(FRIDAY 11TH NOVEMBER - JAMES GERRISH - 6.53am)...The DOW JONES was trading up +125pts about an hour from the close while the S&P 500 is trading +0.49%. European mkts were mixed (FTSE down -0.28%, German DAX up +0.66%, French CAC down -0.34%) while locally, the SPI FUTURES mkt is pricing a higher open up +19pts when trading kicks off here this morning.
Yesterday, the S&P/ASX 200 lost -101pts or -2.35% to close at 4244.
DOW JONES - Not a lot changed from yesterdays session where the DOW was off nearly 400pts to today where the mkt is trading up +100 or so which underscores the irrationality of mkts at the moment. This prompts the obvious questions of why be involved in an irrational mkt? Simple answer - irrationality presents opportunities in good companies and when a mkt is irrational - its often on both the downside and upside. The main aspect to focus on when investing/trading, is targeting stocks that you want to hold longer term because they're fundamentally strong and fit with the strategy your employing, but be flexible enough to sell out if the mkt gets over exuberant, and buy or hold if the market gets irrational on the downside. That's the crux of our investment strategy at the moment and this is overlaid by our belief that the mkt will edge higher in aggregate towards the end of the year.
S&P/ASX 200 - The Aussie mkt traded sharply lower yesterday however it did finish off the session lows. We were relatively active picking up NAB, BHP and Telstra in the portfolios while we also wanted to ad to Wesfarmers but failed to get hit on our buy price of $31.80. WES is a good case in point here - although its frustrating not to get filled (by 1c) then see the stock shoot higher, it highlights the discipline needed in a mkt like this. Have entry prices in mind and be patient for the mkt to come to you. We've probably got that luxury in a mkt that isn't really trending + more shocks coming out of Europe are likely. Another example was Fleetwood (FWD). Some clients got long a while back and topped up again at $12.30/40 as we did in the model portfolios, however for those that missed the boat, we didn't chase the stock higher. We'll sit and wait for a re-test of the recent breakout region around $12.20 before looking at it again.
IRON ORE PRICES
A lot of talk has centered on the Iron Ore price of late and this obviously has a big impact on Australian producers. As most know, I'm not that upbeat on the Iron Ore price longer term given the large uptick in low cost, high quality ore coming out of the Pilbara (FMG, RIO etc ramping up production significantly) however the short term outlook is a bit more appealing.
There has been a large sell off over the last two months where iron ore price fell nearly US$60 per tonne to US$120/t. It has since recovered slightly to US$131/t on a delivered to China basis. About 8% of the iron ore consumed in China has an operating cash cost above US$130/t, primarily high cost Chinese domestic production.
Lower prices place this capacity at risk of closure and so we should see a continuation of the near term rebound in iron ore. Earlier in the week we highlighted some interesting technical patterns in Fortesque Metals (FMG) and Atlas Iron (AGO). We prefer Atlas Iron (AGO) so that's what we added for clients.
Here is another take from Platts...
Asian iron ore spot prices firm further; traders take positions
November 10, 2011
Singapore
Seaborne iron ore destined for Asia jumped higher Thursday on traders actively taking positions as some steel makers sough spot cargoes to replenish their fast-depleting inventories. The Platts 62%-Fe assessment moved up $4.50/dmt to $137.50/dmt CFR North China.
US trader Cargill placed an open market bid for a Handymax or Cape vessel of 61.5%-Fe Pilbara Blend fines at $136/dmt CFR North China loading December 15-25.
The transparent bid was not sold into by the assessment timestamp of 6.30 pm in Singapore, indicating that market value was higher. The trader was also willing to buy other brands of similar quality.
The bid's laycan of December 15-25, which would equate to delivery six to seven weeks forward, lies in the later end of Platts' assessment timing of 2-8 weeks forward.
With the market's structure between November and December in a slight contango, the bid was normalized to the middle of the assessed delivery period, the fifth week.
Some other traders suggested that prices in the prompt ie, November, could be far lower, at $130-132/dmt CFR China for PB fines, but were unable to place offers for such material proving this.
Elsewhere, four market participants pegged repeatable price for PB fines at $136/dmt CFR North China but said that it is very difficult for a serious buyer to purchase spot cargoes as traders are hoarding their cargoes.
"Steel mills are seeking spot cargoes but this is now a seller's market, traders with the cargoes on their hands are not letting go of their cargoes easily, many are biding their time for a higher price for their spot materials," said a Henan steel mill source.
Source: Iron Ore Price Assessments, Daily Charts, Steel News - Metals | Platts Energy Information Leaders
EUROPEAN DEBT CRISIS...A SOLUTION
Below is a great article about what the ECB can do about the current situation in Europe. Printed in the FT and highlighted yesterday in the Goldmans Afternoon Report.
It's time for you to fire the silver bullet, Mr Draghi
By Alexander Friedman
In folklore, a silver bullet is a popular way to slay the monster. In the real world, we are used to hearing policymakers tell us there are no silver bullets for our complex problems.
Today it is clear what eurozone leaders need in order to limit damage from Greece's implosion, recapitalise key banks, and control Italy and Spain's sovereign debt problems. They need more time. Time is the silver bullet and only one organisation can provide it.
The European Central Bank, now led by Mario Draghi, must accept its role as the lender of last resort in Europe. The ECB could stop the panic engulfing Italian and Spanish government bond markets, and it is the only institution in the world with this power.
To do this, it should promise an unlimited liquidity backstop to sovereign bond markets of solvent nations. As long as its support remains reluctant, "limited" and "temporary", peripheral bond and credit default swap markets will remain vulnerable to weak demand and speculative attack.
The Great Depression produced many lessons, but none was more important than recognition of the importance of a lender of last resort. What stopped the vicious market panic that signified the lows of the US 2008 financial crisis?
