(FRIDAY 19TH AUGUST- 07.20 - JAMES GERRISH)...The MKT tumbled overnight with the usual concerns about global growth, inadequate leadership and European issues combining to send the DOW JONES down -419pts. The S&P 500 was down a significant -4.5%, the FTSE 100 lost -4.49% and the Volatility Index spiked +35%. Risk assets were sold down heavily with commodities mostly lower and the Aussie Dollar back to 103.78. SPI FUTURES are pricing a drop of -103pts when trading kicks off here this morning.
AUD - trading quite nicely within the 4c ranges we've highlighted for a while now. 110 - 106 - 102
Why such a big move last night?
1. There is a great deal of unease about the possibility of the US going into another recession (without any policy tools left to fight it) and this is being amplified by a flow of downgrades to global growth expectations. Morgan Stanley was the latest to come out last night to cut its forecast for global growth this year, citing an "insufficient" policy response to Europe's sovereign debt crisis, weakened confidence and the prospect of fiscal tightening. The bank estimates expansion of 3.9%, down from a previous forecast of 4.2%.
From Bloomberg this morning...."The U.S. and Europe are "dangerously close to recession," Morgan Stanley analysts including Chetan Ahya said in the note. "Recent policy errors, especially Europe's slow and insufficient response to the sovereign crisis and the drama around lifting the U.S. debt ceiling, have weighed down on financial markets and eroded business and consumer confidence."
2. Economic data continues to be mixed and on days when we have a natural bias for a risk off approach + we get data that misses expectations, selling is likely to be more aggressive - that's what happens in a nervous market! Today it was the Philly Manufacturing Index which dropped to its lowest level since 2009 + we also saw applications for unemployment benefits rise last week. (although this is a volatile series which has been tracking better of late)
3. We'd rallied hard from the recent lows so it takes less negative news to prompt an up tick in selling volumes (to lock in short term gains that have been hard to come by of late). With no real positive data points to work off, buyers were scarce and that's been the cause of the large 400+ point moves on the DOW recently (probably just stated the obvious with that one!).
Volume the key in this market...!
The ASX 200 gave some indication of impending weakness or at least profit taking over the last couple of days with buy side volume losing conviction. Looking at the chart below, we see a huge up tick in volume last Tuesday supporting the massive turnaround. There was positive follow through over the next couple of days but you can clearly see interest started to wain.
On Tuesday we wrote....'Looking more broadly, there is no doubt that we can make a pretty compelling argument to buy stocks based on historical multiples and that's why we've seen such an aggressive bounce from oversold levels, however there is still a risk premium that needs to be built into analysis. The Macro environment is still a major concern and as we highlighted yesterday, political incompetence is alive and well and unfortunately for mkts, is likely to ensure continued volatility. (Buy the doom- sell the short term boom..!)'
Also looking at the DOW - volume ticked higher today but it did not reach the heights of the recent sell off - one slight positive I guess
Here is the the view of Douglas M. Cohen, of Morgan Stanley Smith Barney - he's a well regarded Wall Street Analyst who I think puts forward a pretty realistic view of current events....
Most "Top 10" lists are probably best left to late night television hosts. However, in this particular case, we thought we would share 10 of our big-picture observations related to the recent market turmoil:
1) To state the obvious, no one can possibly know what stocks will do over the next few days or weeks. At best, we appear to be pricing in a modest recession. At worst we are still in the early stages of a panic-fueled crisis of confidence as it relates to major governments and banks throughout the world (with Europe at the epicenter).
2) The market currently lacks confidence in Washington to save the day.
The fear is that we are out of fiscal and monetary ammunition (the Fed's seemed acknowledgment yesterday that they expect no legitimate recovery for at least two years did not strike us as particularly confidence inspiring). It may indeed take a crisis to bridge the wide fiscal chasm that was evident from the recent debt ceiling fiasco. This could be the crisis. The special bipartisan congressional committee that is charged with proposing a plan by November 23 has the potential to change the prevailing sentiment, although one wonders if continued signs of market panic will lead Congress to expedite matters, The Bowles-Simpson and Gang of Six proposals could serve as the basis of major structural changes to combat what both major parties view as an unsustainable debt path. Can they overcome the massive polarization in Washington? We are hopeful, but not confident.
