Morning Note - Back to back declines in the US

by James Gerrish 24 February 2011

** 24/02/11  - 9.06am  -  by James Gerrish** 

  • Another selloff in overseas markets last night with the DOW JONES down more than 100 points or 0.88% to close at 12105. 
  • The S&P 500 was also down but not as much (-0.61%). Below is an exert from one of the services I subscribe to in the US which comments on the price action of the S&P 500. 
  • " The Indices found a temporary support level and had an oversold rally.  With potential counts down to 1290, it's possible that we may have made the low of  the correction, but this will have to be proven by subsequent action.  There is not even the slightest suggestion that the daily indicators are ready for a turn.  On the other hand, the hourly are trying to get back in an uptrend, but all they could achieve in today's rally were preliminary signals. There is divergence in the A/D (advance decline) index, and this suggests that today's rally may be extended, but we could also retest the low, first. In other words, nothing firm can be derived from today's action, and we'll need to see more before we can make a reliable forecast."
 
  • Tensions are still high in Libyawhich led to a continued rally in the price of Oil. A note out last night by Deutche suggested that an Oil price $10 above current levels (i.e $110 for WTI) for a sustained period of time will take up to 0.5% off US GDP. 
  • We've just seen US GDP expectations increased to 4% for the next 12 months and this had a pretty impressive impact on US Government debt. 
  • One of the best ways for the US to pay back debt is to grow -which generates higher Govt inflows. Combine this with low interest rates and a currency that remains weak and this may be the get out of jail card for the US. 
  • The price of Oil is threatening this as that’s why investors are a little skittish at the moment. 
  • The reality is that if tensions cool in Libya, then Oil will fall as well and talk of the recovery failing will lose its relevance. If we were just talking about Libya, then I would be less concerned, but the threat is that tensions will spread throughout the Middle East.
  • Equally relevant is the roll of OPEC in the supply of Oil. OPEC wants Oil prices around $80-$90 a barrel, so there is the potential for OPEC to step in an increase supplies. This would have a dampening effect on prices. 
  • As you can see, there are so many uncertainties and no one can tell how the cards will settle. My view is that its dangerous to try and pick a market top particularly when we are seeing tangible signs of economic recovery and the Fed is still adding liquidity to the system.
  • On the local market yesterday, we saw a strong move from the intra session lows that occurred at the start of trade. There was actually some green creeping through by mid morning and when all was said and done, the S&P/ASX 200 closed down just 10 points. 
  • BHP had its biggest volume day in years due to its share buy-back. Essentially, BHP has agreed to buy shares at a 10% discount to its VWAP price - the kicker for super funds and especially those in pension faze is that BHP will be paying the amount in the form of a Fully Franked dividend. So although you get 10% less for your shares, add the 30% for franking credits in your tax return and it makes sense. 
  • On the market this morning, SPI FUTURES are pricing in a drop of -25 points 
  • Stocks trading overseas
    •  
    • In New York, News Corp fell by US$0.10 to US$17.70, equivalent to A$17.67, A$0.08 below its last close on the ASX.
    • ResMed fell by US$0.51 to US$31.48, equivalent to A$3.14, A$0.05 below its last close on the ASX.
    • In London, Rio Tinto fell 133.5 pence to £42.07, A$2.16 lower in Australian currency terms.
    • BHP-Billiton fell 75.5 pence to £23.38, A$1.22 lower in Australian currency terms.
    • Henderson Group Plc rose 1.9 pence to £1.60, A$0.03 higher in Australian currency terms.

Disclaimer

James Gerrish is an Authorised Representative (Rep No. 352904) of Shaw Stockbroking Limited ("Shaw Stockbroking"). Shaw Stockbroking is a holder of Australian Financial Services Licence No 236048. Shaw Stockbroking, its directors, officers, associates and employees each declare that they, from time to time, may hold interests in financial products and/or earn brokerage, commission, fees or other benefits from financial products mentioned in this e-mail or attached documents. Unless specifically stated within this page or an attached document, any information communicated by this e-mail constitutes unsolicited general financial product advice which has been compiled without regard to any investor's individual objectives, financial situation or needs. It is not specific advice for any particular investor. Before making any decision about the information provided, you need to consider the appropriateness of this information having regard to your individual objectives, financial situation and needs and consult your adviser. Any indicative information and assumptions used here are summarised and also may change without notice to you, particularly if based on past performance or relate to a future matter.
 

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