(WEDNESDAY 31ST AUGUST- 07:58 - JAMES GERRISH)...Another interesting night overseas with a lot of intra session volatility but not much change in aggregate. The DOW JONES closed up +20pts while the S&P 500 added +0.23%.
The MKT was initially disappointed by a weak print on consumer confidence in the US however the minutes from the recent FOMC meeting provided some optimism that the Fed was looking at alternatives to stimulate growth. As we said earlier in the week, the Fed has indicated they will act if conditions get worse and this effectively provides some certainty in what's been a pretty uncertain environment in recent times.
We touched on Consumer Confidence last week writing..."Consumer Confidence 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 Goldman Sachs 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 an average of 30% in the year proceeding. As it stands, we printed 57.6 and 59.6 in the last 2 months"
Overnight, we saw Consumer Confidence index drop 15pts to 44.5 - its lowest level in more than 2 years and shows the fall out from the political wrangling over the US debt ceiling and concerns around the sluggish unemployment rate.
Unemployment is actually a big topic this week with the Non-Farm Payrolls data due out in the US on Friday. The market is fairly pessimistic with expectations of +67,000 jobs to be added (we need +250,000) at this stage of the recovery) however the range of expectations range from -5000 to +150,000. One chart that I came across showed the correlation between the Philly Fed Factory Activity Index which seems to have historical significance as a leading indicator to the non-farm payrolls data.
This month the Philly Fed printed a woeful number and the chart below clearly shows that this has negative connotations for the payroll number on Friday.
I think the MKT will remain nervous for the rest of the week.
AUSSIE REPORTING SEASON
Expectations leading into this confession season were pretty low and as it turns out, probably a little bit bearish given what we've seen. A simple metric that tells the story is that 52% of companies that have reported, have outperformed the market on the day they released results (obviously 48% didn't) however that is a positive print particularly given that more than 60% of companies have reported an increase in earnings.
The dominate themes have been the negative impact of the high Aussie Dollar, weak consumer sentiment, the impact of natural disasters and the most glaringly obvious trend remains the huge cash generation in the materials sector built on continued appetite for Australian commodities in Asia.
I guess in simple terms, Corporate Australia is still making money, balance sheets are strong and generally well equip t to handle the challenges of ineffective Govt, relatively high interest rates and weak domestic consumption. Clearly, these issues will continue to dampen profitability however companies with clear drivers for growth, competitive positions, strong track records of Earnings Per Share (EPS) growth and high rates of Return on Equity + relative low debt (<50% as a rough guide), are the places to invest.
MODEL PORTFOLIO STOCKS
Kingsgate Consolidated (KCN)
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Kingsgate Consolidated Reports NPAT Down 71% to $21.15m for the Year to 30 June 2011 30-Aug-11 11:09
Kingsgate Consolidated reported NPAT down 71% to $21.15m for the year ended 30 June 2011. Revenues from ordinary activities were $173.35m, down 2% from last year. Gold revenue decreased by 5% to $156.0m and group silver revenue increased by 56% to $16.0m. The decrease in gold revenue is due to lower gold production from Chatree largely offset by the five months production contribution from Challenger, and a higher gold price. Diluted EPS was 18.6 cents compared to 74.5 cents last year. Net operating cash flow was $34.03m compared to $46.47m last year. The final dividend declared was 5 cents, taking the full year dividend to 15 cents compared with 35 cents last year. Gold production for the full year to 30 June 2012 is expected to be in the range of 240,000 to 260,000oz.
AUSTRALIAN STOCK PRICES OVERNIGHT
In New York, News Corp fell by US$0.14 to US$17.30, equivalent to A$16.20, A$0.13 above its last close on the ASX.
ResMed rose by US$0.24 to US$30.42, equivalent to A$2.85, A$0.01 below its last close on the ASX.
In London, Rio Tinto rose 150.5 pence to £36.74, A$2.30 higher in Australian currency terms.
BHP-Billiton rose 83.66 pence to £20.43, A$1.28 higher in Australian currency terms.
Henderson Group Plc rose 4.5 pence to £1.31, A$0.07 higher in Australian currency terms.
