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ASX trading blog by skc

skc

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DOW = 6926, +379 (5.8%), S&P = 719.6, +43 ( 6.37%)

The market jumped sharply overnight on the news that Citigroup is profitable in the first 2 months of 2009.

This jump coincided with a hyped talk of a violent and sharp bear market rally, so there could be some positive momentum for the remainder of the week as investors buy into the story. The previous US rally went up from a low of 7453 on 21/11/08 to a high of 9088 on 6/1/09, a 22.5% rise in 45 days. Although the majority rise took place in the first 8 days (high of 8835 on 30/11/09), and got really choppy after that.

A 20-25% rise from recent low of 6470 targets ~7750 to 8090 points, which is the bottom of the range for much of Feb 09. The next quarterly earnings announcements for banks are around mid April, so the current rally could concievably extend into that period.

Much of the sharp falls in the past month are due to the financials, so if the banks are in fact no longer terminal, it is possible that some of the fall may be reversed. However, main street is unlikely to recover in the short term. Healthy banks is a necessary but not sufficient condition for a growing economy. So with consumer demand still low, this is definitely not quite the end of gloom yet.
 

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Flight Centre - FLT

The trade
Entry: Short $4.74 on 25/2/09​
Exit: Buy to close $4.17 on 26/2/09 for 40% of holding, $3.73 on 11/3/09 for remainder​
Return: $0.834 per share, less 9c dividend paid​

Entry rationale

On 24 Feb, FLT announced a poor interim result and dividends were slashed to just 9c (from 37.5c). The SP promptly dropped 9% to close at $5.35. The overall market at the time has no appetite for any bad results and will punish a stock for days on end after such news come out. Shorting after the news was a higher probability play rather than trying to catch a falling knief.

It seemed to me that a short trade is supported by the chart, overall market sentiment and the fundamental of the business outlook. The travel and airline industries are under significant pressure due to falling consumer demand and business travels, and FLT has a loss making division in US that it is unlikely to turn around in the current climate. FLT earnings also include a lot of investment returns (thanks to its large cashflow) which will reduce due to market volatility and lower interest rate.

FLT fell 25% soon after open on 25 Feb, then went up slightly providing a better short entry. My initial stoploss was $5.15, roughly the last place where there was some small support to the fall.

As it turns out, FLT continued its rapid decend for the next 10 days, reaching a low of $3.39 on 10 Mar.

Exit

When the SP dropped another 50c in the first 20mins on 26 Feb, I decided to take some profit and exited 40%. The partial exit was a wise move on hindsight: The price rebounded to $4.55 by lunch time, and there would have been a good chance that I would close the position trying to protect my profit.

I set the remainder a price target of ~$3.5, based on a notional dividend yield of ~6%. When it reached there on 10 Mar, I set a stop loss at $3.65, roughly where the last support was.

FLT opened sharply higher on 11 Mar at $3.74, following a strong night from the US. I was stopped out at $3.73.

Key lessons:
  • When all the planets line up, a trade can be taken with more confidence
  • Taking partial profit seems to suit my style
  • On hindsight entry was too late, but it was difficult to know exactly how angry the market will get.
 

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Billabong International - BBG

The trade
Entry: Short $7.05 on 3pm, 11 Mar 09​
Initial stop loss: $7.35​
Hedge: Long ASX index CFD at 3243, ~2x BBG trade position size​

Entry rationale

BBG, a specialty manufacturer and retailer in surf wear and other borad sport equipments, has been battered in the last year. The company's business model is being challenged, as they try to maintain a premium brand positioning against heavy discount by other retailers / manufacturers. BBG products are highly discrectionary, which means they are sensitive to consumer confidence.

Today the consumer confidence survey reported a slight 0.2% fall from previous month to 85.6. This means consumer confidence is still low, although not falling as fast as before. http://business.smh.com.au/business/handouts-stoke-confidence-20090311-8ul5.html

The company reported a profit that met expectation, and is still projecting a 10% rise in EPS for the full year. This seems hard to achieve given the reports coming through in the US about shopping more being deserted - even Westfield malls have had to cut back the openning hours. The management have had good growth track record, but they haven't really experienced a down turn yet.

