(TUESDAY 13TH SEPTEMBER- 08:07 - JAMES GERRISH)...The US MKT staged a pretty impressive turnaround in the last 30mins of trade last night with the DOW JONES rebounding +234pts from the session lows to close up +69pts. The S&P 500 closed +0.70% higher while we've got the SPI FUTURES suggesting a rebound today of +51pts (after a savage day yesterday where the index fell -156pts).
The renewed optimism came on reports in the Financial Times that China's sovereign wealth fund was looking at buying Italian Bonds - obviously a positive given China has FX reserves of $3 Trillion and are looking to diversify out of US denominated holdings.
HEADLINE DRIVEN MARKET....
Unfortunately at the moment, the fundamental reasons underpinning the decision to invest or not to invest are being overshadowed by the flow of headlines coming primarily from Europe and the US. Its extremely difficult to make an assessment of value when there are so many uncertainties from a macro standpoint including massive political instability. This is the major reason where seeing a lack conviction on the buy side and what seems to be panic driven selling on the downside which as we saw last night in the US, can turn on a dime.
Normally, when we see a significant reversal in the market intra session (as we saw last night), its a strong bullish indicator that sellers have been exhausted and buyers are now becoming dominate. That was the case on our market back in mid August when the MKT low was put in place (see below).
The reversal in the US overnight was driven by one sketchy headline however it does show that it won't take a hell of a lot of good news to get this market moving higher. It also shows the shorts are nervous and will cover at any sign of a Eurozone resolution/strategy and when this happens, we'll see a significant rally. The big question is obviously from what level the rally will come from!!
I'm sure we're sounding a little repetitious but I'll reiterate our view that volatility is a key characteristic of a market low - another sign is extreme negativity meaning that the consensus view is the market will move lower - invariably the opposite happens.
Its important not to panic in an environment like this. Sure, take a more defensive stance, have a level of cash in your account that lets you take advantage of any market shock that might come along (model portfolio's have a min 30% cash - most have more) but reverting back to 100% cash means you'll miss the relief rally that I believe will come as we move into the back end of the year.
GOLD TELLING A STORY
The Gold market is worth keeping an eye as a proxy of risk aversion. The most telling sign was on Friday when the US mkt fell more than 300pts yet gold was also lower. As we've written before, the structural changes in the global economy supports a higher gold price over the medium to longer term (inflation, debasement of currencies, political instability etc), yet the short term technicals are giving a clear indication that Gold is topping out - that a pullback is likely in the near term.
....and borrowed from the Eureka Report......
Are equities about to outperform gold?
This one is for the technical analysis fans, who will see the 'head and shoulders' pattern formed on the NYSE last night when the gold ETF is put up against the S&P500 ETF. And traditionally that would mean gold's performance is set for a fall compared to equities.
Source: Stockcharts.com as shown in the Eureka Report
MODEL PORTFOLIO STOCKS
HUNNU COAL (HUN) - we're holders of HUN in the EMERGING GROWTH PORTFOLIO and the stock has been subject to takeover bid yesterday. HUN is a Mongolian based coal explorer that we've held since December 2010.
Thai coalminer Banpu plans to outlay $400 million for Hunnu in a takeover pitched at $1.80 a share. The bid for Hunnu is conditional on the target obtaining all regulatory approvals for its proposed projects in Mongolia, along with 90 per cent acceptances. Hunnu shares closed up 34¢ at $1.72, ending at a slight discount to the indicated offer.
The Board has endorsed the bid.
STOCKS WORTH SOME INVESTIGATION.....
Given the bid for Hunnu Coal there is likely to be some focus turned toward Mongolian based coal stocks. Another stock that we're likely to ad into the Emerging Growth portfolio to take HUNs place is CAT LIMITED (CEO). CLICK HERE to read an article on the stock to give you some background.
Molopo (MPO) - This an Energy Company with some strong prospects in Australia, the US, South Africa + Quebec. Its main appeal at the moment is that its market cap sits around $160 million yet its got about $130 in cash and equity backing - so there is not a lot of value attributed to the growth projects they have. CLICK HERE for a recent presentation.
Integra (IGR) - An Australian based gold producer that came into production last year. They've just upgraded their processing facility that now has a annual capacity of 1 million ounces a year. The company is capped at $472 million, is on track to produce at least 106,000 ounces in the next 12 months at a cash cost of $550 an ounce ($127 million). This is being ramped up pretty aggressively which should underpin a strong level of cash flow.
AUSTRALIAN STOCK PRICES OVERNIGHT
In New York, News Corp rose by US$0.04 to US$16.30, equivalent to A$15.74, A$0.39 above its last close on the ASX.
ResMed fell by US$0.21 to US$28.71, equivalent to A$2.77, A$0.03 above its last close on the ASX.
In London, Rio Tinto fell 54.0 pence to £35.10, A$0.83 lower in Australian currency terms.
BHP-Billiton fell 27.5 pence to £19.34, A$0.42 lower in Australian currency terms.
Henderson Group Plc fell 4.8 pence to £1.17, A$0.07 lower in Australian currency terms.
