Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

EURO STOXX 50 Price EUR / Technical Analysis

<ul>
<li>As discussed in our previous Int'l Compass (June 29, 2023), we are bullish on global equities (MSCI ACWI) as long as ACWI-US is above $93, targeting $110</li>
<li>Bullish developments have continued: DXY breaking below $101-$101.50, RS bottoming for small-caps, MSCI ACWI ex-U.S. (ACWX-US) 1+ year breakout above $50, Italy's FTSE MIB breaking above multi-year resistance at 28,100.</li>
<li>This is only further evidence supporting our bullish outlook. We are getting the breakout above 4400-4415 on the EURO STOXX 50 that we've been expecting. Buys in Energy, Materials, Financials</li>
</ul>


As discussed in our previous Int'l Compass (June 29, 2023), we are bullish on global equities (MSCI ACWI) as long as ACWI-US is above $93, targeting $110
Bullish developments have continued: DXY breaking below $101-$101.50, RS bottoming for small-caps, MSCI ACWI ex-U.S. (ACWX-US) 1+ year breakout above $50, Italy's FTSE MIB breaking above multi-year resistance at 28,100.
This is only further evidence supporting our bullish outlook. We are getting the breakout above 4400-4415 on the EURO STOXX 50 that we've been expecting. Buys in Energy, Materials, Financials


Bullish Developments Continue; MSCI ACWI Ex-US 1-Yr Breakout; Buys in Energy, Materials, Financials

Market dynamics remain healthy which suggests a new broad-based bull market is not far off. With that said, we are still waiting for confirmation in the form of breakouts or bullish price inflections on the broad global indexes (ACWI-US, ACWX-US, EFA-US, and EEM-US) in order to turn bullish.<ul type="disc">
<li>
Actionable Theme: Major Autos/Auto Parts. Global automobile stocks display bullish price and RS inflections with many breaking out to new highs -- add exposure... see pages 3 and 5-6.</li>
<li>
Actionable Theme: Financials. There continues to be a plethora of attractive Financial stocks globally, ranging from banks and insurance to financial services -- add exposure... see pages 4 and 6-14.</li>
</ul>

Market dynamics remain healthy which suggests a new broad-based bull market is not far off. With that said, we are still waiting for confirmation in the form of breakouts or bullish price inflections on the broad global indexes (ACWI-US, ACWX-US, EFA-US, and EEM-US) in order to turn bullish.

Actionable Theme: Major Autos/Auto Parts. Global automobile stocks display bullish price and RS inflections with many breaking out to new highs -- add exposure... see pages 3 and 5-6.

Actionable Theme: Financials. There continues to be a plethora of attractive Financial stocks globally, ranging from banks and insurance to financial services -- add exposure... see pages 4 and 6-14.


Buying Global Financials & Autos/Auto Parts

Taiwan Semiconductor (TSMC) / Technical Analysis

Emerging market equities have been one of the worst areas to invest in 2021, but we see early signs of positive change. With the US dollar failing to break above resistance at $93.50 and the MSCI EM ETF (EEM-US) displaying a false breakdown at $52, we believe now is an opportune time to add exposure to emerging market equities. To be clear, we are not getting overly bullish on EM; we have favored developed int’l (EAFE) over EM since May, and we are now shifting back to a neutral stance between the two. We see reason to believe the tide is shifting in EM’s favor. Below we highlight attractive and actionable themes within EM.

Emerging market equities have been one of the worst areas to invest in 2021, but we see early signs of positive change. With the US dollar failing to break above resistance at $93.50 and the MSCI EM ETF (EEM-US) displaying a false breakdown at $52, we believe now is an opportune time to add exposure to emerging market equities. To be clear, we are not getting overly bullish on EM; we have favored developed int’l (EAFE) over EM since May, and we are now shifting back to a neutral stance between the two. We see reason to believe the tide is shifting in EM’s favor. Below we highlight attractive and actionable themes within EM.

