** 01/02/11 - 748am - by James Gerrish**
The local market was actually quite positive yesterday with a strong afternoon rally pushing the S&P/ASX 200 from a low of -57 points to close just -21 down. Obviously the focus was on the turmoil that is occurring in Egypt however it was more a buying opportunity than a reason to throw your hands in the air and dump stocks.
Asian markets were pretty much lower across the board however as we've started to do in recent times, we take our lead from China when it comes online mid morning. Yesterday, the Chinese market was up +1%. I was reading a note from Goldman Sachs yesterday which called the market cheap from a bottom up valuation perspective - currently top 200 stocks are trading at 12.7 times forward earnings - about 14% below their 10 year average. This is interesting and I think another reason why we shouldn't be getting bearish on the market just yet.
What equity markets really love is coordinated global growth. Last year we saw growth in emerging markets somewhat offset by the sluggishness in the developed world. I think its clear, that developed economies are improving whilst we've still got staggering growth coming from emerging economies - If we drill down and look at company valuations and take what Goldman's say on board, then its quite a compelling proposition. Timing is just the key as always!
I also note a report from Charlie Aiken from Southern Cross out at the start of the week which pretty much backs my line of thought. Last year was the year of the small and mid caps. The top 200 stocks actually lost ground (-1.9%) on the year while the small ordinaries were up strongly. I think this theme will change with the large caps, leveraged to a recovery on developed economies likely to lead the charge. My number 1 pick that encompasses all we are envisaging this year is Macquarie Group (MQG). Leveraged to an uptick in M&A as well as trading volumes + they bought well in depressed markets during the GFC. (BUY)
On the market last night it seemed the focus came off Egypt a wee bit and focussed more on the economic situation out of the US. I've always said that I'm confident that US unemployment will improve this year and will be the main driver for the sustainability of the recovery. Last nights data was an important piece in the puzzle - domestic consumption in the US accounts for about 70% of the economy - and it rose +0.7% up from 0.3% last month and above market expectations for 0.5%.
Just to summarise what we got last night -
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Consumers are back spending - presumably because they are more confident about future prospects
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Savings rate dipped from 5.5.% to 5.3% - again based on improving confidence however it does show employment still an issue.
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Inflation remained lethargic which means the Fed is likely to maintain its relaxed policy settings + stimulus programs.
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The Institute of Supply Mgt said that its business barometer rose this month to 68.8 - the highest level since 1988 - Figures over 50 suggest expansion.
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Incomes in the US increased 0.4% for a second straight month while disposable incomes were up +0.1%
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People are buying cars with Ford and GM expected to initiate large scale hiring programs to meet demand + the amount they are paying in profit sharing arrangements has also ticked higher. Sales at Ford increased 15% in Q4.
So I think its pretty obvious that the US is getting better - not worse!
Last night, the DOW JONES added + 68points or +0.58% to close at 11891. The FTSE 100 in London was down -18 points or -0.31% to 4562 however traded well up from the session lows.
Locally, SPI FUTURES are pricing in a rise of +12 points when trading kicks off. Monitor Oil Stocks today as I was a little confused why WPL was down yesterday given the strength in the Oil price - it was up strongly again last night.
RBA decision of rates due out at 2.30pm - They'll keep it unchanged due to the floods.
