(WEDNESDAY 22ND JUNE - 08.06 - JAMES GERRISH)... The US market was up again overnight ahead of the Greek Vote of Confidence which just came through - and was successful. This was first hurdle needed for Greece to restructure debt or 'kick the can down the road' as most commentators are repetitively calling it! Obviously the market had priced in a positive outcome here so it was good to get it. This prompted some buying back into risk assets overnight. The DOW JONES added +109pts while the S&P 500 was up +1.34%. Locally, the FUTURES are suggesting a rise of +34pts when trading kicks off.
As we said, risk was back on the table last night with buying back into commodities, the USD fell and equities bounced. The Volatility Index (.VIX) tanked and is back below that 20 level we keep an eye on. In the States, the best sectors were Materials, Technology and Energy although all sectors were up on the day.
The path for Greece still remains fairly complex with the Government required to ratify legislation by the 28th June that will push through the required austerity measures - these are IMF/EU conditions in place that need to go through parliament for another bailout to occur. This is only the start of the process for Greece and any bailout here is probably just the beginning. It addresses the short term liquidity issue but the solvency is a whole new concern. From a business perspective, the Government is unprofitable and its been that way for a long time. Its a highly unionised society (current Govt put in power by the unions) and has essentially been corrupt. This issue won;t go away any time soon however from a markets perspective, we'll get bounces on the back of positive news flow - as was the case last night.
OUR MARKET
Yesterday we saw a strong rally on our market with stocks bid up into the close. This bucked the trend of the last couple of sessions where sellers dominated the afternoon session. Obviously this is a positive and we're likely to back this up with a positive session today (SPI +34).
Technically, a lot of stocks are incredibly oversold and any move in these are likely to be sharp. OST + BSL + PDN + PAN + BHP + RIO + TOL + WPL + QBE...the list goes on.
Looking more broadly at the index, we're at the bottom of the trading range and although we broke to the downside 2 days ago, this is a common occurrence. Often we get a marginal new low before a bounce and this has now started to play out. We would need to see a break out from the down trending channel shown on the chart before getting too upbeat however it does seem we're poised for some type of relief bounce.
Interesting view from Charlie Aiken yesterday who did call the recent weakness ahead of time, and has now turned bullish. Quote from yesterday...."I actually think the value and yield we see before us today is better risk adjusted buying opportunity (in the right stocks) than the peak of the GFC." I tend to agree and although we've probably been a little premature in adding some positions (eg BHP at $44) we've picked up QBE at a great level and its forced us to look at other areas for Growth outside mining. This has brought stocks like Vocus Communications (VOC) onto our radar which I think will prove positive over time.
FOSTERS (FGL)
Game on for Fosters after 10 years of takeover speculation. It was originally Heineken who were meant to bid for the company (pre Southcorp purchase) but yesterday, we got SABMiller slide in a low ball offer ($4.90). The market obviously thinks they'll be something a little more tasty around the corner with the stock trading at $5.14. The board has rejected the offer however as one article I read this morning put it, there's not much point in putting a property on the market unless you're prepared to sell it. By splitting the wine and bear business, the company was restructuring for a sale so there's little doubt that a transaction will happen at the right price.
With valuations we're they are, I think this will be the start of an up tick in corporate activity. We'll look to provide some targets for you later in the week.
CHART OF THE DAY... Source...www.chartoftheday.com
One positive for the stock market has been the dramatic rise in earnings since early 2009. For some long-term perspective, today's chart illustrates inflation-adjusted, as reported S&P 500 earnings since 1900. One period that stands out is the 92% plunge from the Q3 2007 peak to the Q1 2009 low which brought inflation-adjusted earnings to near Great Depression lows. Since its Q1 2009 low, S&P 500 earnings have surged (up over eleven-fold) and are currently fast approaching credit bubble peak levels. It is interesting to note that the only time that inflation-adjusted S&P 500 earnings have been higher than current levels was a relatively brief 18-month period from late 2006 to early 2008
And from Bloomberg....."For the second time since the bull market began, profits are surging and stocks are falling.
Standard & Poor's 500 Index companies will earn 18 percent more this year than in 2010, according to the average estimate of more than 9,000 analysts compiled by Bloomberg. Higher profits haven't stopped the gauge from falling 6.8 percent since April 29, pushing valuations to the cheapest levels in 26 years. Even if companies posted no growth, price-earnings ratios would be lower than on 96 percent of days in the past two decades". Source www.bloomberg.com
AUSTRALIAN DUAL LISTED STOCKS
In New York, News Corp rose by US$0.39 to US$17.28, equivalent to A$16.32, A$0.29 above its last close on the ASX.
ResMed rose by US$0.60 to US$31.88, equivalent to A$3.01, the same as its last close on the ASX.
In London, Rio Tinto rose 123.0 pence to £42.18, A$1.88 higher in Australian currency terms.
BHP-Billiton rose 56.5 pence to £23.15, A$0.87 higher in Australian currency terms.
Henderson Group Plc rose 0.9 pence to £1.42, A$0.01 higher in Australian currency terms.