On the chart, BBG's been surfing around a narrow range in the past month or so. It has bounced off lows of ~$6.1 to $6.2 a few times, but also retreating from highs of $7.1-$7.2.

A 7% jump today on the back of strong US market (driven by financials) provided an opportunity to take a short trade with a close stop loss at $7.35. Initial target is ~$6.5, giving a R:R of 1.8. BBG also goes ex-div on 17 Mar to the tune of $0.27. So the ex-div target is ~$6.2, which were previous support is. A gap lower tomorrow morning will probably see me take 50% profit.

Given the possibility of a strong bear market rally, I am over-hedging this short trade with an index CFD trade. The hedging is done at ~2x the BBG position size, as BBG is more volatile than the market as a whole.
 

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Thanks Prawn. The best thing is that I can be selective in the trades I post and make myself look good!!! I will start posting some entries followed by exits so it sounds more real time.
 

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IBA - IBA Health Group


Company fundamentals

IBA is Australia's largest listed health IT company, providing IT solutions like financial and patient records management to hospitals and other healthcare providers. They operate mostly in Aus/NZ and UK/Europe, but also has small presence in US and middle East. They run a significant amount of development work out in India - the IT outsource capital of the world.

A number of positives to this share:
  • Relatively recession proof - with 94% revenue funded by public sector
  • Stable revenue - 94% recurring revenue this year, 60% the next
  • Market recognition - IBA is to be included in ASX200 on 20 Mar 09. This may garner new insto following
  • Growth in market - government stimulus packages in US and UK include large amounts to be spent on healthcare IT services

The rights issue

IBA announced on 12 Mar 09 to raise $124M of equity in a 2-for-7 rights issue at 55c a share (last trade 77.5c). Insto component ($77M) is fully committed, and the rest fully underwritten. The purpose of the fund is to retire debt.

Looking at the company accounts, they are retiring some of the most expensive debt in the world. The AEP subordinated debt (total $60M) charges a base rate (i.e. fixed) of 10% + 4.5% margin + 4% PIK + Warrants. Ouch! Even my credit card interest rate is below that. No wonder this debt retirement exercise is said to be EPS positive.

On my back of envelop calculations:

Current EPS = 3.6c, earnings ~$28.3M
Current shares outstanding = 787M
Total shares after rights issue = 1,010M
Saving in interest costs = $14.8M before tax, or $10.4M after tax
New total earnings = $38.7M
New EPS = 3.83c
My finance lecturer told us that debt is always cheaper than equity, as debt is above equity on the capital ladder. But in this case, is it possible that the really expensive debt can be replaced with equity at a lower cost? The numbers seem to suggest that to be the case.

The chart

IBA is in a sideway pattern over the last 12 months, with medium term resistance at ~80c and support at ~40c. You can probably argue about a triangle formation showing itself, but I cannot be absolutely sure.

Interesting to note on the chart that, IBA undertook a rights issue back in Jun 2006, and that sparked a nice SP rise for the ensuing 6 months (the overall bull market certainly helped as well).

The trade approach

I am guessing that the share price will definitely trade below the current price (77.5c) when it opens again, but above the issue price of 55c. There may be some selling pressure as people dump their 55c shares for a quick gain.

I am planning to take a long position if the share price falls substantially. The average PE over the last 3 months is ~18 (vs current PE 21.5). Based on the new EPS of 3.8c, I will probably enter if PE was to fall below that - this mean a target entry price of ~68-69c.

For stop loss, I will adopt a PE of 15 (SP ~57c). If this is reached, it suggests to me that the market has lost confidence in IBA to deliver the projected earning growth, or the overall market's risk appetite is fallen on the wayside. This also close to the rising trend line as indicated on the chart.

