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Good afternoon,

The ASX 200 up 75pts as I type this at about 3pm on Friday afternoon.  Market was pretty flat all week until today's move higher, primarily driven by a big rally in the banks following the easing of the responsible lending legislation introduced by the Rudd-Gillard Government. 

I won't cover that too much, just read about it in the papers (pick your preferred bias below):
As we discussed a few weeks ago, the ASX 200 needs the banks to move higher to break out of the current range, this might be a catalyst for a real re-rate.   As you can see below, it's the non-resources stocks (green) lagging resources (red) at the moment, even when you normalise for dividends (like I've done below). 
Our long-short trade for the past 8 weeks or so has been long WBC, NAB and ANZ ("the other 3"), short CBA.  Played out beautifully so far. 
 
Average return on the "other 3" is an increase of 2.22%

vs

CBA down 6% (after dividend reinvestment)
Speak of long/short, I think there's a nice trade setup in resources at the moment as well, short iron ore, long everything else

I'll setup 2 portfolio's on Factset, the iron ore stocks (RIO, FMG) vs the ASX 300 Resources Index ex-oil and iron ore and we can take a look in a few weeks. 
Not so humble brag

Vulcan Energy Resources (VUL)... signed a senior Tesla executive today and the retail investors loved every bit of it.   Stock has doubled in 30 days.   Intra day high $1.35.

We a long the stock from the placement at 40c. 
Media Stuff

I did a quick fire interview for the team over at The Inside Advisor, if you want to check it out, here's the link:
I also went on Ausbiz again on Tuesday, talking about high quality, reasonably priced, growth companies set to benefit from their dominant industry positions.  I covered Credit Corp (CCP) and IPH Ltd (IPH).  Both are regular dividend payers (3-4%), both have a strong track record or organic and inorganic growth and both are exceptionally well managed.  
AUD/USD

The AUD has fallen off a cliff this week or so (that red line is the 200 day moving average).
But to be fair, the USD has rallied against most major trading pairs... USD Index below (DXY)
Where's the AUD going... god knows.  I got taught a pretty fundamental principle of currency valuation in 2nd year of my undergraduate degree called "interest rate parity".   Here's a chart of the premium/discount the Aussie 10 year bond is trading at relative to the US 10 year bond (blue) vs the AUDUSD exchange rate (red)
If the interest rate futures are right and we do get a rate cut the first Tuesday in October, then perhaps that blue line goes lower again and takes the AUD with it.  US$0.65-$0.70 feels about right to me... but who knows.  
(You can probably guess the sort of regard I hold commentators who talk like they've got a direct line to the RBA/Federal Reserve and the people who describe themselves as a "Self-employed FX Trader" on Twitter.)
Reasons to be a buyer

My investment thesis is, as usual, rooted in the theoretical fundamentals of finance. I think the near-zero interest rates, central bank monetary support (QE) and continued fiscal spending from governments are here to stay (at least inside the relevant investment time horizon). 

As a result, the Equity Risk Premium (ERP) can continue to fall towards 3.50%, driving up asset prices further and future expected returns down.  

However, this structural bull market view needs to be tapered, as theory does not explain markets perfectly.  If theory was all you needed to know, you'd be reading the weekly note of some economics professor rather than some 34 year old who was lucky to graduate uni!  (In fact, there is a whole field of academia studying how flawed financial/economic theory is... its called behavioural finance, we talk about things like "confirmation bias" and the "house money fallacy" all the time!) 
 
But there's actually quite a bit to be bullish about: 
  1. Vaccines - most industry professionals are talking about late this year, early next year.  This should significantly reduce risk aversion and potentially be the catalyst for new highs on the markets. 
  2.  The US election - as much as my clients love to talk politics, it doesn't matter so much who wins, but that its over.  Markets price in uncertainty... prices go up as we move from uncertainty to certainty.
  3. Digitisation on speed - Lockdowns and social distancing have driven up to adopt technological change at a rate we've never seen in history.  Digital, contactless payments, e-commerce, online communication, video games and e-sports... the list goes on.  While there's certainly extreme valuations, there's also extreme change.  I'm not saying all are deserving of their current prices, but fast-growing, expanding margin, wide-moat, fixed cost businesses with a historically low costs of capital and monopoly on the best and brightest.... are generally speaking, excellent investments.
There's always risk.  A great quote from Game Of Thrones (I'm rewatching at the moment) that applies here is "A person can only be brave if they are afraid" and in markets, it's not much different. 
Movers & Shakers

Soul Pat's on a tear after reporting $953m net profit & 35cps dividend.  Telco, Pharmacies, Private Equity doing the heavy lifting.  New Hope Coal (NHC) the main detractor but if you've been a regular reader, you know I'm long NHC at the moment... I think the thermal coal price is unsustainable here and the new management are top drawer and have a track record for effective cost cutting and operational optimisation.  

Service Stream (SSM) got upgraded by Bell Potter, $2.30 price target. 

Whitehaven (WHC) & New Hope (NHC) (not listed here) both had strong weeks - coal stocks are too cheap!

Excluding the banks (NAB, BEN, WBC) and associated (AFG, MOC etc.), pretty much just stocks that had a bad week last week or benefit from increased credit availability that make up the rest. 
Gold and anything to do with the UK struggled (increased lockdowns).  
Credit Corp (CCP) is too cheap at $16.50. 
With the AFL bye round, it's the NBA finals in focus this week. 

I'm tipping Boston over Miami tomorrow (but Miami to win the series) and Denver to bounce back over LA - some very suspect referee decisions in the 4th quarter went LA Lakers way... "The Lebron Effect"... not disimilar to Dangerfield being named in the All Australian Team.  Suspect at best.

For the punters, Celtics by 1-10pts + Nuggets is paying $8.50 and will be my $5.00 bet this weekend.  I will also put aside $5.00 for the best reader multi emailed to me before Saturday morning.  Your name & bet will be shared and either lorded or shamed (lets face it, most likely) next week. 
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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