(FRIDAY 16TH MARCH - 08:44 - JAMES GERRISH)...The US MKT was HIGHER overnight with the DOW JONES up +58pts while the S&P 500 ADDED +0.60%. European mkts were MIXED (FTSE down -0.08%, German DAX up +0.92%, French CAC up +0.44%) while locally, the SPI FUTURES mkt is pricing a HIGHER open up +21pts when trading kicks off here this morning. 

 

Yesterday, the ASX 200 closed down -9pts or -0.22% to 4277. 

 

OVERSEAS MKTS; More positive data out of the US overnight with another drop in jobless claims providing more evidence of a solid recovery in the US labour mkt. 

 

Continuing claims actually fell to the lowest level in 4 years while we also saw small increases in regional manufacturing indices. As a consequence, US stocks were bid higher with the S&P 500 cracking through 1400. 

 

AUSSIE MKT; We'll be higher this morning and we might have another crack at 4300 but I've been disappointed multiple times in the past. We can only really wait and see but I think its just a matter of time before resistance gives way. 

 

Its not often I plug a stock, particularly at the SPEC end of the mkt however I think this one has merit....

 

Challenger Energy (CEL) -  last close 7.3c - is starting to make some interesting moves.To give some background, it's an oil and gas exploration company with prospects in the US and South Africa. The US is in focus at the moment and in particular, the prospect known as Mercury Stetson. Over the past 10 years, the US shale gas industry has taken off and one of the core producing areas taps into the Woodford and Barnett Shales, which are geological extensions of the Arkoma and Fort Worth Basins. 

 

The company is currently drilling and on track to punch through the Barnett & Woodford shales shortly so we should get some more detailed information from the company in the coming days. One of the key reasons why the project is particularly interesting is it includes both shale formations in the same project area which greatly improves the potential economics. Also worth noting is the significant size of the potential reserves which sits in the multiple tcf (trillion cubic feet) of gas.

 

The company has two other prospects that should be mentioned. Triple Crown in the US and Cranemere in South Africa. 

 

Triple Crown was unsuccessfully drilled towards the end of last year - see attached announcement - CLICK HERE - which explains the sharp fall in the stock price (15c down to 5c)  
 

The other is located in Sth Africa which has huge potential but is currently under a moratorium on hydraulic fracturing (fracking for short) - however there are rumblings that this moratorium may be lifted. SA faces major energy shortages and the Karoo land leases, which contain significant gas potential, is where Challenger is located. 

 

The Karoo has three key players - Shell, Falcon and Challenger. Shell has just commissioned a study into the economic & environmental benefits (for Sth Africa) should the ban on fracking be lifted and it seems to be having a positive impact on sentiment. I'm not expecting a lot from the Sth African asset in the near term (although I think Shell wants to increase its stake in the region) however it does provide a back stop if Mercury Stetson fails. 

 

I think its important (when looking at stocks like this) to understand that failures can occur and prospects can underwhelm as we saw with Triple Crown. The key is to have multiple targets, in diverse geographical regions, so they have a number of chances to 'get it right', particularly if they're targeting massive reserves as is the case with Challenger.

     

Disclosure - I own the stock so might be biased but I think its well worth a look at current levels. I first bought in at 15c a while ago now and was obviously unimpressed with what occurred at Triple Crown. I've just doubled down at 5c in the last few weeks and feel pretty comfortable with the direction of the company. 

 

 

COMMODITIES; For a full list of overnight prices, CLICK HERE

  

 

AUSTRALIAN DUAL LISTED STOCKS

In New York, News Corp rose by US$0.15 to US$20.43, equivalent to A$19.41, A$0.10 above its last close on the ASX.

ResMed rose by US$0.13 to US$31.60, equivalent to A$3.00, A$0.01 above its last close on the ASX.

In London, Rio Tinto rose 75.0 pence to £35.55, A$1.12 higher in Australian currency terms.

BHP-Billiton rose 23.5 pence to £20.24, A$0.35 higher in Australian currency terms.

Henderson Group Plc rose 1.3 pence to £1.22, A$0.02 higher in Australian currency terms.

James Gerrish

(WEDNESDAY 14TH MARCH - 07:46 - JAMES GERRISH)...The US MKT was SHARPLY HIGHER overnight with the DOW JONES up +217pts while the S&P 500 ADDED +1.81%. European mkts were HIGHER (FTSE up +1.07%, German DAX up +1.37%, French CAC up +1.72%) while locally, the SPI FUTURES mkt is pricing a HIGHER open up +43 pts when trading kicks off here this morning. 

 

Yesterday, the ASX 200 closed up 50pts or +1.21% to 4247. Given the print on the FUTURES mkt this morning, we're likely to re-test the 4300 level again today.
 

 

OVERSEAS MKTS;  A great night overseas with the US mkt breaking key resistance - the DOW closed at 13177 while the S&P 500 was at 1395 on (once again) better economic data from the US.  

 

There were a number of very key points to take out of last nights session; 

  

1. US retail sales posted their largest gain in five months even with the spike in the cost of energy pushing up petrol prices. What's encouraging about this data is it highlights that the improving economic fundamentals, particularly the strong employment growth that we're seeing, is being translated into higher spending activity. Its obvious that the US is building momentum and it suggests to me that the positive dynamics between jobs growth and spending activity could underpin a stronger economic recovery in the coming months. 

 

 

2. The FED RESERVE finished their one day meeting and kept rates on hold (as expected) but gave no indication of further easing. They touched on the unemployment rate staying elevated at 8.3% but that was it - the message was essentially 'don't expect stimulus in the foreseeable future' given the economic situation is improving... 

 

Could the US mkt be overcoming its insatiable appetite for stimulus (sugar hits) and be satisfied with a menu of better economic statistics?? That was the trend overnight and this saw GOLD sell off (-1%) given that the Fed is unlikely to print money any time soon (-ve for inflation) and the USD moved higher.

 

We highlighted the trend yesterday that the USD is moving higher on an improving economic situation, and is slowly loosening the shackles of being a safe haven currency. We're also seeing money come out of the US Treasuries (now yielding 2.12%) - which is a positive sign of risk appetite. - money moving from safe haven bonds into equities. 

 

 

  

 

3. JP Morgan increased its dividend overnight and said they would buy back as much as $12 billion of its own stock this year in a significant show of confidence - "We expect to generate significant capital and deploy that capital to the benefit of our shareholders."

 

4. The mkt rallied overnight but the Aussie Dollar was pretty flat - its generally considered a 'risk on trade' which rallies when the mkt's rise and sells off when the mkt falls. The fact we actually saw the USD rally while the US equity mkt rallied - and the AUD was flat at the same time is an insight into a potential new trend that could be very bullish for our mkt. 

 

  

 

 

If we accept the USD is now trading on the back of economic strength from the US, this suggests the Aussie could be under some pressure from here. If we see interest rate cuts, that will put additional pressure on the Aussie which has been a significant headwind for our mkt. So if we get a US mkt that rises combined with an Aussie Dollar that falls, our mkt could benefit from multiple tail winds.

 

I don't want to get too overly optimistic here, however the trends above look to be extremely positive. Throw in our belief that China will start to ease policy soon and its easy to get more bullish on the outlook for our stock mkt this year. 

   

 

AUSSIE MKT; Higher open this morning and a retest of the 4300 resistance level looks likely. From a technical standpoint, out mkt still looks choppy/weak in comparison to the US and we need to break out of the current congestion zone before we get some clear air. The catalyst now for this to happen might be consolidation and possible weakness in the AUD amplified by an interest rate cut or two. That's what we really to see and this will prompt money sitting on deposit to re-enter the fray. 

 

 

  

 

 

 

COMMODITIES; For a full list of overnight prices, CLICK HERE

  

 

 

AUSTRALIAN DUAL LISTED STOCKS

 

In New York, News Corp rose by US$0.49 to US$20.29, equivalent to A$19.23, A$0.35 above its last close on the ASX.

ResMed rose by US$0.86 to US$31.00, equivalent to A$2.94, A$0.06 above its last close on the ASX.

In London, Rio Tinto rose 82.5 pence to £35.33, A$1.23 higher in Australian currency terms.

BHP-Billiton rose 33.5 pence to £20.47, A$0.50 higher in Australian currency terms.

Henderson Group Plc rose 4.0 pence to £1.19, A$0.06 higher in Australian currency terms.

James Gerrish

(THURSDAY 1ST MARCH - 07:32 - JAMES GERRISH)...The US MKT was LOWER overnight with the DOW JONES off -53pts while the S&P 500 lost -0.47%. European mkts were LOWER (FTSE off -0.95%, German DAX off -0.46%, French CAC off -0.04%) while locally, the SPI FUTURES mkt is pricing a LOWER open off -22pts when trading kicks off here this morning. 

 

 

DOW JONES

  

 

 

Yesterday, the ASX 200 closed UP +35pts or +0.84% to 4298.  The MKT was actually up 45pts leading into the match but sellers dominated the last 10 mins and sold the index back below 4300 - but more importantly, the 200 day moving average which seems to be an unmovable barrier at the moment - as the chart below shows. What you tend to find in situations like this is that once it breaks convincingly, the mkt rallies pretty quickly to the next level of resistance which sits around 4450-4500. 

 

ASX 200

 

  

 

 

There is a lot of talk this morning about a possible correction in the mkt from here - that the mkt has run too hard, too fast. The issue with having this view is that you're trying to find a top in a rising mkt - which is difficult to do. I've never been good at it and I think over time, it ends up costing you money by trying. So for mine, I'm staying long here and will get more convinced if our mkt breaks above the 200 day moving average.   

 

 

OVERSEAS MKTS; A lot to digest overnight with the ECB's long Term Refinancing Operations (LTRO) lending EUR529.53 to 800 European banks while Fed Treasurer Ben Benanke hosed down any chance of further quantitative easing out of the States given the upward revision in growth expectations. 

 

LTRO; So the amount of loans written by the ECB overnight was pretty much inline with mkt expectations at a touch over EUR500 billion. The first auction in December saw EUR489 billion being lent. Interestingly, this time around saw 800 institutions tap into the facility v 523 in December so its a positive that money is finding its way into a broader cross section of institutions. 

 

My personal view on the figure is that its enough to ad liquidity which will continue to support the risk trade but it wasn't enough to suggest European banks are grabbing for a cash at any opportunity. If it had of gone towards EUR1 trillion, I think we would have seen some initial optimism (spike in the mkt) then on contemplation, there would have been some concerns emerge about the actual health of the institutions tapping into the cash and that may have led to a mkt sell off. 

 

The fact that it come in where it did, on the lower end of expectations, I think will have the opposite effect. Some initial softness in mkts (which we saw in Europe) but on reflexion, we'll draw a positive from the operation.

 

 

FED SPEECH; Benanke spoke in the States overnight and it probably had a bigger impact on mkts than the LTRO did. He effectively doused expectations for further stimulus in the US (in the near term at least) and I think this came as a surprise to the mkt. 

 

Looking across asset classes, it seems the mkt had been positioning somewhat for QE3. This was certainly the case with the USD and Gold in particular giving a pretty clear sign of how the mkt was positioned. 

 

Gold is an inflation play and stimulus is thought to increase inflation. If stimulus is off the table, then the threat of inflation is diminished, so traders reduce their hedge against it. This prompted a massive move in GOLD overnight which fell -$92 or -5%. 

 

We've been pushing the view for a while now that the basis for Gold as an inflation hedge was losing validity. Not because it won't hedge against inflation but because we're not seeing any uptick in inflationary pressures - in fact if we look at China, inflation is ticking lower, there is no issue with price inflation in the US while in Europe, deflation is a bigger risk at this stage. 

 

So the basis for Gold moving higher short term is void. I do think we'll see inflation come into play down the track, and at that point, Gold will be a key holding, but for now, I'd prefer to be elsewhere. 

 

 

 GOLD

 

 

The mkt obviously took Benanke's comments overnight as a negative given we won't see a liquidity injection any time soon, but it is an endorsement of the US recovery - which is now gaining some traction and is filtering through to upward revisions in growth expectations.  

 

 

AUSSIE MKT; We'll be lower on the open today however the key level remains the 200 day moving average. Its actually also come into play on the Chinese mkt as shown in the chart below. 

 

CHINA

 

 

 

 

We see 4th Qtr Capex numbers out at 11.30 today and the mkt is expecting a rise of +3.8%. These will give us a better insight into whether spending in mining has remained strong so we might see some reaction in the mining services stocks around that time. 

 

 

COMMODITIES; For a full list of overnight prices,      CLICK HERE

  

 

AUSTRALIAN DUAL LISTED STOCKS

 

In New York, News Corp rose by US$0.02 to US$20.29, equivalent to A$18.91, A$0.05 above its last close on the ASX.

ResMed fell by US$0.14 to US$29.30, equivalent to A$2.73, A$0.03 below its last close on the ASX.

In London, Rio Tinto fell 145.78 pence to £35.85, A$2.16 lower in Australian currency terms.

BHP-Billiton fell 82.0 pence to £20.38, A$1.22 lower in Australian currency terms.

Henderson Group Plc fell 9.1 pence to £1.19, A$0.13 lower in Australian currency terms.

(WEDNESDAY 22ND FEBRUARY- 08:27 - JAMES GERRISH)...The US MKT was HIGHER overnight with the DOW JONES up +15pts while the S&P 500 was up +0.07%. European mkts were LOWER (FTSE off -0.29%, German DAX off -0.58%, French CAC off -0.21%) while locally, the SPI FUTURES mkt is pricing a LOWER open down -19pts when trading kicks off here this morning. 

 

Yesterday, the ASX 200 closed HIGHER up +35pts or +0.82% to 4291 - the first time in 2.5 months that the index has risen three consecutive days. 

 

Its also interesting to note that the 4300 resistance level for the ASX 200 is still well an truly in play. We still haven't broken this level and until that happens, we'll retain some fire on the sidelines. 

 

  

 

 

OVERSEAS MKTS; Greece was obviously the big news yesterday with an agreement on the bailout reached. The reaction on the mkt was pretty anemic and we probably expected a bit more out of it but I think that will come in time. 

 

To recap, here is what happened in Europe; 

 

- European Finance Ministers passed a 130 billion euro aid package to Greece 

 

- This package brings the total assistance for Greece, Ireland & Portugal to 386 million euro 

 

- Private holders of Greek debt have taken a 53% haircut on the value of their holdings 

 

- Greek debt is forecast to come back to 121% of GDP by 2020. Without the package, we would have seen debt to GDP of 200% by 2012 (forecasts show). 

 

Although its a positive move, its not a silver bullet for Greece - they still have a long road to travel and default is a distinct possibility. In fact, if history is a guide then a default in the years following a bailout is the most probable outcome and this is exacerbated by the fact that Greece is the least competitive nation in the eurozone (as measured by the world economic forum) - and is likely to remain that way.  

 

From a mkts perspective, the main aspect with this deal, is its ability to contain the situation to Greece. Greece is manageable but Spain or Italy may not be. That's why we've been so keen to monitor bond yields from these countries. 

