(THURSDAY 25TH AUGUST- 07.17 - JAMES GERRISH)...If you look at the way Gold was treated last night (down -5%), you could easily make a couple of assumptions.
1. The MKT is not pricing in money printing (quantitative easing) by the FED in the next few months. If they printed money, the USD would drop + inflation expectations would spike. Both positives for the precious metal.
2. It seems that investors in Gold are now expecting some type of stabilisation in Europe, hold the view that a US recession is still an unlikely scenario and of course are somewhat disappointed by the exit of the Libyan Mad Man Gadaffi. Or the chartists would just say that it went parabolic, ran too hard too fast and a correction was inevitable.
Whatever the case, I think the longer term fundamental drivers for GOLD remain (inflation, political instability, devaluation of currencies etc etc) but the risk of a more pronounced correction (couple of $100) is pretty high particularly if we get some better than expected data out of the US in the coming weeks (as we did last night).
On the MKT, the DOW JONES added +143pts while the S&P 500 was up 1.31%. This comes on the back of 300+ move the previous night so not a bad couple of sessions in the States. Locally, the SPI FUTURES are matching up +43pts this morning after what was a pretty disappointing day yesterday (ended down -5pts after FUTURES were up +60pts in the morning) - however we had added +91pts the previous day independent of any positive lead from the US.
SOME GOOD NEWS....
The optimism in the US last night came on the back of better than expected data on Durable Goods Orders. These are large, longer lasting manufactured goods such as cars, planes.....even washing machines and dryers and the positive print here was quite unexpected (+4% in July). There was also some better than expected housing data that showed US house prices dropped less than forecast (yes - still dropping but not as much as economists thought).
An important point to make regarding the recent data that has been coming out is that expectations are now firmly down - the talk of recession has intensified and this presents an opportunity for even slightly better data to have a real positive market impact. This is one point that supports the view that the market has seen a low...!
THE ARGUMENT THAT A LOW HAS BEEN PUT IN PLACE.....
My gut feel suggests that we've seen a low in the MKT of 3765 on the ASX 200. There are however many dynamic factors and left field events that might change this view, however I'll outline the case for it below. Some of these reasons are my own, some have been borrowed from colleagues, friends & other market analsysis.
We'll focus on price action first up.
1. The chart below shows a couple of interesting points. Firstly, if we look at the recent high in the DOW JONES back in July, we see clear divergence between price and momentum indicators. The price made a new closing high of 12724 however the oscillators below made a lower high- what is know as bearish divergence. Although we haven't seen the reverse of this happening at the low, we have seen that both price and the oscillators have put in place higher lows and in doing so, have given a short term buy signal. Weight would be added to this if we saw a break above the previous swing high which sits around 11,550.
2. We showed this chart the other day from a colleague of mine, basically highlighting the choppy nature of recent market lows. The premise here is that recent lows have shown an inclination to test and retest a certain level a number of times before moving higher. This looks similar to what could be playing out this time around.
3. From a Friend over at Patersons, Frank Carpenter.
"The Dow should see the 50 day Moving Av. cross south through the 200 day tonight. This is bearishly referred to as the Death X, however as I've highlighted before it is best to look at the history of these crosses on the particular index/stock.
When the same happened early July '10 the Dow rallied 1100 pt's in a Month (yes a whole 3 day move in this madness!) The similar MA X for the S&P (lower chart) also occurred in July - the difference is the repeat X has already happened. This move on 10th August (imminent now on the Dow) followed with a sharp 90 point rally in the S&P.
Conclusion: The Dow's & S&P history of this MA X suggests a bullish S-T move for the Dow"
4. Consumer Sentiment is historically low. 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
This is a contrarian indicator which Goldmans think could mark the bottom of the cycle. 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.
5. Citigroup Economic Surprise Index - is a clever concoction that measures the variations in the gap between the expectations and the real economic data. When the CESI is positive it means that the released data have been better than the expectations. In other words, economists have not ratcheted up their optimism enough to match the data coming in. When CESI is negative, it means that actual results have been worse than expectations.
Similar to consumer confidence, it serves as a contrarian indicator. When the index falls to historically low levels as we've seen at the moment, we often get a clear move by economists to ratchet back expectations, which makes it easier for releases to surprise to the upside (and support equities)
6. Broader Economic Indicators (US) are not really suggesting a US recession. Retail Sales do not show signs of a pending recession. Industrial Production data does not show signs of a pending recession. Corporate Earnings Guidance indicated an expected slowing, but not a pending recession. The Interest Rate Yield Curve is still very steep.
Unlike almost every recession in history, corporate bonds are rising or maintaining value as stocks have fallen-a bullish sign that indicates the recent market action is probably just an old fashioned panic and crisis of uncertainty. When a real recession is likely, people typically sell corporate bonds and stocks at the same time.
US Corporate profits
So that's the bullish argument however I must premise this with the fact that risks surrounding Europe are significant- a lot will depend on the resolve of Germany and how much they are willing to give up in order to bail out the banks that lent too much to Spain, Italy, Greece, and Portugal.
REPORTING TODAY (only a selection)
AGK - Expected profit of $429.3m and DPS of 30cps
ILU - Expected profit of $133.1m and DPS of 21cps
KCN - Expected profit of $41.6m and DPS of 12cps
MAP - Expected profit of $214.8m and DPS of 11cps
RHC - Expected profit of $218.5m and DPS of 27.5cps
TOL - Expected profit of $294.9m and DPS of 13cps
WOW - Expected profit of $2124.2m and DPS of 67c
MODEL PORTFOLIO STOCKS
BHP Billiton Limited (BHP)
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BHP Billiton Reports NPAT Up 85.9% to US$23.65m for the Year to 30 June 2011 24-Aug-11 16:23
BHP Billiton reported NPAT up 85.9% to US$23.65m for the year ended 30 June 2011. Revenues from ordinary activities were US$71.74m, up 35.9% from last year. Diluted EPS was 426.9 US cents compared to 227.8 US cents last year. Net operating cash flow was US$30.08m compared to US$16.89m last year. The final dividend declared was 55 US cents, taking the full year dividend to 101 US cents compared with 87 US cents last year. The company also reported that underlying EBITDA and attributable profit (excluding exceptional items) increased by 51% and 74% respectively, while underlying return on capital, excluding investment associated with projects not yet in production, increased to 50%. The strong increase in the group's underlying EBIT margin to 47% emphasises the quality of the company's diversified portfolio.
NRW Holdings (NWH)
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NRW Holdings Announces Special Services Agreement 24-Aug-11 08:51
NRW Holdings announced that it has entered into a two-year special services (framework) agreement with BHP Billiton Mitsubishi Alliance (BMA). The agreement is for the provision of earthworks services for BMA's Project Development Group's operations in Qld. The packages will be undertaken by way of work orders as requested by BMA.
AUSTRALIAN STOCK PRICES OVERNIGHT
In New York, News Corp rose by US$0.49 to US$17.01, equivalent to A$16.25, A$0.65 above its last close on the ASX.
ResMed rose by US$0.41 to US$29.70, equivalent to A$2.84, A$0.05 above its last close on the ASX.
In London, Rio Tinto rose 79.5 pence to £35.06, A$1.24 higher in Australian currency terms.
BHP-Billiton rose 42.5 pence to £19.33, A$0.66 higher in Australian currency terms.
Henderson Group Plc was unchanged at £1.26.