Shifting Exposure To Emerging Markets; Buying TSMC/Taiwan Semi, ICICI Bank, Many Others

Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

Powszechna Kasa Oszczednosci B / Equity Bottom-Up

LTM results at PKO may not look pretty given the hugely distorting effects of CHF mortgage provisioning. With 6.7 billion zlotys already set aside for potential settlements with Swiss franc mortgage holders, the lender's top managers recently said the bank currently has no plans to create additional loan loss provisions on its Swiss franc mortgage portfolio and would like to return to dividend payments as soon as possible, subject to the decision of Poland's Financial Supervision Authority. Including the aforementioned provisions in OPEX, as our data supplier does, generates very poor Efficiency ratios. Stripping these out of OPEX shows a bank making gradual improvements on the Efficiency front. This means that rather than scoring “0” on Efficiency, the bank should perhaps score a “1.1” in our binary PH Score™ model. If we were to do this, PKO would score 3.3 rather than 2.2. Either way, this is a subpar outcome given the deterioration, not helped by the provisions, in Profitability as well erosion in Common Equity/Assets (though not all Capitalisation ratios), in NIM/Spread, and in Asset Quality. Provisioning was better though while Liquidity improved on account of reining back credit provision. Stripping out CHF provisions, PT Profit was some 8% lower YoY which is reasonable given the C-19 backdrop though underlying Profitability revealed a downward trajectory given Asset growth (accumulation of debt instruments).PKO specialises in consumer credit (61% of Loans), mainly mortgages, though the bank has a (receding) corporate credit book (39%), backed by transactional account funding (84% of Deposits). Under Zbigniew Jagielło's respected tenure, <span title="" data-toggle="tooltip" data-offset="10%" data-trigger="manual" data-html="true" data-container="body" data-template='&lt;div class="tooltip" role="tooltip"&gt;&lt;div class="news-article-tooltip-arrow tooltip-arrow"&gt;&lt;/div&gt;&lt;div class="tooltip-inner"&gt;&lt;/div&gt;&lt;/div&gt;' data-original-title="">PKO made a string of acquisitions and more than doubled its asset size, but the CEO's surprise resignation has raised questions about whether Poland's largest bank will face growing political interference. PKO has been a state-controlled financial institution since its inception. But Poland's ruling party PiS has, since coming to power in 2015, <span title="" data-toggle="tooltip" data-offset="10%" data-trigger="manual" data-html="true" data-container="body" data-template='&lt;div class="tooltip" role="tooltip"&gt;&lt;div class="news-article-tooltip-arrow tooltip-arrow"&gt;&lt;/div&gt;&lt;div class="tooltip-inner"&gt;&lt;/div&gt;&lt;/div&gt;' data-original-title="">intensified efforts to increase state control of the financial sector. The "redomestication" of banks promises greater national autonomy though in reality the participation of government has also led to concerns by investors that banks might be used to finance unprofitable entities or sectors. Jagiełło's leadership of PKO over the last 12 years has been seen by the market as a sign of stability, and helped reposition it as a modern, digital financial institution and strengthen its leading position in the banking sector. During his tenure, the bank's assets increased from less than €40 billion in 2009 to more than €80 billion in 2020. It strengthened its position in various markets via M&amp;A, including the purchase of Nordea’s Polish banking and insurance units, the Polish leasing operation at Raiffeisen, and the Polish asset management at KBC while branches were opened in Germany, the Czech Republic, and Slovakia<div class="content-highlight">A FV of 19% and a PBV of 1.2x are not attractive given the respective thresholds of 10% and 1.0x. The bank commands subpar fundamental momentum despite the headline CIR and lack of Profitability being more optical than real within a low PH Score™. Management autonomy generates uncertainty and is a risk moving forward.</div>

