividend) after re-recommending it at $6.00 in January. We also re-recommended our Hybrid Portfolio with a few new additions and things are looking up in the hybrid sector. Existing long term blue chip recommendations BHP Billiton (BHP), Rio Tinto (RIO), Woodside Petroleum (WPL) and our big banks continue to trade as if the worst has passed, while our Premier Investments (PMV) investment (the owner of the old ‘Just Group’) continues to rally strongly regardless of the broader market’s direction.
Looking ahead

We are very close to taking profits on RIO but will be looking for other examples of market mispricing due to overcooked debt concerns. This market will punish complacency, so even if we leave a few dollars on the table, our conviction to take profits regularly to counter the effect of an unpredictable market pullback is strong.