 

So the real game changer for mkts isn't this deal with Greece, it was the Long Term Refinancing Operations (LTRO) by the ECB back in December and again this month that has proved critical. 

 

We just needed the deal with Greece to go through to take the perceived risk off the table. To get rid of the threat that a messy default was going to happen and unsettle mkts. We now have a greater chance that Greece (and the rest of Europe) will muddle through. 

 

We won't have a liquidity event like Lehman Brothers. Even if Greece defaults, European leaders have bought some time to focus on getting the larger nations (Spain/Italy etc) in order. In the short term, I think the focus will turn to these countries. That's what mkts tend to do. When one crisis is averted the next possible risk gets some attention - so expect some media noise here as they fill the void left by the Greek deal. 

 

 

In the US overnight, the DOW JONES actually traded above 13000 for the first time since May 2008 - but unfortunately could hold above it to close just shy of it. 

 

 

  

AUSSIE MKT; Reporting season heated up yesterday with the best day yet. Some standouts included Flightcentre (FLT), Oil Search (OSH), Boart Longyear (BLY), Monodelphous (MND), One Steel (OST), Downer (DOW), iinet (IIN)  

 

If you want any information about these reports, please email me.  

 

 

Woodside a big one today. 

 

 

COMMODITIES; For a full list of overnight prices,   CLICK HERE

 

The commodity mkts were strong overnight with the CRB index sharply higher. We think the easing in China, the deal with Greece and liquidity injections by the ECB are likely to see commodities higher in the short/medium term - for confirmation of this we need to see the break of the current range as the chart shows. 

 

 

  

 

 

 

AUSTRALIAN DUAL LISTED STOCKS

 

In New York, News Corp fell by US$0.04 to US$20.21, equivalent to A$18.96, A$0.09 below its last close on the ASX.

ResMed fell by US$0.18 to US$28.93, equivalent to A$2.71, A$0.02 below its last close on the ASX.

In London, Rio Tinto fell 6.5 pence to £37.00, A$0.10 lower in Australian currency terms.

BHP-Billiton rose 2.5 pence to £20.80, A$0.04 higher in Australian currency terms.

Henderson Group Plc was unchanged at £1.26.

(TUESDAY 14TH FEBRUARY- 07:48- JAMES GERRISH)...The US MKT was HIGHER overnight with the DOW JONES up +72pts while the S&P 500 added +0.68%. European mkts were HIGHER (FTSE up +0.91%, German DAX up +0.68%, French CAC up +0.34%) while locally, the SPI FUTURES mkt is pricing a FLAT open off -2pts when trading kicks off here this morning. 

 

Yesterday, the ASX 200 closed HIGHER adding +39pts or +0.94% to 4285. The Aussie Dollar was trading around 107.38 this morning. 

 

 

OVERSEAS MKTS; A lot has happened in the last few days that we need to be across. 

 

Greece - Yesterday morning, the Greek Parliament backed the austerity measures that will unlock bailout funds and enable them to make good on their loan repayments - and avoid default (if they carry through with the agreement)

 

The bill was supported by the majority of the two largest political parties (socialist Pasok & conservative New Democracy) with 199 votes for and 74 against, while 27 abstained. 

 

In addition to the austerity measures, the legislation also encompasses the bond swap deal with the private bond holders. This should unlock the 130 billion euro of bailout funds however there are still a couple of hurdles to overcome this week. There is a meeting of Eurozone Finance Ministers who need to support the deal (we expect they will) on Wednesday then we'll need to see deal passed in parliaments around Europe later in the week. 

 

I'm not sure the mkt is overly convinced that this is the silver bullet for the Greek woes and the rioting leading into, and during the vote didn't exactly do a lot for confidence. 

 

We also have Greek elections in the next 2 months and the EU have been adamant that all parties needed to be 100% behind the austerity package - therefore who ever gets into power the deal will be honored. 

 

Overall, it seems both major parties have the weight of numbers behind the package and the deal is a real positive for Greece (and mkts) - but of course there will always be skepticism until we actually see the plans being implemented post elections. It might take a little while to sink in that a messy default + contagion to other European nations is off the table.

 

 

Italy - whenever we get a deal in one European nation, it seems the mkt turns its attention onto the next weakest link - arguably Italy. We've been tracking Italian Bond yields as a proxy for this theme but overnight we actually saw yields come down, as has been the theme since December. They successfully got away 12 billion euros in T Bills at lower yields overnight and are progressing with their funding task (helped by the LTRO of the ECB).  

 

 

Italian 10 year yields  

 

  

 

 

US - there was an interesting chart by www.chartoftheday.com sent out on Friday which has appeared in a number of mkt reports since then, but worth reproducing here for those that haven't seen it.

 

• The Dow made another post-financial crisis rally high Thursday as it approached the 13,000 level. 

• To provide some perspective to the current Dow rally that began back in early October 2011, all major market rallies of the last 111 years are plotted on today's chart. 

• Each dot represents a major stock market rally as measured by the Dow. As today's chart illustrates, the Dow has begun a major rally 28 times over the past 111 years which equates to an average of one rally every four years. 

• Also, most major rallies (78%) resulted in a gain of between 30% and 150% (29.8% to 150.5% to be exact) and lasted between 200 and 800 trading days (9.5 months to 3.2 years) -- highlighted in today's chart with a light blue shaded box.

• As it stands right now, the current Dow rally (hollow blue dot labeled you are here) would be classified as well below average in both duration and magnitude.

OUR MKT; The reaction to the Greek vote yesterday morning was pretty subdued initially but as the US FUTURES started to tick higher, we saw some buying in stocks locally. The index finished +39pts higher yesterday in a pretty strong session really. We're likely to be fairly flat this morning as we've priced in most of the overnight move yesterday. 

 

Reporting is well underway locally with another round of companies updating the mkt today including; BOL, CDD, GWA, OKN, PDN, SAI, SGN. (PDN the one we're really interested in with expectations of NPAT of -19.7m & FY EPS of -1.8c) - so a loss but a smaller loss than the pcp.

 

A couple of interesting theme's yesterday in stocks we like with Bradken (BKN) going ex-divi by 19.5c and actually rising 3c on the day - great performance. At the smaller end of the spectrum, we like Challenger Energy (CEL) which has started to move yesterday ahead of a drilling program while we added to some existing positions in Santos. 

 

Newcrest (NCM) had an impressive session yesterday up +3.2% and breaking its downtrend resistance line on a better than expected revenue number for the 1H. We're neutral to negative Gold short term because of a lack of inflationary pressures (at the moment - this will change) so we struggle to get keen on NCM at current levels.

 

Fortescue Metals (FMG) - had another good day yesterday on news reports of Teck Resources who appear to be the mystery buyer of 2.89% of the stock through a nominee account. 

 

 

COMMODITIES; For a full list of overnight prices,   CLICK HERE 

 

 

AUSTRALIAN DUAL LISTED STOCKS

 

In New York, News Corp rose by US$0.27 to US$20.12, equivalent to A$18.74, A$0.09 above its last close on the ASX.

ResMed rosel by US$0.14 to US$29.87, equivalent to A$5.44, A$0.01 below its last close on the ASX.

In London, Rio Tinto rose 73.5 pence to £38.46, A$1.08 higher in Australian currency terms.

BHP-Billiton rose 25.0 pence to £20.83, A$0.37 higher in Australian currency terms.

Henderson Group Plc rose 4.5 pence to £1.28, A$0.07 higher in Australian currency terms.

 

(MONDAY 6TH FEBRUARY- 07:23- JAMES GERRISH)...The US MKT was HIGHER on Friday with the DOW JONES up +158pts while the S&P 500 added +1.48%. European mkts were higher (FTSE up +1.81%, German DAX up +1.67%, French CAC up +1.52%) while locally, the SPI FUTURES mkt is pricing a HIGHER open up +56ptS when trading kicks off here this morning. 

 

On Friday, the ASX 200 closed DOWN -16pts or -0.39% to 4251. The Aussie Dollar hit a high of 107.93 on Friday but was trading back at 107.25 this morning.  

 

OVERSEAS MKTS; The US jobs report provided an upside surprise on Friday and further supports our view of an improving economic situation in the US. The mkt was expecting about +150k jobs to be added in the States with the unemployment rate steady at 8.5%. Instead we got +243,000 jobs created in January sending the unemployment rate down to 8.3% (biggest gain since last April). 

 

Clearly a good result and we're getting close to the level we need to be at. Looking at the composition of the number, the growth in jobs was broadly-based, with gains across all industries, and hours worked went up by 0.2%. 

 

The mkts reaction was obviously positive and it also filtered through into support for commodities. It is however important that we put the number into perspective in a longer term context and the chart below does it pretty well.     

  

 

 

Note how the number of jobs steadily increased from 1961 to 2001 (top chart). During the last economic recovery (i.e. the end of 2001 to the end of 2007), job growth was unable to get back up to its long-term trend (first time since 1961). More recently, the number of nonfarm payrolls has been working its way higher but at a pace that is not fast enough to close the gap on its 1961 to 2001 trend. In fact, the current number of US jobs is still below its 2001 peak. 

 

The bottom chart shows the percent of gains above or below the regression line and its clear that we're still falling well short. Graphs such as this fuel the argument that we're in a period of structural change in the dynamics of the labour mkt. Put simply, it requires fewer people to produce goods based on better technology and outsourcing to lower cost centers in the developing world, hence the US will need to get used to structurally high unemployment. 

 

 

Greece;  The mkt may not be as optimistic as the Futures are suggesting this morning given the flow of news coming from Greece over the weekend. It remains an incredibly complex situation with dual negotiations happening in unison. Firstly, the private Greek Bond holders (who are mostly European banks) are negotiating with the Greek Govt about the haircut arrangements that will be applied and rumors are that they'll now accept a coupon of 3.6% on new 30 year paper. 

 

Once agreed, these banks will need to consider the recapitalization of their own balance sheets and that is likely to support a massive demand for ECB money in the next auction come the end of Feb. I think the mkt is pretty much expecting a solution here and the rumblings coming from the negotiations suggest it will be soon. 

 

Also under way is the negotiations between the Greek Govt and the Troika (which refers to the 

European Commission (EC), the International Monetary Fund (IMF), and the European Central Bank (ECB). Negotiations here seem to be a little more complex and an agreement seems less likely at the start of the week. 

 

The ultimate deadline for Greece is the 20th March when they have bond payments to make and the Troika need to release the next round of aid for this to happen. 

 

At the moment it seems Greece disagrees with the amount of austerity being demanded by the Troika particularly in the areas of minimum wages and holiday entitlements. From the Troika's perspective, they would certainly be annoyed about the hollow rhetoric Greece provided at the last negotiations and lack of follow through on agreed actions. 

 

As it stands, the negotiations are at an impasse which if unresolved could be disastrous for Greece. What I think will play out is that Greece will agree to the Troika demands to ensure to payments proceed, the country will avoid default for now and then they'll be some type of negotiated implementation after the general elections which are tipped for April. 

 

John Noonan from Thomson Reuters put it well this morning quoting Einsteins definition of insanity...Doing the same thing over and over and expecting different results... Probably serves as a good lessen in life as well! 

 

One observation on Fridays session in the US was the continued lack of volume in stocks. It was lite and people tend to worry about this. Speaking with some mates in funds management over the weekend, they seem to think that a lot of institutional money is waiting for the Greek situation to be officially agreed upon (as in private creditors + Troika) before putting more cash back into risk assets such as equities. 

 

Whatever your current view on the mkts, remember that mkts often rally in the face of negative news flow largely because the media is reporting the here and now while mkts price in what's likely to be happening in 6 months time. 

 

One of interesting themes that helps me justify a more more bullish stance, is the price action following January's rally. The DOW has fallen 6 of the last 8 trading days yet the average fall was just -0.06%. So after the big January rally and when instos were back at the end of January, no one has sold the rally. We saw on Friday that investors want to latch onto positive news - they want an excuse to buy and they're getting it from the US economic data + they might get it from Europe this week. 

 

 

AUSSIE MKT; Higher open this morning with miners to cop a bid. Domestic reporting season heats up this week (from tomorrow) with Bradken (which we own), Cochlear. Transurban, Ansell, BHP (which we own), Boral, RIO (which some clients hold), Stockland, Tabcorp (which come clients hold), Telstra (which we own) and Newcrest (which some clients hold). 

 

We also get the RBA decision on interest rates out tomorrow with the mkt expecting a 0.25% cut taking the benchmark to 4%. Those expectations have come back a bit because of the good numbers from the States on Friday but I still have the opinion (hope) they'll cut. 

 

Retail Sales + Inflation out today for the RBA to consider. 

 

So a big week for our mkt and a lot that can drive stocks. 

James Gerrish

(FRIDAY 20TH JANUARY- 07:27- JAMES GERRISH)...The US MKT was higher overnight with the DOW JONES up +45pts while the S&P 500 added +0.49%.   European mkts were higher (FTSE up +0.68%, German DAX up +0.97%, French CAC up +1.96%) while locally, the SPI FUTURES mkt is pricing a higher open up 29pts when trading kicks off here this morning. 

 

The ASX 200 had a pretty weak session yesterday and although it was only down 3pts, it opened much higher and was sold off all day following the weak employment numbers. 

 

OVERSEAS MKTS - The DOW is approaching the top of its range so we should be conscious of this and I guess that's why there was a bit of selling about yesterday (or lack of buying support) and stocks drifted off on our mkt. 

 

Watch 12750 as the key region in the DOW

 

DOW JONES

  

 

The DOW is now up more than 400pts for the year to date and although the rhetoric coming out of Europe remains fairly negative, earnings in the States have held up pretty well. 

 

If we look at the companies that have lead the DOW this year, they are Caterpillar, 3M, American Express and United Technologies which in itself tells a pretty interesting story. At the height of the GFC - when investors were massively gloomy, Warren Buffet came out and said that one of the biggest mistakes global investors will make, is underestimating the ability of the US to innovate. There is no more obvious example of this than Apple which hit another all time high overnight. 

  

 

But its not just the Tech plays that are a stand out. I also like to keep an eye on industrial companies such as Union Pacific which is obviously involved in the movement of goods around the US. It gives a good indicator of domestic activity in the States. It too hit an all time high overnight and reported great numbers yesterday - CLICK HERE to view their release - outlines some current trends in the US.  

 

 

 

Another interesting trend last night was a sharp increase in US bond Yields (10 year +4.92% and 5 year +6.6%) - we spoke last week about the strange trends that were playing out in the mkt - Equities going up and Yields going down when traditionally, we see money move out of bonds into equities pushing equities up and bond yields up. That trend re-emerged last night which is a bit more comforting. 

 

We also had bond auctions in Europe and here is what Adam Carr from ICAP had to say this morning.....