LTM results at PKO may not look pretty given the hugely distorting effects of CHF mortgage provisioning. With 6.7 billion zlotys already set aside for potential settlements with Swiss franc mortgage holders, the lender's top managers recently said the bank currently has no plans to create additional loan loss provisions on its Swiss franc mortgage portfolio and would like to return to dividend payments as soon as possible, subject to the decision of Poland's Financial Supervision Authority. Including the aforementioned provisions in OPEX, as our data supplier does, generates very poor Efficiency ratios. Stripping these out of OPEX shows a bank making gradual improvements on the Efficiency front. This means that rather than scoring “0” on Efficiency, the bank should perhaps score a “1.1” in our binary PH Score™ model. If we were to do this, PKO would score 3.3 rather than 2.2. Either way, this is a subpar outcome given the deterioration, not helped by the provisions, in Profitability as well erosion in Common Equity/Assets (though not all Capitalisation ratios), in NIM/Spread, and in Asset Quality. Provisioning was better though while Liquidity improved on account of reining back credit provision. Stripping out CHF provisions, PT Profit was some 8% lower YoY which is reasonable given the C-19 backdrop though underlying Profitability revealed a downward trajectory given Asset growth (accumulation of debt instruments).PKO specialises in consumer credit (61% of Loans), mainly mortgages, though the bank has a (receding) corporate credit book (39%), backed by transactional account funding (84% of Deposits). Under Zbigniew Jagielło's respected tenure, PKO made a string of acquisitions and more than doubled its asset size, but the CEO's surprise resignation has raised questions about whether Poland's largest bank will face growing political interference. PKO has been a state-controlled financial institution since its inception. But Poland's ruling party PiS has, since coming to power in 2015, intensified efforts to increase state control of the financial sector. The "redomestication" of banks promises greater national autonomy though in reality the participation of government has also led to concerns by investors that banks might be used to finance unprofitable entities or sectors. Jagiełło's leadership of PKO over the last 12 years has been seen by the market as a sign of stability, and helped reposition it as a modern, digital financial institution and strengthen its leading position in the banking sector. During his tenure, the bank's assets increased from less than €40 billion in 2009 to more than €80 billion in 2020. It strengthened its position in various markets via M&amp;A, including the purchase of Nordea’s Polish banking and insurance units, the Polish leasing operation at Raiffeisen, and the Polish asset management at KBC while branches were opened in Germany, the Czech Republic, and SlovakiaA FV of 19% and a PBV of 1.2x are not attractive given the respective thresholds of 10% and 1.0x. The bank commands subpar fundamental momentum despite the headline CIR and lack of Profitability being more optical than real within a low PH Score™. Management autonomy generates uncertainty and is a risk moving forward.

PKO: Not as Bad as It Looks but Still Unappealing

We have been pretty negative on Polish banks this year: <a href="https://www.smartkarma.com/insights/polish-banks-latest-fundamental-trends-and-valuations-instil-caution" target="_blank" data-smartkarma-citation="insights:29744" rel="noopener">Polish Banks: Latest Fundamental Trends and Valuations Instil Caution</a> . There are some structural issues that will not go away. But we will focus on a different issue today.Recent reports in November concerning a Supreme Court ruling on zloty conversion sent shares plunging. The court said that the loans could be converted back into zloty without cancelling the contract. It added that the interest paid by borrowers would continue to depend on Swiss franc interest rates, which are considerably lower than the zloty equivalent. The ruling only applies to one case. But investors worried that the ruling, the first since the EU’s top court delivered its own landmark ruling a few months back on how to deal with such mortgages, could set the tone for other cases, and require Polish banks to reimburse tens of billions of zlotys to customers. Bank Millennium fell almost 4 cent on the news, while Santander Polska dropped 3 per cent, and PKO  slid 2.9 per cent. The Polish currency weakened to its lowest level against the euro since the start of October. Overnight, PKO became the most oversold bank globally. Shares have since, somewhat inevitably, bounced from an oversold position.<div class="content-highlight"><a href="https://www.smartkarma.com/entities/pko-bank-polski-sa" target="_blank" data-smartkarma-citation="entities:27058:1" rel="noopener">PKO PW</a> , Poland's biggest lender, scores pretty well at 7.8 on our value-quality gauge, the PH Score™, driven by core Profitability and Efficiency gains among other variables. Other lenders in Poland score less well such as Bank Millenium, BHW, PEO, and SPL. In fact, they generally exhibit subpar scores. Perhaps, a pairs trade might be compelling, going long PKO and short one of the aforementioned banks.</div>The bank is moving in the right direction, as gauged by Fundamental Momentum, but shares are being held back by aforementioned concerns relating to zloty conversion. It is almost impossible to predict a worse case scenario given regional courts will take a different stance with varying solutions. The worse case "hit" to Polish banks is  thus tricky to say the least but 60bn zloty for the entire system has been mooted, spread over years.In short, we believe that the perception of risk regarding the ongoing zloty conversion is overplayed and we see the System withstanding even a prolonged worse-case scenario. (This is not to say we are mindful of other issues such as State control and the level of Polish Debt on bank books).In the mid-1960s, Warren Buffett bought 5% of American Express, shares then battered by an infamous salad-oil scandal with American Express viewed as liable for $60 million in damages. (In the "Great Salad Oil Swindle", AMEX eventually reached an agreement with salad oil claimants that would cost only $32 million net of taxes). Buffett correctly recognized that the competitive advantage of American Express’s consumer monopolies was still very much intact. Though different, we can see PKO maintaining an enviable competitive banking franchise (maybe not the "compounding machine" of AMEX but still a 11% ROE bank) and overcoming bouts of extreme negativity. <div class="content-highlight">The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was backtested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. </div>

