The ASX200 crossed 6,000 yesterday caught most by surprise after the banks pull off a large jump, partially driven by short squeeze and Hayne’s report recommendation that didn’t go far enough to remove the vertical integration of fund business. And the US markets continue to chalk good recovery, with this being the best January in 30 years! As I mentioned before, welcome to the new norm where there’s going to be many ‘first’.
But while the indices were great, the rise were not felt across the board and recovery for many stocks are still very much below in % terms than what the indices suggest. So while ASX200 has now recovered to just 5.8% below its recent high of 6373 in August 18, CSL, which is in the class of its own, is still down 16.9% from its high. Its BHP and the banks that led the indices higher.
So where to from here? I had indicated earlier before Christmas that I expected a recovery rally in January, and one in which provides the opportunity to sell down. I also indicated that recovery would be patchy and likely for small caps to continue to be beaten down as their intrinsic value is actually not much value. Goldman Sachs in the link below seems to think that the best of 2019 was seen in the whole month of January and returns going forwards would be very mediocre.
The US State of Union address tonight would unlikely influence the markets much – ‘choosing greatness’ haha more of Trump ego on display, nothing more. US-Chine trade talks at crawling pace but likely something to come out of it. Brexit fears somewhat dispel now, with Merkel likely to help out to avoid no deal Brexit. But has all of these been somewhat factored in the recovery rally? I believe so, and I expect markets to trade sideways for a few months after the exuberance dissipates.
The big picture remains that the risks lie in the horizon and many people need to start planning for an earlier exit before the Big Kahuna comes. The trouble is most people would sit pat, despite all the signs now clearly pointing to the slowdown, and most economists are still behind the curve in seeing a forthcoming recession.
By keeping powder dry, I am not making money but I am also not losing. And not losing is a great start for 2019!
For microcap holders, you need to be cautious about companies making bolt on acquisitions – take LVT’s recent acquisition of Wizdom, a software business mentioned as complimentary to LVT’s ongoing business, which cost 30m Euros or $48m bought at 8x ARR (Annualised recurring revenue) with EBITDA positive (but no indication of how positive is positive, so possibly only slightly positive) and paid via a combination of cash and shares. All in all a 7.5% shareholder dilution! But such an acquisition IMO does not make a material impact to LVT’s business and represent an opportunistic CR to also raise $7m in working capital (to cushion their cash burn). These are the TRICKS employed that IMO does not improve shareholder value in the long run. An another tech microcap Buddy Platform (BUD) is just about to announce a similar story!
