Morning Note - "God makes sure trees don't grow into heaven...!"

 ** 10/02/11  -  7.45am  -  by James Gerrish** 

 
I met with a client yesterday who had a pretty interesting saying..."God makes sure trees don't grow into heaven"... It was a German saying so I may have missed some in translation however I think the meaning is pretty clear. Stocks won't continue higher for ever and the recent rally in equities will come to an end - its just very difficult to call when this will actually occur. 

We're in a bit of a purple patch for equities at the moment - We've got coordinated global growth with emerging markets still growing strongly while the US is recovering. We've got accommodative monetary policy in the US (with Fed added liquidity to the system) and interest rates at record lows. We saw 2 nights ago that China raised rates however this is yet to slow expansion. 

I think there is little doubt that China will continue to tighten policy to manage its inflation issues and ultimately this will bring down growth however it appears the market is quite comfortable in the measured approach being currently rolled out. Commodities are generally very sensitive to any tightening in China however we've taken this one in our stride. Only two months ago, China monetary policy was the main game in town and any tightening would have prompted selling in growth orientated equities/commodities. This has not occurred. 

Looking forward, I think its prudent to follow the current trends in the market. I just watched the close of Wall Street and the market pushed + 25 points in the last few minutes of trade to close the session just in the green. Its obvious that the market doesn’t want to go down and this is driven mainly from positive sentiment derived from improving US data. 

Cisco was another company to report in the US overnight. They beat on both top line revenue growth and bottom line profit which has been a common theme during the recent reporting season where we've seen more than 75% of companies beat expectations. 

Last night, the DOW JONES had its eighth day of gains adding +6 points or +0.06% to close at 12239. In London, the FTSE 100 lost -39 points to close at 6052. Locally, the FUTURES markets are pricing a small drop on the open -4 points however I'd expect this to tick positive when trading resumes before the cash market this morning. 
 
The local reporting season  is well underway and we saw CBA dominate the news yesterday with a cracking result which saw shares more than 2% higher. 

About the result....
CBA reported 1H11 cash NPAT of $3,335m, up 6% sequentially and 13% on pcp. Basic cash EPS improved 5% and 12% respectively to 214.3c. The interim dividend was up 10% to 132.0c fully franked. ROE improved 70bp to a strong 19.2%. This result was above consensus of $3.2bn, hence the 2%+ rally in the shares today to a nine-month high. There will be consensus upgrades in the market today. 

Telstra reports today with expectations for $3.589 billion and a 14cps dividend.  RIO is also due out with results later today and the market is expecting full year profit of $14.237 Billion and 45cps dividend.