Early Days on The Bank Hedge

Posted on | by Leon Hinde | Leave a Comment on Early Days on The Bank Hedge

We’ve been running a hedge on the Australian banks; CBA through an in-the-money European March option, NAB using an in-the-money American February option and WBC a longer-term call option. In ANZ our preference has been to exit the trade altogether.

On Friday, our domestic banks started to see some profit taking and the catalyst could’ve been selling ahead of the US banking results and/or the announcement of weaker export data out of China.

JP Morgan and BoA’s results , released last night, were adequate on the bottom line but both companies missed on the revenue front. Increased dividends and share-buybacks helped support what otherwise would’ve been viewed as weak results.

Chart – CBA
Chart – WBC
Chart – NAB
Chart – ANZ

 

 

RIO – Q4 Production Report

Posted on | by Leon Hinde | Leave a Comment on RIO – Q4 Production Report

On balance, 2016 wasn’t a bad year for RIO Tinto. After posting a 7-year low at $36.50 on February 1st, shares of the mining giant closed out the year just below the $60.00 mark (a 64% gain).

This impressive turn-around was supported by a broad rebound in Iron Ore, Copper, Coal and Aluminium. Rio has an impressive portfolio of assets. It anticipates solid growth in Iron Ore production in 2017, with a large copper project coming online over the next decade.

The company has a market cap of just under $80 billion.

On Tuesday, RIO will release its Q4 2016 production report. We expect the report to show a modest 1% lift in quarter-to-quarter production, driven primarily by Q4 strength in Iron Ore production and shipments from the Pilbara.

In addition, forecasts expect RIO to have lifted group production by 5% YoY in 2016, with strong gains in Copper (3%), Iron Ore (6%) and Aluminium (10%).

We also expect RIO to lift group production forecast by a further 7% for calendar year 2017.

In FY17, we expect revenue to up 5% to $37b, net profit up from $5.2b in FY16 to $7b in FY18. EPS will increase from $2.90 in FY16 to $4.00 in FY18, helping to push the dividend yield from the current 3% to almost 5% in 2018.

We’re keeping exposure to resources and selling tight covered calls 5% above current market valuations.

Chart – RIO

Key US Data: Retail Sales

Posted on | by Todd | Leave a Comment on Key US Data: Retail Sales

US economic data will dominate Friday’s trade with the release of retail sales figures before the open of the US stock market

Consensus forecasts expect the Commerce Department to announce retail sales rose 0.7% in December following a 0.1% increase in November. In the USA, consumer spending accounts for 70% of  GDP growth which makes this report a closely watched indicator of overall economic activity.

Earlier this week, the ABS announced Australian retail sales rose by .2%, missing expectations for the first time in four months.

Dow Jones – Eve of US Bank Earnings

Posted on | by Leon Hinde | Leave a Comment on Dow Jones – Eve of US Bank Earnings

As investors we rarely need to take much notice of intra-day graphs. However, I’ve attached the Dow Jones 5-day graph which shows the price behaviour rolling over, heading into tomorrow’s bank results.

Short-term traders and index investors, (both long and short), will find the chart and strategy outline shown below of interest. As too, would someone running a dynamic portfolio hedge using futures, index options, etc.

The chart pattern shows the recent “lower high and lower low” selling pattern as the index hit resistance just below 20,000. This big number has little relevance to us and is of no real interest. What’s more interesting is the pattern leading into tomorrow’s US bank earnings.

Traders may form a view that staying short the index as long as the price pattern stays below the 19,980 level is warranted.

From an investor perspective, we remain cautious of global markets based on current valuations and increasing macro risks. We continue to position defensively and use covered calls to deliver returns without pursuing an overweight “growth” portfolio allocation.

Chart – Dow Jones

US Bank Earnings Preview

Posted on | by Todd | Leave a Comment on US Bank Earnings Preview

The fourth quarter earnings season kicks into high gear this week when the first of the major US banks report tomorrow night. Expectations are mixed, based on forecasts that include the impact of the FED raising interest rates and the Presidential election.

Bank of America and JP Morgan are both expected to report solid bottom-line growth. On the other hand, Wells Fargo is expected to say that its earnings have slipped from a year ago.

Below is a quick overview of what is expected from these three banks.

BoA Q4 profit is expected to come in at 38 cents per share, which would be close to a 30% gain from the year-ago period. The consensus has earnings pegged at 40 cents per share.

JP Morgan is expected to announce it had earnings of $1.47 per share, which would be up from $1.32 per share a year-ago on revenue of $23.70 billion.

Wells Fargo is expected to post Q4 EPS of $1.00 per share which is down three cents from a year ago on revenue of just over $22.00 billion.

Australian Bank Profit Announcements – Key Dates

Posted on | by Leon Hinde | Leave a Comment on Australian Bank Profit Announcements – Key Dates

Bank profit announcements start in February with the following key dates worth noting.

SUN 9 February, BEN 13 February, CBA 15 February along with 1Q17 trading updates from ANZ and NAB in February.

Following the recent rally in bank shares, we see the current trading range as full value, therefore, placing the banks at risk of being buffeted by any increase in market volatility.  Although net interest margins have improved, the prospects of earnings growth is modest with the outlook between 1% – 4% growth at both top and bottom-line.

We also remain concerned that the cycle for bad debts is likely to rise from the current historic low levels.

Charts – Aust Bank ETF