(WEDNESDAY 21ST SEPTEMBER- 08:13 - JAMES GERRISH)....The European mkts brushed off the Italian credit downgrade yesterday and actually made ground on the session with the Dax up +2.90% while the FTSE 100 rose 2%. In the US, the DOW JONES added +7pts and the S&P 500 finished down -0.17%.
Had the Italian downgrade occurred a few months ago, the mkt would have sold off a couple of percent but that didn't happen. This is interesting as it goes some way to highlight what's actually been priced into mkts at current levels. There is no doubting that news flow is terrible however as Charlie Aiken wrote this morning (and I agree), a lot of negativity seems to be priced in.
"we continue to believe that markets are pricing in dreadful long term outcomes from European debt worries, and that at some stage we will get through those worries and we continue to push a 4Q rally.....Our view continues to be that markets are handling bad news, they seem to have stopped falling, and much bad news is in the price....."
On Monday, we looked at the argument put forward by Robert Buckland, the chief strategist for Citi who 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.
Overnight we had the IMF come out with their red pen and downgrade global growth. The IMF now sees the world economy growing by 4 per cent in both 2011 and 2012, down 0.3 per cent and 0.5 per cent, respectively, from an earlier forecast made in June. That's not too shabby and certainly no where near a global recession. This suggests stocks have overshot to the downside which isn't surprising given the weak sentiment indicators and barrage of negative media reporting.
WHAT'S THE US FED DOING...? Taken from a report provided by Blair Hannon over at Comsec Advisory who sourced cnbc
TWIST
The Fed in the week ahead is widely expected to pull the trigger on a new easing program.
Market expectations are high that the Fed will announce a new program - dubbed "operation twist" - at the end of its two-day meeting Wednesday
"Twist" is different than the much larger scale "QE2" quantitative easing program which involved the purchase of $600 billion in Treasury securities. Fed watchers expect this program to raise the duration of the securities the Fed holds, not the amount. The program, in theory, could reduce long-term interest rates as the Fed buys more securities in the middle and longer end of the yield curve
In the bond market, as traders debate exactly what the Fed will do, they will also debate the Fed's focus. Some believe the Fed is likely to buy the middle of the curve - 5- and 7-year notes - as well as the 10-year but avoid the longest duration, 30-year bond, which would be more difficult to unwind
METCASH (MTS)
Yesterday we had the Federal Court decide not to grant the Australian Competition and Consumer Commission an interim injunction to restrain Metcash from acquiring the Franklins supermarket business until a full appeal is heard and determined.
This is a positive move for Metcash given that its food distribution business is the main growth driver for the company and its realising solid growth and margin improvement through scale efficiencies. The acquisition of Franklins (if granted) will continue to enhance scale efficiencies and will give it a solid platform to compete against Coles and Woolies (who dominate the mkt with over 70% mkt share).
MTS currently trades on 12.8 times 2011 earnings against the sector that trades at 15.3 times and is yielding 6.6% against the sector average of 4.6%. Obviously this is reflective of its second tier status against the big boys but with Franklins on board, a re-rating is possible.
The earnings profile is relatively strong as shown in the chart below and this has been flowing through to some strong dividend growth over time.
Return on Equity has plateau d but again, it seems the added scale provided by the Franklins footprint should be positive here.
We'll be looking to ad a position in the Pension Performers Portfolio over the next week or so.
SWANNY IS OUR MAIN MAN....
There are plenty of times that Wayne Swan has appeared on TV looking pretty chuffed with him self but non more so than his appearance this morning after picking up the Grammy of the Finance World - Finance Minister of the Year as determined by Euromoney. The London-based finance magazine has awarded Mr Swan the title for his "careful stewardship" of Australia's finances and economic performance both during and since the global financial crisis.
Thanks Wayne....we really appreciate your efforts and its just simply reassuring to know that you're captaining our ship through these choppy seas....!
NO MODEL PORTFOLIO UPDATES
AUSTRALIAN STOCK PRICES OVERNIGHT
In New York, News Corp fell by US$0.03 to US$16.90, equivalent to A$16.47, A$0.08 above its last close on the ASX.
ResMed fell by US$0.07 to US$28.99, equivalent to A$2.82, the same as its last close on the ASX.
In London, Rio Tinto rose 32.5 pence to £35.38, A$0.50 higher in Australian currency terms.
BHP-Billiton rose 30.0 pence to £19.65, A$0.46 higher in Australian currency terms.
Henderson Group Plc rose 1.8 pence to £1.22, A$0.03 higher in Australian currency term