It was arguably a television interview with Federal Reserve chairman Ben Bernanke in which he declared that the Fed was the world's lender of last resort. When asked if he had been "printing money", Mr Bernanke said: "Well, effectively ... and we need to do that, because our economy is very weak and inflation is very low."
Unfortunately, in the European sovereign crisis of 2011, Europe's central bank has been more timid in the face of arguably greater threats. The ECB has been reluctant to act due to Europe's own history and a fear of the political consequences for the future. The ECB remains steeped in the Bundesbank tradition of rigid inflation targeting, which has developed as a result of Germany's own history lessons from the hyperinflation of the 1920s.
The ECB has executed this mandate with aplomb.
However, as Italian sovereign bond yields reach unsustainable levels above 7 per cent, these rationales are not acceptable because they threaten Italy with a solvency crisis that would fundamentally destabilise the global markets, likely tip the nascent recovery in the US into recession and undermine the emerging market's growth engine.
The ECB needs to provide additional support to prevent this. There are a couple of ways it could do it.
The first, to allow the European financial stability facility access to the ECB's lending facility, appears to have been rejected outright over the course of the European summit.
The second is potentially more controversial, but remains on the table and should be pursued. The ECB should turn its bond-buying programme, the securities market programme, from "limited" to "unlimited", in effect capping the lofty yields that threaten Italy and Spain. Despite what Mr. Draghi, and Jean-Claude Trichet before him, have said, the ECB is the lender of last resort to sovereign nations, for there is no one else. But again, this needs to be stated.
It is wrong to turn away from the option of an expanded SMP because of fears of inflation. Estimates of the non-inflationary loss absorption capacity of the eurozone are in the region of €3,000bn. Given that the combined size of Italian and Spanish bond markets is about €2,750bn, €3,000bn is as good as unlimited. Furthermore, the mere threat of unlimited support would likely make the actual intervention relatively small, as we saw with the Swiss National Bank's franc intervention.
Ironically, the current alternative to an expanded SMP will most likely prove to be a powerful deflationary force. The European summit will force banks to raise capital after marking-to-market the depressed value of peripheral bonds on their balance sheets. Partly as a result, banks have already committed to withdraw $1,000bn worth of credit, and the actual contraction could prove to be double this. This sharp credit tightening is already pushing parts of the eurozone back into recession and appears to threaten even the mighty German export machine.
Critics note that a permanent SMP would not address budget imbalances and could engender moral hazard, as governments could pursue irresponsible fiscal policies with confidence the ECB would finance their deficits. However, Europe's politicians have proved on multiple occasions this year that rushed, half-baked solutions are no way to end this crisis. Yet, leaders are forced into these rushed decisions to attempt to calm markets, as the Cannes summit demonstrated.
Ultimately, the only lasting solution is likely to involve fiscal confederation and eurobond issuance. But this will take time and only a bold stance from the ECB would calm markets for long enough for European politicians to consider and negotiate the necessary treaty changes to make this happen.
Time to use your silver bullet, Mr. Draghi.
Alexander Friedman is chief investment officer of UBS and former chief financial officer of the Bill & Melinda Gates Foundation
MODEL PORTFOLIO UPDATES
Emerging Growth - we added to BHP
Pension Performers - we added to Telstra (TLS)
Buy Write - we bought NAB
BHP Billiton Limited (BHP) (emerging growth + buy write)
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BHP Billiton Announces Amendment to WA Royalties and State Agreements 10-Nov-11 13:23
BHP Billiton advised that it has finalised an agreement with the WA Government to increase the royalty rate payable to the State for its iron ore Fines product. Based on this agreement, the WA Government will proceed with amendments to the State Agreement Acts covering operations managed by BHP Billiton Iron Ore. These amendments will include an increase in the royalty rate applicable to iron ore Fines from 5.625% of sales revenue to 6.5% from 1 July 2012, and then to 7.5% from 1 July 2013. This will align the royalty rate for Fines with the existing rate paid on Lump ore. The State Agreement amendments are subject to the approval of the Parliament of WA.
Telstra Corp (TLS) (pension performers)
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Telstra Corporation Announces Successful EUR750m Benchmark Bond Issue 10-Nov-11 09:45
Telstra Corporation announced the completion of a 10.5 year benchmark EUR750m Eurobond issue, with a 3.75% annual coupon and a maturity of 16 May 2022. Proceeds will be fully swapped into A$ at drawdown through to maturity and provide the company with around A$1.0bn of cost effective long-term funding. The bond will help lengthen the average maturity of the group's debt portfolio. Issue proceeds will be mainly used for refinancing maturing debt and general working capital purposes.
AROUND THE GROUNDS ON FRIDAY
Italian 10year Bond Yields - came back overnight but still around the 7% level which is clearly unsustainable
US 10 year Treasury Yields
S&P 500 - as with the DOW JONES, we think its now in a new trading range
OIL - Big move in the last week and its now broken the downtrend. Worth noting that we'll start to see negative headlines in the US about the impact of a high Oil price on economic growth - in essence, we don't really want to be seeing Oil above $100 a barrel.
GOLD
COPPER
AUSTRALIAN DUAL LISTED STOCKS
In New York, News Corp rose by US$0.31 to US$17.26, equivalent to A$17.01, A$0.11 below its last close on the ASX.
ResMed fell by US$0.37 to US$27.82, equivalent to A$2.74, A$0.08 below its last close on the ASX.
In London, Rio Tinto fell 59.13 pence to £34.25, A$0.93 lower in Australian currency terms.
BHP-Billiton fell 11.0 pence to £19.57, A$0.17 lower in Australian currency terms.
Henderson Group Plc fell 1.0 pence to £1.12, A$0.02 lower in Australian currency terms.
