(MONDAY 22ND AUGUST- 07.20 - JAMES GERRISH)...The MKT turned bearish again last week ending the relief rally we'd seen from the recent lows. The S&P 500 fell -4.7% for the week, locally, the All Ords lost -1.6%, in London the FTSE 100 dropped -5.3%, Gold was up +6% (to a record high of $1852) while the AUD was flat against the Greenback.
On Fridays session, the ASX 200 lost -149pts while in the US, the DOW fell -172pts (most of which was done in the last hour of trade - shows a nervous mkt). The DOW FUTURES were actually down more than 100pts at the close of our MKT on Friday so in aggregate, we're likely to be a bit better off this morning than these numbers are suggesting. SPI FUTURES are suggesting a pretty flat start on our MKT this morning but I'd expect some selling to come in.
CONFIDENCE...or lack of!
The Eureka report over the weekend published a pretty interesting quote (supplied by Grand Private Equities).
"If the US government was a family, they would be making $58,000 a year, spending $75,000 a year, and have $327,000 in credit card debt. They are currently proposing BIG spending cuts to reduce their spending to $72,000 a year. These are the actual proportions of the federal budget and debt, reduced to a level that we can understand."
Looking more broadly, the chart below highlights the current debt to GDP in major global economies. Clearly, the US is a major concern but more so due to the level of growth (or lack of) that's being generated to manage higher levels of debt. Ultimately, the US needs to grow their way out of their debt hole and the concern is that ineffective leadership + moves to actually cut spending at a time when greater spending is needed (to stimulate growth short term) will derail the recovery (that has been led by US corporate earnings). We've seen Morgan Stanley downgrade Global Growth last week and this is obviously based largely on a negative outlook for the US (given the US is a major MKT for emerging economies as well).
Debt to GDP
The obvious question is that if Corporate America has remained resilient and as the recent reporting season shows is growing earnings, why hasn't this translated into jobs growth.
Unemployment
The answer comes down to confidence. The consumer is lacking confidence and when the consumer is tentative, Corporates are tentative and unwilling to put on new hire's. - hence the stubborn rate of unemployment in the US
US Consumer Confidence
US Consumer Confidence is out again in 2 weeks (Aug 30) and as Goldman Sachs proposed earlier last week, could mark the bottom of the cycle. They sighted the more recent Michigan Sentiment Index which fell to its lowest print in 31 years as a precursor to what is set to be a woeful number at the end of August.
The significance is that whenever Consumer Confidence has dropped below 66, we've seen the US share market rally a average of 30% in the year proceeding. As it stands, we printed 57.6 and 59.6 in the last 2 months. This is obviously a contrarian indicator which has some pretty impressive historical significance.
When confidence hits rock bottom - when the majority are disillusioned with it all we often see the best opportunities. This fits with the Buffet approach of the buyer when others are fearful etc etc. (as we said last week, Buffet had his biggest buying day all year near the recent MKT lows).
Just to reiterate, the premise here is that when we see a poor consumer confidence number (less than 66), we more often than not get a significant share market rally - the most of which is put on in the 6 months after the MKT has bottomed and when the majority are still licking their wounds and shuddering at the thought of putting money at the mercy of the share market.
As I said last week, I think we've seen the low in our MKT, or at least we've come very close to it and their will be some solid gains to be made over the next 6 - 12 months. Yes, the short term outlook is about as clear as the Paramatta River, however as John Templeton said, "Bull markets are born in pessimism, grow on scepticism, mature on optimism and die in Euphoria".
I'm certainly not suggesting to buy this mkt indiscriminately and we'll probably dip lower in the short term, but there are some encouraging signs for mine
PORTFOLIO STOCKS
Amcom (AMM) is a portfolio stock we hold in the Pension Performers Portfolio - they reported a solid result last week. They paid the t\
From Morningstar....AMM reported a strong FY11 result. NPAT excluding equity accounting for IIN's earnings is $13.8m, inline with our $13.4m forecast. Top line revenue was ahead of our $79.6m forecast, increasing by 38% to $87.2m. EBITDA is up 29% to $28.8m. Group margin declined on higher network expense and employee expense. Fully franked final dividend of 1cps takes FY11 dividend to 1.6cps, inline with our forecast. AMM also paid out its stake in iiNet (IIN) as a specie dividend to shareholders.
As a word of note on our Model Portfolio's, we are holding a fairly significant amount of cash Emerging Growth = 50% - Buy Write Portfolio = 62% - Pension Performers = 49% - For now we're happy with this amount of cash on the sidelines however we expect to put some of this in the market in the coming weeks.
View portfolios at www.mymarketview.com.au
DIVIDENDS
The morning note has a new section. On the top left hand side, we'll now have a link to all the dividends for the current month. This will be updated at the start of each month. For those reading this through the website, why not get on our mailing list - CLICK HERE
AUSTRALIAN STOCK PRICES OVERNIGHT
In New York, News Corp fell by US$0.51 to US$15.80, equivalent to A$15.22, A$0.38 below its last close on the ASX.
ResMed rose by US$0.26 to US$27.81, equivalent to A$2.68, A$0.02 above its last close on the ASX.
In London, Rio Tinto fell 63.0 pence to £34.32, A$1.00 lower in Australian currency terms.
BHP-Billiton fell 30.0 pence to £18.60, A$0.48 lower in Australian currency terms.
Henderson Group Plc fell 7.0 pence to £1.23, A$0.11 lower in Australian currency terms.