 

 "Spain managed to sell €6.6 billion of 2016, 2019 and 2022 bonds, which was well above the target of €4.5 billion and with bid to cover ranging from 2-3.2. In each case yields were sharply lower - so for instance the 2022's went out at an average yield of 5.403 per cent, which is down from 6.975 per cent paid in November - although they then rose in the secondary market. So far, Spain has completed one-fifth of its 2012 funding needs. The French in turn sold €8 billion in bonds (maturities ranging from 2014, 2015 and 2016) with solid demand and lower yields than before their credit downgrade. Both auctions are a good sign that the European situation may be stabilising. This is why euro was up about 90 pips to 1.2938." 

 

  

ASX 200 - was off 3 pts yesterday after being up in early trade. It seems traders were a bit spooked by the worse than expected domestic jobs data which showed a drop of 29000 jobs v expectations of a 5000 gain. The Unemployment rate stayed steady at 5.2%. 

 

Looking at our mkt on the charts is a bit disheartening relative to the DOW JONES. On the positive side, we are attempting to break out from recent consolidation as the chart below shows but we really need to go on with it - for a break out like this to have validity, it needs to have some force behind it (like the Copper chart we've been showing recently and is available below).

 

ASX 200

 

 

 

Another positive for our mkt at the moment is that the Chinese mkt is getting a bit of traction - It was down nearly 30% last year on growth concerns but this weeks GDP data (better than expected) seems to have put a base in that mkt and its starting to edge higher. 

 

CHINESE MKT

 

I've had a lot a discussions with clients at the start of the year about what to expect for 2012. Yesterday, Shane Oliver from AMP put out an interesting piece for the Eureka Report which outlined his view on current themes for this year. CLICK HERE to view the report.  Its well worth a read! 

   

 

 

COMMODITIES; For a full list of overnight prices, CLICK HERE

 

Pretty much all Commodities were higher overnight with Copper up another 1.75% and has clearly broken out of its range. 

 

  

 

 AUSTRALIAN DUAL LISTED STOCKS

 

 In New York, News Corp rose by US$0.48 to US$20.05, equivalent to A$19.25, A$0.30 above its last close on the ASX,

ResMed rose by US$0.37 to US$26.37, equivalent to A$2.53, A$0.05 above its last close on the ASX.

In London, Rio Tinto rose 2.0 pence to £37.13, A$0.03 higher in Australian currency terms.

BHP-Billiton rose 21.0 pence to £21.59, A$0.31 higher in Australian currency terms.

Henderson Group Plc rose 5.9 pence to £1.14, A$0.09 higher in Australian currency terms

(TUESDAY 17TH JANUARY- 07:37- JAMES GERRISH)...The US MKT was closed overnight however European mkts were higher (FTSE up +0.37%, German DAX up +1.25%, French CAC up +0.89%) while locally, the SPI FUTURES mkt is pricing a higher open up +9pts when trading kicks off here this morning.

 

OVERSEAS MKTS; The main focus overnight was on European Bond yields after the downgrade on Friday and auctions for French and Spanish Debt. Yields were actually lower which was a positive and probably shows a higher amount of ECB participation in the mkt. Whatever the case, S&P is probably sitting back with some significant concerns about their lack of influence in the mkts these days. The reality is though that a rating is a relative score against other mkt participants so when we get more participants with lower ratings, the less impact a rating downgrade will actually have. Supporting that thesis was the lack of mkt concern when we saw the European Bailout Fund downgraded from AAA to AA+ which really was a surprise given Germany is the only participant still rated AAA. 

 

Looking at the Auctions, France got away €1.895bn of 12-month bills at a yield of 0.406%, down from the 0.456% they paid only a week or so ago. The 3-month and 6-month paper (over €8bn in total) was also given at lower yields. 

 

Other European Bond Yields fell other than Italian 10 year debt which was pretty flat. 

 

 

German 10 year Yields   
 

 

French 10 year yields 

 

Italian 10 year yields 

  

 

COMMODITIES; For a full list of overnight prices, CLICK HERE

  

Copper continued higher overnight, Gold was up a touch and the broader suite of a base metals pretty much all finished higher. There was no floor trading in the US so obviously volumes were light but the action shows that investors didn't expect the downgrades to have any impact on global growth. 

 

 

OUR MKT; Will be focussed on Chinese Growth data out today which generally gets released around lunch time. We're expecting growth of 8.7% which would be the slowest pace in 10 quarters and will support some easing of Chinese policy (Reserve Requirement Ratio cuts). 

 

We also get RIO + FMGs production reports today. 

 

QBE Insurance (QBE)

 

QBE came out with a shocker last week saying profit would fall by 40-50% due to higher payouts from natural disasters. The stock fell sharply on the news but I think its worth a look at these levels for those that don't own it - while those that do could consider adding to existing positions. 

  

What Happened: 

QBE said their net result is  likely show a 40 to 50% fall in FY11 NPAT to between US$640m and US$765m from US$1.278bn in FY10. A small loss may be reported for 2H after 1H NPAT of US$673m. The final dividend will be cut from 66 to 25 per share with the FY11 DPS falling from 128 to 87. What ever way you slice and dice it, it was a pretty poor number and we saw investors dump the stock. 

 

I guess the question to ask now is whether QBE's recent performance is the new norm or its just a blip in an otherwise strong track record.

 

QBE's Business 

 

Firstly I think its critical to understand how the business operates. It's a company that has diversified geographically and across a huge number of sectors to provide insurance. It's in the business of pricing risk and has done a pretty good job of it over many years. 

 

When you're in the business of pricing risk, of putting numbers around natural disasters you'll get it wrong on occasions and profitability will be hit. That's what happened here. They ineffectively priced risk and are paying the price for it. 

 

After pricing the risk, they issue an Insurance Policy and the customer pays the premium. QBE then invests that premium in the Bond mkt to generate additional returns. 

 

Investment returns have been under intense pressure as the chart below shows because of ultra low interest rates in the US impacting Bond Yields. This is another area of concern for QBE at the moment. 

  

 

So with the mispricing of risk and the ultra low interest rates impacting investment returns, not to mention the high Aussie Dollar, earnings have suffered and the earnings trend looks pretty poor. 

 

  

Will this theme continue or can the company turn things around? 

 

When we see a period of higher than usual catastrophes, we then see premiums increase on the back of it. It gives the company an excuse to do it while their pricing models have a new round of data to consider. So from a revenue perspective, it seems that QBE will be able to increase that side of the ledger in the years to come. 

 

When it comes to investment returns, you need to have a view on US interest rates. Will they go lower or higher? Looking at a chart of the US 10 year Treasury we see they are currently sitting at 1.86% while the benchmark rates are sitting at 0-0.25%. Thats fairly low and I'd probably make the argument that they're more likely to go up in time than go down. If they go up, it will have another positive impact on QBEs earnings.  

 

 

 

Book Value =  Assets - Liabilities. What they would get if they wound up the business now and sold off the parts. 

 

In 2007 when the market was powering, QBE traded at nearly 4 times its book value. At that time, the stock was trading above $35 whilst book value was calculated at $9.63. 

 

At the moment, the stock is trading at just 1.06 times book value which is calculated to be $9.68. At this level it seems the stock is being priced for these current conditions to remain. It doesn't consider that insurance is cyclical in nature and periods of earnings contraction are often followed by period of earnings expansion.  
 

 

  

 

 

 The chart below shows the relationship of price to book value and share price while the brown bars cover the dividend. You can clearly see that QBE has not been this cheap when considering price to book for many years and although its likely to be a long road back for the insurer, there is a fair amount of clarity around how they can turn earnings around.  

 

   

 

Analysts expect the following: Our FY12 NPAT forecast reduces from US$1.865bn to US$1.665bn and from A$1.78bn to A$1.586bn on an A$/US$ exchange rate of 1.05. EPS falls from 157.1 to 140.3. 

 

We anticipate a rebound in DPS from 87 to 120. Fair value eases from $21.10 to $19.65 and price triggers adjust accordingly. While disappointing it is not the end of the world. That did not stop the share price falling 20%. Another opportunity!

 

 

So i'd be happy to ad to QBE here. I've owned the stock prior to the drop so if I was happy to buy it at $14 & $13 - I'm happy to weigh in at $10 & $11 based on the above thesis. 

 

 

AUSTRALIAN DUAL LISTED STOCKS 

 

US mkts were closed 


James Gerrish 
 

(TUESDAY 10TH JANUARY- 07:25- JAMES GERRISH)...The DOW JONES was up+34pts overnight while the S&P 500 was trading +0.2% higher. European mkts were lower (FTSE off -0.66%, German DAX down -0.67%, French CAC off -0.31%) while locally, the SPI FUTURES mkt is pricing a higher open up +17pts when trading kicks off here this morning.

 

 

  

 

** I'll be on SKY Business today at midday til 1pm 

 

Commodities were pretty flat overnight with Gold off a few dollars, Copper little changed and Oil clinging above $100 a barrel. 

 

 

The bigger focus on the US mkt was the unofficial start to the reporting season with Alcoa set to report after mkt (expectations for a loss of 3c per share). The actual expectations for US profits have been cut in recent months given weak earnings momentum at the back end of last year. 

 

In aggregate, the mkt is looking for a 6% increase in per- share profit during the September-December period, which in my view, sets up for some possible upside surprise. When heading into a reporting season we want to see low expectations which gives a greater chance of upside surprise - which the mkt can rally on. I think we've seen a bit of this today with Alcoa up nearly 3% ahead of releasing its numbers. 

 

Alcoa is of course in a JV partnership with Alumina (AWC) listed on our mkt and both stocks have been poor through 2011 amid falling Aluminium prices (-27% over last 12 months) and rising input costs (such as electricity). In the case of Alumina, I see its been removed from the Goldman Sach conviction BUY list and we've also seen Ausbil Dexia (large domestic fund) sell down 119 million shares in the company over the last couple of months.

 

 

In Europe, Merkel and Sarkozy met overnight and there wasn't a lot that came out of it. They expressed confidence that an agreement on European treaty changes could be reached by the end of the month while both leaders suggested new measures to promote growth may be enacted as part of the broader package to stabilize things. 

 

Sarkozy did finally get some support from Merkel for the French led Financial Transaction Tax that they propose to apply to all Equity, Bond and Derivative transactions. In essence, its a revenue raising tax that has been opposed in the UK which is important given that London is the biggest financial hub in Europe. I don't see how they can roll it out without unilateral support for it given that it will decrease competitiveness of their own financial sectors. Anyway, I guess it was just nice to see them agree on something. 

 

There was not a lot else to go on last night and it seems that investors are sitting on their hands under a vale of uncertainty from Europe and China. 

 

We actually get a fair bit of Chinese data out this week with important Trade Data out around lunchtime today. This will be the main driver of our mkt while domestic Building Approvals will also have a say in the direction of the mkt today (expectations for +6% increase in approvals).


James Gerrish

(MONDAY 9TH JANUARY- 07:01 - JAMES GERRISH)... 2012 is shaping up as a massive year for investors with a number of complex and interrelated issues likely to play out in the first half. 

 

At the moment, Europe is center stage and unfortunately, it looks like they'll hog the lime light for the next few months at least. Not until we get decisive political leadership with the ECB stepping in as lender of last resort will there be any sustained period of risk appetite from investors. 

 

In the US, the data is actually improving with unemployment ticking lower, Consumer Confidence bottoming and monetary policy remaining pretty loose. 

 

Its also worth remembering the US Presidential election is due on the 6th November. Looking back in time tells us that since 1942, the stock market has never found a new low in the 4th year of a Presidents term. Its most often bottomed in the 2nd year while the 1st year of the cycle also corresponds with a number of market lows (that was 2009 when the mkt bottomed). Since 1926, the S&P 500 has returned an average of 11% during an election year and out of 21 election years, investors have lost money in only four - so history is offering 'some' cause for optimism.  

 

Also on our radar is China and although growth data from the region remains fairly upbeat, the pace of growth will slow in 2012 which will have a negative impact on Australian exports - as we've seen last week with a contraction in our Terms Of Trade. 

 

Throughout 2011, Chinese authorities have been working hard to manage growth and curtail rising property prices. Data thus far shows its working pretty well and although we'll continue to hear a chorus of China doomsayers, the controlled nature of their economy provides a greater ability for the leadership to manage drivers for growth, and we fully expect that China will continue to expand in excess of 7.5% PA. 

 

The Nikkei Newspaper actually came out over the weekend suggesting that Chinese officials will lower their base case scenario for growth going forward to 7%, down from the 8% we've seen over the past few years. Its important to note this is a base case outcome and traditionally we've seen the economy grow at higher levels than their stated base case. That suggests Chinese officials are targeting about 8% growth and although that sounds impressive anything sub 7% would be considered a recession for that economy, so we need to be conscious of that. 

 

The near term outlook for a lot of Australian companies is linked to the news flow coming from China and there is a lot of it out this week. Last year we saw the material stocks under perform the All Ords index by about 10%, Copper was off by 20% in the year and the broader suite of base metals were under pressure - highlighting the concerns that local investors have about the rate of growth in China and the impact of a European recession on Chinese exports. 

 

If we do see Chinese data stabilize, the US continue to improve as recent data has shown and god for bid, European leaders put together a longer term plan for the region, it will be these risk assets that lead an impressive market rally that history shows, can be well in excess of +30% in a year. That's probably some way off yet (my readings on longer term price cycles suggests this move will come in the second half of the year) but history does show moves like this will happen after periods of intense volatility.  

 

From an investors point of view, we retain our bias at the start of the year for the following portfolio structure: 

 

- Hold a selection of boring, high yield securities >7% that offset a lot of growth potential with a higher degree of earnings certainty. By this we mean securities that pay a high yield now with the understanding that the income will probably stay static for the next few years. These can include stocks and hybrid style investments.

 

- Complement this with an array of stocks that pay decent yields >4% now, but have strong trends in earnings and an underlying driver that will see those earnings continue to rise. This should filter through to growth in dividends over time. 

 

- Combine options in the portfolio to smooth returns and take advantage of volatility. When we use options, we're primarily sellers of options (not buyers), with options being used to reduce risk, rather than adding risk to the portfolio.

 

- Consider using interest rate securities such as Hybrids to further reduce volatility and increase income. 

 

- Be active rather than passive in the market. The set and forget approach is dead and active management will be key in 2012 & beyond. 

 

 

EUROPE

 

Stock markets in Europe finished mostly lower in 2011 

 

FTSE 100 - Down -1.58% 

 

French CAC - Down -15.39%

 

German DAX - Down -12.81

 

Euro v USD - Down marginally 

 

** Figures above show the 12 month return as at 8th January  - Source Bloomberg

 

Despite a lot of noise to the contrary, I don't believe the Eurozone will 'break up' and the shared currency will stay in tact for the foreseeable future at least. Because of this, the Euro will be under pressure from economic weakness in countries like Spain, Portugal, Italy and Ireland but the weakness will benefit export led nations such as Germany - which will ultimately provide the backstop (through the ECB) for the regions debt woes. 

 

Although the new head of the ECB Mario Draghi has been adamant that the Central Bank won't be the 'lender of last resort' his track record of cutting rates + increasing liquidity as soon as he took over, highlights his bias for easing policy and the next step would be some form of Quantitative Easing (similar to what happened in the US). 

