(TUESDAY 30TH AUGUST- 06:55 - JAMES GERRISH)...We've now got a situation where news headlines are reading...Stocks gain amid optimism for the economy.... when only last week there were headlines...Stocks drop on concern for the economy - US heading for a recession... The lessen here is to take media headlines with a grain of salt - and focus more on rational analysis rather than react to those pushing articles that are designed to insight panic (and sell content).
On that note, you might like to check out the recent STOCKWATCH recording I did for the Finance News Network yesterday morning. CLICK HERE which builds on my view that we've seen a low put in the MKT. (I wrote about many of the reasons last week).
Anyway, I'll get off my soap box and start focusing back on the MKT and last night we saw another strong rally with the DOW JONES up +254pts while the S&P 500 put on +2.83%. This sets up a positive session locally with the SPI FUTURES suggesting a rise of +61pts.
Notice the ascending triangle pattern in the DOW JONES with the index just breaking to the upside overnight. Not totally convincing at this stage but encouraging non-the-less.
JACKSON HOLE ON FRIDAY
Will they or won't they (put in further stimulus) was the biggest question going into Jackson Hole on Friday and the question remained unanswered. Looking at the MKT reaction, there was obviously some immediate concern about the lack of any clear policy response to the recent weakness however that was short lived and buyers stepped in - pushing the DOW JONES on a 300+pt turnaround.
The main messages.....
1. Fed Treasurer Ben Benanke did not announce any stimulus package however he did hint the door was open for further assistance if the economy needed it. That was a key point and from my perspective it has put a floor under the economy/market. If we get more subdued data, I've got little doubt there will be a support package turn up.
Remember, the only plausible way the US can extricate themselves from their debt burden, is to grow their way out of it. As Mark Mobius rightly put it yesterday "It's very clear that he's (Benanke's) not going to preside over a severe economic downturn if he can help it."
2. Benanke delivered a more positive message about the US economy. By not announcing any further stimulus (and we know he's partial to firing up the printing presses), he's effectively saying that there is not really any immediate problem to deal with but if one does arise, we've got the tools to deal with it.
From a markets perspective, the speech was a success.
OVERNIGHT
The MKT rallied overnight however it was on low volume presumably because a lot of New Yorker's were worried about the roof over their head rather than the stocks in their portfolio (Hurricane Irene). Still, we had a great number on consumer spending that showed U.S. personal spending rebounded in July as autos sold at the fastest pace in three months.
There was also some positive momentum on the back of Hurricane Irene being downgraded to a tropical storm and the forecasted damage bill cut from $14 billion to $2.6 billion which prompted some strong moves in the US insurance companies which should translate into QBE on our MKT today.
The Greek MKT was also worth a mention last night with their Index up a massive 14 percent after Alpha Bank SA said it will buy EFG Eurobank Ergasias SA to create the nation's biggest lender. Both banks, along with their peers National Bank of Greece SA and Piraeus Bank SA, jumped more than 28 percent. The Cyprus General Market Index climbed by a record 18.5 percent.
My View...The MKT has been pricing in a US recession + some type of major structural failure in Europe. I think the weight of probability says we won't get a US recession, while it does seem likely that we'll get some further shocks in Europe. However if we do get some positive resolutions from the euro zone (which is a possibility), this MKT will rally hard into year end.
PORTFOLIO ADDITION
We're adding Computershare (CPU - $7.47) to the Emerging Growth Portfolio + the Buy Write Portfolio + we'll have it as a short term trade given its strong technical structure.
CPU is the only global share registrar, administering more than 100 million shareholder accounts for over 14,000 corporations across 20 countries on five continents. It has a clear competitive advantage, global reach and is very much exposed to a recovery in the financial markets.
From our valuations, CPU is fully valued on 2011 numbers however consensus forecasts has the company trading on a 34% discount to its 2012 valuation of $9.99. Even if we're significantly more conservative with our numbers we come up with a valuation of $8.63 (compared to current price of $7.47).
Technically, the stock has been sold down quite significantly in recent months however has now worked hard to consolidate at current levels, and made a clear breakout from an ascending triangle pattern yesterday. This is a bullish move with this particular chart pattern having a very success rate.
MODEL PORTFOLIO STOCKS
(Morningstar)
Kingsgate Consolidated (KCN)
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Kingsgate Consolidated Announces Settlement with Thai Preference Shareholder 29-Aug-11 14:58
Kingsgate Consolidated announced that a settlement has been reached with Sinphum Co., a Thai company which held preference shares in the Company's Thai operating subsidiary, Akara Mining. As a result both parties have agreed to cease all legal and arbitration actions and the preference shares in Akara have been transferred to a new Thai investor. The Company has agreed to meet outstanding financial obligations to Sinphum under the original shareholder agreement. As part of the settlement, the Company will grant 1.5m Kingsgate 3 year options that vest in 12 months at a strike price of $10.36 and 500,000 share performance rights that vest over the next 14 months to a company associated with the former preference shareholder.
COMPANIES REPORTING
HVN - Expected profit of $233m & dps of 8c
KCN - Expected profit of $41.6m & dps of 9c
AUSTRALIAN STOCK PRICES OVERNIGHT
In New York, News Corp rose by US$0.43 to US$17.44, equivalent to A$16.35, A$0.24 above its last close on the ASX.
ResMed rose by US$0.60 to US$30.18, equivalent to A$2.83, A$0.02 above its last close on the ASX.
In London, Rio Tinto rose 23.0 pence to £35.23, A$0.35 higher in Australian currency terms.
BHP-Billiton rose 15.0 pence to £19.59, A$0.23 higher in Australian currency terms.
Henderson Group Plc fell 0.8 pence to £1.27, A$0.01 lower in Australian currency terms.
