The Overnight Report: Reverse Image

This story features ENERGY RESOURCES OF AUSTRALIA LIMITED. For more info SHARE ANALYSIS: ERA

By Greg Peel

The Dow closed up 83 points or 0.9% while the S&P gained 1.1% to 986 and the Nasdaq added 0.8%.

It was as if we had stepped into an opposite universe to the one we have been existing in for the week. The theme of the week up until last night has been one of slightly less impressive earnings numbers, disappointing economic data and poor demand at bond auctions. These factors conspired to send the stock markets down in morning trade each day, only to see willing buyers take the dip opportunity and push the markets back towards square again in the afternoon. The result has largely been slightly weaker, but impressively resilient.

The implication from such activity is that for every seller (or shorter) who believes the market is toppy after such an extraordinary run of up-days, there are buyers who have probably been late to the party and have jumped on board with the backing of more bullish longer term forecasts from analysts and economists. The week’s increase in the VIX volatility index implies there is put protection being sought.

No clearer is the effect of a change of heart from stock analysts than that evident after Citi suddenly shifted from cautious to positive on the Australian banking sector yesterday. Citi upgraded all of the Big Four from Hold to Buy, and raised price targets substantially. Thus we had a strong rally in the ASX 200 yesterday despite the drag of lower commodity prices.

Last night in New York the day began on a positive note for a change. Before the bell the weekly jobless claims were released, and although the volatile weekly figure showed an increase in new claims, the more indicative four-week average of new claims again fell to reach its lowest level since January, and continuing claims also dropped lower once more. The peak of jobless claims (if this is indeed what we’re seeing) is a proven indicator of the end of a recession.

It was also a good morning for earnings. Analysts had expected phone-maker Motorola to post a loss for the quarter, but heavy cost-cutting meant a small profit resulted. Motorola shares rose 9%.  Tyre-maker Goodyear’s reported loss was about half of what Wall Street had forecast – its shares rose 14%. And Dow Chemical – an important input to breast enhancement – went the other way and suggested the US economy has “found a bottom”. Dow shares were up a perky 6%.

It was not all good news however. Analysts had expected oil giant Exxon to post an EPS of US$1.02, but it fell well short at US81c. Exxon’s 66% drop in profit was due not only to oil and gas prices, but to lower production. Exxon shares were only down 1% – probably a reflection of the oil price which we’ll get to in a minute.

After the bell Walt Disney posted a result which slightly beat on the earnings line but missed on the revenue line. Its shares are down 3.5% in after-market trade.

The US bond market has received close attention this week, given a record amount of issues. Wall Street had shown concern on Tuesday and Wednesday when record issues of two-years and five-years showed indifferent demand. Foreign central bank buying fell to around 35% from around 65% last month, implying a withering of desire to keep funding the US at current yields. Traders were holding their breath last night when the longer dated seven-year auction was held, given support at the long end is vital to prevent a sudden inflationary spike. They were thus relieved when demand was strong, and participation from foreign central banks was back up to the 60% mark.

All this conspired to send the US dollar lower once more last night, as Wall Street again decided risk is good. The combination of a lower dollar and positive corporate and economic factors had oil reversing what it lost on Wednesday night, rising 6% or US$3.59 to US$66.94/bbl. London metals, however, had a more timid decline on Wednesday night, and then last night saw a return to bullishness combined with obvious short-covering.  Aluminium, copper, lead, tin and zinc all jumped 3-4% while nickel surged 6%.

Gold rose US$4.20 to US$933.40/oz while the Aussie conquered 82 again, rising 0.7c to US$0.8236.

With all this good news on board, the Dow surged to be up 176 points at 11am. The S&P 500 made an assault on 1000, but stopped at 996. The Nasdaq hit 2000 for the first time since October 1. The Dow then spent the rest of the session trying to hang on to about a 150 point gain, before late selling came in to drive the average back to only an 83 point result. The S&P fell back to 986 and the Nasdaq retreated to 1984.

All week the feature of this market has been a weak morning session followed by late buying. Last night saw a strong morning session followed by late selling. What should we thus conclude?

Apart from obvious profit-taking on a strong day toward the end of what might be the best July since 1937 (depending on what happens tonight) – a day in which short-coverers probably gave the longs a good end-of-month opportunity – tonight sees the release of the first estimate of US second quarter GDP. President Obama last night warned his people to brace themselves for another negative number and economists are calling negative 1.5% (up from negative 5.5% in the first quarter). A result on or above the money will likely see the S&P 500’s assault on 1000 completed. Below the money might just be a profit-taking trigger, although Wall Street has shown a great reluctance to pullback with any feeling.

The momentum is clearly to the upside. A breach of 1000 could spark another leg-up towards 1050, which has become a popular target among analysts. However, 1050 has also become a popular year-end target among analysts, and that’s a few months off.

The SPI Overnight was up 33 points or 0.8%. With the ASX 200 finishing at 4190 yesterday, we are again (from Tuesday) up more than 1000 points from the March bottom.

The earnings watch highlight today is Energy Resources of Australia ((ERA)).

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