FYI | Jul 18 2007
The Aussie dollar is going to play a prominent role in the upcoming results season. Even if the currency will not rush beyond US0.89c over the next few weeks as some currency specialists are suggesting, at US0.87c the Aussie has already moved much further up than most CEOs and securities analysts had accounted for.
Today’s profit warning by mineral sands miner Iluka (ILU) is probably just the proverbial tip of the iceberg of what the tone will be over the next six weeks. Basing a company’s profit guidance on an Aussie at US0.75c is asking for trouble and at FNArena we have been pointing this out regularly over the past few weeks.
Today Iluka management finally did what they should have done weeks ago already: taking the calculator and redoing the maths. Iluka stated today its result for the full year to December is likely to come out between $55m and $65m because of an Aussie dollar that averaged US0.81c in the first half of the year and now is anticipated to average US0.87c over the next six months.
The revised profit figures include $27m in EBIT (earnings before interest and taxes) from closing out the company’s currency hedging positions.
Earlier guidance was for a full year net profit between $90 and $100m.
What took us by surprise is that Iluka’s share price was down more than 4% at a given time yesterday, although the share price did recover to a small loss only at the closing bell.
What took us even more by surprise is that when we looked up the average forecasts for the year by various securities analysts (via Thomson One Analytics) we found out that most earnings estimates are still either within the previously given $90m-$100m range or only narrowly below it. Two brokerages still have figures penciled in their models that are significantly above management’s previous guidance.
It doesn’t happen that often, but frankly I am speechless.
(silence)
Most investors will have been watching the US dollar closely recently, and very understandably so as the greenback had landed at another key technical support level against the euro (at 1.39) and if this would have been broken the US dollar would have landed in a virtual free fall. At least that’s what technical chartists and other market watchers were telling us.
So far the barrier at 1.39 euro has remained intact and, as per usual, when it concerns currencies there is absolutely no consensus about the next direction of the US dollar, or the Aussie.
It is almost a given that one has to get the direction right for the US dollar before one can predict the direction of other currencies and the Aussie is certainly not an exception.
What is currently weighing against the US dollar are more and more problems from subprime and CDO matters, while the US housing market doesn’t seem to have bottomed out yet.
Another negative is a high oil price. This used to be one of the solid pillars underneath the US dollar’s strength but oil producing countries are picking non-US dollar assets to invest in these days with the consequence that oil at US$70-plus per barrel is now acting against the greenback.
This process seems irreversible with Iran now demanding Japan pays in yen for its oil deliveries and with Russia having ruble plans of its own.
However, it is not the US dollar but the yen that has caught the attention of the global financial community at the moment. Those readers with a good memory will no doubt remember that it was a sudden spike in the yen that caused global risk appetite to retreat last year and as a result equity markets went into correction mode.
Part of the expert community seems genuinely worried that risk appetite will again pull back in the near term and that a stronger yen will act as the proverbial canary in the coalmine.
To add to these concerns, asset strategists at Credit Suisse reported this week their Global Risk Appetite Index is at its highest level since May 2006. Yes, that was the time of the last major share market correction. The index is still beneath “euphoria” levels though, but only just.
Similar to the USD, the yen recently managed to stop the euro from moving past the key support level at 170. However, as things appear to be turning into the Japanese currency’s favour since, the world’s attention is firmly fixed.
Dennis Gartman suggests that if the yen recovers to 168 euro all hell might break loose. Expect headlines about the end of the global carry trade to return.
On a more positive note, several local brokerages have been updating their valuation targets for the Australian share market and it would seem there is a consensus building that the ASX/S&P200 index will be at or near 7000 this time around next year. This would suggest your average investment portfolio will generate a return in excess of 10% over the year ahead.
It’s probably a safe assumption that the road from 6329 now to 7000 next year won’t be one straight line upwards. Also note that a stronger Aussie will also affect most local resources companies.
Till next week!
Your alert as always editor,
Rudi Filapek-Vandyck
(as always supported by the Fab Three: Terry, Chris and Greg)