Packer Calls the Top in Property

The first week of reporting season is coming to an end. So far it hasn’t been too bad…a few hits and a few misses. But yesterday’s miss from ANZ [ASX:ANZ] probably matters a bit more than most.

That’s because it gives an early insight into how the banks are faring as they move deep into an expansion cycle.

The big news was that ANZ announced a $3 billion capital raising at $30.95 per share. It also announced slightly weaker than expected profit growth and a 13% jump in bad debt charges to $877 million.

For years now the banks have reported lower and lower bad debt charges, which along with generally robust conditions have allowed them to post higher profits.

But if the cycle for bad debts has indeed turned, then it could be as good as it gets for the banks. Perhaps that’s why CEO Mike Smith surprised with the rights issue. He wanted to get in ahead of Westpac and the Commonwealth Bank (NAB has already tapped the market).

ANZ’s announcement sent investors running from the other banks. The ‘Australia’ proxy, Commonwealth Bank [ASX:CBA] dropped 3.2%. Investors are nervous about CBA’s own capital raising and its future profit growth.

The big question for bank investors though is whether the trend of ongoing profit growth has now changed? My guess is yes it has. But that’s just my opinion. Let’s see what the market thinks about CBA by looking at its chart.

A chart can be of crucial importance. I know many people who think chart reading is a load of bollocks. I used to be sceptical too. But when you think about it, a chart is simply a historical record of people’s opinions, analysis and valuation of a particular company.

It is also a record a human emotion, and for that reason chart patterns tend to repeat.

A chart tells you what people who are putting their hard earned cash on the line really think about a stock. In the parlance of old-school Wall Street, the ‘tape’ never lies.

I wouldn’t go so far as saying the charts never lie, but I would say that they give you a lot of useful information if you know how to look.

So let’s have a look at the chart of CBA and see what it’s ‘saying’. The blue and gold lines you see in the chart are called the moving averages. I’ll explain why they’re so useful some other time.

For now, note how CBA’s share price crashed in May and June, and then worked it’s way above the moving averages in late June and July. But then yesterday the stock fell decisively though the moving averages.


That tells me you’re going to see some near term weakness.

But that’s not a big deal. Stocks are volatile. So what.

Longer term investors should keep an eye on the June low, which is just below $80. If that level breaks, it will increase the probability that CBA may be heading into a longer term downtrend.

From there, the October 2014 low becomes very important. If, for whatever reason, that level goes, then something is obviously happening in the economy that is not good for the banks.

But that’s a hypothetical. Right now, the chart tells you not to panic. But keep your eye on the $78/79 level. If that goes, maybe panic a little bit, and lighten your holdings.

While it might seem hard to believe that CBA could actually fall below $80 and $70 per share, absolutely anything can happen in this market. So be prepared. Have a plan and be ready to act if you need to.

More importantly, never fall in love with a stock. A stock doesn’t know you own it, so it won’t take offence to you selling it. If the stock turns on you, dump it!

By ‘turns’ I mean changes trend. This is such an important thing to be mindful of in investment markets, yet very few people take any notice of it. Until last year, I didn’t either.

But I tell you what, taking note of trends has made a massive difference to my investing. I’ll tell you more about that next week.

For now, let’s stick with the banks.

What could make the sector go into a downtrend, or at least put a stop to the unrelenting bull market that’s been underway since mid-2012?

I know this is even HARDER to believe, and Markets and Money co-editor Callum Newman will be chuckling at my stupidity as he reads this, but what about an end to the Aussie housing boom as a reason to stop the banks in their tracks?

I know, it sounds far-fetched.

I’m not talking about a housing crash. I’m simply referring to a situation where mortgage demand drops right off at the same time that banks raise capital (and therefore have more shares on issue).

And if the bad debt cycle starts to pick up, then bank earnings will go backwards, dividend per share growth will be over, and share prices will fall.

For things to get really ugly though, you’d need to see the property market really fall over. That doesn’t look likely anytime soon, but in terms of symbolism, the record price fetched by the sale of James Packer’s Vaucluse house this week smells a bit toppy.

Chinese Australian billionaire Chau Chak Wing apparently paid a record price of $70 million for Packers’ pad. Crazy record prices generally happen at or close to the top. And Packer’s got some reasonable form. He sold out of his media assets at top dollar, just before the sector’s structural woes become apparent.

He did have a shocker by buying into the Ten Network in 2010 though, a horrendous investment by anyone’s standards. But overall his strategy of getting out of media and doubling up on gaming has been the right one.

Has he just picked the top of another market?


Greg Canavan+,

For Markets and Money, Australia

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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

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