(MONDAY 18TH JULY - 07.56 - JAMES GERRISH).....US Markets closed higher Friday with positive company earnings finally getting some traction against a backdrop of debt ceiling negotiations and European debt concerns.
Of the 39 US companies that reported last week, 74% have beaten expectations. Granted, a lot of the big names are still to come, but its been a good start to reporting non the less. On Friday, the DOW JONES added +42pts, the S&P 500 rose +0.56% while the local ASX 200 lost -17pts. The FUTURES market is pricing a rise of 17pts this morning so a positive start to the week is expected.
ASX 200
It doesn't take a lot of technical acumen to see that the S&P/ASX 200 is trading above a pretty critical level. Support in the index sits around 4450-4470 and we've tagged this region on three occasions.
On Friday the market bounced again from this level which is a positive and if we do see continued support hold, this could be a longer term low in the market - however we need more confirmation before being confident on this call (however gut feel suggests that we're forming a base here).
Longer term basing patterns take time to play out and can often retest the support region a number of times. This is obviously a difficult time in the market. So, do we step in and buy stocks with the view that this region will hold or do we wait for support to be formed and buy in at higher prices.
My view here is that we can tentatively ad some positions but ensure we retain at least 30% cash in accounts. We've got this benchmark across our Portfolio's and I still think its a prudent call. In the event we see a break of support, it seems that 4200 would be the logical downside target. But if the market did get to that level, I think valuations would become simply too appealing for those still on the sidelines and we'd see a pretty quick bounce. So for mine, the downside from here looks manageable.
CONFIDENCE...? No where to be seen
Westpac bucked the trend on Friday making a pretty aggressive call that the next move on interest rates would be down. This goes against the other three banks that are still looking for a hike sighting tight employment and inflation.
We've been suggesting for a while now that we think rates will be on hold longer than most predict but I think the call by WBC is a long shot. They're predicting a 100 basis point (1%) cut in the next 12 months and this is obviously based on a pretty down beat assessment of our economy. Yes, I think the economy is spluttering ex-mining (David Jones result last week an example) and calls like Charlie Aiken from Bells that the East Coast is in a recession hold some weight, but unemployment at 4.9%, a huge ramp up in mining investment and continued growth in Asia, although not doing much for some parts of the country, are likely to support our economy as a whole.
So I guess my view here has not changed. Interest rates arn't going up any time soon, but I think its a long shot that we'll see a cut to the tune of 1% within the next 12 months as WBC are suggesting.
The gauge of consumer confidence below printed another negative number last week and would have been a consideration for Westpac to change their view.
Its not just Westpac though that have gotten downbeat the economy. It seems that the US Federal Reserve has also got quite negative if the use of words such as slow, weak, subdued, decline etc in the FOMC minutes are anything to go by. They hit the highest level since August 2009 recently as the chart below shows.
That's nots necessarily a negative thing for equity markets. A quote from Buffet himself.... "Be Greedy when others are fearful and fearful when others are greedy..." It certainly proved correct given the huge rally in stocks the last time the Fed got that NEGATIVE in their FOMC minutes back in 2009. From August 2009 to now, the DOW JONES has rallied nearly 40%.
GOLD....All time highs.
Gold nearly hit $1600 an ounce on Friday settling at $1592 - a historical high. So why the appeal?
1. Inflation - Printing money + other lose monetary policy filters through in to inflationary fears. We haven't seen any issues in the States just yet but it is a concern for 2012 onwards.
2. Negative real Chinese interest rates - we know Chinese citizens like gold and when you've got benchmark interest rates of 6.56%, savings rates at 3.5% and inflation ticking above 5% then they like GOLD even more (as a store of value given they effectively lose purchasing power sitting money in the bank).
3. Or what about the need for countries like China and Russia to invest internationally. They used to buy the US Dollar although that doesn't look to be the safest bet these days. They then started to diversify into the Euro but this is looking a little shaky as well. So the next asset along the chain in Gold.
These factors have combined to send Gold higher in recent weeks. There's no doubt we'll have pullbacks in bullion along the way but it seems to me, the issues outlined above won't change any time soon so they'll continue to offer support to Gold prices over the longer term.
GOLD Exposure
Obviously Newcrest Mining (NCM) is the main Gold play in Australia and its a quality company. We're actually looking down the chain a little bit at a company called Kingsgate Mining (KCN). We added the stock as a Short Term Trade at the end of last week and we'll be adding it to the Emerging Growth portfolio today. It's a gold exploration, development and mining company focused on the Chatree project, 280km north of Bangkok in Thailand.
The company has been under some pressure over the last 12 months or so given difficulties in getting approvals from the Thai Govt, however these have now been finalised. Their main mine has about 1.9Moz of reserves and 3.8Moz of resources sufficient for over 14 years life at current mining rates. A plan to double throughput to 5.0Mtpa and production to +250kozpa is appealing.
The stock looks likely to break out from its current trading range and we'll get on board if it does.
AUSTRALIAN STOCK PRICES OVERNIGHT
In New York, News Corp rose by US$0.10 to US$16.09, equivalent to A$15.12, A$0.35 above its last close on the ASX. ResMed fell by US$0.15 to US$33.02, equivalent to A$3.10, A$0.02 above its last close on the ASX. In London, Rio Tinto rose 3.5 pence to £43.91, A$0.05 higher in Australian currency terms. BHP-Billiton fell 46.0 pence to £23.40, A$0.70 lower in Australian currency terms. Henderson Group Plc rose 1.3 pence to £1.52, A$0.02 higher in Australian currency terms.
