(MONDAY 24TH OCTOBER - JAMES GERRISH - 7.22am)...The DOW JONES added +267pts on Friday night while the S&P 500 put on +1.88%. European mkts were all higher (FTSE up +1.93%, German DAX up +3.55%, French CAC up +2.83%) while locally, the SPI FUTURES mkt is pricing a higher open up +45pts when trading kicks off here this morning.
On Friday, the S&P/ASX 200 lost 3pts or -0.07% to close at 4141.
DOW JONES - Clear break out on Fridays session from the congestion zone we've been trading in since the start of August. Clearly, the mkt is optimistic about a potential resolution to the European issues. From a purely technical standpoint, we would want the breakout level of 11 700 to become support whilst for an upside target we'd ad the depth of the previous trading channel to get a target around 12,600. That would be just a couple of hundred points below the April high. On the negative side of things, if we did rally to this point and not any further, it would set up another lower high in the mkt and that may be the time to reduce mkt exposure. That's some 900 pts away on the DOW so we'll worry about it then but certainly something to remain conscious of.
To recap - Here is what we wrote in Fridays note about the DOW JONES which is now more relevant given the breakout.
Firstly, if you look the DOW JONES from a broader perspective, its clear that the index is hitting its head on resistance around current levels. But drilling down and looking at the last weeks price action tells a different story. There are clear signs of consolidation at the top of the range which is positive + on the one session that we tried to break lower (Tuesday I think), there was pretty strong price rejection at lower levels and the index popped back up into the short term congestion zone.
Its been trading in a very tight range and if you imagine a spring that has been compressed, when it pops, it does so with some force. If the mkt does break out above 11.600/700ish on the DOW, expect a sharp rally. I think this will be the outcome however there is a chance we'll get a pullback before breaking through resistance.
S&P/ASX 200 - We need to break above the down trending resistance line on the chart which seems likely given the strong patterns we're seeing in the DOW.
HYBRIDS
Given Woolies (WOW) has announced it will be raising $500million + through a new hyrbid offering I thought it relevant to touch on what hyrbids are and what we think f the Woolies offer.
Generaic overview of what they are....
"Hybrid securities are "higher yielding" investments, generally paying regular income to investors a couple of basis points above the bank bill rate. Such investments are popular with retirees seeking higher yields than they'd normally receive from a cash account.
As with most investments, riskier hybrids pay a higher interest payment (otherwise called a coupon or preferred dividend) to compensate investors for the added risk.
When buying a hybrid security you are typically lending money to a bank, insurance company or large corporation, known as the issuer. In return for the loan, the issuer pays a given interest rate (called the coupon) for the life of the security, repaying the principal at maturity (Some are actually perpetual in nature but that's not the case with the Woolies note).
In the case of the Woolies offering, some key terms are outlined below:
Yield: 3.25% to 3.5% above the 90 day bank bills which on Friday sat at 4.73%. This equates to an annual return of between 7.98% & 8.23% depending on demand. The income is unfranked and paid quarterly in arrears. The first important date post issue is Novemver 24th 2016 which is the Step Up date. At this time, Woolies have two options. Pay the holder an additional 1% pa to continue to hold the security or redeem them and pay back the holder the amount they initially invested (return of capital).
If they decide to pay the additional 1% the security would then mature on the 24th December 2036 however it does seem that Woolies have some incentives to redeem the notes after five years. These include:
1. The obvious increase in the cost of funding (1%)
2. Woolies have negotiated a condition in the notes with S&P (credit rating agency) where by they will allow an "equity credit" (that is, pretend that the debt is equity) for 50% of the value of these notes when it comes to calculating Woolworths' gearing and debt-service ratios.
This will effectively allow Woolworths to have a higher senior debt credit-rating than might otherwise be the case.
They lose this condition after the 2016 step up date + because this agreement has been put in place, they presumably should be able to raise cheaper senior debt and could therefore redeem the notes in 2016.
Also, Woolworths has entered into a replacement capital deed with S&P which requires the Notes II be replaced with similar subordinated notes or equity upon redemption, so they can redeem them, then reissue something similar.
Its not that important to understand the intricacies of the offering but it is important to know where it sits in the capital structure. The hybrids are subordinated debt which means in the event Woolies defaults, these instruments rate behind all other creditors and senior debt-holders but ahead of share holders.
Why we like the Woolies Hybrid?
It pays a pretty attractive yield of around 2% more than a cash management account. Both investments will be hit if interest rates fall but on a relative basis, it still looks attractive.
We think there is a high chance the notes will be redeemed in 2016 but if they don't, the additional 1% seems like decent compensation.
Although there is no formal rating on this Hydrid, the Standard & Poor's rating on Woolworths' senior debt is A-, which is attractive.
On a broader sense, it provides diversification away from our existing holdings in Bank Hybrids and will ad to income + reduce volatility in portfolios.
If you do have interest in this Hybrid, please get in contact this morning. I'll be requesting an allocation at no later than noon today.
MODEL PORTFOLIO UPDATES
Woodside (WPL)
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Woodside Petroleum Provides September 2011 Quarter Report 21-Oct-11 09:58
Woodside Petroleum provided its third quarter report for the period ended 30 September 2011, reporting that sales revenue of US$1,313m was 5% higher compared to the previous quarter, predominantly as a result of higher sales volumes and higher realised LNG prices. Production for the quarter was 16.1 MMboe, which was a solid result despite the impact of planned shut-downs at the North West Shelf North Rankin facility and LNG Train 5, as well as lower volumes from the Enfield oil field. Production was assisted by higher production volumes from Vincent, following integration of two new infill wells, higher Stybarrow oil production and higher domestic pipeline gas production. Sales volumes (16.7MMboe) were 2% higher compared to the previous quarter, largely driven by the timing of cargo liftings and higher domestic pipeline gas sales.
NRW Holdings (NWH)
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NRW Holdings Receives Contract Extension for Earthworks at Simandou Project 21-Oct-11 08:57
NRW Holdings advised that Simfer SA, a wholly-owned subsidiary of Rio Tinto, has awarded the company a three-year extension to the existing contract for Earthworks at the Simandou project in the Republic of Guinea, West Africa. Works under this contract include ongoing construction of roads and drill pads at the main Simandou site together with community based civil work in support of Simfer's environmental and communities program. The contract will now extend from 1 August 2011 through to 31 July 2014. The contract extension has an estimated minimum value of $36m annually excluding any additional works awarded.
AUSTRALIAN STOCK PRICES OVERNIGHT
In New York, News Corp rose by US$0.34 to US$17.39, equivalent to A$16.82, A$0.21 above its last close on the ASX.
ResMed rose by US$0.86 to US$31.09, equivalent to A$3.01, A$0.06 above its last close on the ASX.
In London, Rio Tinto rose 136.0 pence to £31.51, A$2.09 higher in Australian currency terms.
BHP-Billiton rose 64.0 pence to £18.97, A$0.99 higher in Australian currency terms.
Henderson Group Plc rose 1.5 pence to £1.19, A$0.02 higher in Australian currency terms.