For target, I will probably take partial profit at the recent resistance of ~78c, and let the rest ride and test that resistance. R:R is ~1 for the 78c target, but reward is higher if the rest run past the resistance.

Note: Do not rely on any of this information for your own trading. I wrote this for my own record-keeping, learning and entertainment purpose only. Any or all of the figures could be wrong, incomplete, mis-interpreted or pulled from thin air. I may or may not actually enter the trade. I am not a financial advisor, borker, communist, porn star...etc.
 

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Billabong International - BBG

The trade

Entry: Short $7.05 on 3pm, 11 Mar 09

Initial stop loss: $7.35

Hedge: Long ASX index CFD at 3243, ~2.6x BBG trade position size

Exit: Covered $7.41 on 10:10am, 13 Mar 09. Closed hedge at 3292 at the same time.

P/L: A loss of 36c per share on BBG (~5% move), partially offset by the hedge which made 49 points (0.5% move). As the hedge position was 2.6x the size of the BBG trade, I am -2% on this trade after commission.

The entry

See description here https://www.aussiestockforums.com/forums/blog.php?b=540

The Exit

A strong night on the DOW coupled with better than expected retail data saw BBG spiked up in early trade. I moved my stop loss just gently to beyond the daily pivot point resistance level, but the stock had no problem pushing through that, and I was stopped out at $7.41. I closed my hedge at the same time.

The trade would be in a small profit had I closed both legs just 15 mins later (BBG @$7.39, CFD at 3316). Oh well, if only I had polished my crystal ball clearer.

Key lessons:
  • The hedge worked well and to expectation. It was wise to put in the hedge in light of a potential rally from the US.
  • I didn't know US retail data was due out last night. It is important to know when major economic data is coming out. Having said that, even if I did know I would have expected some really ugly data and still play the trade the same way.
  • I had no problem moving the stop loss just a tag, as the daily resistance level can often provide resistance to a better exit point. I need to be sure however, that I have enough discipline not to move it again and again...
 
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Thanks for an excellent post. Well done, and the fact that you are sharing it with others , is credit to you.
 
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thanks for sharing skc,
nice work in evaluating your trades, something ill definitely use from now on
best of luck
 

skc

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Thanks Babka.

FYI I got into this at 66c
 

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Rio Tinto

The Chinese courtship

Rio Tinto is aiming to form a strategic partnership with Chinalco by selling to them about 10-15% ownerships in a number of assets.

The deal is currently waiting approval by FIRB, and some of the key issue are definitely political. Many politicians have spoken out against a deal. Every argument from protection of national interests, undue Chinese influences on price and poor human right records of Beijing has been thrown around. Furthermore, the FIRB decision to extend the time of deliberation by another 90 days (from 13 Mar 09) leave the company in further limbo.

Today RIO slumped ~8%, and has fallen from recent high of $53 to ~$47.5, against a strong overall market. In contrast, BHP has only fallen by 3%.

Bless this courtship

My view is that the partnership will be given the go ahead. By and large, the asset sales are for minority interests only, and RIO maintains the ultimate control. Many commentators are concerned about the level of influence the Chinese can have on production, marketing and price negotiation, which in turn will affect the entire mining industry. These, while valid, should be viewed as levers for bargaining. There are lots of safeguards that can be put in place to manage this conflict of interest, and FIRB can add further conditions rather than banning the deal outright.

But I believe the most important consideration for FIRB should be that, the national interest served (mostly political) by approving this deal is substantially more than any national interest protected (mostly economical focusing on a specific sector of the economy) from banning the partnership. Saying NO to the Chinese today presents a huge risk further down the track when we need them on other fronts - trade talks, military arrangements, buying Australian government bonds, accessing investment opportunities in China, hosting the FIFA world cup... After all, for Chinese it is all about relationship, reciprocity and face. With Rudd having a strong understanding of the Chinese way of thinking, I doubt this will be overlooked.

