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The new year rally came to a grinding halt this week amid growing fears the US Federal Reserve will slow or cancel its QE3 programme after minutes revealed a divide amongst senior officials about the risks of persisting with the stimulus measures. The news spooked global markets, triggering a sharp fall in all major Indices as investors sold out of equities on the back of heightened concerns over US growth in an economic environment not supported by central bank stimulus. Poor economic exacerbated investor concerns as jobless claims increased and US manufacturing activity deteriorated. Ironically, the weak data is more likely to be viewed positively by equity markets as unfavourable economic indicators support the validity of QE3 and likelihood that the Fed will persist with the stimulus programme.
Despite Thursday's fall, our market did make up ground to close the week slightly lower. The best resilience was seen in the banking (NAB up 14 straight weeks) and insurance stocks such as IAG and Suncorp. The resources sector continues to drag on the market with the sector again under pressure as commodity markets followed negative leads in equities, causing many mining equities (ex BHP and RIO) to forfeit much of the gains to date in 2013. Base metals fell across the board while the bullion dropped below UD$1,600 to hit the lowest level since July last year. Oil prices eased slightly whilst iron ore prices remained over US$150/t to be largely unaffected by recent sell off in commodities.
However, it was not all bad news for the sector with BHP Billton stating said it expects a recovering global economy to support commodity demand and prices in the short-term. The nation's largest publically listed company reported a 57.8% fall in net profit over the half ending December 31, with the company joining other local and overseas majors such as Rio Tinto, Newmont, Paladin, Kinross, Anglo America and Barrick to be affected by large write-downs.
We also saw half yearly reports from some of our major energy stocks with Origin Energy missing market expectations whilst Santos and Woodside provided mixed results which showed enough promise to support current prices.
Amongst a deluge of earnings results reported this week, industrials companies reporting resilient growth in this environment are being rewarded while those that disappoint are quickly punished. Seek rallied on the back of the strong result, following peers such as the REA Group and Carsales.com. The same couldn't be said for the Breville Group as the share price plummeted as results failed to meet investors' lofty expectations and concerns arose around a key Canadian distribution contract.
From Our Trading Desk this week...
Position One: Buy-write NCM - Buy stock at $22.13 and Sell NCM March $23.5 Calls at 30 cents
Current Share Price: $22.13
Research Target Price: $27.90
The Newcrest share price has been having a tough time post an ordinary (in-line) interim result and a weaker gold price.
The recent volatility in the Dow Jones should mean that gold stocks find some support.
Position Two: Sell QBE June $13.75 Puts at 155 cents
Current Share Price: $12.75
Research Target Price: $11.96
QBE shares closed down 2% yesterday after missing earnings again, the dividend was cut to $0.10.
This trade hopes the turnaround in the stock is getting closer, break-even entry point into the stock is $12.20/share
Position Three: Sell WOW April $34.16 Calls at 72 cents
Current Share Price: $33.94
Research Target Price: $30.20
Woolworths now trades on a yield of 3.9% and a PE of 18 times FY13. We like the stock but feel it is expensive at current prices.