 

I'd also suggest a greater level of fiscal integration in the Eurozone with the introduction of Euro Bonds to ease funding pressures on weaker nations. 

 

These steps may be some way off - or they might be rolled out next week however one would have to assume, we're closer to getting some type of coordinated, centralized action from leaders than we were six months ago. I think the situation in Europe is improving behind the scenes and although it will remain volatile, I believe sanity will prevail. 

 

I do say this with some degree of trepidation and obvious nervousness given the likely impact on markets if Europe implodes - which is always a possibility but i don't think it's the most probable outcome. 

 

One aspect that is likely to keep markets under pressure near term is the refinancing program for a lot of these struggling European nations. Italy kicks this process off in February with the country needing to refinance 200 billion Euros before April. (Its got total debt of 1.9 trillion Euros). Spain, Portugal, etc will follow suit. 

 

My own view is that the market can't have a sustained rally until we see that these nations can refinance debt and it seems that it will take some type of involvement by the ECB to provide the confidence needed in the market, which in turn will put down ward pressure on bond yields. 

 

Looking at the chart below, we see the FTSE 100 has now broken above the 200 day moving average (Orange line) and buyers are tipping into the market at higher prices each time there is a pullback. It is at a critical juncture at the moment given there is a chance of a double top and subsequent resistant level around 5750 but the chart looks better than most. 
 

 

  

 

The German Dax looks similar to the chart of the Aussie market. It seems that equity investors are pricing future pain in Germany (and Australia for that matter) given they were more resilient throughout the GFC and continue to provide a backstop for peripheral Europe. 

 

From a technical standpoint the DAX is trading in a contracting range with higher lows and lower highs. The nature of this pattern doesn't give us a lot of evidence to suggest which way the market will break - only that its likely to break either way with a high degree of force.

 

  

 

Meanwhile the French CAC has a similar chart to the German market which shows some indecision amongst investors.  

 

  

 

 

The US of A

 

The US stock market finished higher in 2011. 

 

Dow Jones - Up +5.5%

 

S&P 500 - Up +0.5%

 

Nasdaq - Down 0.04% 

 

US Dollar Index - up +13.65%

 

 

** Figures above show the 12 month return as at 8th January  - Source Bloomberg  

 

On Friday night we saw data that showed +200,000 jobs were added in the US in December and although this number has obvious seasonal factors within it (ie 27,000 part time retail jobs were added + jobs in logistics for the seasonal spike in activity) the trend is heading in the right direction at least. 

 

  

 

We're seeing this theme play out in other metrics we look at including US manufacturing data and consumer confidence (and in turn business confidence) that seem to have have bottomed. Consumer confidence is actually an important print to consider given the historical correlation between a low in this data set and a strong equity market rally which we spoke of (probably prematurely) at the end of last year. 

 

Debt is obviously the big elephant in the room in the US and the graph below highlights the trend of increasing Government debt v deleveraging of households. This theme thus far has had a big (negative) impact on the US services sector (70% of US economy) and I would anticipate that the trend of lower household debt will mean the recovery continues at a slower pace. 

 

This also has implications for stock valuations given that previous assessments were calculated in an environment where consumers were more highly leveraged  If we take out the leverage, spending capacity contracts and asset prices come back to meet the market, therefore creating the new norm around valuations. I guess what I'm saying here is that looking at historical valuations should be done so with a degree of caution because the operating environment has changed.  

 

 

 

On the whole, we think that the US is actually in pretty good shape relative to other countries. Debt is massive and political imbalances are glaringly obvious, but stimulus has been positive and it seems Benanke and Co are happy to prime the pumps again if conditions warrant it. 

 

As we said earlier, monetary policy is as loose as it gets and is likely to stay that way for a while (as confirmed by the Fed Treasurer) and history points to a positive year courtesy of the Presidential cycle. 

 

Looking at the Charts, we see the US market as shown by the DOW JONES looks pretty strong. Its broken above the 200 Day Moving Average, its now above its last trading range and we see buyers getting interested at higher levels each time there is a pullback. It looks like the healthiest market by far from a price action perspective so we've got to give that some respect for now. 

 

  

 

 

CHINA 

 

The Chinese market fell sharply in 2011 and this put added pressure on our local market. 

 

Shanghai Shenzhen CSI 300 Index - Down -26.67%

 

 

Will they or won't they...have a hard landing that is? 

 

This is the biggest question from an Australian/Commodity perspective that needs an answer this year. To be honest - I don't know what the outcome will be and this ads additional risk to the markets. 

 

If we look at the data prints from China, so far it seems the Chinese leadership are doing a pretty good job of curbing inflation and capping growth at a more sustainable level. Talking to people who visit the country regularly, on the whole their personal experiences are supportive of the data we're seeing. 

 

We also listen to the global commodity producers such as BHP, RIO and Vale and take on board what they say about the demand for their products - and at this stage, they remain upbeat about the health of their customers. 

 

We can look at China's track record of managing global market volatility/crisis and see that they have maintained incredible growth for sustained periods of time, through changing global trends... yet the market is still very skeptical of the Chinese story. 

 

That's why we've seen the Chinese equity market fall nearly 27% this year - that's why Copper is off 20% in the last 12 months and it also explains the underperformnace of the Australian market v the US in 2011.   

 

The fact is, no one really has an intricate understanding of how China's economy is positioned yet it seems we're ready to sell the China story first and ask questions later. I guess that's why BHP has such a big discount applied to its future earnings. 

 

What ever the case, China's importance to the Australian economy can not be understated. This was highlighted this year when the RBA announced they'd be opening an office in Shanghai to gain a more hands on feel for the economy. Perhaps this will give the RBA a better insight into the region and will enable them to act preemptively if China does come unstuck. 

 

As it stands, Australia is supplying China with a significant amount of raw materials to fuel their expansion. The numbers are phenomenal and that trend is more likely to continue than falter. 

 

Yes, there certainly will be some impact from a European recession and if the US slips backwards that would have further implication for Chinese exports, but China has massive currency reserves, is a controlled economy where leaders have more responsive levers to pull, plus they have a changing domestic demographic with the emergence of the middle class or Chuppy as Charlie Aiken likes to call them (Chinese Yuppy).

 

So, although I think China will continue to slow, and this will have a negative impact for Australian commodities short term, the long term drivers of growth remain and until we see those dynamics change, we can't get too bearish on our big Asian neighbor.

 

In saying all of this, one question that does trouble me a little is the challenge facing an economy that is hot in some parts and cooling in others. Yes, the Government has to tools available to re inflate prices if things start to come back too hard but how they support some parts whilst dampening others will be critical.  

 

Property prices for instance are still at elevated levels and the government wants to avoid a bubble, yet they want to continue to support manufacturing given the slowing demand coming out of Europe. An interesting conundrum! 

 

 

.......................

 

AUSTRALIA

 

The Australian Equity market had a tough year in 2011 dropping -14.6%.

 

 

 

So how do the global factors we've discussed above impact an Australian investor who is trying to grow wealth and provide income for retirement? 

 

Equity market volatility has been significant and because of the uncertainties outlined above, that trend will continue for the first few months in 2011 at least. So firstly, to invest in the equity markets we need to be realistic about what to expect. You'll have periods of concern followed by periods of elation. They'll be wins and losses but if you apply a structure and be active, and initially have a greater focus on income, you'll be in the market when the big upside move does come as history suggests it will.  

 

Clearly, the two big Questions short term for Australia is the resolution in Europe and growth expectations for China. Unfortunately, we can only monitor each situation and make fluid assessments as the data becomes available. 

 

We presented our suggested portfolio structure above that has served us well in 2011. We retain that view for the first half of 2012 unless conditions change significantly. 

James Gerrish 
 

(WEDNESDAY 14TH DECEMBER - JAMES GERRISH - 7.30am)...The DOW JONES lost -66pts overnight while the S&P 500 fell -0.87%. European mkts were mixed (FTSE up +1.15%, German DAX off -0.19%, French CAC off -0.35%) while locally, the SPI FUTURES mkt is pricing a lower open off -12pts. 

 

 

 

 

OVERSEAS MKTS; 

 

Focus remained on the Bond mkts overnight while there was also comments by US Fed Treasurer Ben Benanke who was actually more positive on the US economy that usual. Looking at Benanke's comments, the mkt viewed them as a sign that further money printing and Quantitative Easing was a way off and like a kid who has just been told that he can't have Maccas now, that he can have it in a few months time, there was some obvious short term anger - prompting stocks to come back off earlier highs. 

 

The mkt was actually up +126 at its best and down about -116 at its worst with selling corresponding with Benanke's speech. 

 

I still think the Benanke put option is in place if needed, but the reality is US economic data is improving so its not needed at the moment.  

 

On the Bond mkt, there was a successful sale of short-dated debt by the euro-zone's government bailout fund which shows investors seem more optimistic about the next phase of Europe's rescue project. The European Financial Stability Facility sold €1.972 billion of three-month treasury bills, opting to raise shorter-term funding after its 10-year bond sale in November struggled to receive adequate demand. It was the EFSF's first short-dated debt sale. 

 

In addition, Spain and Belgium were able to sell their countries' debt at much lower yields than at previous auctions - another sign of easing concerns. 

 

Italian debt continued to tick higher with the 10 year yield at 6.62%. 

 

 

GOLD 

 

We wrote a while back that we were negative gold short term largely on the back of a clear lack of near term inflationary pressures. We think that longer term inflation will be a major concern coupled with continued debasement of currencies and Gold will provide a good hedge,  but where not there yet. 

 

Technically, its now broken through support and is sitting just above the 200 day moving average. If you're still in Gold (physical that is), then its probably worth holding until it breaks the 200 day (around $1623) then if it does consider lightening. Technical downside target of $1400

 

 

 

 

ANYONE INTERESTED IN COAL SEAM GAS?? If so, its worth taking a look at the draft Energy White Paper put out by the Federal Govt yesterday -  CLICK HERE - it gives the message that Australia will need to embrace CSG if we are to meet our rising energy demands. Good for the CSG industry that has been hammered by public negativity (thanks Alan Jones).  

 

 

OUR MKT; 

  

Lost ground yesterday and continues to be dictated by Euro Developments. To be honest, I'm getting a little bit sick of writing/discussing whats happening in Europe so we'll start to focus on some stock specific stories for the remainder of the week. 

 

Super Retail Group (SUL)   

 

Super Retail Group (SUL) has recently acquired Rebel Sport from private equity and we've now had a chance to look into the rationale behind the acquisition. 

 

SUL is actually a stock we like and have held previously but the Rebel acquisition was somewhat of a concern. There is no doubt the stock has a strong history of earnings growth which we like and this has flowed through to rising payouts for investors as the charts below show. 

 

When looking at the reasons behind the purchase, SUL believes Rebel lost its way in terms of effectively presenting and maintaining its position in the minds of consumers as the authority and leader in the sports/fitness category. SUL sees a large opportunity to extract greater share of wallet. Greater buying power, direct product sourcing, and superior supply chain and logistics infrastructure will lower costs, and increase Rebel's ability to respond to its market.

 

Although the progress on these aspects take time to occur and be shown in company performance, we note the strong track record in specialty retailing of SULs management and would argue that although this will ad greater risk to the company, the rewards (as in future growth) reflect the additional risk. 

 

Given mkt conditions, we're probably not in any rush to buy SUL at this stage but its one we like, and will be looking to take a position in time

 

 

  

 

 

 

MODEL PORTFOLIO UPDATES 

 

None this morning. 

 

 

AUSTRALIAN DUAL LISTED STOCKS

 

In New York, News Corp fell by US$0.16 to US$17.70, equivalent to A$17.68, A$0.01 above its last close on the ASX.

ResMed fell by US$0.59 to US$24.05, equivalent to A$2.40, A$0.04 below its last close on the ASX.

In London, Rio Tinto rose 51.0 pence to £31.70, A$0.79 higher in Australian currency terms.

BHP-Billiton rose 4.5 pence to £19.02, A$0.07 higher in Australian currency terms.

Henderson Group Plc rose 0.8 pence to £1.08, A$0.01 higher in Australian currency terms.

(WEDNESDAY 23RD NOVEMBER - JAMES GERRISH - 7:48am)...The DOW JONES lost -53pts overnight while the S&P 500 fell  -0.41%. European mkts were mostly lower (FTSE down -0.3%, German DAX off -1.22%, French CAC down -0.84%) while locally, the SPI FUTURES mkt is pricing a lower open down -24pts when trading kicks off here this morning. 

 

Yesterday, the S&P/ASX 200 fell -29 pts to close at 4133. 

 

US MKT  - The GDP print actually came in below expectations overnight printing +2% (v 2.5%) in Q3 which prompted the slight weakness amongst stocks. Looking at the composition of the number it was a case of corporate profits were higher but there was a big downward revision to inventory levels. So the takeout here is that the US is growing and Q4 is looking like it will come in fairly strong due to restocking of inventory levels that were run down in Q3.

 

 

We also had the FOMC minutes released and it showed there was some discussion around further policy easing if the economy required it. I think it was Charlie Aiken who coined the phrase 'the Benanke Put' and it seems it is a fairly long dated one. The main impact overnight was felt in the commodity space that rebounded on the back of the hint towards further easing. We've been a bit negative gold here and a little concerned about its short term prospects but it was clearly shown overnight that any indication of further QE in the US (or the UK for that matter) will be supportive of the Gold price. 

  

  

 DOW JONES 

 

 

AUSSIE MKT - It was fairly volatile day yesterday with the index hitting a low of -69pts before recovering to be down -13pts at its best before closing off -29. The big news yesterday was in the Steel stocks with Bluescope announcing a 4for5 accelerated renounceable entitlement offer at 40c to raise $600million. The offer is fully underwritten. Not surprisingly, OneSteel (OST) was wacked on the news and closed at an 11 year low. BSL is still in trading halt but will open sharply lower when it comes back online.    

 

Volume was actually better in the mkt yesterday but we're expecting the rest of the week to be pretty thin. Thanks Giving holidays start in the US tomorrow (Thursday) with a half day Friday but in reality a lot of them will pull up stumps half way through the session tonight.  

 

Today, keep an eye out for Chinese flash PMI due out at 2.30pm and we want to be seeing this number remain above 50.   

S&P/ASX 200

 

 

 

Also worth noting the strong bounce in the Iron Ore price over the past 3 weeks adding +27. Unfortunately this hasn' t followed through into Iron Ore stocks which have struggled in recent weeks. 

 

 

MODEL PORTFOLIO UPDATES

 

 

iiNET (IIN) (Pension Performers)

-------------------------------------------------------------------

 

Another positive acquisition  22-Nov-11 24:43

 

IIN acquired TransACT Communications - an internet service provider (ISP) with a fibre-to-the-node network - for $60m. The deal is priced at an EV/EBITDA multiple of 3.5x, inline with previous acquisitions debt funded and EPS accretive.

