Chart of the Day: S&P 500 vs VIX 15-Month Chart
The VIX (CBOE) is known as “the fear index” and can be used to gauge market sentiment. With our base view being bearish, we aren’t too optimistic on a 6 to 12 month view generally, and the VIX can be used by investors to engage in some profit taking. We feel when the Vix is at above 30 (marked in orange) it is a good starting point to dip your toes into equities (as there is no perfect way of predicting the bottom, we can dollar cost average into quality stocks in times of market-wide weakness), while anything below 20 (due to our bearish view) marked in green is a time to take profit, and has worked out well over the last 15-months.
Currently with the VIX at 19.10, we do find it hard to recommend buying into stocks and this why we have a cautious view on the market. We are still far away from market panic or capitulation, which is still a possible risk given inflated valuations across most of the market and deflated earnings outlook, and why we prefer to have some dry powder (cash) for that situation. To put that into context the Covid sell-off had the VIX peak at 85, GFC at 89, and during the slower and more isolated Dot Com crash the VIX peaked at 48, while the Russian and Asian Financial Crises had a Vix of 49 and 38 respectively.
VIX 1994-2023
Markets overnight
Next DC looks set to do well today as management announced total contracts have increased +30% — we take this as a very bullish signal as it implies more revenue for the data centre provider over the coming decade. Next DC is a core component of our Australian portfolio and we like the stock under $10.00.
Briscoes released their annual report today and we thought it was interesting to see some signs of margin pressure on Rod Duke’s golden goose. Gross margins fell from 45.8% to 44% whilst online sales normalised to represent 19% of total revenue. We’re neutral on Briscoes — big box retail isn’t an area we like. Duke’s a best-in-class operator but even he can’t outplay consumer’s tightening budgets.
The S&P 500 sat flat at 0.00% as markets play a game of “sitting and waiting” – Manchester United moved up +6.43% as the bidders move to a third round – we still see this deal as going through and it remains the biggest allocation in our US model portfolio. Consider this: current MANU majority owners the Glazers borrowed £40 million last year to pay £33m in dividends, of which they received £22m.This strikes us as pretty bad management and it explains, in one quick sum, which the Glazers simply cannot afford to keep owning MANU. Or put another way: MANU generates a surprising amount of cash – £122m last year – but £21m went on interest payments to service debt the Glazers have accrued. To be a buyer, then, you need to have deep pockets to unlock that cash flow – luckily, “trophy assets” are back in style.
We’re reminded of the quote attributable to that famous capitalist Lenin – “There are decades where nothing happens; and there are weeks where decades happen”. Markets feel a little bit like this at the moment. Much of the bank risk has been priced in – banks start reporting this week (expecting JP Morgan, Citigroup, etc) and the consensus view is that they will report a flight in deposits as consumers panic re: small regional banks. We disagree with the consensus – big banks like JP Morgan look even better places to store cash since the regional bank crisis and we think they ought to have done quite well considering. The larger issue that we’re worried about is the cost of funding deposits – more and more banks are paying out market interest rates which reduces the net margin the large banks used to rely upon as their “bread and butter”. Expect a little deposit flight at Wells Fargo, however, but this is more representative of Wells Fargo’s poor customer service record.
Next week we have a lot of earnings being reported which may act as a market catalyst: LVMH, Adobe, Netflix, etc. Our question is: how bad do earnings have to get before the market moves downwards?
