ETF Watch – OOO.AXW BetaShares Oil ETF

Oil prices surged overnight as investors speculate that OPEC members will push toward securing a deal to cut output. West Texas Intermediate Crude oil rose 5.8%.

As an introduction to our ETF Watch commentary, we’re looking at the BetaShares Oil ETF listed on the ASX under the code OOO.AXW. The ETF provides investors with a “pure play” to take a view on oil prices. It aims to track the performance of an index (before fees and expenses), that provides exposure directly to crude oil futures.

In addition, as oil is priced in USD the fund hedges its USD exposure back to AUD, which reduces currency risk for Australian investors.

At a company specific level, we continue to like OSH, ORG and note the recent positive momentum in STO following China’s Hony Capital increasing its share holding.

Chart – ETF Oil BetaShare OOO.AXW


Chart - Oil Search
Chart – Oil Search
Chart - Origin Energy
Chart – Origin Energy
Chart - Woodside Petroleum
Chart – Woodside Petroleum


Harvey Norman – Algo Buy Signal

Harvey Norman and JB Hi-Fi have sold off recently and now reflect at a “higher low” price formation within a broader uptrend. Our algo engine has triggered buy signals on both of these names, so we will take this opportunity to look a little closer.

Harvey Norman reported a solid Q1FY17 trading update, yet the share price has sold off over 15% following questions being raised over the group’s accrual accounting practises. The strong history of free cash flow generation should begin to dampen investor concerns and lift share prices.

FY17 revenue is likely to be up 7% year-on-year to $1.9b, EBITDA $650m and NPAT $375 which will be up 10% on FY16, placing HVN on a forward yield of 7%.

Momentum studies suggest HVN is worthy of consideration: FY15 to FY16 EPS growing by 25% or from $0.24 to $0.30 per share.

Chart – Harvey Norman
Chart - JB Hi-Fi
Chart – JB Hi-Fi



Global Macro

The USD has been a major beneficiary of the final result of the US Presidential election. Not only has US Dollar sentiment improved now that no protracted legal challenge will create market uncertainty, but it’s also getting a lift from the direction of current policy measures outlined by the FED and  President-elect Donald Trump.

Long time readers will recall that our bullish case for the USD has been based on the theme of diverging monetary policy between the FED and the other G-7 central banks. However, now that Mr Trump is discussing some details about his economic plans, investors are now anticipating favorable fiscal policy measures which are bullish for US Stocks and the USD, as well.

During the Presidential campaign, both Trump and Clinton promised fiscal stimulus , but Trump’s plan offers more infrastructure spending and tax cuts and could top the $1 trillion mark (or 6% of GDP) by the time it’s fully implemented. At the same time, investors are growing more confident of a FED rate hike next month and the futures markets are beginning to price in a more aggressive FED. On the Friday before the election, market participants learned that US average hourly earnings rose by 2.8% on a year-on-year basis. This is the fastest pace in five years and consistent with rising core inflation pressures.

This policy mix of tighter monetary policy and expanding fiscal policy is the most bullish combination for a currency. The last time the US economy saw this this concurrent policy dynamic was after the 1980 election when the Reagan/Volcker mix sparked a 30% US Dollar rally into 1985; which was the impetus for the Plaza Accord. With little first tier Economic data scheduled in the US, we expect to see the firm tone in the USD and US asset prices continue this week.

Chart – Dow Jones
Chart – NASDAQ
Chart – US10YR


Commodities Update

Since the Global Financial Crisis in 2008, one of the most consistently followed market correlations has been …. how the value of the US Dollar influences the price of base metals and industrial minerals including  Coal, Copper and Iron Ore.

Over the last eight years, from a basic “cause and effect” standpoint, as the US Dollar appreciated against the basket of G-7 currencies, the price of Coal, Copper and Iron Ore declined; and vice versa.

However, over the last 45 days, this correlation has soften materially. During this period, the price of Comex Copper has rallied from $2.10 per pound to $2.60 per pound; a gain of over 23%. Similarly, over the same timeframe, the price of Iron Ore has risen from $63.00 per ton to $76.00 per ton for a 20% gain, and the price of Coal has lifted over 11% from $41.00 per ton to $45.50 per ton.

This has all occurred while the USD Index has traded just over 4% higher from 95.50 to 99.50.

Chart - Copper
Chart – Copper
Chart - Iron Ore
Chart – Iron Ore
Chart - USD
Chart – USD

James Hardie – Buy Rec Update

We recently highlighted James Hardie as a buy recommendation and we therefore draw your attention to the upcoming 2Q earnings result scheduled for release on Thursday.

Consensus expectation for FY17 net profit is around US$275m. This will mean JHX is delivering 15%+ EPS growth. It’s likely that a positive earnings trend can be supported by stronger demand for its products from North American consumers.

FY17 revenue $2b,  EBIT $400m, NPAT $275, EPS $0.65, DPS $0.44 places the stock on a forward yield of 3%

Chart – James Hardie (JHX)