(FRIDAY 2ND SEPTEMBER- 08:08 - JAMES GERRISH)....Stocks stalled overnight with the US MKT ending a 3 day rally that saw equities up 5.1%. This wasn't unexpected given the Non-Farm Payrolls data is due out tonight which is by far the most important print for the month. Expectations have been pulled back somewhat overnight with the MKT now expecting +68,000 jobs keeping the unemployment rate at 9.1%.
The interesting conundrum here is that if we do get a poor number, that suggests a higher chance that Benanke will act to initiate stimulus but if we print higher than expectations, then it shows that fears of a US recession may be being overstated (and too aggressively priced into equities). So I'll go out on a limb and say the MKT reaction to tonight's number might be a little bit confused and this suggests we'll see some big intra session swings but not a lot of change in aggregate.
The other important data print for the week was out last night with the Institute of Supply Management (ISM) data on manufacturing showing expansion (as in growth..!) is still occurring. This went against expectations of a contraction and was a pretty good print relative to the markets bearish predictions. Looking at the US Dollar overnight, it crept up for the third straight session and to me, the USD is a good indicator of the markets expectations of stimulus. A rising USD means the MKT thinks we're less likely to see QE3 and vice versa.
On the MKT last night we saw the DOW JONES down -119pts and the S&P 500 fell -1.19%. On the local front, the SPI FUTURES are pricing a drop of -49pts when trading kicks off this morning.
Charlie Aiken from Bell Potter put out an interesting piece yesterday saying that the most obvious trade in this market is commodities playing catch up to commodity equities. The chart below highlights the underperformance of the Australian Material Index (tracks resource stocks) and the Reuters Commodity Index (CRB).
Clearly, there has been a dislocation driven largely by risk aversion from equity investors. Charlie sights that Commodity prices have been supported by Chinese restocking at a time when equities fell out of bed and he suggests that the next move is that risk equity premium in commodity equities falls and share prices rise to catch up to the strength in commodity prices.
This could certainly play out however its worth noting that we could be seeing commodity equities foreshadowing a drop in underlying commodity prices based on expectations of stalling global growth.
I think that's the lower probability scenario but worth keeping in mind. The other aspect thats worth considering is valuations for commodity producers have largely been based on lower commodity prices. BHP is an obvious one that if we plug in current spot rates for commodities we get valuations above $70. I know thats not realistic but it shows the buffer already built into current valuations.
Bell Potters best picks in the space.
Diversified: BHP (Target of $57.64)
Iron Ore: Fortesque Metals FMG ( Target $9.17)
Gold: Beadell Resources BDR (Target $1.27)
Small cap Coking Coal: Aspire AKM (Target $1.16)
Nickel: Western Areas WSA (Target $6.21)
Manganese: Jupiter Mines JMS (Target 88c)
Copper: Sandfire Resources SFR (Target $9.50)
Another commodity that's really been out of favour is Uranium which isn't surprising given the fall out from the Fukishima disaster.
Paladin Energy (PDN) is the largest Uranium play on the local MKT and worth a look at these levels.
Firstly, its worth looking at the dynamics of demand for Uranium. There is no doubting that Fukishima was a game changer but it wasn't terminal for the industry. In Japan, the 6 nuclear reactors that were involved in the incident have been closed while all other nuclear plants have been suspended. Germany has pulled back its nuclear ambitions and plans to shut down plants over the next 10 years or so. A similar scenario is playing out in Switzerland and Italy.
On the flip side, France, Russia, Korea, China and India all seem likely to continue on with Nuclear power. China is clearly the main driver of nuclear power with 14 nuclear power reactors in operation, more than 25 under construction, and more about to start construction soon.
Additional reactors are planned, including some of the world's most advanced, to give more than a ten-fold increase in nuclear capacity to at least 80 GWe by 2020, 200 GWe by 2030, and 400 GWe by 2050. With the growing industrialisation of China and pressure coming from the associated environmental impacts of traditional electricity generation (Coal), there seems to be a lack of any other alternatives for China.
By 2016, its tipped that China will need 10,000 tonnes of uranium per annum and as it stands, they've nailed down supply for the next 3-5 years.
So although the demand dynamics have taken a hit, the medium to longer term outlook still looks encouraging and for investors with that type of horizon, now could be a good time for some exposure.
In the case Paladin (PDN), the company reported an underlying loss of US$49m which was slightly higher than most were expecting however its main appeal at this stage, is its one of only few global producers with any type of large scale resource.
In the short term (and with the current share price where it is), a takeover looks a distinct possibility particularly given expectations of 12 month NPV sits at $3.40 a share (current price of $2.03).
We'll be looking to ad PDN to the Emerging Growth portfolio in the coming days when we get further confirmation that a base around $2 has been established.
NO MODEL PORTFOLIO STOCK UPDATES
AUSTRALIAN STOCK PRICES OVERNIGHT
In New York, News Corp fell by US$0.30 to US$17.08, equivalent to A$15.93, A$0.35 below its last close on the ASX.
ResMed rose by US$0.10 to US$31.07, equivalent to A$2.90, the same as its last close on the ASX.
In London, Rio Tinto fell 33.5 pence to £37.69, A$0.51 lower in Australian currency terms.
BHP-Billiton was unchanged at £21.06.
Henderson Group Plc fell 0.54 pence to £1.29, A$0.01 lower in Australian currency terms.