 

 

 

AUSTRALIAN STOCK PRICES OVERNIGHT

  

In New York, News Corp rose by US$0.28 to US$16.30, equivalent to A$16.57, A$0.10 above its last close on the ASX. 

ResMed fell by US$0.25 to US$29.67, equivalent to A$3.02, A$0.05 below its last close on the ASX.

 

In London, Rio Tinto rose 37.5 pence to £31.64, A$0.60 higher in Australian currency terms.

 

BHP-Billiton fell 14.5 pence to £18.68, A$0.23 lower in Australian currency terms.

 

Henderson Group Plc rose 2.5 pence to £1.09, A$0.04 higher in Australian currency terms.

(TUESDAY 22ND NOVEMBER - JAMES GERRISH - 7:50am)...The DOW JONES lost -247pts overnight while the S&P 500 fell  -1.86%. European mkts were sharply lower (FTSE down -2.62%, German DAX off -3.35%, French CAC down -3.41%) while locally, the SPI FUTURES mkt is pricing a lower open down -65pts when trading kicks off here this morning. 

 

Yesterday, the S&P/ASX 200 fell -13 pts to close at 4163. 

 

DOW JONES - It was 89th day for the year we've had triple digit moves in either direction on the DOW - shows the volatility we're dealing with at the moment and supports our preferred strategy of manufacturing returns through a 3 tiered approach. 

 

1. Have an allocation to stocks paying high income now which might be offset with potentially lower growth in the future. Telstra, Banks, TTS, Hyrbids, etc

 

2. Have an allocation to stocks paying relatively lower income now but are likely to increase dividends over time due to strong earnings growth. MTS, FWD, WES etc

 

3. Sell call options over a portion of the portfolio to manufacture additional income. 

 

By a using a strategy such as this, we can expect a grossed up dividend income of around 8% now with expectations that it will grow in the future, we can expect to generate 2% a month from the sale of options and if we do that on 50% of the portfolio, 6 months out of 12, then that ads another 6% to the total portfolio return over the year. That's 14% before we ad in capital gains or in the event the mkt goes backwards, we've got a buffer against capital loss.  
 

That's obviously our broader strategy or structure we're investing towards however its critical that we aim to time the mkt as best we can. From a technical standpoint overnight, the DOW JONES did break through support overnight which is obviously a negative. Gold and other commodities were hit pretty hard as the risk off trade really unwound.
 

 

  

 

  

WHY WE LIKE THE BANKS...

 

It all comes down to value which is on offer at the moment due to concerns coming from Europe. The bank sector is currently trading on a forecast PE or 10x v long term average of 12.6x. As the chart below shows, the sector tends to revert back to the averages from an overbought or oversold state. 

 

Some would obviously argue that the current discount is justified given the issues currently facing the banking sector which include subdued credit growth, higher costs of funding, normalization of bad debts impacting the ability for earnings growth and earnings from wealth management divisions clearly under pressure. 

 

At the moment, the sector is trading at an 11% discount to market. Historically, it trades at a 7% discount to market however that has ticked up to a peak of 15% during the GFC. 

 

So in that context, banks can get cheaper from here but not significantly if history is a guide (and it should be). 

 

  

 

 

   

Couple this with a grossed up forecast yield of 10.5% across the sector + we have the ability to write options against the holding and the banks fit the profile for our strategy. 

 

If we look at the current yields in a historical context it becomes clear that they won't be sustained at these levels over the long term. One of two things can happen here. 

 

Banks cut their payouts or stock prices rise. Given banks are recording record profits and even though times are getting more difficult, earnings are still growing + payout ratios are not stretched (74% the highest for WBC and 64% the lowest for ANZ) - so it seems we can be fairly confident that dividends will continue to flow at current amounts or higher. The obvious conclusion here is that prices will tick higher over time and although there are short term concerns, these will pass and the investment case in the banks at the moment remains fairly compelling. 

 

  

So whats our preferred exposure? To chose 1 it would be ANZ but in reality the performance within the sector is likely to be fairly correlated. 

 

We like ANZ given expectations for earnings growth derived largely from its Asian expansion plans ( it now generates +15% of earnings from Asia).

 

Using the Lynch Model which we find helpful in determining bank valuations ANZ comes out on top. The Lynch Model seeks to rank a banks attractiveness if the sum of its annualized earnings growth and gross dividend yield is greater than the forecast PE. In the case of ANZ, it has an average EPS growth rate plus dividend yield of greater than 18% and trades on forecast PE of 9x - clearly an attractive outcome. 


  

 

 

MODEL PORTFOLIO UPDATES 

 

None this morning 

 

 

AUSTRALIAN STOCK PRICES OVERNIGHT

 

In New York, News Corp fell by US$0.22 to US$16.60, equivalent to A$16.86, A$0.06 above its last close on the ASX.

ResMed fell by US$0.59 to US$25.89, equivalent to A$2.63, A$0.01 below its last close on the ASX.

In London, Rio Tinto fell 185.58 pence to £30.90, A$2.95 lower in Australian currency terms.

BHP-Billiton fell 90.0 pence to £17.80, A$1.43 lower in Australian currency terms.

Henderson Group Plc fell 6.7 pence to £1.05, A$0.11 lower in Australian currency terms.

(WEDNESDAY 16TH NOVEMBER - JAMES GERRISH - 7.38am)...The DOW JONES added +17pts while the S&P 500 up +0.48%. European mkts were all lower (FTSE down -0.03%, German DAX off -0.87%, French CAC off -1.92%) while locally, the SPI FUTURES mkt is pricing a higher open up +8pts when trading kicks off here this morning. 

 

Yesterday, the S&P/ASX 200 lost -18pts or -0.44% to close at 4285. 

 

 

DOW JONES - Tech and financial stocks led the rise on the US overnight but volume was once again pretty light. Some buying came on optimism that Mario Monti will have some luck with the Italian debt situation (but those headlines change daily) while retail sales topped expectations in the US. We'll actually do something a little different this morning and focus on US economic metrics which have taken a back seat to European Issues of late.

 

 

  

 

 

 

S&P/ASX 200 -  There has been fairly muted trading over the past two weeks but it seems the index wants to edge higher. We need to take out that last swing high on the chart (circled) before getting too optimistic but I think there is a high chance that will occur. 

 

  

 

 

US ECONOMIC METRICS 

 

A while back we wrote our view of the mkt as being... 

....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). 

 

With regard for China , we've had data out recently (notably inflation) that gives evidence against a hard landing + we've seen commodity mkts start to show signs of bottoming and even break to upside in the case of Crude Oil. 

 

Looking at the US, there is still a lot of concern about a possible recession, but its important understand the trends that a prevalent during a sustained economic contraction. The US is no doubt struggling but as the charts below show, on most metrics the situation over there is not deteriorating which would be case if we were headed for a double dip style event. 

 

 

Overnight we had retail sales come in better than expected and we clearly see there has been a recovery here post GFC + the trend is positive. 

 

 

 

Unemployment is probably the biggest issue in the US at the moment with average monthly growth of 125,000 jobs. The number really needs to be closer to 250,000 jobs a month but the important element to consider when looking at the potential for a double dip style scenario is the trend. Is it improving or deteriorating. Clearly, the trend is improving. 

 

 

 

Unemployment rate seems to have peaked and is tracking lower. 

 

 

 

This graph is probably more relevant showing total unemployment plus all marginally attached workers plus total employed part time for economic reasons. 

 

 

 

+ the time an individual is looking for job has peaked. 

 

 

Here's one for those questioning the benefits of a tertiary education. The unemployment rate for an individual with a Bachelors degree or more is under 4.5% in the US + its peaked. 

  

 

 

 Here's the kicker! We speak a lot about US corporates being healthy and this chart shows it pretty clearly. It tracks US corporate profits after tax and the rebound has been sharp. Essentially, corporate profits have more than doubled since the GFC and are now above pre-GFC levels.  

  

 

Another important element to consider is personal savings rates. During an economic contraction or when confidence is low, personal savings rates are high. At the moment, savings rates remain at elevated levels but they do seem to have peaked and are ticking lower. This is important as we want to be seeing money being pumped back into the economy rather horded underneath the mattress. 

 

  

Part of the consumer caution in the States comes back to housing mkt. We know that housing was the basis for a lot of the GFC related pain however we're not yet seeing a recovery in that sector (yet). 
 

  

 

Looking at these charts (and quite a few others) we come to the conclusion that the US economy is muddling through at this stage. Importantly, things aren't getting worse and as corporate profits show, companies are actually preforming pretty well. 

 

 

MODEL PORTFOLIO UPDATES

 

Emerging Growth - Starpharma (SPL) is raising capital. Details out today. 

 

No other updates

 

 

AUSTRALIAN DUAL LISTED STOCKS

 

In New York, News Corp rose by US$0.31 to US$17.71, equivalent to A$17.40, A$0.21 above its last close on the ASX.

ResMed rose by US$0.14 to US$27.86, equivalent to A$2.74, unchanged since its last close on the ASX.

In London, Rio Tinto rose 35.0 pence to £34.58, A$0.54 higher in Australian currency terms.

BHP-Billiton fell 9.5 pence to £19.61, A$0.15 lower in Australian currency terms.

Henderson Group Plc fell 1.8 pence to £1.14, A$0.03 lower in Australian currency terms

(TUESDAY 15TH NOVEMBER - JAMES GERRISH - 7.17am)...The DOW JONES lost ground overnight down -74pts while the S&P 500 finished off -0.96%. European mkts were all lower (FTSE down -0.47%, German DAX off -1.19%, French CAC off -1.28%) while locally, the SPI FUTURES mkt is pricing a lower open down -36pts when trading kicks off here this morning. 

 

Yesterday, the S&P/ASX 200 added +8pts or +0.19% to close at 4304 however that was a long way off session highs (+50pts) 

 

 

DOW JONES - low volumes and anemic trading  action overnight with the mkt still focused on Italy. Domestically in the US, there was some positive news with Boeing signing an agreement with Emirates for 50 777-300ER jets, and an option for 20 more, in a deal valued at $26 billion. We also had an upgrade of Caterpillar + Warren Buffet disclosed a 5% holding in IBM. Normally, that would get traders excited but not to be overnight. 

 

 

 

S&P/ASX 200 - A disappointing day yesterday with the MKT coming well off session highs. Expect trade to remain choppy but we retain the view that we'll continue to edge higher into Christmas. 

 

 

 

 

URANIUM...In the headlines

 

Julia Gillard has confirmed that she'll support Uranium exports to India even though India has not signed the Nuclear Non-Proliferation Treaty.

 

"We must, of course, expect of India the same standards we do of all countries for uranium export - strict adherence to International Atomic Energy Agency arrangements and strong bilateral and transparency measures which will provide assurances our uranium will be used only for peaceful purposes," she told Fairfax. 

 

So its worth taking a look at the broader dynamics of the Uranium market. There is no doubting that Fukishima was a game changer but it wasn't terminal for the industry. In Japan, the 6 nuclear reactors that were involved in the incident have been closed while all other nuclear plants have been suspended. Germany has pulled back its nuclear ambitions and plans to shut down plants over the next 10 years or so. A similar scenario is playing out in Switzerland and Italy. 

 

On the flip side, France, Russia, Korea, China and India all seem likely to continue on with Nuclear power. China is clearly the main driver of nuclear power with 14 nuclear power reactors in operation, more than 25 under construction, and more about to start construction soon. 

 

Additional reactors are planned, including some of the world's most advanced, to give more than a ten-fold increase in nuclear capacity to at least 80 GWe by 2020, 200 GWe by 2030, and 400 GWe by 2050. With the growing industrialisation of China and pressure coming from the associated environmental impacts of traditional electricity generation (Coal), there seems to be a lack of any other alternatives for China.

 

By 2016, its tipped that China will need 10,000 tonnes of uranium per annum and as it stands, they've nailed down supply for the next 3-5 years. 

 

In India, electricity demand is increasing rapidly, and the 830 billion kilowatt hours produced in 2008 was triple the 1990 output. But the Indian electricity industry has problems. There are huge losses in transmitting power over long distances. Coal provides around 68 per cent of Indian electricity but reserves are limited and can't support the planned enormous power expansion projects.

 

Gas provides about 8 per of Indian power and hydro 14 per cent, while nuclear is currently around 4 per cent, because India has had problems accessing world nuclear technology. In the longer-term that technology freeze looks like being a blessing for India, because when the Western world turned its back on nuclear, India did extensive research work developing nuclear power technology.

 

But that's all changing. Not only does India expect to double per capita electricity consumption by 2020, but huge rises in power generation are expected in the following decades.

 

While there is considerable community debate in India, the 2050 broad plan is to generate 25 per cent of this greatly expanded electricity requirement via nuclear power.

 

So although the demand dynamics have taken a hit, the medium to longer term outlook still looks encouraging and for investors with that type of horizon, now could be a good time for some exposure. 

 

(Information on India sourced from the Business Spectator this morning. Data on China + broader Uranium mkt sourced from a variety of research) 

 

 

MODEL PORTFOLIO UPDATES

 

No new updates this morning 

  

 

AUSTRALIAN DUAL LISTED STOCKS

 

In New York, News Corp fell by US$0.20 to US$17.4, equivalent to A$17.06, A$0.04 below its last close on the ASX.

ResMed fell by US$0.34 to US$27.70, equivalent to A$2.72, A$0.02 below its last close on the ASX.

In London, Rio Tinto fell 44.5 pence to £34.23, A$0.69 lower in Australian currency terms.

BHP-Billiton fell 21.5 pence to £19.71, A$0.34 lower in Australian currency terms.

Henderson Group Plc fell 0.70 pence to £1.16A$0.01 lower in Australian currency terms

(MONDAY 14TH NOVEMBER - JAMES GERRISH - 7.52am)...The DOW JONES had a strong session Friday adding +259pts while the S&P 500 finished up +1.95%. European mkts were all higher  (FTSE up +1.85%, German DAX up +3.22%, French CAC up +2.76%) while locally, the SPI FUTURES mkt is pricing a higher open up +44pts when trading kicks off here this morning. 

 

On Friday, the S&P/ASX 200 added +52pts or +1.24% to close at 4296.  

 

 

DOW JONES - it was meant to be a quite session Friday given it was Bank Holiday and the Bond mkt was closed however better than expected Consumer Sentiment data and approval of the new austerity plan in Italy was enough to get investors excited. The Italian 10 year bond yields dropped sharply settling at 6.42% after hitting 7.5% on Wednesday. We also had Berlusconi make way for Mario Monti who has a strong financial background which the mkt clearly liked. For an overview of Monti, CLICK HERE

 

  

 

S&P/ASX 200 - A strong day on our mkt Friday particularly in the last hour of trade. We think the mkt will continue higher towards year end but we're more inclined to buy into shocks rather than chase rallies. Although we've got positive developments from Italy, we've been here before. As soon as Greece got their house sort of in order, focus turned to Italy. Now Italy has made positive moves, I think we'll start to hear more about the time table of the US Super Committee - the panel created under the debt ceiling deal earlier this year. 

