(MONDAY 19TH SEPTEMBER- 07:26 - JAMES GERRISH).. A good end to the week on Friday with US MKTs finishing higher for the fifth straight day. You wouldn't think it reading the doom and gloom in the weekend papers which certainly goes some way to explain the weak consumer confidence readings we've been getting in recent times. Its important to note that markets bottom at the height of bearishness and from I can tell, we're there or there abouts.
On Friday, the DOW JONES added +75pts while the S&P 500 was up +0.57%. Locally, the SPI FUTURES are pricing a rise of +8pts when trading kicks off here this morning.
For the week, there was a clear out -performance by US equities with the S&P 500 adding +5% against the All Ords which lost -1.1%. The MSCI Global Index was also better adding +3% while the AUD lost -1.1% against the USD.
EUROPE
Of course the coordinated move by the ECB, FED etc at the end of last week was a positive short term move but it is important (if we are to see a sustained move in equities) that we get some longer term solutions/strategies.
We did have the European Finance Ministers meet over the weekend and they were kind enough to invite US Treasury Secretary Timothy Geithner along for some input.
For his part, he did push for greater cohesion amongst member nations + he floated a new idea that was actually a variation to an old policy he had developed while at the New York Fed that would expand the reach of the 440 billion Euro European Financial Stability Fund using leverage in partnership with the ECB.
As we said last week, the market is looking for some type of expansion of that existing facility but it seemed the Luxembourg Prime Minister (who Chairs the meetings) wasn't about to consider a plan put forward by the US. "We're not discussing the increase or the expansion of the EFSF with a non-member of the Euro Area". Enough said!
Testosterone aside, I still think the idea is the likely course for Europe and we will see some action taken to increase the facility in the next week or so.
ARE SHARES CHEAP?
I thought I'd borrow some of the views written about in the EUREKA Report over the weekend as summarised by Allan Kohler.
...."whether shares are cheap or not depends on your time frame. Looked at over 10 years, or even 20, they look cheap now. However, there have been extended periods when price/earnings valuations have been well below 10 times, or roughly 50% lower than they are now, so historically valuations are not necessarily a reliable guide.
Robert Buckland, the chief strategist for Citi, says global equities are now pricing a 10-15% fall in earnings per share next year, which usually only occurs during a recession. In other words, the sharemarket is predicting a global recession next year.
Citi's economics team is not predicting a recession and Buckland has done a lot of work around earnings revisions by global companies. To cut a long story short, this suggests to him that markets are now approaching a bottom.
The weakness in global earnings revisions this year has mainly been because of downgrades in Europe ex-UK and over the past four weeks this is where we have seen the weakest EPS revisions.
However, while a large proportion of the downgrades in the region were in the periphery (Greece, Portugal, Ireland, Spain and Italy), we have recently seen downgrades for company earnings in core Europe accelerate rapidly.
"... to see convincing gains in prices, history suggests we need to have a number of indicators stabilise. Importantly, we need to see the pace of EPS downgrades slow. While global EPS revisions have just had their weakest five weeks since 2009, the pace of downgrades is not accelerating."
and from Share Oliver...
Bottom line: Shane Oliver of AMP suggests looking for shares with a price/earnings multiple of 10 or less and/or a yield of 7% or more, and I can't disagree with that."
Source: Allans Weekend Briefing - Eureka Report - Saturday, 17 September 2011.
So if we take Shane Oliver's view, the universe of stocks that we should be looking at is about 40 and can be found by CLICKING HERE. I'm sure however that its worthwhile digging a little deeper in the actual trends of these metrics (as in earnings and dividends) while adding in other key measures such as investing in companies that are generating high levels of return on the equity employed, have sustainable competitive advantages even in an environment of slower economic growth, a low or at least modest level of debt and its also important to asses their current price action (technicals) to see how the market is viewing the company.
This is essentially the process we use to look at a company.
So to give you an example, ONESTEEL (OST) appears on the list above and its also been fairly oversold from a technical standpoint. I was also listening to one of the guys over at Macquarie Private Wealth suggesting to buy this on Friday so its a stock worth some further investigation.
The stock is trading on 8.2 times 2012 earnings and yield of 7.5%. From these metrics, it probably looks cheap.
Looking more closely at earnings trends, we see that earnings have been hit during the GFC (as with most companies) however we're yet to see any type of meaningful recovery in both earnings and of course dividends.
Looking at the return the company is generating on the equity employed, its a pretty anaemic 5.3%, (compared to a term deposit that's paying 6%) so you can see they're experiencing some pretty tough times.
The outlook is somewhat complicated as well with the Macro backdrop of global growth questionable, the introduction of the carbon tax in Australia, the high Aussie Dollar as well as rising input costs (although they do have upstream capabilities in Iron Ore).
So I guess looking simply at the PE and Dividend yield is worthwhile, but the analysis shouldn't end there. From a valuation perspective, we currently value the stock at $1.39 v current price of $1.33 so at this stage, not a lot of upside looks likely.
We'll look at a stock tomorrow that we think has better prospects and shows more positive trends in the metrics above.
NO MODEL PORTFOLIO UPDATES TODAY
AUSTRALIAN STOCK PRICES OVERNIGHT
In New York, News Corp rose by US$0.50 to US$17.04, equivalent to A$16.56, A$0.60 above its last close on the ASX.
ResMed rose by US$0.38 to US$29.78, equivalent to A$2.89, A$0.06 above its last close on the ASX.
In London, Rio Tinto rose 19.0 pence to £36.25, A$0.29 higher in Australian currency terms.
BHP-Billiton rose 16.0 pence to £20.02, A$0.24 higher in Australian currency terms.
Henderson Group Plc rose 3.6 pence to £1.28, A$0.05 higher in Australian currency terms.
