16/08/10 - 8.12am - by James Gerrish
On Friday, the DOW JONES lost -16 points or -0.16% 10303. The FTSE 100 added +9 points or +0.19% to 5275. Locally, SPI FUTURES are suggesting a drop of 50 points so a negative open for the market today.
Last week we saw sentiment change as economic data from the US refocused attention back on the speed of the US recovery. Employment is the dominant indicator here given it flows through to other measures and unfortunately last week, the market was disappointed with the level of employment growth last month and was shocked by the downward revision of the June figure.
We've been saying for quite some time now that our belief is that the US recovery will be slow and it would be better to have money exposed to growth of emerging markets. However it's important to note that the US is recovering. Despite what is pushed by market commentators we are seeing an improving situation in the US. Employment, although a lagging indicator is improving with jobs being created in the private sector - Not enough jobs but we are seeing some growth. This is further supported by a rise in average hours worked so companies are getting more from their existing workforce. Employment data will continue to be the main driver of sentiment in the market near term.
Last week we also saw the Federal Reserve act to improve liquidity in the system in another attempt to prop up growth - in what's now being touted an QE2 (Quantitative Easing Mark 2). It does confirm that the US recovery has slowed but it also shows the intentions of policy makers to do what is necessary to support growth.
Looking at the investment landscape that we all need to operate within, there is no doubt there's a higher level of uncertainty based on last weeks events. On Fridays note we touched on the bearish technical structures that are now playing out. For those that want to recap ("The market has made a lower high structure which is bearish. A shorter term double top is obvious in the S&P 500, and if you're into Elliot Wave, we got the possibility of a three wave corrective move playing out.')
In this environment, I think its important to reaffirm our process for investing.
1. Invest for a theme - This should be the overall framework for any investment decision. Our theme is: a) target growth in emerging markets b) avoid exposure in developed economies. Example: Buy ANZ rather than NAB - TOLL rather than Brambles - Coke rather than Fosters
2. Develop a universe of stocks that fit this theme - This will reduce the number of stocks that we need to be across.
3. Don't underestimate price action - at the end of the day, the price of a security is the most important element of an investment. Recent trends in price action can tell you a story that is void of personal bias and broker spin.
4. Be active in managing risk when uncertainty increases - Invest during good times with the knowledge that we can manage risk by using Option Contracts in times of greater uncertainty.
This week, reporting season intensifies and you'd have to say that so far, its been a little disappointing. Today we see Bluescope (BSL), Leighton (LEI), Lend Lease (LLC) & Newcrest Mining (NCM).