 

The panel has until November 23 to reach an agreement on at least $1.2 trillion in deficit reduction over the next decade. If it works out an agreement, Congress must vote on the unamended plan by December 23. Failure to reach an agreement or gain approval by Congress and President Barack Obama would trigger significant automatic spending cuts scheduled to take effect in 2013. 

 

We saw back in August the massive divide between political parties in the US which ultimately led to the downgrade of the US credit rating. The US has been extremely vocal about European leaders taking action so it will be incredibly interesting to see how the US approaches these upcoming negotiations. 

 

The optimist would have to argue that the divisive actions that occurred on both sides of politics in August serves as a warning that such action can't occur again - there needs to be some type of bi partisan result and from a mkts perspective it will be essential for this rally to continue. 

 

As with any political negotiation, there will be days when headlines are negative and as we said above, its probably better to be a buyer on these days. 

 

 

   

A TRIBUTE TO BERLUSCONI - SOME CRACKING QUOTES IN HERE...! Well worth a read. 

 

 

 

Italian Prime Minister Silvio Berlusconi is famed for making his views known in blunt, colourful, sometimes combative language.

 

At times he strays into what one of his predecessors, Massimo D'Alema, described as "planetary gaffes".

 

Here is a selection of quotations from Mr Berlusconi on a range of topics over his years in and out of office.

 

On Italy's debt crisis

 

Speaking on 13 August 2011, as he announced a raft of new austerity measures: "Our hearts are bleeding. This government had bragged that it never put its hands in the pockets of Italians but the world situation changed. We are facing the biggest global challenge."

 

But on 4 November 2011, he told a news conference at the end of a G20 summit: "The life in Italy is the life of a wealthy country: consumptions haven't diminished, it's hard to find seats on planes, our restaurants are full of people."

 

Scandals over his private life

 

Mr Berlusconi - caught in a series of scandals over his private life, including his alleged dealings with younger women and prostitutes - has frequently turned to a pithy phrase in an attempt to shrug off the allegations.

 

For instance, in April 2011, he said: "When asked if they would like to have sex with me, 30% of women said, 'Yes', while the other 70% replied, 'What, again?'"

 

At the end of the previous year, as allegations swirled about escorts and "Bunga, bunga" parties, the PM deadpanned the line: "I unfortunately have never in my life been to a wild party."

 

However, the talk of scandal has got under his collar at times.

 

He told Il Giornale newspaper in an interview on 12 August 2009 that he had nothing to apologise for and no skeletons in his cupboard: "I deserve to be left in peace: enough violations of privacy."

 

Questioned on the sex allegations in late July, Mr Berlusconi admitted: "I am not a saint, you've all understood that."

 

In an earlier interview with gossip magazine Chi, Mr Berlusconi denied he pays for sex, adding: "I never understood where the satisfaction is when you're missing the pleasure of conquest."

 

More bluntly, in November 2010 Mr Berlusconi hit out with the following: "It's better to like beautiful girls than to be gay."

 

Battles with the courts

 

On the news in October 2009 that Italy's constitutional court had overturned a law granting him immunity from prosecution while in office:

 

"Lucky that there's Silvio, otherwise we'd be completely in the hands of these gentlemen of the left... I will defend myself in the courts, exposing the accusers to ridicule, showing all Italians what stuff they're made of and what stuff I'm made of."

 

Earlier, he insisted that the charges against him were farcical and that his administration would "govern for five years with or without the law".

 

His view of Italy's judiciary in June 2008: a "cancerous growth".

 

On judges pursuing former Prime Minister Giulio Andreotti on charges relating to the Mafia: "Those judges are doubly mad! In the first place, because they are politically mad, and in the second place because they are mad anyway.

 

"If they do that job, it is because they are anthropologically different from the rest of the human race."

 

Politics and the Italian Left

 

In November 2011, facing the biggest crisis of his leadership, he said: "I want to look those who want to betray me in the face."

 

As a spat with his former wife hit the papers in late April 2009, Mr Berlusconi rebuffed her accusations that his party planned to field attractive young women as European election candidates: "We want to renew our political class with people who are cultured and well prepared... [Candidates standing for my party would be unlike the] malodorous and badly-dressed people who represent certain parties in parliament."

 

He is quoted as saying on 9 April 2008: "The left has no taste, even when it comes to women."

 

On left-wing voters at a conference of retailers during the 2006 campaign: "I trust the intelligence of the Italian people too much to think that there are so many pricks around who would vote against their own best interests."

 

Promising to put family values at the centre of his campaign for the April 2006 general election: "I will try to meet your expectations, and I promise from now on, two-and-a-half months of absolute sexual abstinence, until [election day on] 9 April." He later insisted the pledge was "just a joke".

 

On Mussolini

 

"Mussolini never killed anyone. Mussolini used to send people on vacation in internal exile."

 

In the wake of 11 September

 

"We must be aware of the superiority of our civilisation, a system that has guaranteed well-being, respect for human rights and - in contrast with Islamic countries - respect for religious and political rights, a system that has as its value understanding of diversity and tolerance...

 

"The West will continue to conquer peoples, even if it means a confrontation with another civilisation, Islam, firmly entrenched where it was 1,400 years ago."

 

His response to worldwide condemnation of the above speech: "They have tried to hang me on an isolated word, taken out of context from my whole speech."

 

"I did not say anything against the Islamic civilisation... It's the work of some people in the Italian leftist press who wanted to tarnish my image and destroy my long-standing relations with Arabs and Muslims."

 

On his alleged conflict of interest as prime minister and one of Italy's biggest tycoons, with major media holdings: "If I, taking care of everyone's interests, also take care of my own, you can't talk about a conflict of interest."

 

President Obama's skin colour

 

Of Barack Obama, upon his election as US president in November 2008, he said: "[Mr Obama is] young, handsome and suntanned".

 

His response to the wave of criticism following the remark: ''God save us from imbeciles... How can you take such a great compliment negatively?"

 

An unabashed Mr Berlusconi rehashed the jibe on his return from the G20 summit in Pittsburgh on 28 September 2009: "Ah, Barack Obama. You won't believe it, but the two of them sunbathe together, because the wife is also tanned."

 

The L'Aquila earthquake

 

In general Mr Berlusconi won praise for his handling of an earthquake that hit central Italy on 6 April - except for his advice to homeless survivors that they should see their plight "like a weekend of camping."

 

Women

 

In September 2010, speaking at a youth rally, saying women should marry rich, older men: "Women are lining up to marry me. Legend has it, I know how to do it."

 

In January 2007, Mr Berlusconi was forced to issue a public apology to his wife, after she accused him of flirting with two women.

 

"If I wasn't already married, I would marry you right away," Mrs Berlusconi accused him of telling women at a TV awards dinner.

 

"With you, I'd go anywhere," he was quoted as telling another woman.

 

On Italian secretaries (comments made at the New York Stock Exchange): "Italy is now a great country to invest in... today we have fewer communists and those who are still there deny having been one. Another reason to invest in Italy is that we have beautiful secretaries... superb girls."

 

On himself

 

After his immunity from prosecution was lifted by the Constitutional Court in October 2009, he declared:

 

"I am without doubt the person who's been the most persecuted in the entire history of the world and the history of man."

 

"In my opinion, and not only mine, I am the best prime minister we can find today."

 

Previously, on the same theme: "I am the Jesus Christ of politics. I am a patient victim, I put up with everyone, I sacrifice myself for everyone."

 

"The best political leader in Europe and in the world."

 

"There is no-one on the world stage who can compete with me."

 

"Out of love for Italy, I felt I had to save it from the left."

 

"The right man in the right job."

 

"I don't need to go into office for the power. I have houses all over the world, stupendous boats... beautiful airplanes, a beautiful wife, a beautiful family... I am making a sacrifice."

 

Yet by May 2010, he appeared in a chastened mood when he told a news conference at the Organization for Economic Cooperation and Development in Paris: "As prime minister, I have never had the feeling that I was in power."

 

To a German newspaper:

 

"In Italy I am almost seen as German for my workaholism. Also I am from Milan, the city where people work the hardest. Work, work, work - I am almost German."

 

Other politicians

 

In June 2005, on enlisting the support of Finnish President Tarja Halonen for Italy to host the European Food Safety Authority: "I had to use all my playboy tactics."

 

Mr Berlusconi added insult to injury by saying that he had had to "endure the Finnish diet", such as smoked herrings.

 

To German MEP Martin Schulz, at start of Italy's EU presidency in July 2003: "I know that in Italy there is a man producing a film on Nazi concentration camps - I shall put you forward for the role of Kapo (guard chosen from among the prisoners) - you would be perfect."

 

During the controversy raging over the above remark: "I'll try to soften it and become boring, maybe even very boring, but I am not sure I will be able to do it."

 

At the Brussels summit, at the end of Italy's EU presidency, in December 2003: "Let's talk about football and women." (Turning to four-times-married German Chancellor, Gerhard Schroeder.) "Gerhard, why don't you start?"

 

On his first meeting with Danish Prime Minister Anders Fogh Rasmussen in 2002, Berlusconi complimented him with the words: "Mr Rasmussen is not only a great colleague, he's also the best-looking prime minister in Europe."

 

On Aids

 

A joke about Aids told by Mr Berlusconi: "An Aids patient asks his doctor whether the sand treatment prescribed him will do any good. 'No', the doctor replies, 'but you will get accustomed to living under the earth'."

 

His response to critics who said the joke was offensive: "They have lost their minds; they really have come to the end of the line, indeed they have gone beyond it. I would advise them, too, to undergo sand treatment..."

 

 

MODEL PORTFOLIO UPDATES

  

No updates this morning  

 

 

AUSTRALIAN DUAL LISTED STOCKS

  

In New York, News Corp rose by US$035 to US$17.60, equivalent to A$17.12, A$0.06 above its last close on the ASX.

ResMed rose by US$0.25 to US$28.04, equivalent to A$2.73, A$0.02 below its last close on the ASX.

In London, Rio Tinto rose 48.5 pence to £34.68, A$0.76 higher in Australian currency terms.

BHP-Billiton rose 35.5 pence to £19.92, A$0.55 higher in Australian currency terms.

Henderson Group Plc rose 4.8 pence to £1.17, A$0.07 higher in Australian currency terms.

(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)

-------------------------------------------------------------------

 

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)

-------------------------------------------------------------------

 

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.

(THURSDAY 3RD NOVEMBER - JAMES GERRISH - 7.52am)...The DOW JONES added +178pts overnight while the S&P 500 put on +1.61%. European mkts were higher (FTSE up +1.15%, German DAX up +2.25%, French CAC up +1.38%) while locally, the SPI FUTURES mkt is pricing a higher open up +43pts when trading kicks off here this morning. 

 

Yesterday, the S&P/ASX 200 lost -48pts or -1.14% to close at 4184. 

 

 

DOW JONES - Held that key support region overnight as the chart below shows on the back a reminder by Fed Chairmen Ben Benanke that they are prepared to do what is necessary to support growth. The speech came after the ADP private sector jobs reports showed that 110,000 workers were added in October and we also saw an upward revision on the prior month. These figures are interesting but the main focus remains on the Non-Farm payrolls data out on Friday (expectations of +90,000 jobs v prior month of 103,000 and unemployment steady at 9.1%) 

 

Also worthy of mention in Benanke's speech was comments that there are significant downside risks to the outlook which has promoted them to cut 2012 growth forecasts + raise their expectations for unemployment to 8.5%-8.7% in Q4 next year from a previously estimated 7.8%-8.2%. 

 

As regular readers would know, I tend to think that Benanke has a tendency to talk down the economy as a means of justifying further stimulus however on this occasion, the fact that he is talking down the economy, cutting growth expectations etc but is essentially doing nothing at this stage to support growth, in itself probably suggests the US  economy is tracking along OK - that's what the recent economic data is telling us anyway and it seems Benanke concurs.  

 

  

 

 

S&P/ASX 200 -  Not a bad recovery on our mkt yesterday given we were down -92pts around 11.30am and ended down -48pts. The move came after building approvals were soft which puts more pressure on the RBA to act in December. I this will probably occur given they don't meet in January, and there was no reference/insinuation in the minutes that the move 2 days ago was a one off. So another cut in December then an assessment period for a few months seems likely.

 

ASX 200 Intra Day 

 

 

 ASX 200 Daily   

 

 

REFERENDUM 

 

Another reason that may have prompted some buying in our mkt yesterday afternoon was a bit more clarity around the Greece Situation. Reports the previous night confirmed that Greek Prime Minister Papandreou was going to put the Greek Bailout package to a referendum which was obviously seen as a major risk and heightened the chance a hard type of default in Greece. Yesterday, we saw a couple of developments on this front with the main one being the type of question posed in the referendum. 

 

If the Question is more focussed on whether or not Greece wants to remain part of the EU, and as a consequence, needs the bailout funding there is a high chance it will pass (given 70% of Greeks want to remain part of the EU) and default will be averted + Papandreou has put the decision back to the people (which I kind of think is a good thing if the result is the right one - not so good if it gets vetoed!).

 

So, the time line is this: 

 

1. Papandreou faces a no-confidence vote expected on Friday and at last count, the ruling party holds 151 votes out of 300 - too close for comfort! 

 

2. There is an aid package due in Mid November

 

3. If Papandreou succeeds, we would expect the aid package to go through and the country to hold the referendum early next year. 

 

However if Papandreou is ousted on Friday, there would be snap elections which would take about a month to organise. 

 

Theoretically, they would then still receive the bailout package mid November before going to the polls in the first week of December.  However presumably, if the Government falls, it would be on the back an uprising against the austerity plans that are a requirement to receive the bailout funds and we might see the IMF, ECB pull the pin..which would lead to a hard default. 

 

What I would like to see happen, is Papandreou win the confidence vote on Friday, the aid package is then administered in November ahead of a referendum in January that has a very specific question around Greece remaining as part of the EU. 

 

Whatever the case, Friday is shaping up to be a massive day with Non-Farms in the States and probably a vote in Greece. 

 

 

WESTPAC'S RESULT...KEY POINTS 

 

-  Company cash earnings up 7% yoy to $6,301m vs consensus estimates of $6,320m.  

 

- Cash EPS: Basic cash EPS up 6% yoy to 209.3¢ vs expectations around 210

 

- DPS: Final dividend of 80¢ vs consensus forecasts of 78¢. 

 

- Revenue: up 1% yoy to $17.1bn 

 

- Net interest margin: FY11 NIM 2.22% (vs FY10 2.22%)

 

- Loan growth: FY11 loan growth of 3.8%

 

- Costs: up 2% yoy to $7.1bn. 

 

- ROE: 16.0%

 

As Gail Kelly put it yesterday, its a fairly solid result that shows the bank is doing fine and the important element here is that the dividend looks safe and sustainable. 

 

ANZ 

 

Reports today with expectations for profit of $5.66 Billion & Dividend of 73c

 

 

MODEL PORTFOLIO UPDATES 

 

Pension Performers - We added to Fleetwood (FWD) yesterday morning and the chart is worth a look as a typifies the way we want to trade. 