We have been pretty negative on Polish banks this year: Polish Banks: Latest Fundamental Trends and Valuations Instil Caution . There are some structural issues that will not go away. But we will focus on a different issue today.Recent reports in November concerning a Supreme Court ruling on zloty conversion sent shares plunging. The court said that the loans could be converted back into zloty without cancelling the contract. It added that the interest paid by borrowers would continue to depend on Swiss franc interest rates, which are considerably lower than the zloty equivalent. The ruling only applies to one case. But investors worried that the ruling, the first since the EU’s top court delivered its own landmark ruling a few months back on how to deal with such mortgages, could set the tone for other cases, and require Polish banks to reimburse tens of billions of zlotys to customers. Bank Millennium fell almost 4 cent on the news, while Santander Polska dropped 3 per cent, and PKO  slid 2.9 per cent. The Polish currency weakened to its lowest level against the euro since the start of October. Overnight, PKO became the most oversold bank globally. Shares have since, somewhat inevitably, bounced from an oversold position.PKO PW , Poland's biggest lender, scores pretty well at 7.8 on our value-quality gauge, the PH Score™, driven by core Profitability and Efficiency gains among other variables. Other lenders in Poland score less well such as Bank Millenium, BHW, PEO, and SPL. In fact, they generally exhibit subpar scores. Perhaps, a pairs trade might be compelling, going long PKO and short one of the aforementioned banks.The bank is moving in the right direction, as gauged by Fundamental Momentum, but shares are being held back by aforementioned concerns relating to zloty conversion. It is almost impossible to predict a worse case scenario given regional courts will take a different stance with varying solutions. The worse case "hit" to Polish banks is  thus tricky to say the least but 60bn zloty for the entire system has been mooted, spread over years.In short, we believe that the perception of risk regarding the ongoing zloty conversion is overplayed and we see the System withstanding even a prolonged worse-case scenario. (This is not to say we are mindful of other issues such as State control and the level of Polish Debt on bank books).In the mid-1960s, Warren Buffett bought 5% of American Express, shares then battered by an infamous salad-oil scandal with American Express viewed as liable for $60 million in damages. (In the "Great Salad Oil Swindle", AMEX eventually reached an agreement with salad oil claimants that would cost only $32 million net of taxes). Buffett correctly recognized that the competitive advantage of American Express’s consumer monopolies was still very much intact. Though different, we can see PKO maintaining an enviable competitive banking franchise (maybe not the "compounding machine" of AMEX but still a 11% ROE bank) and overcoming bouts of extreme negativity. The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was backtested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. 

2020 High Conviction: PKO - Not as Toxic as It Seems

Poland

Santander Bank Polska S.A operates as a bank The Bank offers business and personal loans, mortgages, pension plans, insurance, factoring services, securities brokerage services, credit and debit cards, accounts, and money transfer services. Santander Bank Polska serves customers in Poland.

Bank Pekao S.A. attracts deposits and offers commercial, retail, and investment banking services. The Bank provides mortgages, consumer and business loans, debit and credit cards, custody, factoring, lease financing, private banking, asset management, and securities brokerage services.

mBank S.A. provides commercial banking services. The Bank offers corporate, retail, and private banking services. mBank is active on the capital markets through its brokerage subsidiary and offers lease financing services through its leasing subsidiary.

Bank Handlowy w Warszawie S.A. operates as a bank that offers deposits, lending, foreign and domestic settlements, foreign exchange, as well as capital market activities and money market operations. The Bank has 28 domestic branches, four representative offices and the London foreign branch.

Bank Millennium S.A. attracts deposits and offers commercial and consumer banking services.  The Bank offers credit, lease financing, securities brokerage, pension plans, factoring, and investment banking services.  The Bank also sponsors credit and debit cards.