Downside scenario not that bad

Furthermore, even if the deal doesn't go ahead, it is not necessarily all bad for RIO:

  • The Chinese has put a price tag on these assets that is substantially higher than their current market value. There is no better independent valuation.
  • There are plenty of alternatives - rights issue, equity raising etc. Many existing shareholders have expressed support for such moves.
  • RIO can actually handle their debt in 2009. So they have the time to come up with other resolutions.
  • The market will always assume BHP is lurking in the shadow, and price RIO accordingly

RIO has ~$10B debt maturing in each of 2009 and 2010. The 2009 portion is pretty much taken care of by reducing cap ex, cost cutting and its own FCF. Now, assume they undertake a rights issue to raise a massive $4B to cover the debt in 2010, and they do it at a steep discount of $38 (~20% to current price). This means ~100m new shares which can be covered with a 2-for-9 rights issue. Total shares on issue increased from 457m to 560m. The share price would be diluted (all things being equal) to ~$45-46. And this ignores any interest savings. Ultimately, this is only a drop in price of <5%. A similar calc assuming a $8B issue will take the price down to may be $43 - bad but not catastrophic.

The trade approach

As I intend to trade on this particular event, the most sensible trade is a pairs trade by shorting BHP. This take any movement in the underlying commodity prices out of the equation.

The current price ratio is $47.5/$31.1, or 1.53. The average ratio has been since announcement of the partnership (12 Feb 09) has been 1.62. So the divergence is starting to become tradable, although I will probably wait for a more favourable entry, given that this has at least 90 days to play out yet.

For target, I will exit if the ratio reaches 1.7, or when the events are played out.

For stop loss, I will set the ratio at 1.42. This is based on the fully diluted RIO SP post-rights issue over current BHP price. Position size to be 1.5% of capital based on this stop loss.

P.S. Thank you to Robert Gottliebsen from the Business Spectator for some great information and analysis.
 

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Entered this trade at around 2pm

Long RIO @ $45.88
Short BHP @ $31.39

Ratio RIO/BHP = 1.46

Position size of RIO is ~15% larger than BHP to slightly bias on the long side
 

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Trade is going ok today, with RIO up 5%, and BHP up 3.3%. OZL is facing the music today and a favourable ruling by FIRB may provide a temporary spark to RIO...
 

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DOW 7775 +495 (6.8%), S&P500 822.9 +54 (7.1%)

This rapid and violent rally is now 12 days old. The DOW has gone up ~1250 points, or ~19% from its low of 6525.

The rise last night came as government decided not to nationalise the banks, but buy up toxic assets... many commentators are suggesting this is slated for failure. The US banks are not actually fundamentally sound, and toxic assets where not underpriced due to fear and lack of market, but due to the fact that they were way too expensive, wrongly priced and contained low quality loans in the first place.

The US government is not stupid - they know exactly what they are doing. They are doing this because the nationalisation of the banks is not tolerable for them. They are doing this as a face-saving way to bail out the banks, knowing well that they are paying for assets at a price that never should have been. They rope in some private investors to make the whole thing appear more legit and calculated, but ultimately US taxpayers are wearing the loss. Socialisation of bank failure achieved under the guise.
 

skc

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This trade is working well a bit too quickly. Surprised that the OZL delay did cause any negativity towards RIO. I guess the FIRB really want a more holistic approach to all this rather than assess case by case.

Closed half the position

BHP @ 34.37
RIO @ 53.86

Closing ratio = 1.567
 

skc

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Closed the remaining half

BHP @ 33.23
RIO @ 53.40

Close ratio = 1.607. This was close enough to the average ratio post announcement.

Overall, Rio was up $7.75, and BHP up only $2.41. The net long on RIO also helped.

This is my first venture into pairs trading based on a fundamental and technical view of how things should pan out. I will keep an eye on this pair from now on, and see if there are further entries to be made.
 

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Boy did I exit too early on this one. RIO is now up to $59.2 and BHP still at $34 ish. Ratio is now 1.7...
 
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Hi SKC,

I read your posts with interest as am just learning - curious how did this trade go for you?
 

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