 

1. We like FWD from a fundamental standpoint - we've done our valuations, looked at earnings momentum, yield and made a determination on the businesses prospects. 

 

2. We bought some a few months ago because we liked it fundamentally even though the technical s hadn't yet confirmed a buy. 

 

3. It looked set to break a key technical level and when it closed above it on Tuesday, we went and bought the remainder of our position on Wednesday given the market had started to come around to our view. 

 

   

 

  

AUSTRALIAN STOCK PRICES OVERNIGHT

 

In New York, News Corp rose by US$0.30 to US$17.36, equivalent to A$16.79, A$0.28 above its last close on the ASX.

ResMed rose by US$0.39 to US$28.24, equivalent to A$2.73, A$0.04 above its last close on the ASX.

In London, Rio Tinto rose 87.74 pence to £33.40, A$1.35 higher in Australian currency terms.

BHP-Billiton rose 37.0 pence to £19.52, A$0.57 higher in Australian currency terms.

Henderson Group Plc fell 1.2 pence to £1.13, A$0.02 lower in Australian currency terms.

   

(WEDNESDAY 2ND NOVEMBER - JAMES GERRISH - 7.58am)...The DOW JONES lost -297pts overnight while the S&P 500 lost -2.79%. European mkts were lower (FTSE down -2.21%, German DAX down -5%, French CAC down -5.38%) while locally, the SPI FUTURES mkt is pricing a lower open down -61pts when trading kicks off here this morning. 

 

Yesterday, the S&P/ASX 200 lost -65pts or -1.52% to close at 4232. 

 

 

DOW JONES - Sold off heavily overnight on the back of the decision by the Greek Government to take the recent bailout package to a referendum. As Adam Carr wrote this morning, 'I mean can you believe it? Imagine your bank manger coming out and saying, 'Mate we are going to slash your mortgage', and you turn around and say, 'Yeah, maybe, I'll think about it'. Truly unbelievable...'

 

If you look at the social unrest in Greece, its pretty safe to say there is a significant amount of the Greek population who haven't been happy with the way things have been handled and are likely to vote down the package. That said, the alternative is a default and potential exclusion for the EU so its a fairly decent deterrent. What it does mean is an extended period of uncertainty which we know is a negative for stock mkts. 

 

Technically, the DOW pulled back to the breakout region yesterday so obviously this should provide support if we are operating in a new trading range as we'd suggested last week. We certainly put weight behind technicals however its worth noting at the moment, the mkt is being largely impacted by political rhetoric.

 

  

 

 

S&P/ASX 200 -  another lower start to trade this morning following some weakness overnight. The rate cut yesterday of 0.25% to 4.5% would generally be a positive for our mkt yet the price action yesterday and whats likely to occur today is a clear indication that macro news flow is the main driver at the moment...Still! 

 

 

WEBSITE - www.mymarketview.com.au 

 

A shameless plug for the site which gives market updates, overnight commodity prices in addition to Model Portfolios and Education Resources. It also outlines how we can help to manage your investments. Worth a look. 

 

 

MF GLOBAL - a big story at the moment and is another clear warning for investors to ensure that retirement savings, super funds etc and the assets they hold, are held in their name and have some type of third party guarantee behind them. Shares, when traded through a traditional broker have this however some funds, and super fund structures provided by some institutions may not actually hold your assets in your name, on your HIN. I won't name names here but if you are concerned about how your assets are being held, feel free to contact me. 

 

Below is the notification from MF Global to its clients. 

 

_______________

 

Notice to clients

 

1 November 2011

 

Background

 

On 1 November 2011 at 7:45am, Christopher Robert Campbell, David John Frank Lombe and Vaughan Neil Strawbridge of Deloitte Touche Tohmatsu were appointed as administrators of the following companies (Companies):

 

MF Global Australia Limited (Administrators appointed) (ACN 001 662 077) ("MFGA")  

MF Global Securities Australia Limited (Administrators appointed) (ACN 125 669 801) ("MFGS")  

Brokerone Pty Limited (Administrators appointed) (ACN 070 037 482) ("Broker")  

The administrators have taken control of the Companies and all of their operations with immediate effect, in accordance with the Corporations Act 2001 (Cth) (Act).

 

In communications this morning prior to the opening of trading on the Australian Securities Exchange (ASX), the ASX advised the administrators and the Companies that all of the Companies' participations on the ASX have been suspended with effect from the appointment of the administrators. 

 

Accordingly, now that they are in administration, none of the Companies have any capacity to trade on the ASX, including to open or close any positions. The ASX have advised us they are in the process of closing out all Australian positions held by the Companies with immediate effect. The ASX has taken this step as a direct consequence of the appointments over the Companies.

 

Customer positions

 

We write to provide you with notice to you of certain steps which MFGA and MFGS are taking in relation to open customer positions with effect from our appointment.

 

In relation to Australian Equity CFDs, Index CFDs and Commodity CFDs, the counterparty has issued a default notice and advised that it is has closed out all positions it holds. We understand that this process may take a short period of time. The action by the counterparty means that MFGA is no longer able to maintain its hedge position in relation to these CFDs. 

 

Therefore MFGA has no alternative but to also close out all CFD positions open, in accordance with the terms of the client agreement between MFGA and the customer. Information from the counterparty close out transactions will be the basis for calculating the MFGA close out transactions.

 

In relation to FX CFDs and Margin FX, the administrators are seeking confirmation of the status of MFGA's hedge position, which is with another member of the MF Global group. Should the administrators decide to close out the CFD positions open as at the date of their appointment, in accordance with the terms of the client agreement between MFGA and the customer, affected customers will be notified accordingly. In addition should these counterparties close out these positions then MFGA gives you notice that it will also close out client positions.

 

In relation to Australian futures, MFGA's participation of the ASX market, clearing and settlement facilities has been suspended. The ASX has also indicated that it proposes to enforce the powers under their rules to close out or otherwise deal with open positions registered at the clearing facility.

 

In relation to overseas futures, the ability for customers to deal in overseas positions will depend upon the extent to which the overseas market, clearing and settlement facilities will allow such activity and position of offshore MF Global Group entities. Should these positions be closed we cannot be certain if or when the funds from the transactions will flow to MFGA. We are hopeful this will become clearer in the near future.

 

To the extent that funds are held with offshore MF Global Group entities or at offshore exchanges or clearing facilities, the return of such monies will be subject to relevant arrangements in those jurisdictions. If you have overseas positions you should be aware of these constraints and once more information is available we can possibly provide alternatives for clients.

 

In relation to Australian equities, MFGS's participation as a trading participant of ASX has been suspended. No further trades will be executed.

 

We are now in the process of reviewing all of the companies' information available to us from the records of MFGA and MFGS, with a view to ensuring that customer positions are identified and reconciled. We will write to customers again in due course to advise customers of their position with MFGA and MFGS and amounts payable or receivable by customers of those companies. It may take time for the administrators to be able to confirm the position and, in due course, to process appropriate payments to customers.

 

In the interim, the administrators are not in a position to adopt or to take any other steps to perform any obligations of MFGA or MFGS under any agreements with customers or other parties, or to open any new trades.

 

We will keep you and other parties involved in the administrations of the Companies informed of developments.

 

Any queries should in the first instance be run through your normal channels of communication and / or Broker. A dedicated email account for customer queries is now active:

 

mfgaustralia@deloitte.com.au

 

Yours sincerely,

Christopher Campbell, David Lombe and Vaughan Strawbridge

Joint administrators

MF Global Australia Limited (administrators appointed)

MF Global Securities Australia Limited (administrators appointed)

Brokerone Pty Limited (Administrators appointed)

_____________________

 

MELBOURNE CUP YESTERDAY... Macquarie's quant analysis picked the winner again this year - thats 3 in a row. 

 

 

MODEL PORTFOLIO UPDATES 

 

Pension Performers - We're adding to our position in Fleetwood (FWD)

 

  

AUSTRALIAN STOCK PRICES OVERNIGHT

 

In New York, News Corp fell by US$0.79 to US$17.06, equivalent to A$16.52, A$0.31 below its last close on the ASX.

ResMed fell by US$0.45 to US$27.85, equivalent to A$2.70, A$0.03 above its last close on the ASX.

In London, Rio Tinto fell 132.5 pence to £32.53, A$2.04 lower in Australian currency terms.

BHP-Billiton fell 54.48 pence to £19.13, A$0.84 lower in Australian currency terms.

Henderson Group Plc fell 6.2 pence to £1.14, A$0.10 lower in Australian currency terms.

(TUESDAY 1ST NOVEMBER - JAMES GERRISH - 7.51am)...The DOW JONES lost -276pts overnight while the S&P 500 lost -2.44%. European mkts were lower (FTSE down -2.77%, German DAX down -3.23%, French CAC down -3.16%) while locally, the SPI FUTURES mkt is pricing a lower open down -39pts when trading kicks off here this morning. 

 

Yesterday, the S&P/ASX 200 lost -55pts or -1.27% to close at 4298. 

 

 

DOW JONES - There were multiple aspects to last nights session that probably muddies the waters a little. The obvious concern around Europe is emerging again but I think there was more to it last night.

 

Firstly, the Japanese intervened in the currency mkt by selling Yen in an attempt to put pressure on their currency - obviously to make exports more competitive. This prompted selling of the yen and buying of the USD which was up strongly on the session. 

 

Any upside move in the USD is a negative for commodities and the move in the currencies was the catalyst for the initial sell off in raw materials. This was then amplified by the bankruptcy of MF Global, the worlds largest Futures broker about an hour before trade started on the CME. 

 

Only liquidation orders were allowed and MF Global floor traders were not permitted in to trade. A lot of brokers clear through MF Global so it would have been a case of mitigating damage & moving accounts, cashing in open positions and heading back to cash. 

 

That would have amplified the move in commodities significantly and the concern filtered through into other sectors. 

 

 

 

 

S&P/ASX 200 -  a lower start to trade this morning following some weakness yesterday. 

 

 

RBA DECISION TODAY

 

There seems to be more commentators getting cold feet on the call for a rate cut when the RBA meet today. The decision is due out at 2.30pm this afternoon and it seems it could go either way. I think the evidence is there to justify a cut mainly on the back of a subdued inflation print last week. 

 

 

Countering that was better than expected credit data out yesterday which actually showed both private and business was increasing borrowing. 

 

If they don't make a move today, it would be first time the RBA have sat on their hands for the last 5 years (on Melbourne Cup day).  

 

I think we'll probably see one but I'm not confident.  

 

ITALIAN DEBT

 

We spoke yesterday about the importance of monitoring the European Bond yields and  overnight, Italian yields continued higher (6.07%). This is probably the country most likely to rattle markets near term and the bonds above +6%, are an issue.  

 

 

 

MELBOURNE CUP 

 

 

 

Each year, Macquarie puts out a comrpehensive quant analysis on the Melbourne Cup and they've had some recent success....Worth a look 

 

From the Guys at Macquarie 

 

They're in!..Off and racing here at Macquarie Research...

The Emirates Melbourne Cup is being held today at Flemington Race course. The Macquarie Quant team transform racing stats into traditional quant signals to come up with our top picks for the race that stops the nation. 

 

For the second year running our model came up trumps in 2010 with the box trifecta paying dividends. Whilst we were tempted to retire ahead, we thought this would be against the nature of this piece and possibly considered un-Australian. So this year we go for three in a row. 

 

CLICK HERE FOR THE NOTE 

 

 

MODEL PORTFOLIO UPDATES 

 

Starpharma (SPL)

-------------------------------------------------------------------

  

Starpharma Reports Negative Cash Flow of $2.03m for the September 2011 Quarter  31-Oct-11 10:37

  

Starpharma reported negative cash flow of $2.03m for quarter ended 30 September 2011. Operating cash flow for the period was $(2.13m). Investing cash flow was $(4,000). Financing cash flow was $102,000. Cash in hand at the end of the quarter was $16.98m. 

  

Macquarie Group Limited (MQG)

-------------------------------------------------------------------

 

1H12 result: Market related earnings disappear  31-Oct-11 07:36

 

1H12 NPAT of $305m was down 24% on 1H11, below our $350m forecast and market expectations of $330m. Revenue fell 11% reflecting weak conditions across the market-facing businesses with a significant decline in trading income. Costs also fell with staff costs down due to reduced profit share and slightly lower staff numbers. The interim dividend was reduced from $0.86 to $0.65 per share unfranked. Given its strong capital position MQG plans to buy back up to 10% of its ordinary shares.

(MONDAY 31ST OCTOBER - JAMES GERRISH - 7.19am)...The DOW JONES added +22pts on Friday while the S&P 500 put on +0.04%. European mkts were mixed (FTSE down -0.2%, German DAX up +0.13%, French CAC down -0.59%) while locally, the SPI FUTURES mkt is pricing a marginally higher open up +13pts when trading kicks off here this morning. 

 

On Friday, the S&P/ASX 200 added +5pts or 0.12% to close at 4353. 

 

 

DOW JONES - A relatively quite night on Friday in the US with the DOW trading in the tightest range for a number if weeks. After such a big move from the recent lows, its positive to see things quieten down after a technical breakout on most major indices. My gut feel is that we'll hang around current levels for a while and consolidate which would be a healthy outcome. 

 

They'll still a lot of skepticism around the European plan and no doubt focus will turn the other peripheral's - namely Italy and probably France. These are certainly larger member nations and its unlikely that the EFSF would have the capacity to act as a back stop if we saw a run on their bonds. That's an important aspect to consider and we'll keep a close eye on the bonds of Italy, Spain, Germany, Portugal, France etc over the coming months. 

 

 

 

 

 

S&P/ASX 200 - Some selling came into play on Friday after a pretty strong open to trade. There is obvious concern (from what I'm reading over the weekend) about the sustainability of the European plan but from my perspective, I don't argue with a trend. The break from resistance in the DOW and the ASX 200 indicates a change of trend so we'll respect it for now.  

 

  

 

EUROPEAN BONDS - higher bond yeilds are an indication of risk and so its essential we keep up to speed with the implied risk the mkt is placing on European debt. One of the interesting charts below, is that of Ireland. Ireland were in trouble and received assistance however it seems they are successfully administering austerity and reducing their perceived sovereign risk and bond yields are falling. This is what we want to see with the other charts below. 

 

 

 

 

 

  

 

 

    

 

   

  MODEL PORTFOLIO UPDATES 

 

No new updates

(FRIDAY 28TH OCTOBER - JAMES GERRISH - 7.46am)...The DOW JONES added +339pts overnight while the S&P 500 put on +4.52%. European mkts were significantly higher (FTSE up +2.89%, German DAX up +5.35%, French CAC up +6.28%) while locally, the SPI FUTURES mkt is pricing a higher open up +59pts when trading kicks off here this morning. 

 

Yesterday, the S&P/ASX 200 added +105pts or 2.49% to close at 4348. 

