Buffett’s Not Buying Yet

Monday, 4 May 2020
Melbourne, Australia
By Greg Canavan

Is the bounce over?

That’s the question many investors are grappling with as we kick off another week.

The ASX 200 plunged 5% on Friday, after rallying 21.5% from the 23 March low.

US stocks had a rough day on Friday, and our market started off shaky this morning.

But by 10:30, stocks had turned around. At lunch time, the ASX 200 showed modest gains. How long it stays there is anyone’s guess. But strength from the banks and gold miners early is supporting the overall market today.

Oh…that and Afterpay.

On Friday, after the market closed, Chinese internet giant Tencent Holdings announced that it had taken a 5% stake in Australia’s buy now, pay later facilitator, Afterpay Ltd [ASX:APT].

APT peaked just over $40 in February, plunged to a low of $8 in March, and after today’s rally on the back of the Tencent news, is back up to over $36.

If you managed to hold on through that roller coaster, well done.

The share price plunge obviously piqued Tencent’s interest. The substantial shareholder notice released to the ASX on Friday revealed it paid between $17 and $31 for its stake.

At $36 per share, APT has a market capitalisation of well over $8 billion. Yet it’s not forecast to turn a profit until financial year 2022. Hmmm.

It’s fair to say Tencent is looking at the long game. It’s betting that COVID-19 won’t really change the growing trend for people to buy now and pay later. If it’s right, and Tencent rolls out APT’s technology into the vast Chinese market, then it’s a big value boost for the Aussie company.

The move from Tencent just goes to show the bullishness that remains around tech right now.

I mean, take a look at the NASDAQ, below. It fell over 3% on Friday. But prior to that, the rally had retraced around 70% of all of its losses during the March sell-off.

There are no bears in tech…

The Insider

Source: Optuma

Meanwhile, the ASX 200 continues to struggle. No doubt that’s because of the large weighting to banks. And as I’ve showed you over the past few weeks, the ASX 200 faces decent overhead resistance here, as you can see from the chart below.

The green line represents the low from 2018. Just above that is the important Fibonacci retracement level of 38.2%. The market turned down from here sharply on Friday.

The Insider

Source: Optuma

For me, it’s hard to see how the market will continue moving higher in the short term. It’s also hard to see how it takes out the lows from March and keeps falling.

Think back to that time. The situation was highly uncertain, wasn’t it? There was a lot of fear priced in at that point. For the market to move even lower, you’re saying that the fear wasn’t great enough back in March.

That’s a big call.

Still. I know enough to know that I know nothing at all. The best way to move forward in environments like this is to understand this truth. Doing so will enable you to roll with the punches and deal with whatever the market throws at you.

My old mate Warren Buffett knows this all too well. On the weekend, Buffett hosted a unique Berkshire Hathaway annual general meeting…there was no one in attendance.

While the meeting was virtual, there were still plenty of interesting takeaways. On market direction, Buffett knows he doesn’t know:

Perhaps with a bias, I don’t believe anyone knows what the market is going to do tomorrow, next week, next month, next year. I know America’s going to move forward over time, but I don’t know for sure and we learned this on Sept. 10, 2001. And we learned it a few months ago in terms of the virus. Anything can happen in terms of markets. And you can bet on America but you’re going to have to be careful about how you bet. Simply because markets can do anything.

He also revealed the sharp declines in March didn’t cause him to deploy any of his vast cash holdings. He wasn’t even tempted to buy back stock in the company he runs, Berkshire Hathaway. From CNBC:

Buffett explained why he didn’t repurchase more Berkshire Hathaway shares during the sell-off in the first quarter. The company only repurchased $1.7 billion of Berkshire shares even as it sits on a record $137 billion cash pile.

“The price has not been at a level where it really feels way better to us than other things, including the option value of money, to step up in a big way,” he said.

From the peak at the start of the year to the low in March, Berkshire’s stock price plunged 30%. But that still didn’t bring prices down to, or below, Buffett’s estimate of intrinsic value.

Given Buffett’s long-term track record and deep understanding of value, this is not exactly good news for the bulls.

For the short term at least, and despite tech having its head in the clouds, the path of least resistance for stocks looks to be down.

On Wednesday, I’ll take a deeper dive into how Buffett calculates intrinsic value. It will give you some good insights into how a rational stock picker is approaching this market.

Please continue below to Pivot Trader Editor, Murray Dawes’ ‘Week Ahead’ video. Today, he discusses the S&P 500, the NASDAQ and Telstra. 

Cheers,
Greg


Cracks Appearing
By Murray Dawes

 

I look at a few different markets in the update today. I start with a quick analysis of the current situation in the E-mini S&P 500 futures, and then show you the NASDAQ because it looks pretty ripe for a correction from these levels.

I finish off by showing you an interesting set up in one of the least loved stocks on the ASX, Telstra Corp Ltd [ASX:TLS].

In the interests of full disclosure, my trading service Pivot Trader is already long Telstra.

My ‘Week Ahead’ videos shouldn’t be seen as buy or sell recommendations. These videos are just showcasing my analysis in real-time so you can learn about my trading methods and make your own mind up about whether you think they are successful.

After last week’s trading, it looks like the sellers are lined up ready to pounce on any opportunity. I gave you my key zone of 3,000–3,090 in the E-mini S&P 500 futures last week. Prices got within 35 points of the zone before meeting stiff selling pressure.

We may still see a spike up into that area, but while the short-term trends are pointing down traders should be looking for opportunities to get short. I give you some of my methods for calculating where selling pressure should be as prices squeeze higher over the next few days.

The NASDAQ, in particular, has a compelling set up that should see selling pressure over the next few weeks. The NASDAQ has had a huge rally since the crash on the back of the usual suspects (FAANG). I think the short squeeze has gone far enough now and the risk is now to the downside.

I finish up with a quick look at Telstra because the very long-term charts are pointing to it as a potential opportunity just as other large companies are cutting dividends. If Telstra can show that it is able to sustain its dividend during tough times there may be some money coming its way.

Regards,

Murray Dawes,
Editor, Pivot Trader