(MONDAY 10TH OCTOBER - JAMES GERRISH - 7.37AM)...We finally got some upside momentum step into the mkt last week with the ALL ORDS adding +3.8%, the S&P 500 +3%, the MSCI world index up +1.8% while the Aussie Dollar rebounded +1.4% and Gold was also up +1.5%. Much of the move was put on at the end of last week with the Australian mkt up more than 7% from Tuesdays low. This shows a number of things.
1. The mkt was short risk assets and covered fairly aggressively (volume was high on the moves).
2. Shorts seem to be nervous which is pretty understandable given what already appears to be priced into mkts (i.e - US recession + inadequate resolution in Europe as we discussed last week).
3. MKTs will rally hard on 'less bad' news and the risk now seems to be to the upside.
On Fridays session in the US the DOW JONES fell -20pts, the S&P 500 was off -0.82% while locally, the SPI FUTURES are pricing a drop this morning of -26pts.
The aspect we now want to see is the characteristics of any selling that might come into play. Its only natural for some profit taking to occur after such a strong bounce however we really want to see selling on low volume with stocks drifting lower or sideways. We don't want to be seeing high volume selling come back into the mkt as this would suggest a sustainable rally is unlikely to occur.
Ideal Scenario: The mkt pulls back or consolidates on light volume over a number of trading sessions but does not breach Fridays low (4080ish). This would position the mkt for another leg higher potentially on the back of better than expected US company reports that start at the end of this week. Bare in mind, that expectations for US earnings have been ratcheted back recently which sets the bar lower from a mkts perspective.
US EMPLOYMENT
The US economy added 103,000 jobs in September which kept the unemployment rate steady at 9.1%. The print was better than the mkt had expected (around 50,000) but it wasn't enough to get the mkt too excited. The reality is that its not enough at this stage of the recovery as the charts below show but its not signalling a recession either - which we believe the mkt is already pricing in.
As one US commentator put it over the weekend, 'We are treading water, which is better than drowning, I suppose'.
Today's chart puts the latest data into perspective by comparing nonfarm payrolls following the end of the latest economic recession (i.e. the Great Recession -- solid red line) to that of the prior recession (i.e. 2001 recession -- dashed gold line) to that of the average post-recession from 1954-2000 (dashed blue line). As today's chart illustrates, the current jobs recovery is much weaker than the average jobs recovery that follows the end of a recession. Today's chart also illustrates that the current jobs recovery has been slightly stronger than what occurred following the recession of 2001. However, the already modest upward trend has slowed significantly over the past five months.
BUFFETS INSIGHT
I always watch what some of the most successful investors are doing and there's non more important than Buffet. Below is a exert from a recent interview. There's one really important point made here and it centres on Intrinsic Value in response to a question around the recent buy back announcement of Berkshire shares.
SUSIE GHARIB: Billionaire investor Warren Buffett was busy investing in the third quarter. He told me today that he bought $4 billion worth of stocks in the past three months. Buffett came here to the New York Stock Exchange to ring the opening bell with Business Wire CEO Cathy Tamraz. They were celebrating the 50th anniversary of the news wire service owned by Buffett`s Berkshire Hathaway (NYSE: BRK.A) conglomerate. As Buffett mingled on the floor with traders, stocks were falling, but the oracle of Omaha told me he`s still buying and upbeat about the U.S. economy.
WARREN BUFFETT, CEO, BERKSHIRE HATHAWAY: The economy is doing pretty well. We own 70-plus businesses. We own about five that are associated with home construction. They`re flat on their backs and they`re just like they`ve been for three years now, four years, almost. And so there`s been no bounce there. Everything else is moving forward. We have businesses that serve heavy industry. They`re moving forward. We have consumer business. We have three jewelry chains. We have four furniture operations. Their sales are improving.
GHARIB: Cathy, how about you? How is your business doing in this climate?
CATHY TAMRAZ, CEO, BUSINESS WIRE: We`re doing well in business. We`re pretty conservative in how we move it forward, but revenues are up and we`re pretty happy with the way things look.
GHARIB: Is business good enough that you`re hiring?
TAMRAZ: Yes, I want to say one thing. We`ve never had a layoff at Business Wire in good times and bad times, but we run it I think pretty strictly and we are adding a few bodies as I like to call them this year. We`ve got the global growth going on, so yeah. We need people doing their jobs.
BUFFETT: She`s doing a fabulous job. I will tell you.
GHARIB: Mr. Buffett, everybody was so surprised earlier this week that you announced a stock buyback of Berkshire stocks. Why did you do it?
BUFFETT: Because of the relationship of the price of the stock and what we think is the value of the stock. We`ve always said when you`ve taken care of the needs of the businesses and your stock sells well below what you think it`s intrinsically worth, then it makes sense to buy it in. We tried it one time in 2000, but the stock ran up real fast. If the stock stays down relative to intrinsic value, we`ll buy a lot of it.
FEAR...
Alan Kohler from the Eureka Report printed an interesting chart over the weekend that's worth reproducing here. It was originally provided by Citi.
History has shown, according to Citi, that when its "Other P/E" (the panic/euhporia index) is in panic territory, as it is now, that means there is a 90% chance the market will rise over the next six months and a 97% probability of double-digit returns over the next 12 months.
Pretty good odds, but that's not the same as saying the market has bottomed, and as you can see in the chart, the "Other P/E" line has been lower than it is now; that is, there is still room for more panic before the market bottoms.
Source: Alan's Weekend Briefing - Eureka Report.
Some weeks ago (probably a bit early) we wrote about the correlation between consumer confidence and the US stock mkt sighting research provided by Goldman Sachs. The premise they made was that consumer confidence below 60 often provides a strong contrarian indicator and has been a precursor (about 80% of the time) to an equity mkt rally particularly in the 6 months following the poor sentiment numbers.
Basically, both of these indicators support the view that its worthwhile buying equities when the majority don't want to!
MODEL PORTFOLIO UPDATES
We've got a number of holdings across our portfolios in the IT, Telecoms sector given what we feel the sector offers some pretty defensive earnings profiles. We bought MTU on Friday and hold VOC & AMM (as well as TLS).
Patersons have released a report on these recently and it seems they have the same view. Contact me for the report in FULL
AUSTRALIAN DUAL LISTED STOCKS
In New York, News Corp rose by US$0.28 to US$16.30 equivalent to A$16.68, A$0.21 above its last close on the ASX.
ResMed fell by US$0.25 to US$29.67, equivalent to A$3.04, A$0.03 below its last close on the ASX.
In London, Rio Tinto rose 37.5 pence to £31.64, A$0.60 higher in Australian currency terms.
BHP-Billiton fell 14.5 pence to £18.68, A$0.23 lower in Australian currency terms.
Henderson Group Plc rose 2.5 pence to £1.09, A$0.04 higher in Australian currency terms.