 

DOW JONES - A massive relief rally overnight after the Europeans put forward a credible plan to manage debt and support struggling European nations. We'll touch on that shortly. Looking at the DOW,  we highlighted the break out at the start of the week and it now seems the index is in a new trading range 11,600/700 - 12,600/700. Incidentally, the DOW JONES is set for its biggest monthly move since 1974 which actually happened during the 1973 to 1975 bear mkt in the States! 

 

 

S&P/ASX 200 - When trading came back on line yesterday the Aussie mkt rocketed following the EU resolution. Technically, we smashed through the resistance level we'd highlighted all week which is clearly positive. The first higher high, higher low type structure has been put in the index which is the first sign of a trend change. So from the intra day low on the 4th October of 3840, the index is now up +485pts or 12.6% (and more to go today). 

 

 

EUROPE - So the mkt pretty much got all it was after (for now)

 

1. Leveraged EFSF giving it fire power of 1 trillion euros so it has some type of backstop against other peripheral EU nations.

 

2. Greek Bond holders took a 50% 'voluntary' haircut on their holdings therefore not triggering a default event. This cuts Greek debt by 100 billion euros which they reckon is now sustainable. (even though its still 120% of GDP) 

 

3. They will recapitalize European banks aiming for tier 1 capital of 9%. 

 

So it ticked all the boxes for now but the implementation will be another hurdle to overcome. There is no doubting there is still some risk here but I think what has proven to be true is the determination in Europe to come up with a plan and I can;t see them stumbling during the implementation process. 

 

 

RISK ON..... The charts below show one of the biggest risk on events I've seen in years. Whats most telling is the massive exodus from 'safe haven assets'. 

 

Commodities Index 

 

 

 

Australian Dollar 

  

 

 

Volatility Index 

 

 

 

 

 US Dollar Index 

  

 

  

10 Year Treasury yields - Pushing higher which indicates less demand for safe haven treasuries. 

 

 

 

WHAT TO DO....

 

So its risk back on and we've got a situation where institutional investors are incredibly lite on in equities. The mkt has risen (so far) on low volume which indicates that it was just taking the path of least resistance - given the lack of sellers. 

 

We now have the real possibility that money is going to flow back into this mkt as insto's have seen the rally of +12% from the lows and the 'fear of missing out' can come into play. 

 

The bears will still question the resolution and point to the issues surrounding the implementation of the plan which is a valid point but one I wouldn't want to trade towards. The mkt trend is now firmly to the upside and it dangerous to go against that view. 

 

We've been buyers of this mkt - not aggressively but we've been adding to positions over time + adding some new ones (including JBH + WES) at the start of the week.

 

I watched AMP's Shane Oliver on Switzer last night and he reiterated our view of things. 

 

1. The mkt was pricing a US recession - the data suggests this is a myth 

 

2. The mkt was pricing economic Armageddon in Europe - developments yesterday negate this call

 

3. The mkt was pricing a hard landing in China -  we think it will be soft rather than hard landing and the data supports this. 

 

Couple this with the strong company earnings in the States (72% of corp orates have beaten expectations in the States so far) and closer to home, the outlook for interest rates being cut next week and we can come up with a bullish outlook on things. Don't under-estimate it! 

 

 

SOME TRADE IDEAS 

 

Suncorp (SUN) - thanks Frank 

 

 

 Woodside (WPL) 

  

 

 

Starpharma (SPL)

 

 

 

 

Wesfarmers (WES) 

 

 

 

 

MODEL PORTFOLIO UPDATES 

 

Buy Write - We bought back sold calls in ANZ, AWC, BHP, CBA & QBE. 

 

 

AUSTRALIAN STOCK PRICES OVERNIGHT

 

In New York, News Corp rose by US$0.92 to US$18.09, equivalent to A$16.87, A$0.22 above its last close on the ASX.

ResMed rose by US$1.37 to US$28.63, equivalent to A$2.67, A$0.08 above its last close on the ASX.

In London, Rio Tinto rose 37.5 pence to £31.64, A$0.56 higher in Australian currency terms.

BHP-Billiton rose 140.5 pence to £21.09, A$2.11 higher in Australian currency terms.

Henderson Group Plc rose 2.5 pence to £1.09, A$0.04 higher in Australian currency terms.

(THURSDAY 27TH OCTOBER - JAMES GERRISH - 7.31am)...The DOW JONES added +162pts overnight while the S&P 500 put on +1.05%. European mkts were mixed (FTSE up +0.5%, German DAX down -0.51%, French CAC off -0.15%) while locally, the SPI FUTURES mkt is pricing a higher open up +27pts when trading kicks off here this morning. 

 

Yesterday, the S&P/ASX 200 added +14pts or 0.35% to close at 4242 however this was more than 50pts off the session lows are inflation data added to the likelyhood for a rate cut in November.   

 

DOW JONES -  Rallied late in the session on reports that EU leaders were approaching some sort of agreement. As it stands, it seems that agreement has been made to leverage the EFSF to 1 trillion euros (4 times leverage) and there is some sort of consensus around the haircut Greek bond holders will need to take (around 50% at the moment with a mix of cash and bonds) but nothing has officially been agreed upon. As one guy put it on Twitter this morning, it seems they've agreed on the Dinner Menu but France and Germany are still debating over the wine selection. 

  

 

 

 

S&P/ASX 200 - Yesterday, the ASX 200 was down -55pts in early trade and looked pretty weak following the drop of more than -260 pts on Wall Street the previous session. All that changed at 11.30am when we got CPI (inflation) data out which pretty much sealed a rate cut for November and maybe another in December. That saw the mkt trade to a high of +30pts before closing up +14pts so a pretty impressive move of 2% from the lows + we once again butted heads with key resistance point that you can see in the chart below. There is a high chance we'll break this today which is a strong technical buying setup. 

 

 

 

 

EUROPE - Still the main game in town and we haven't got the second statement yet which is now overdue. The first meeting involved the 27 Eurozone members and there was a 3 page statement released after this broke up (CLICK HERE TO VIEW).  The 17 European Union members then broke off to nut out the details of the plan and as it stands, we're still awaiting an update. We'll keep you posted on the website (www.mymarketview.com.au) when it breaks. 

 

 

ECONOMIC DATA - European issues aside we got another positive data print from the US overnight with Durable Good Orders coming in well ahead of expected. These are large, long lasting items and when they stripped out more volatile aspects such as aircraft and defense spending the number looked even better + we also had existing home sales that came in at the highest level in 6 months. Both prints support our long held view that the US is not headed for recession. 

 

 

NAB - Reported this morning with profit up 23.6% at $5.22b  and lifted the dividend to 88cps v expectations of 87c. Expectations had been for a 19% lift in profits so they've beat the street here while net interest margins also improved. A good result from NAB and the stock should rise today.

 

For some Comsec Research on the Banks, CLICK HERE 

 

 

MODEL PORTFOLIO UPDATES 

 

None this morning 

 

AUSTRALIAN STOCK PRICES OVERNIGHT

 

In New York, News Corp rose by US$0.02 to US$17.17, equivalent to A$16.53, A$0.07 below its last close on the ASX.

ResMed fell by US$0.11 to US$27.26, equivalent to A$2.62, the same as its last close on the ASX.

In London, Rio Tinto fell 2.5 pence to £33.00, A$0.04 lower in Australian currency terms.

BHP-Billiton rose 8.0 pence to £19.69, A$0.12 higher in Australian currency terms.

Henderson Group Plc fell 2.9 pence to £1.19, A$0.04 lower in Australian currency terms.

(WEDNESDAY 26TH OCTOBER - JAMES GERRISH - 7.25am)...The DOW JONES lost -207pts overnight while the S&P 500 fell -2%. European mkts were all lower (FTSE down +0.41%, German DAX closed, French CAC off -1.43%) while locally, the SPI FUTURES mkt is pricing a lower open down -37pts when trading kicks off here this morning. 

 

Yesterday, the S&P/ASX 200 lost -27pts or 0.64% to close at 4227 

 

DOW JONES - Some weakness in the States overnight due to a number of factors. 1. Concern that any major plan coming out of Europe tonight might not eventuate given European Finance Ministers cancelled a meeting overnight and there were comments suggesting that there was still 'a lot of work to be done'. 2. A number of companies that reported overnight missed expectations including UPS and Amazon. 3. Economic data was weak overnight with Consumer Confidence printing well below even the most bearish of expectations. 

 

Technically, we want to see the DOW do some work around this 11600/700 region so it sets up a solid base in what could prove to be a new trading range. 

 

 

S&P/ASX 200 - A pretty lackluster day yesterday with the mkt floundering around resistance. Our main focus here is seeing a breakout from that down trending resistance line obvious in the chart. 

  

 

 

CONSUMER CONFIDENCE - a woeful print overnight in the States showing that consumers are still a tentative bunch and this is largely based on continued softness in the housing mkt. This is understandable when a families largest asset has fallen so much and although there are signs of bottoming, there certainly hasn't been any type of upside momentum.  Until we see this trend, consumers are likely to remain subdued in the US. 

 

We have previously discussed the role of Consumer Confidence data as a contrarian  indicator of the stock mkt - kind of a graphical representation of the Buffet philosophy of buying when others are fearful etc. So the fact its still printing low levels isn't really a massive concern and as data from Goldman Sachs has shown, more often than not, its a strong pre-cursor to an equity mkt rally. 

 

Can we make sense of whats happening in Europe & what it will mean from a mkts perspective? 

 

 

We wrote about our view yesterday as being... 

  

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 to answer the question posed above, our base case is that no one really knows what the outcome will be, not even the 17 EU leaders that are going to nut it out tonight so that obviously ads some risk over the next couple of trading days. Coppo (recent entrant into the Stockbroking Hall of Fame) in the Goldmans afternoon report yesterday put some relevant thoughts  around this question which, in the absence of a crystal ball is probably as sensible answer as well get. 

 

- So the reasoning goes that we have rallied +10% thus we should look to sell some stocks here as (1) mkt resistance is at 4300 & (2) the rally is +10% in a short period of time & (3) everyone has been buying into the Euro Conference and if it disappoints then they'll all sell it all the way back down. 

 

- The mkts have rallied hard in the last 2 weeks, no doubt about it, but the US and Aust were down about -20% just a few weeks ago from where they were 4 months ago on worries about GFC2 about to begin. - 

The mkts were worried about Armageddon if the Europeans did not address their issues. But the packages coming - even if they are not the 'silver bullet' all would like - they only have to convince mkts that a financial meltdown of Europe is not imminent = if they at least do that the downside is limited & may provide a spring board for a totally unexpected rally.

 

- Also the rally in the last 2 weeks has come via the course of least resistance, in that it has rallied on very light volumes. Normally you;d say that is bad but in this case most have held back waiting for Euro clarity & if it comes you could see real volume get behind a decent end of year rally. Thus the theory that everyone has been positioning themselves for a positive European situation is false. 

 

Source: Goldman Sachs Afternoon Market Report - Tuesday, October 25, 2011 - Richard Coppleson  

 

 

INFLATION..and interest rates 

 

One of the biggest data prints we've had all year is the Consumer Price Index (CPI) that is due out this morning at 11.30am. This will pretty much determine whether we get a rate cut on Melbourne Cup day or they hold off til December (or beyond). 

 

The mkt is expecting +0.6% for the headline and core figure and if annualized, that's 2.4% - well and truly at the mid point in the RBA target range of 2-3%. If we print at this level, I'd be backing a cut in November but there would be skeptics so the mkt may not have much of a reaction. Anything lower than 0.6% adds weight to a cut while I think if we print 0.7% or higher, we won't see a cut until  December at the earliest. 

 

So from a mkts point of view, we want to see a print 0.6% or lower (but not too low) which brings into play a cut which is going to be supportive of equities.

 

GOLD 

 

Finally some love came back into the gold pits overnight with the metal being bid strongly. We retain the view that the longer term structural reasons for Gold at higher prices haven't changed (debasement of currencies, inflation etc etc) and that the recent weakness has come on profit taking rather than anything else. From a technical standpoint, clearly the strong trend hasn't yet faltered. 

 

 

 

IRON ORE PRICES 

 

 

  

 

The Iron Ore price has come under significant pressure recently and was down sharply again overnight - trading at $138.50 a tonne. The monthly chart below doesn't show the most recent data but it does show where the price has come from. A significant fall and shows why we should be cautious of holding pure play iron ore stocks. 

 

Here is what we wrote about Iron Ore stocks and FMG in particular back on the 3rd October....worth a revisit. 

 

 

Fortesque Metals (FMG) reported strong production figures on Friday and are on track to ship 55 million tonnes of Iron Ore this year. They have plans to increase this to 155 mtpa by 2014 en route to 350 mtpa. 

 

 The Iron Ore price currently sits around $160 a tonne while FMG is getting the Ore out of the ground and shipping it for about $50 a tonne. To put this into context, it mines about 100,000 tonnes a day worth about $20 million. A cash cow you'd call it and if Iron Ore prices stay at these levels, FMG at $4.42 looks massively cheap. 

 

But what if Iron Ore doesn't stay at these levels? FMG is only exposed to the one commodity and has one export destination (at this stage). It has about $4 billion in debt and the expansion plans will dramatically increase this amount.  

 

If China does slow to 5% growth, demand for Iron Ore will fall at a time when production has been ramped up aggressively. FMG is not alone with its expansion plans, RIO TINTO is even keener to grow earnings from Iron Ore while BHP is also in the mix.  

 

I want to make it abundantly clear, that I am a believer in the growth story in China and other emerging nations. I personally think that Iron Ore prices will stay at elevated levels for some time (al- be- it probably lower than where they are today), and that Australian resource stocks will prove to be a good investment over time.  

 

My main point here though is that its essential to understand to possible risks of an investment. I would be reluctant to put a clients retirement next egg in a company with such reliance on a signal commodity and growth story, that is going to dramatically increase its debt position. 

 

If China slows, Europe's debt issues escalate and debt markets seize, FMG is not a company I'd like to own. Food for thought!

  

  

MODEL PORTFOLIO UPDATES 

  

No changes 

 

 

Telstra Corp (TLS)

-------------------------------------------------------------------

 

Telstra Corporation Provides Annual Debt Issuance Program Prospectus  25-Oct-11 09:27

 

Telstra Corporation provided its Annual Debt Issuance Program Prospectus which was lodged with the United Kingdom Listing Authority on 24 October 2011. The Prospectus includes a full year and operations review - June 2011; a Directors' report; and a financial report.

 

  

 

AUSTRALIAN STOCK PRICES OVERNIGHT

 

In New York, News Corp fell by US$0.52 to US$17.15, equivalent to A$16.45, A$0.26 below its last close on the ASX.

ResMed fell by US$4.33 to US$27.37, equivalent to A$2.63, A$0.02 above its last close on the ASX.

In London, Rio Tinto fell 71.0 pence to £33.03, A$1.09 lower in Australian currency terms.

BHP-Billiton fell 35.5 pence to £19.61, A$0.54 lower in Australian currency terms.

Henderson Group Plc was unchanged at £1.22.

(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.