(TUESDAY 25TH OCTOBER - JAMES GERRISH - 7.30am)...The DOW JONES added +109pts overnight while the S&P 500 put on +1.29%. European mkts were all higher (FTSE up +1.93%, German DAX closed, French CAC up +1.55%) while locally, the SPI FUTURES mkt is pricing a higher open up +32pts when trading kicks off here this morning. Yesterday, the S&P/ASX 200 had a great session adding +113 or 2.74% to close at 4255
DOW JONES - Went on with it over night confirming yesterdays break out largely on the back of strong results from an economic bell weather (Caterpillar) and a strong update from Fed-Ex in the US.
S&P/ASX 200 - A strong day yesterday put the index near the down trending resistance point. Potential for a break of this key level today.
DATA POINTS....
So the data that we're now seeing is further supporting our view on a number of fronts.
1. Stronger than expected earnings from US corporate's and even somewhat optimistic outlook statements from the likes of Caterpillar are encouraging and clearly show an economy that remains weak, but is growing non-the-less - and almost certainly not heading for a recession (which we think the mkt had priced in).
When you think about it, US Corporates' should be making hay given the sun is shining on ultra cheap capital, a low USD, a reduced cost base through fewer employees while continued growth in export markets in the emerging world are partially offsetting weakness in European economies.
Caterpillar is a stock I watch closely in the States and the result overnight was a cracker (vs expectations). For those that don't know, Caterpillar is the worlds largest construction and mining equipment maker and therefore a strong barometer on global growth. The company reported a third-quarter profit of $1.71 a share (we expected around $1.50), an increase of 40% from a year earlier. Revenue jumped 41% to $15.7 billion while the most impressive component in Caterpillar's results was the company's outlook for 2012 - in essence they said advanced orders and overall demand is very strong which will flow through to a 10% to 20% increase in Revenue.
Clearly, Caterpillar isn't calling for a significant boom in economic activity and when you drill down into the results they do show a slow down in growth given that demand has come off the boil somewhat and margins are under some pressure. The important point here though is that there is less acceleration in demand but acceleration all the same. This should NOT be confused with an overall slowdown. Caterpillar's shares were up +5% overnight.
Caterpillar Chart
2. Fed-Ex is another company I keep an eye given its performance is directly linked to goods being shipped around the US and abroad. The premise here is that a slow down in the movement of goods is an indication that the US economy is struggling and vice-versa. They gave an update overnight saying they plan to add about 20,000 seasonal workers to handle the surge in volumes expected over the Christmas period, up from 17,000 they put on last year. In an update the company provided last month they said that while it's seeing signs that the economy is slowing down, it's not predicting a recession.
I also look at the DOW TRANSPORTS which tracks the transport stocks in the US for the same reasons as outlined above. We want to see the Transports confirm the action where seeing in the INDUSTRIALS and in this instance, they're singing from the same song sheet.
Fed-Ex
Dow Transports
3. CHINESE MANUFACTURING data was positive yesterday with HSBC's Flash PMI showing the Chinese manufacturing sector picked up in October after a three-month contraction as both new orders and new export orders strengthened.
The flash Purchasing Managers' Index (PMI), designed to preview China's factory output before the release of official data, rose to 51.1 October from September's final reading of 49.9 - climbing above the 50-point level for the first time since July.
China is by no means immune to weakening demand from the United States and Europe but robust domestic demand and solid export growth to emerging markets have provided some cushion.
The stronger number we saw in this data point supports the views of Aussie mining companies (BHP+RIO etc) that have been questioning the recent skepticism over Chinese growth which has had a big impact on commodity prices.
Copper is a key asset here that has seen some massive declines in recent weeks but is starting to bounce back strongly as data refutes the Chinese skeptics.
4. EUROPEAN DEVELOPMENTS will keep us grounded and somewhat cautious because we still don't have a definitive plan from the Eurozone but it does seem to be closer. Wednesday is of course d-day with a plan set to be announced. Realistically, I think we'll only get a frame work and further developments will be rolled out in the weeks and even years to come.
The key elements we'll be looking for on Wednesday include a plan for the reduction of Greek debt, a plan to cushion European banks against the losses they would take on Greek bonds and a mutually agreeable plan on the expansion of the European Financial Stability Fund so it can backstop countries such as Spain and Italy and reassure bond investors they can pay their debts.
The underlying structural challenges of making European countries productive and competitive in a global sense will take years to work through but I guess the important aspect here is that we get a foundation and some confidence in the short term to work towards these longer structural changes.
OUR VIEW - At the height of bearishness, it seemed investors were focused on 1. US Recession. 2. Hard landing in China (commodities bubble burst). 3. European Armageddon.
We think the US recession is a myth, we think the landing in China will be soft rather than hard and we have no idea what the outcome will be in Europe (but are hopeful).
So really, the risk that we're dealing with now is Europe and the indications so far are that a solution is being nutted out. Whether this will be taken well by the mkt will be seen in time, but for now, it seems the mkt wants to believe. This is flowing through to the price action that we're seeing (DOW Breakout, FTSE breakout, US Dollar Break down, ASX 200 threatening a breakout, Aussie Dollar surge, VIX rolled over and yield on 10 year Treasuries seemed to have bottomed.
MODEL PORTFOLIO UPDATES @ mymarketview.com.au
None this morning
AUSTRALIAN STOCK PRICES OVERNIGHT
In New York, News Corp rose by US$0.28 to US$17.67, equivalent to A$16.88, A$0.08 above its last close on the ASX.
ResMed rose by US$0.61 to US$31.70, equivalent to A$3.03, A$0.03 above its last close on the ASX.
In London, Rio Tinto rose 222.5 pence to £33.74, A$3.40 higher in Australian currency terms.
BHP-Billiton rose 99.0 pence to £19.96, A$1.51 higher in Australian currency terms.
Henderson Group Plc rose 3.8 pence to £1.22, A$0.06 higher in Australian currency terms.
