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Good afternoon,

The ASX 200 up another 1.22% this week, with the mid caps industrials leading the way (suits me!)

This morning's weekly note is bought to you by the two coffees my exceptionally patient partner Claire made me, so I'd suspect I'll be a bit nicer this week.  Sorry to the one guy last week who unsubscribed after I clearly offended his sensibilities, I was just trying to help. 

Thanks to the 20-odd newbies for signing up and the readers who emailed, called and text'd me on the back of last week's note.  Writing this thing every week gets more challenging as our business grows so getting the occassional positive comment or share on social media strokes the ego adequately enough to keep me going.   

As a heads up though, I'm going to write up to c. 15 December and then I'm not doing it again until late Jan/Feb, long time readers will know this is my usual 'downtime'.  
The ASX200 kinda "broke out" this week, with the market breaching the range of 5800-6200 points for the first time since COVID-19 hit the global financial markets.  I could run through 3 or 4 really bullish technical indicators that went off in the past week (golden cross, MA uptrends etc.) but who cares... it's all pointing in one direction. 
And let's face it, I'm not much of a chartist and primarily use them to make me feel better/validate my pre-existing views #confirmationbias. 
It was actually a surprisingly news-packed week so rather than wax on (again!) I'll just get into the stocks/stuff you should know. 
Chinese ban on Austrailan thermal coal

Not sure if you caught it during the week but apprently, China has banned imports of Australian thermal coal (subscription required). 

As you all probably know, I'm long both Whitehaven (WHC) and New Hope Coal (NHC) and think there's a substantial investment opportunity in both. 

I've seen similar tactics from the Chinese in recent history, and at those times, the Chinese haven't been willing to 'augment' the seaborne coal price (by removing a big chunk of the demand) for any extended period of time (less than 9 months). 

I think most coal traders will tell you that the Chinese have been trying to prop up their own, much more expensive, domestic production for many years, limiting the overall import volumes of Aussie coal in any given period, lending money for free, offering them ridiculous payment terms on invoices for power, water, tax etc. 

The problem for them is seaborne (Australian) coal is significantly better quality and can be dug up cheaper (and subsequently sold sustainably) than Chinese coal.  So whenever the restrictions are lifted or the quota periods 'roll over'  we see record high imports (as we did in Mar-Apr) as traders arbitrage the domestic price and seaborne price gap #freemoney.  


Don't be surprised to see a few of the coal marketing "dark arts" come out to get around/exploit this ban.
NHC was down 9.54% this week, WHC only down 2.4%.  NHC also announced significant redundancies at its head office (what did I tell you...) and have clearly already started to drive the cost base even lower. 

Mark my words, NHC will come out of this with the leanest and meanest fixed cost base of any of their global peers and should coal prices tick up, will have more operating leverage than any of the peers (as Bengalla is about as good a thermal coal asset as you'll find) AND with a free kick on the potential upside from New Acland Stage 3 getting approved by a more rational Labour government in desperate need for jobs or the newly-elected, coal-friendly Libs in Qld. 
It terms of the China ban, who knows what's going to happen. It's a geopolitical event and no different to the risk faced by companies like A2 Milk or Treasury Wines who derive significant revenues from China - it's a black box and nobody knows how long they can or will sustain this irrationality for their own political gain. 

I've sent out a few emails to my favourite coal market experts and I am going to try and put together a little video for you all on the coal market dynamics, the ban and let the guru's tell you a bit about the commodity trading business. 
I lied last week / Howard Marks is not stupid

I lied to you last week, not deliberately, I just forgot.  I subscribe to a newsletter, its the Howard Marks irregular memo, and even though it's not a stockmarket newsletter, it probably a better read than anything else you read.  I've been reading this thing since my 2nd year of uni after one of my lecturers banged on about it.   Just Google "Howard Marks" and have a look at his track record, what he's worked on and who he's worked with, he's not stupid, you should probably pay attention to him. 

Anyway, my favourite excert from this particular memo is...

"Most decisions in investing are relative decisions. Investors try to find the most attractive opportunity so as to be able to achieve the highest risk-adjusted return. Thus a great deal of the selection process is comparative. “I’m considering buying X. How does its risk/return proposition compare with the one on Y?” That means the lower the return is on Y, the less X has to offer to be the superior investment. And if X is to offer less return, the way it gets that way is through an increase in its price. Thus, assets and asset classes are inherently interconnected. Money moves from one asset class to the next in search of the best bargains, which get bought up until they’re at equilibrium with everything else. Changing the risk-free rate has the potential to reset the returns on everything.

He goes on to talk about the impact of the Equity Risk Premium (ERP) on valuations for stocks and why your rules of thumb don't work anymore (sound familiar?)

I won't butcher the great man's words, so just click the link above, make yourself a cup of tea, chuck on a Spotify playlist on shuffle (you might like one of mine) and read the 17 pages. 
Banks, Miners & Easy Alpha

I'm starting to see a few other commentators get on the bank bandwagon as share prices have rallied c. $2 per share for NAB, ANZ and WBC ($4 for CBA). 

If you're invested in the Australian share market and trying to outperform the benchmark (whether that be the 100, 200 or 300) you need to get the tilt on banks vs iron ore right.  