3) Last Friday's S&P US credit downgrade was a sideshow, in some respects. It was probably the figurative equivalent of yelling fire in a crowded theater, but did not really say anything the market did not know. The timing, though, could not have been much worse, in our view, given how nerves were already on edge.
4) The European situation is still highly concerning. While the latest ECB buying has driven Italian and Spanish government bond yields down from their recent highs, the structural challenges regarding who will be left with exposure to the over-indebted peripherals (and increasingly parts of the core) remains largely unresolved. Cyclical indicators such as industrial production also appear to be slowing down markedly in the European core, making austerity measures all the more challenging. At the moment France's AAA sovereign rating appears to be in the cross hairs with pressures appearing in France's credit default swaps.
5) MS & Co.'s US equity strategist Adam Parker's view that the market could be in for a period of multiple contraction has proven right over the past few weeks. Despite generally strong earnings reports in the first half of 2011, the one-year forward P/E on the S&P 500 has declined to just below 11x today from 13x at the start of the year. Adam believes that a 10x multiple is possible. The historical norm for the recent interest rate and inflation environment is closer to 13x.
6) The Q2 earnings season was generally solid, with some notable exceptions among several industrial companies who telegraphed signs of economic weakness for the first time since 2009. With the great majority of companies having already reported, 2Q y/y EPS growth is running at 12% and is about 4% above expectations. Revenue growth has been strong at 13% y/y. Results are even stronger when looking at the S&P 500 ex-financials, with earnings up 22% y/y and revenues up 16%. The prevailing concern is that earnings could roll over in coming quarters as the global economy slows and margins face downward pressure.
7) Certain segments of the market such as the large-cap multinationals are offering relatively attractive dividend yields above current 10-year Treasury rates. Despite potential near-term "deer in the headlights"
trepidation from Corporate America, the outlook for dividend growth is generally positive. With dividend payout ratios well below historical norms and cash-rich balance sheets, we expect dividend growth to outpace earnings growth in coming years and for investors to reward corporate managements that favor returning capital via dividends and buybacks.
8) The equity bull case as supported by the Morgan Stanley Smith Barney Global Investment Committee is that equities offer attractive valuations, strong balance sheets, good earnings growth and provide attractive value relative to very low yields on fixed income and cash.
The GIC favors emerging market equities relative to developed markets.
9) We think that the "Global Gorilla" theme, loosely defined as high-quality multinational corporations with strong balance sheets, positive free cash flow generation, and defensible operating margins are trading at supportive valuations relative to the overall market and are the most compelling opportunity in the equity marketplace. These types of stocks have begun to decouple somewhat from the general market weakness of the past few weeks and also offer above-average dividend yields and leverage to a potentially weaker US dollar.
10) In our view, those who simply cannot tolerate excessive volatility should strongly consider reducing their equity exposure. The mind-numbing volatility is unlikely to be over. Longer-term investors with ample diversification and a Warren Buffett-like long-term disposition should likely look to buy into the recent correction.
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Incidentally, Buffet has come out and confirmed he had the biggest buying day of his year last Monday.
MY View....
I think at this stage, we've seen a low on the Australian Market of 3765 (I think I wrote 3829 when I mentioned this figure on Monday - apologies). My main concern in the short term is that our market has outperformed the US recently, setting us up for some larger falls relative to peers. Today will provide us a good indication of that given the FUTURES are pricing a drop of -2.45% while the US MKT fell more than -3.5%. It would be nice if this out performance could last but I doubt that will be the case.
For short term players in the MKT, I think its a case of Buy the doom- sell the short term boom..! as I have previously suggested. For longer term holders be very conscious of valuations. Have a clear indication of what the companies in your portfolio are worth + the ones you've been eyeing off. Being able to make a sensible estimation of intrinsic value (what a company is worth rather than its price), is a skill that will serve you well in volatile times - thats what Cohen is referring to as a Buffet like approach.
DIVIDENDS
TAH, MNF, KOV go Ex today
STOCKS TRADING OVERSEAS
No data yet - I'll update it on the website when (www.mymarketview.com.au) when it comes through.
