Federal Election, China and Three Option Ideas

by Raymond Chan

Federal Election – Saturday 14 September 2013

As pointed out by Alan Kohler over the weekend, “Last year I thought a Labor win was a vague possibility; now I think it is very much the Coalition’s election to lose. That is, the only way there won’t be a change of government in September is because Tony Abbott and/or his team stuff up the campaign in some way, perhaps by making some big basic mistake with arithmetic. But I’d say we are going to have not only one of the longest campaigns in history, but also one of the most certain results in history.”

Overall, if Coalition reclaims the control of government, the key implication will be (1) Removal of Hung Parliament, (2) Removal of MRRT and Carbon Tax, (3) Holding back on the Superannuation Reform (proposed by Labor limiting the tax deductibility via Super for high income earners).  Remember the last bear market began when Labor government took control of Federal Government in December 2007. Stock market, in anticipation of a change of government, enjoyed a broad based rally this week.

ChinaPMI figures

PMI (Purchasing Managers’ Indexes) are accurate and timely economic indicators deviated from monthly surveys of private sector companies  (wikipedia.org). In US, the most popular measures are Markit Group and ISM (Institute of Supply Management). In China, the widely used figures are from HSBC (i.e. HSBC China PMI) and Government Authority (i.e. China Official PMI).

Our strategist suggests that the official Chinese PMI survey rests a fraction above 50, compared with the average 52.8 over its post-2005 history. We follow the orders/inventory ratio as a better lead indicator for IP, and note that it troughed in May/June, and picked up from July. However, the level of both the overall index and the crucial orders/inventory index suggest no strong recovery in 1H13. From which, we think it’s still appropriate to maintain neutral weighting (rather than overweighting) on resource stocks. Besides, the bottoming of Chinese economy should mean further upside in China A shares (e.g. AGF)

From our Option Desk, here are our three ideas for the week:

Reporting season is underway, these events usually provide good trading opportunities, please call for dates or forecasts.

Position One: Sell BHP February $36/$38 strangle at 40 cents
Current Share Price: $37.37
Research Target Price: $37.71
BHP will report their half-year result on 20 February, consensus estimates are for a profit of around $5.6bn and DPS of 57 cents. The break-even levels for this trade are $35.60 and $38.40.

Position Two: Covered call- Sell NAB March $27.50 calls at 103 cents
Current Share Price: $28.09
Research Target Price: $29.84
NAB will provide a 1st quarter trading this morning. The current share price (improvement from $25/share or 11% in January) has probably captured any recent improvement in trading conditions for the bank.

Position Three: Sell MQG February $37.01 calls at 60 cents
Current Share Price: $36.74
Research Target Price: $29.52
On Monday Macquarie bank upgraded their 2013 profit forecast by 10% to $803m, the market was under-whelmed and the stock closed down 4% on the day.
The analyst believes the next leg of share price appreciation will need to come from revenue growth and this will likely require a greater increase in capital market activity levels


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