The Overnight Report: A New Millennium

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By Greg Peel

The Dow closed up 29 points or 0.2% while the S&P gained 0.1% to close right on 2000 and the Nasdaq added 0.3%.

There was a whole lotta nothing going on on Bridge Street yesterday despite us being smack bang in the middle of the busiest period of the local reporting season. It was not a balancing act yesterday as it was on Monday – the materials sector did not fall materially on the lower iron ore price and no other sector scored much of a gain. There is nevertheless clear evidence of that hoary old chestnut, the big miner-big bank switcheroo.

If we consider that August’s dip-and-recovery in the ASX200 has been totally driven by global macro, and particularly geopolitical, influences, we can conclude that the earnings season has had no impact on the index as a whole, only on individual stocks. Indeed, we started August about where we are now. Some are claiming it as a “great” season and that’s fine if you only look at headline profits results versus consensus expectations.

If you drill down into underlying earnings comparisons, we see a fairly balanced end result. Of the 174 stocks covered by FNArena database brokers that have reported up to Monday, 30% have beaten expectations, 27% have missed and 43% have met. If we look at consensus target prices as a guide, the simple average of the consensus targets of all those 174 stocks has risen 2% from before the season began. That’s good, no doubt about it, but nothing spectacular when many stocks are flirting with lofty PEs. Indeed, we’ve seen quite a few of the high-PE industrials take a hammering by simply not smashing forecasts.

So it’s probably no surprise the S&P200 is going nowhere at the moment, having returned to its highs after this month’s global correction-that-wasn’t.

(Note: the above assessment is drawn from FNArena’s daily Reporting Season Monitor.)

The PE argument is also an endless one at present on Wall Street. The quarterly reporting season there is pretty much over now for a net result of around 10% earnings growth on 5% revenue growth. Sounds great, but adjust for share buybacks and that 10% number is more like 6%. Mind you, it is the best revenue performance for a long time. But is the S&P500 overvalued? Well, opinions diverge. You can look at trailing PEs and 2014 forward PEs and 2015 forward PEs and come up with different arguments. Or you can just say the stock market is yielding around 4% on net dividends when the ten-year bond yield is at 2.4%.

Or you can say that, right now, the only thing holding up Wall Street is Europe. The pattern was there again last night – the Dow was up 77 points around 11.30am NY and the S&P at 2005 when Europe closed. Then came the drift-back.  In Europe itself, the German DAX was up another 0.8% and the French CAC 1.2%.

The DAX is now up 6.5% from its recent low around 9000, a breach of which threatened a technical crevasse. The initial bounce came when Putin appeared to back down, and the kick-on came from Mario Draghi’s implication on Friday that perhaps it’s time the eurozone stop playing the fiscal austerity game.

Putin met Poroshenko last night on neutral territory in Minsk, with the Belarussian president playing umpire and an EU rep looking on. Strangely enough the two antagonists found they had differing views, so they decided to hold further meetings. There is no truth to the rumour it was Sir Humphrey Appleby representing the EU. The fact the two did not end up on the floor in a scuffle, having to be dragged apart, perhaps helped the European stock markets rally further.

There was also a welter of US economic data to consider last night, but they provided no clear picture either.

The Conference Board’s monthly index of consumer confidence came in at 92.4, up from 90.3 in July, and confounding expectations of 88.5. It’s the highest reading since October 2007 – the month Wall Street peaked ahead of the GFC. It would be terrific news, if only the Michigan Uni fortnightly consumer confidence measure was not going the other way. There’s another one of those due on Friday night.

July new durable goods orders rose a whopping 22.6%, smashing the previous monthly increase record of 16.6% set in 2000. Problem is, July was the month Boeing started taking orders for its new 777X. Take out those, and a solid rise in auto orders, and non-transport durable goods orders fell 0.8%. This alone was considered a disappointing result.

Case-Shiller’s twenty city house price index continues to slow. Prices fell an adjusted 0.2% in June to mark 8.1% year on year growth, down from 9.4% in May. For the first time since the GFC, every one of those twenty cities saw an easing in price. The FHFA index of prices of houses on Fannie/Freddie mortgages paints an even more sluggish picture, suggesting only a 5.2% rise in the June quarter from last June quarter.

On the other hand, this month’s Richmond Fed manufacturing index came in at 12, up from 7 last month and ahead of expectations of 8.

Forex traders signalled out the strong US consumer confidence report in pushing the US dollar index up another 0.1% to 82.67. The greenback continues to rise but alas, the Aussie is currently stuck in a web of cross rates. It is also up 0.1%, to US$0.9306, and has been jogging on the spot for many days now.

Not jogging on the spot is the iron ore price. It’s down another US30c to US$88.90/t. Unlike the big plunges of earlier this year and late 2012, iron ore has not fallen into a vacuum this time, rapidly tanking and suggesting a rebound is inevitable at a similar pace. This time iron ore has more slowly slipped into the abyss of 80-land.

The LME was back in action last night, sending aluminium and nickel up 1% but copper down 0.5%.

Brent fell US21c to US$102.50/bbl while West Texas rose US45c to US$93.85/bbl.

Gold is up US$5.70 to US$1281.70/oz. The US ten-year bond yield is steady.

The SPI Overnight rose 9 points.

Today in Australia we’ll see data for June quarter construction work done, as part of the lead-up to next week’s GDP. Then there are another million or so earnings reports due.

The most heavily shorted stock on the market will report today, and Atlas Iron ((AGO)) has not been enjoying this FY15 iron ore price fall. Another one of those PE high-flyers, in the form of Flight Centre ((FLT)) will report, along with heavyweights Lend Lease ((LLC)) and the new-look Westfield Corp ((WFD)).

Note also that the ex-div trickle is starting to increase, ahead of turning into a flood next month. The ASX200 will open on a handicap today as Telstra ((TLS)) and Woodside Petroleum ((WPL)) go ex, among others.

Rudi will appear on Sky Business at 5.30pm.
 

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