(WEDNESDAY 14TH SEPTEMBER- 07:45 - JAMES GERRISH)...Overnight we saw the smallest trading range in US MKTs for a number of months with no real significant updates on the European debt situation apart from German Chancellor Angela Merkel confirming they are working hard to manage the situation (and will do all they can to resolve the debt issues)....a lack of a mkt rally on the back of those comments probably shows the level of scepticism the mkt has for our political leaders and their hollow rhetoric at the moment!
Looking at mkt pricing, the 5 year Credit Default Swaps on Greek debt are pricing a 90% chance of a default in that time (next 5 years) so at this stage, the market is pricing a failure - probably a highly coordinated, managed and orderly one.
So the problem or concern in the mkt at the moment isn't what is known (as in a Greek default) but the flow on implications this will have for banks holding Greek Sovereign debt + the fears that it will prompt other economies to fail (Italy at the top of the list here).
I guess one silver lining that could come from a Greek default is a softening of the Euro which would ultimately be a positive for the export competitiveness of other members but that's unlikely to get traction against the juicy headlines of a country defaulting.
Anyway, a rise of +44pts on the DOW JONES and a +0.91% rise on the S&P 500 was marginally positive while locally, the SPI FUTURES are matching +3pts higher.
Are we expecting a Lehman type scenario...?
A lot of correlations are being made between European Banks and the collapse of Lehman Brothers during the GFC. There is real concern/rumours that we'll see another bank failure that will prompt a seizure of credit markets that will put further pressure on already anaemic global growth.
The focus of this concern seems to be on the three major French Banks given their exposure to Greek Sovereign Debt ($56.7 billion combined) and concern about their ability to remain well capitalised if we do see a default.
BNP Paribas is the largest of the French Banks by mkt value and has reacted strongly to an opinion column in The Wall Street Journal yesterday that alleged the bank could no longer borrow dollars. BNP countered by claiming it was fully able to obtain U.S. dollar funding in the "normal course of business" and that it has sufficient liquidity to deal with the fall out from a possible Greek default.
This typifies the reality of the current conditions with innuendo and rumours + a lack of clarify from a political standpoint making investors extremely nervous. It's not surprising that we've seen a large sell off in all major French banks (+US banks for that matter) which are now trading near their GFC lows .
However if we look at the case of BNP Paribas, its now trading on just 0.3 of its book value (assets - liabilities) so it does show the level of panic that we're seeing at the moment and the amount of discount/risk traders are pricing in.
I don't know if this is an over reaction and only time will tell however on face value, its seems that when we look across the broad spectrum of asset classes (gold, treasures, currencies, stocks etc) we're getting to a point that a lot of negativity/possible shocks are already priced into the mkt and this sets up the potential for some upside surprises. This fits in with our technical view of the markets forming a base here.
Weekly Chart of BNP Paribas
HARANGA RESOURCES (HAR) - one to consider
Hunnu Coal (HUN is the Mongolian Based coal play we held in the Emerging Growth portfolio that is now under takeover offer at $1.80 a share. The stock was listed only 18 months ago at 20c so its pretty good result for those initial share holders (we got in after listing).
It was originally listed by Perth based Garrison Capital, a company headed by Matthew Wood. Wood was instrumental in putting together the assets for Hunnu and driving its development over the last 18months. He's very well connected in Mongolia and its pursuing a similar strategy with an Iron Ore Junior called Haranga Resources (HAR).
HAR is at the early stages of its operations (about 12 months behind HUN) but given the skills + track record of those involved, I think it will get some real traction in the next year or so.
Its worth some further investigation over time however we're going to start by adding a small holding in the portfolio today. This is a medium term play which we'll add to as mkt conditions calm down.
www.haranga.com.au
NO OTHER MODEL PORTFOLIO UPDATES
AUSTRALIAN STOCK PRICES OVERNIGHT
In New York, News Corp rose by US$0.01 to US$16.31, equivalent to A$15.82, A$0.17 above its last close on the ASX.
ResMed rose by US$0.67 to US$29.38, equivalent to A$2.85, A$0.05 above its last close on the ASX.
In London, Rio Tinto rose 37.0 pence to £35.47, A$0.57 higher in Australian currency terms.
BHP-Billiton rose 18.5 pence to £19.52, A$0.28 higher in Australian currency terms.
Henderson Group Plc rose 1.0 pence to £1.18, A$0.02 higher in Australian currency terms.
