(MONDAY 17TH OCTOBER - JAMES GERRISH - 9.08AM)..The DOW JONES added +166pts on Friday night while the S&P 500 put on +1.74%. European mkts were mostly higher while locally, the SPI FUTURES mkt is pricing a rise of +49pts when trading kicks off here this morning.
For the week, the All Ords added +1%, the S&P 500 was up a significant +6% and Commodity markets were firmer adding +4.5%. The large under performance of the Aussie mkt can be put down to the move in the AUD v USD which was up +5.9% on the week and is now firmly back up above parity at 103c.
Interest Rates
Clearly, the RBA has been positioning itself to loosen policy over the last few months and I think now it becomes a questions of when and by how much rather than if. The mkt seems to think Melbourne Cup day is a certainty but it will come down to the CPI data thats out in 2 weeks (26th October). Goldman Sachs reckon that if it comes in below 0.7%, they will cut but above that number and it might be December instead. What ever the case, it seems prudent to have a look at stocks that are sensitive to interest rates and discretionary spending.
The obvious names that spring to mind include Harvey Norman, JB Hi Fi, David Jones, Myer, and to a lesser degree, Super Retail Group and ARP Corp (ARB).
Charlie Aiken from Bell Potter has started to push the sector saying 'In scouring the market for alpha to rate cut cycles, you simple can;t go past discretionary retailers. Back testing shows discretionary retailers rally around +30% during rate cut cycles.
Yes, everyone says they are in structural decline, but we started that debate two years ago with a piece on internet retailing. The fact is that there are structural challenges from internet retailing, but the major Australian discretionary retailers are now priced for terminal decline in their traditional business models. That is too aggressive at what will prove the absolute bottom of the Australian retail spending cycle and consumer confidence"
Looking very quickly at the earnings profile of the companies listed above lets us discard the stocks without much evidence of strong earnings momentum.
Harvey Norman (HVN)
JB Hi Fi (JBH)
David Jones (DJS)
Myer
Super Retail Group (SUL)
ARB Corp (ARB)
This is obviously a basic overview of earnings however before you'd even consider investing in a company, you want to have a clear understanding of its earnings trend.
From the charts above, I think its pretty clear that you'd want to do some more work on a few of them, but not all. In my view we'd discard Harvey Norman, Myer and David Jones and be more receptive to putting money in SUL, JBH or ARB Corp.
From a technical standpoint, I'm more inclined to put work into JB Hi-Fi given its pulled back fairly sharply in recent months but now seems to have an obvious support level at $14). This isn't to say ARB and SUL are not worth considering and as those that follow Stockwatch will no, ARP Corp has been a favorite, but JBH is trading at the largest discount to our 2012 valuation.
JBH - Current price of $15.10 v $19.04 valuation
SUL - Current price of $6.50 v $6.73 valuation
ARP - Current price of $8.24 v $9.79 valuation
** These are based on 2012 consensus numbers.
MODEL PORTFOLIO UPDATES
Non today - however we're looking to ad JBH.
AUSTRALIAN STOCK PRICES OVERNIGHT
In New York, News Corp rose by US$0.16 to US$17.29, equivalent to A$16.75, A$0.01 below its last close on the ASX.
ResMed rose by US$0.14 to US$30.41, equivalent to A$2.95, the same as its last close on the ASX.
In London, Rio Tinto rose 3.44 pence to £32.87, A$0.05 higher in Australian currency terms.
BHP-Billiton rose 37.0 pence to £19.47, A$0.57 higher in Australian currency terms.
Henderson Group Plc rose 2.1 pence to £1.21, A$0.03 higher in Australian currency terms.
