Morning Note - Dow rallies hard!

 ** 18/03/11  - 7.35am  -  by James Gerrish** 

• The market bounced overnight from oversold levels and this followed a really positive day on our market yesterday. 
• Last night, we saw the DOW JONES ended up +161 points or +1.39% to close at 11774 
• Yesterday, the S& P/ASX 200 was down more than 70 points in early trade following a sharp drop on Wall Street the previous night (-247 points), however some strong buying came in mid morning and stocks were bid higher throughout the session with the index finishing just -2 points in the red. 
• This morning, the FUTURES markets are pricing in a rise of +18 points when trading kicks off. 

• There are a number of factors combining to cause instability in the market at the moment. Japan is the main one short term and Australia has a large exposure to any potential slowdown in the worlds 3rd largest economy.

 
 
Who has to the most to lose from Japan?    Total exports to Japan

Australia is the G10 member with the most to lose by a Japanese economic implosion - and the most to gain from a recovery - as this graph of the percentage of its total exports to the country in 2009 shows.
Source: Morgan Stanley
 

• However history shows that natural disasters, although horrific at the time, have very little impact on longer term economic growth in the region affected.
• AMP economist Shane Oliver wrote an interesting article in the Eureka report recently about this - an exert is below.

 

• " All natural disasters follow a similar pattern in terms of their economic impact and the Japanese earthquake is unlikely to be any different. The initial impact is negative because production is disrupted as a result of damage to factories, the power supply, transport infrastructure, confidence, and to homes, which means workers are focused simply on survival. This then gives way to recovery as rebuilding kicks in and production returns to normal. 
• This was seen in terms of the Kobe earthquake in Japan in January 1995, which claimed 6434 lives. Japanese industrial production fell 2.6% that month only to be followed by gains of 2.2% and 1% respectively in the subsequent months. In fact, it’s worth noting although Japan’s GDP fell 0.7% in the December quarter of 2004, it actually rose 0.8% in the March quarter 2005 when the quake hit and rose another 0.8% and 1% in the June and September quarters respectively.
• It was also seen in the Boxing Day tsunami that hit Indonesia in 2004, with initial negative economic consequences in the areas affected followed by a strong rebound. In fact, it was barely a blip in the Asian growth story at the time. 
• The initial negative effects from recent floods are now being felt in Australia, but there is good reason to expect a rebound in growth from the June quarter." 
•  
  • I continue to stress to my clients that although the near term outlook does look concerning, it’s important to put things in context and look for opportunities that may present themselves. 
  • The LNG sector I believe is one of these potential opportunities. 

 

• With Japan implementing a rolling blackout system to fill the gap in power supplies they will need to look at alternatives to power the recovery/rebuilding process as well as the resumption of normal life.  
• A nuclear power station can take up to 10 years for planning and construction, a coal-fired power station between two and three years while a gas-fired power station can be taken from design to operation within 12 months
• Already, Japan is the world’s biggest user of LNG, munching through about 35% of global consumption.
• I've read some varying views here however best guess estimates of the additional gas required to stop prolonged rolling blackouts are about 7.5 million tonnes over the next year.
• These sort of numbers have obvious implications for the prices of LNG and its not surprising that we’ve seen a 12% spike in the British gas price since Friday.
•  Woodside (WPL) Offers the best potential upside to this theme while others to consider include Santos and Oil Search
• Enjoy a positive end to the week! 

James Gerrish 
(02) 9375 0117