(FRIDAY 14TH OCTOBER - JAMES GERRISH - 7.54AM)..The DOW JONES lost -40pts overnight while the S&P 500 dropped -0.3%. European mkts were lower while locally, the SPI FUTURES mkt is pricing a drop of -5pts when trading kicks off here this morning.
Yesterday, our mkt finished higher (+40pts) at 4244 and continues to look fairly positive. We think the mkt is likely to grind higher from here towards 4500 (4450 the technical target) but we'll need to see the US mkt break out from its consolidation range before adding more conviction to that call.
Friday Funny's - How does the Financial System Work - This link is worth a look if you're in need of a laugh (thanks Mike) - http://www.youtube.com/watch?v=M_3T-Af57Pg&feature=player_embedded
WHERE ARE WE NOW....?
So it seems that equity markets have settled and those that were calling for another GFC type scenario have gone quite, for now. Its a strange thought but we might actually get mkts to trade back in line with fundamentals (meaning company earnings) and divert from the news driven circus we've had for the last few months.
Coppo in the Goldmans Afternoon Report yesterday made an interesting point and its a subject I spoke about with a client yesterday. Markets have a great ability to look 9-12 months ahead so while many news services will tell you how bad things are right NOW, (which is what gets talked about at family BBQs etc), mkts are continually looking forward and the recent bounce from the lows suggests that its starting to see light at the end of the tunnel.
We've spoken a number of times before about Consumer Confidence as a good contrarian indicator and we wrote about Citi's Panic/Euphoria indicator earlier in the week, which both support the view that mkts bottom at the height of bearishness yet it takes the majority of sceptics a couple of months before realising this.
This is what gives validity to the old saying of 'markets climb the walls of worry'... because the reality is that the start of a bullish move is built on a foundation of scepticism derived from a recent mkt shock. This has been amplified even more so this time around because of the fresh memories surrounding the GFC where we saw equity mkts fall 30% post Lehmans collapse.
Believe it or not (now), its different this time around for a couple of key reasons:
1. Companies are flush with cash and if the mkt doesn't price assets realistically, corporate s will. We've seen this activity increase recently with FGL, HUN, CSV, SDL etc etc under take over.
2. There is a massive amount of cash on the sidelines that is going to be earning less if interest rates are cut (as expected). This cash has just witnessed a 10% rally in equities in a little over a week. That's 2 years worth of cash returns since last Tuesday - which certainly gets attention.
3. So, the recent mkt bounce is probably short covering, but instos are cashed up + they are massively underweight equities. Don't under estimate the old Fear Of Missing Out type event. Any pullback I think serves as a buying opportunity and we should trade this view for the remainder of the year.
4.. Fixed interest yields have been pressured in recent times given higher demand for safe haven assets. They now offer a relatively unattractive comparable return. (example - Bank Shares yield 10+% in a super fund while a comparable bank hybrid yields 7.8% - or Telstra yields +10% against a 3 year term deposit yielding 5%.
5. Coppo also sighted yesterday the reduced ability of Hedge Funds to short stocks given Funds Under Mgt have dropped significantly (MAN Financial an example of this). So the fact that hedge funds were bigger in 2008 and there were more of them, they had more clout. Recently, the sector has been performing fairly poorly so they'll be tentative to make those larger calls, and less tolerant for positions that go against them.
The ASX 200 has now rallied +401 pts or 10.44% over the last 8 days since Tuesdays intra day low of 3840 (previous low was 3765). We're still likely to get news driven shocks in this mkt but broadly speaking, we think the trend will be higher from here into year end.
AROUND THE GROUNDS ON FRIDAY
MODEL PORTFOLIO UPDATES
None this morning
AUSTRALIAN STOCK PRICES OVERNIGHT
In New York, News Corp fell by US$0.03 to US$17.13, equivalent to A$16.82, A$0.02 above its last close on the ASX.
ResMed rose by US$0.05 to US$30.27, equivalent to A$2.97, A$0.03 below its last close on the ASX.
In London, Rio Tinto fell 78.5 pence to £32.84, A$1.21 lower in Australian currency terms.
BHP-Billiton fell 54.5 pence to £19.10, A$0.84 lower in Australian currency terms.
Henderson Group Plc fell 1.0 pence to £1.19, A$0.02 lower in Australian currency terms.
