(MONDAY 15TH AUGUST- 07.34 - JAMES GERRISH)....I'm actually a little bit shocked writing that the All Ords finished higher on the week (+1.6%) while the US markets as shown by the S&P 500 was down only -1.7%. This goes against the headlines that most media outlets are running with as they look to insight panic and sell papers! Its always important to remember that the media is in the business of creating fear - over dramatising a situation to get more attention. As an investor, we need to step back from the noise and think rationally before making any knee jerk reactions.
Incidentally, the US MKT was up on Friday with the DOW JONES adding +125pts while the S&P 500 rose +0.53%. The FUTURES are pricing a rise of +48pts when trading kicks off here this morning.
Politics
The global political landscape has been dominating events in recent times and it seems the mkt has lost faith in the ability of those in office to provide any type of sensible approach to the current issues. The fact that the US debt ceiling negotiations went on so long and came down to a last ditch agreement was a joke, with political posturing taking centre stage at the expense of rational thinking.
This ultimately prompted S&P to downgrade US debt given that those charged with managing the situation were blaringly incompetent. The US Govt does not present a credit risk - its the reserve currency and will stay that way for many years to come but. The impact on 10 year treasury yields confirms the markets view on this with the yield dropping despite the downgrade.
The EU is also not with out blame given the inadequate bail out of Greece and lack of plausible plan for countries like Ireland and Portugal. They also neglected to put in place measures to beef up the European Financial Stability Fund to create a buffer for other EU countries that may face difficulties. It's no wonder that we've seen some panic set in to other Eurozone countries which has caused bond yields to spike in Spain, Italy and even France is on the wrong end of sentiment (and rumortage).
It has taken the ECB to step in and buy Italian and Spanish Bonds to settle nerves in the region and put some downward pressure on Bond Yields. The ECB will need to significantly increase its balance sheet to continue with this program and it seems thats what it plans to do.
Back in the US, the Fed came out last week and confirmed that Interest Rates will be kept on hold for the next year to accommodate a move back towards growth. The mkt certainly took this as a positive given that this is likely to put a cap on any significant rise in the US Dollar - one of the main reasons we've seen such a positive flow of US company reports during the recent reporting season.
So I guess the conclusion here is that ineffective (some may say incompetent) political leadership has compounded current issues. We're certainly not immune from this phenomenon domestically with the labour Govt doing their darnedest to distabalise already fragile confidence.
Economic Data
US data has been mixed recently and certainly not all doom and gloom as some have been reporting. Consumer sentiment has certainly taken a hit (which isn't really surprising) but we are seeing some resilience - retail sales for July which came out on Friday and gained +0.5% (the biggest in four months) is an example of this. We've also got the situation where expectations have been ratcheted back. This is shown by the Citigroup Economic Surprise
Index which seems to be bottoming.
This is important because the mkts reaction to economic data is based on the expectations of what that data will be. Lower expectations means a greater chance of having upside surprises which can be a positive for the MKT. I know we've seen signs that the US recovery is stalling, and this increases the chances of a US recession, but I think the market has started to price this in + there is no tangible signs that US corporate s are struggling at the moment. This may change, but its hard to argue with the recent US company results.
In Europe, data has been soft - more negative than anything and with widespread tightening (austerity) measures being rolled out, it seems this will be the new norm. Last week, Industrial production was flat in Europe and down in France. Countries like Germany that export are benefiting from the exchange rate but other parts of Europe are clearly struggling. It now seems that the drivers of economic growth in the region will be forced to support those that are struggling and the obvious question is - for how long!
Last week in China we had inflation data that came in higher than expected but when you strip out the food prices, it actually dipped a bit and could signal to top of inflation in China. This is important because China's tightening bias in recent months has put downward pressure on commodities. When we combine this with the comments by the US Fed about keeping rates low for an extended period, then we may get a situation of a low USD and reduced concerns about a sharp slow down in China.
So what to do....?
Obviously there are risks in this market at the moment and we all need to be conscious of them. In saying that, market lows are more often than not formed after an impulsive move to the downside where we get a capitulation type scenario. The price action last week is conducive to this, particularly given the large turn around on Tuesday.
From the April 11 high in the MKT of 4796 to the low last Tuesday of 3829, the MKT had dropped 1200 pts or 24%. We're now 10% off that low - certainly a strong bounce but I'd suggest we've got more to go. A 24% correction is huge in anyone's language.
So, I guess it all comes down of whether to be a buyer or a seller in this market! We've gone into the turmoil with some cash on board and have bought into the weakness. That's easy to say in hindsight and I don't want to one of those people that come out after the event and claim oracle status (I'm far from that). On my advice, clients were invested going into this recent shock. I certainly didn't foresee the drop we've had but having some cash on board has given us the ability to buy into the dip.
We might be able to turn around in a couple of months and see what a great opportunity the recent dip has been but then again the market might go lower. The real question comes down to the individual person and their horizon on investment. My view is that the MKT now has more potential upside than downside. We might get a retest of the recent low and if we do, I won't be shy in pulling the trigger to buy - but I don't think we'll get that opportunity. I think we've seen the height of bearishness and a MKT low in place at 3829. Its likely to remain volatile for a while but for those that can weather some volatility, its certainly not a time to sell, and could well be a great time to buy.
DIVIDENDS
CBA & BKN goes ex-divi today
AUSTRALIAN STOCK PRICES OVERNIGHT
In New York, News Corp rose by US$0.08 to US$16.67, equivalent to A$16.08, A$0.42 above its last close on the ASX, ResMed rose by US$0.48 to US$28.69, equivalent to A$2.77, A$0.03 above its last close on the ASX, In London, Rio Tinto rose 157.0 pence to £36.89, A$2.46 higher in Australian currency terms, BHP-Billiton rose 52.0 pence to £20.18, A$0.82 higher in Australian currency terms, and Henderson Group Plc rose 6.4 pence to £1.41, A$0.10 higher in Australian currency terms.
