(TUESDAY 2ND AUGUST- 08.24 - JAMES GERRISH)... Not the night that we expected in the US with the DOW JONES finishing down -10pts after the FUTURES were pricing a jump of 140pts before open. The optimism surrounding the US debt ceiling negotiations was short lived after weaker than expected manufacturing data refocussed attention back on the fragile economy.
I know I've been more upbeat on the global economic recovery (outside the macro headwinds) than some, and the data out overnight is pretty dissapointing to say the least - especially when it comes on the back of a weak GDP print on Friday. Overnight, the ISM fell to 50.9 with any reading above 50 showing expansion - but it was down from 55.3 last month. We also had a weak print coming from the UK just to ad fuel to the fire.
It was a wild ride on the MKT overnight with the index trading in a 280pt range, before finishing in the middle of it - so not a complete disappointment I guess...!
This morning, the SPI FUTURES are pricing in the drop of -73 pts, so giving back the gains we made yesterday however the debt deal going through parliament maybe a positive.
Here's the view on the data overnight from Adam Carr in the Business Spectator this morning (he's an economist with ICAP)...."On the face of it then, global manufacturing was barely expanding in July, which is obviously a bit of a worry. Why I'm not ready to jump on that bandwagon (getting completely downbeat the global economy) yet is because these indicators can give false signals, especially during times of heightened anxiety. I would put concerns about European and US debt into that category and so it is unclear to me whether these surveys are simply capturing these concerns.
Higher tier data - industrial orders, trade and industrial production - still suggest global economic growth remains robust, but this is something to watch. Seeing these PMIs dip so sharply is not a cause for celebration obviously. But note the speed at which they have fallen. It seems unlikely to me that real demand has just dropped off a cliff without some catalyst. This suggests to me that these surveys could rebound over coming months."
So what does all this mean for MKTs?
We were really looking for a relief rally when the debt ceiling was sorted however I think the main game now is the reaction by the ratings agencies. Clearly the market is looking for issues to fret over and the potential downgrade of the US is the clear favourite. A downgrade from AAA to AA would be a major concern and would push up the cost of servicing US debt. This gains importance given the US is now looking to cut spending as a consequence of the recent debt ceiling negotiations.
So while the ratings agencies review the recent deal (that is going through parliament as I write), MKTs will remain nervous and we're likely to oscillate around current levels on the ASX 200 (4400-4600 now seems the likely range).
We've also got a situation where US economic data has started to soften at a time when the US is now about to implement spending cuts - which will presumably have a contractory impact - although I am now hearing intial whispers relating to the possibility of QE3.
Markets Overnight
Commodities were lower overnight with growth orientated assets such as Copper and Oil sold pretty aggressively after the manufacturing data was released. This pushed the Commodity Index lower and it continues to trade below resistance as shown in the chart below + looks more likely on the downside.
The big move came in the bond market with a distinct flight to safety. The US 10 year Treasury yield dropped 9bps to 2.75% on big volumes so it was clear that investors were seeking a safe haven in the face of the manufacturing data.
Model Portfolios
Rightly or wrongly we made some additions to the Model Portfolios yesterday given we were carrying about 50% cash.
Emerging Growth
Sandfire Resources (SFR) was added as a higher risk growth play... Here's a quick snap shot.
SFR is a pure growth play with takeover appeal to boot. Located in WA, the company has a large scale Copper resource that is planned to generate cash from Q1 next year. Copper is expected to be produced at $1.02 a pound (compared to current Copper price of $4.48), with the mine expected to produce $4.2 billion - thats $2.4 billion in pre tax profit (from a company capped at around $1.2 billion).
Thats not including other potential projects or the added appeal of Oz Minerals 19.9% ownership or Korean Steal giant Posco which sits at No 2 on the register.
Read more at http://www.reuters.com/article/2011/08/01/sandfire-idUSL3E7J118120110801.
We're also having a look at Uranium Miner Paladin (PDN) for inclusion shortly.
Pension Performers
We added the Seven Group Hybrid Security (SVWPA) which is a preference share of Seven Group Holdings, the merged entity of Westrac and the Seven Network. The securities have a face value of $100, are perpetual and pay 4.75% over the 180 day bank bill swap rate (fully franked).
This currently equates to a grossed up yield of 11.5%. We feel the yield adequately compensates for the risk and is attractive for investors that can take advantage of franking credits.
We also added some growth elements to this portfolio with NRW Holdings (NWH) and Amcom (AMM).
NRW Holdings (NWH) is a mining services provider. With the large scale capex being announced by Aussie Miners, NRW will benefit. The company has most exposure in the WA Iron Ore space but is diversifying into QLD coal. The stock has run quite hard however the recent consolidation pattern is positive. The company is still undervalued on our metrix and pays a dividend yield of 3.8%. We want to ad some growth elements in the portfolio without a direct exposure to commodities and subsequent price volatilities.
Amcom (AMM) has a core business in the provision of high speed data communications through fiber optics. It is now embracing cloud computing and has just announced a new $9 million contract with University of WA - its first agreement since launching the offering in May 2011. There is a distribution coming up to shareholders in August (subject to approval). Following this there will be a 3 for1 share consolidation (23rd August). We see value up to 45c and are happy to ad a small position in the portfolio given the outlook for growth - Internet use expected to have 34% compounded annual growth rates in the Asia Pac region in the next 3 years.
To view the model model portfolios, visit www.mymarketview.com.au and request logins.
RBA RATES DECISION
RBA expected to keep rates on hold when they meet today - at least that's what most economists expect (25 no change v 4 calling a 25bp hike). Decision due out this afternoon at 2.30pm.
AUSTRALIAN STOCK PRICES OVERNIGHT
In New York, News Corp fell by US$0.09 to US$16.50, equivalent to A$15.03, A$0.04 below its last close on the ASX.
ResMed fell by US$0.17 to US$30.29, equivalent to A$2.76, A$0.03 above its last close on the ASX.
In London, Rio Tinto fell 53.5 pence to £43.00, A$0.79 lower in Australian currency terms.
BHP-Billiton fell 54.5 pence to £22.73, A$0.81 lower in Australian currency terms.
Henderson Group Plc fell 0.9 pence to £1.60, A$0.01 lower in Australian currency terms.