Over the last 5 years you've wanted to own the miners.  Chart below is BHP in blue with NAB, WBC and ANZ in red
As of 1 August, the tide has started to turn.  I think you gotta ask yourself "are the banks adequately provisioned?" then you have to ask yourself, can commodity businesses (read: price takers, almost perfectly substitutable products) sustain over 100% margins on their product?
Our short CBA, long "the other 3" trade is still in play and adding significant alpha (CBA in Green below) 

(just for the rookies:  "alpha" is "outperformance" above the relevant benchmark, the extra return you get for taking on stock specific risk.  It's the opposite of "beta" or the return achieved in your portfolio because 'all boats rise with the rising tide' - we want as much alpha as possible.)
As I've said all along, this is "easy alpha" and often the kind of stuff many trying to manage their own SMSF at home on Commsec (or even with the guidance of an adviser) ignore.  It's not sexy, it's not going to double your capital over night, it's not hot.  BUT, if you compound that over the long term it really, really adds up.   
Model Portfolio Update

This sort of simple, straight forward, long term and fundamentally-rooted thinking is what we do with the Seneca's Australian Shares Model Portfolio which now has +7% alpha since inception (+12.67% gross vs ASX200 Accum +5.67% from 17/06/2020.) 
Remembering: past performance is not an indication of future performance and that this product might not be right for you, get advice (see last week!)
What's driving the returns?  

This month (October) so far it's our relative overweight positions in the 3 banks discussed + MQG, plus our overweight positions in Pendal (PDL), Credit Corp (CCP), Xero (XRO) and Super Retail Group (SUL).   

See what I mean about nothing sexy.. it's just consistency & basics (in my opinion anyway). 

What else are we holding?

If you really want to know all my holdings all the time, just invest in the portfolio and you can see them all!  But broadly, its the stuff we talk about in this note:
  • building materials stocks for the US housing recovery
  • mining services for late-cycle exploration exposure
  • I almost always have a gold stock or 2 to keep the Chairman of Seneca's Investment Committee happy (Andrew's a bit of a gold bug)
  • Stocks exposed to domestic travel (no, that's not Flight Centre, think 2nd and 3rd order derivatives)
  • Leaders in niche industires with underlying stable growth dynamics
  • Selective technology, healthcare, non-bank financials, industrials.
Movers & Shakers

The old Westfield (URW) had a big week +23% on the back of some activist shareholder/not doing a rights issue/I don't know or don't really care.  I hate shopping centres and refuse to attend them, hell on earth as far as I'm concerned, as a result, I have very limited interest in investing in them.  

I was a bit dirty about the Link (LNK) takeover.  I had a hunch that private equity was looking at either Link (LNK) or Computershare (CPU) and sure enough, convinced myself that CPU was a better option for them and bought a minimum size in the portfolio as a bit of a "see how we go" position.  Typical. 

The automotive bull market is defintely on.  We are on the stock with the most leverage in my view (Super Retail Group, SUL +10% this week), but GUD Holdings (GUD), Bapcor (BAP), AP Eagers (APE) and ARB Corp (ARB) have all been on a tear.  Why? 

People are upgrading their cars and associated accesories to take more camping and caravanning domestic holidays.  Remember I talked about 2nd and 3rd order thinking?  THIS is how you play the domestic travel recovery story (well, at least in part, I've got a few other ideas...)

Not Sydney Airport (SYD, domestic travellers don't spend any money on airport retail... its a glorified bus station), not Qantas (QAN, there's no margin in domestic flights) or Flight Centre (FLT, you going to go to the travel agent to book a trip to Perth or Hamilton Island?... I mean who actually still uses a travel agent anyway?)

Nice quarterly inflow update from the people over at Pendal (PDL) which I was really pleased with.  I could write a whole bit on PDL, but look, its still trading on a steep discount to peers, a steep discount to history, has an improving outlook and a 6% dividend yield.
What did I say about Flight Centre (FLT) & Webjet (WEB)...

Mesoblast (MSB) shareholders... give up. Take your money and throw it in one of those vibrating pokie machines.  It's more fun and probably offers superior risk adjusted returns (In case you can't hear the sarcasm, I'm joking, I hate poker machines even more than I despise people who pretend that a certificate 4 in stockbroking from an online university qualifies them to convince hard working people to punt their life savings on speculative biotech rubbish.)

Zip (Z1P) down after the quarterly.  If you haven't worked out that Zip runs into every quarterly and then gets sold off afterwards by now, you aren't paying attention (pretty good set of numbers as per usual).  For my own money, I'd maybe be a Zip buyer in the low $6's all else being equal. 

Bit a of mixed bag with a bit of building materials, a bit of mining, a bit of real estate making up the list of relative small moves. 
Bit of a quiet time on the sporting front, a bit of Premier League and the Bledisloe should keep me occupied after I get this note finished. 

I'm hoping Dan Andrews let's the animals out of the cage tomorrow. I've got a speculative week-off booked at Skene's Creek in November and I didn't check the refund policy on AirBnB.  I'm not hopeful... 
Have a good weekend, 
LL
Luke Laretive
CEO & Investment Adviser

T  +61 3 8639 1601  |   M  0451 122 656 | lukel@senecafs.com.au
Level 2 Professional Chambers
120 Collins Street Melbourne VIC 3000 
AFSL No. 492686
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