Bank Ochrony Srodowiska S.A. (BOS) attracts deposits and offers commercial banking services.  The Bank offers construction, Lombard, margin, bridge, mortgage, hire purchase, and student loans, trade finance, and investment banking services.  BOS also finances environmental projects.

Powszechny Zaklad Ubezpieczen SA offers property and casualty insurance. The Company offers a wide range of non-life insurance products including fire and automobile insurance. Powszechny Zaklad also has a division that offers life insurance.

Kruk SA as founded in 1998 and offers debt collection services in Poland, Romania, Czech Republic and Slovakia. The Company's two main business lines are: acquisition of non-performing debt portfolios and debt collection outsourcing with a main focus on consumer and corporate loans.

Warsaw Stock Exchange operates an exchange for the trading of Polish securities. The Exchange trades equities, derivatives, bonds, subscription rights, and warrants.

Hang Seng Bank Limited and its subsidiaries provide banking and related financial services.

CIMB Group Holdings Berhad provides commercial banking and related financial services. The Company and its subsidiaries, operate as a regional universal bank offering a full range of financial products and services, covering corporate and investment banking, consumer banking, treasury, insurance and asset management.

Standard Chartered PLC is an international banking group operating principally in Asia, Africa, and the Middle East. The Company offers its products and services in the personal, consumer, corporate, institutional and treasury areas.

CTBC Financial Holding Company Ltd. is a holding company.  Through its subsidiaries, the Company provides a variety of banking and financial services, including deposit, loan, guarantee, international banking, trust banking, credit card, investment banking, safety deposit box, and Internet banking services.

Punjab National Bank provides financial services such as corporate and personal banking, industrial finance, agricultural finance, financing of trade and international banking. The Company provides services to domestic conglomerates, medium and small industrial units, exporters, non-resident Indians and multinational companies.

Bank of Baroda owns and operates commercial banks in India.  The Group's banks provide the traditional forms of banking services, including CD's, Credit Card services and a variety of car loans, in addition to gold banking and a range of insurance services.  The Group also owns IBU International Finance Limited, an international banking company in Hong Kong.

Public Bank Berhad provides a range of banking and financial services which include leasing and factoring, stock and futures broking, financing for the purchase of licensed public vehicles, and other financial services. The Group's overseas operations include branches in Hong Kong, Sri Lanka, Laos, Cambodia, and Vietnam.

Bank of Nanjing Co., Ltd. operates commercial banking businesses. The Company offers deposits, loans, settlement, discounting, financial bond issuance, government bond underwriting, bank guarantee, and other related financial services. Bank of Nanjing provides services for enterprises and individuals.

KB Financial Group Inc. (the "Company"), in accordance with Financial Holding Companies Act, was established on September 29, 2008, through stock transfer with the former shareholders of its subsidiaries including Kookmin Bank in order to provide management services and financing to associated companies. The headquarters are located at Seoul, Korea

E.Sun Financial Holding Company Ltd. is a holding company.  Through its subsidiaries, the Company provides banking, brokerage and dealer services.

Powszechna Kasa Oszczednosci Bank Polski S.A. attracts deposits and offers commercial banking services. The Bank offers all types of banking services present on the Polish banking market, money market and capital market for institutional and individual clients.

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Powszechna Kasa Oszczednosci B (PKO PW)

Bullish Developments Continue; MSCI ACWI Ex-US 1-Yr Breakout; Buys in Energy, Materials, Financials

We remain bullish on global equities as long as $ACWI remains above $93, targeting $110; Bullish developments continue: $DXY below $101.50, small...

Vermilion Research

Buying Global Financials & Autos/Auto Parts

Global automobile stocks display bullish price and RS inflections with many breaking out to new highs. Financials are attractive globally, ranging...

Vermilion Research

Shifting Exposure To Emerging Markets; Buying TSMC/Taiwan Semi, ICICI Bank, Many Others

We see early signs of positive change within EM, and we present a strong case as to why we believe now is an opportune time to add exposure.

Vermilion Research

PKO: Not as Bad as It Looks but Still Unappealing

PKO faces diverse headwinds in the form of subpar fundamental trends, risk to management autonomy, and stretched valuations relative to peers.

Paul Hollingworth

2020 High Conviction: PKO - Not as Toxic as It Seems

We have been pretty negative on Polish banks this year: Polish Banks: Latest Fundamental Trends and Valuations Instil Caution . There are some...

Paul Hollingworth

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