Morning Note - A round up of current issues

by James Gerrish 22 March 2011

** 22/03/11  - 8.43am  -  by James Gerrish** 

  • The market rallied strongly overnight after reports that the situation in Japan had improved. 
  • The situation still isn't great however the Chernobyl type event the market was feared seems unlikely
  • Risk came back on the table with the Aussie Dollar finding support; Commodities bid higher and strong buying in equities - particularly the energy sector. 
  • The moves last night were pretty decent - stocks in Europe advanced between 1.2 per cent (FTSE100) and 2.3 per cent (Dax), with US markets up 1.5 per cent on the S&P500 (1298) and that’s despite some horrible housing data.
  • We know the housing market remains weak and indeed existing home sales were expected to fall 4.2 per cent. Nevertheless, they actually fell 9.2 per cent in February and remain well below average.
  • By sector (on the S&P), energy, industrial and tech stocks were the key outperformers (Nasdaq up 1.8 per cent to 2692), while telcos, healthcare and financials lagged. The Dow for its part closed up 178 points to 12036 while the SPI was 0.7 per cent higher at 4697. 
 
  • There are a few key things we need to remain across in the market at the moment 
  • Japan 
  • While the current situation is clearly serious, the implications for Australia is relatively known. 
  • There will be considerations for exports near term, however I'm of the opinion that from a markets point of view, the situation is now becoming contained and qualified and this will be supportive for a continued bounce in equities.
  • Middle East 
  • This will be a situation we'll be discussing for a lot longer than Japan. 
  • The focus has now turned to Bahrain which is a tiny place off the coast of Saudi Arabia (See MAP) 
  • Bahrain is mostly populated by a disadvantaged Shi'ite majority but is ruled by the Sunni Minority. 
  • Its also an important place for the US as its home for their military fleet that ensures the safe passage of US bound Oil tankers. 
  • The only way things will settle in Bahrain is with more equality for Shi'ites or an overthrow of current Sunni rule. 
  • If this was confined to Bahrain, we'd be less concerned; however Iran is mainly a Shi'ite population. 
  • Saudi Arabia on the other hand is providing military support for the ruling Sunni Minority while the US has also backed the current rulers.
  • So we're seeing an uprising of the Shi'ite majority against the ruling Sunni's and this brings in the three big powers - Iran - Saudi Arabia - US 
  • Iran has criticised Saudi Arabia's involvement in Bahrain and have the support of their ally Hezbolah in Lebanon 
  • The US are unlikely to go against its ally in Saudi Arabia, while Iran is likely to support the Shi'ites protests. 
  • The possibility of supply disruptions for Oil are quite high and when we ad this to a backdrop of global growth, the fundamentals are bullish for Oil. I reiterate my previous Recommendation BUY Woodside (WPL), 
 
  • Equitty Markets 
  • The Australian market is trading on a forward PE of 11.4 times - at the height of the sovereign debt crisis in Europe last year, where the implications for the global banking system were significantly higher, the market was trading on 11.3 times earnings. 
  • I often find it useful to look at the world’s best investors - namely Warren Buffet - and see where they are putting their cash. 
  • Buffet was a buyer during the GFC and remains a buyer now. His two most recent acquisitions have been in Burlington Northern, a US railroad company and Lubrizol, a US based industrial lubricant company. 
  • Both investments show that he's backing a strong and sustainable recovery from the US and I think he's right. 
  • Don't get me wrong, I think we'll see volatility in markets given Japan, the Middle East, China (tightening policy), European Debt and the eventual wind back of US stimulus however I strongly believe, the market will be significantly higher by the end of the year. 
  •  
James Gerrish 
(02) 9375 0117

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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