Rudi’s View: No Shortage Of Positive Views

This story features BHP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BHP

By Rudi Filapek-Vandyck, Editor FNArena

Not a day goes by without securities analysts further increasing future profit estimates for ASX-listed companies or without their colleagues at the economy-desk lifting forecasts for Australian growth this year or next.

The main reasons remain ongoing optimism on the back of last month's reporting season, more positive economic data worldwide and -above all- increasing expectations for prices of bulk commodities this year.

No wonder thus, growth expectations for the likes of BHP Billiton ((BHP)) continue to move higher. In USD terms, BHP is now expected to improve its published earnings per share (admittedly, last year's number was extra impacted by write-downs) by some 110% this fiscal year and again by more than 45% in FY11.

That's on present consensus estimates, but don't be surprised if these numbers grow even larger over the weeks ahead.

On present estimates, and taking guidance from today's AUD/USD value, the shares are reflecting a Price-Earnings multiple of 12.2 for FY11 only. For Rio Tinto ((RIO)), whose financial year ends six months later than BHP's, the corresponding multiple is 10.9.

Rio Tinto benefits more from iron ore price upgrades, while for BHP oil price forecasts have become a more important factor over the past few years.

The Australian share market has lagged US equities, with the major indices still more than 100 points off the January highs, while some indices in the US are now at new highs for the year. While not everyone agrees on this subject, most market experts interpret the latest developments in the US as a clear positive.

There is, firstly, the widely held view that technology stocks, as represented by the Nasdaq index, have been leading the broader market in the US over the past few years. As the Nasdaq continues to outperform the DJIA and S&P500 this time around, this is seen as a positive indicator for the weeks (if not months) ahead.

Technical trader Corey Rosenbloom, from GFT, pointed out last week that most share market indices around the world have now recovered to the 50% retracement level of the Big Bear Market Sell Off that started in late 2007.

However, notes Rosenbloom, the Nasdaq and the Russell2000 indices have both recovered to the 61.8% retracement level of the Bear Market Sell-off. If we assume both indices are leading the pack, than the future should look bright for the others.

Just for indicative purposes: were the S&P500 index to climb further to the next Fibonacci retracement level (61.8%) this would take the index to 1228 (from around 1150 now) or 6.7% higher.

Note: this is exactly the same indicative figure as mentioned in relationship to the US ISM manufacturing index potentially having peaked at 58.4 in January – see story “Rudi's View: Why A Global Peak Could Be Near”, March 10, 2010).

For the Dow Jones Industrial Average (DJIA) the corresponding level would be at 11,246, or 5.8% above Friday's closing level of 10.624.

Rosenbloom is far from the only one with a positive view towards the short term outlook for equity markets. If my observations are correct (and I believe they are), the world has again turned more positive these past two weeks.

Regular readers of my market commentaries and analyses know that I continue to keep a close eye on the currency markets as I remain of the belief the USD remains the clue to the future direction of risk assets.

Note for instance how on Friday FX traders were again unkind to the greenback and US equities subsequently managed to keep losses contained on the day. On Monday morning it appears the USD is clawing back some territory in Asian trade and Australian equities have in early afternoon trade reversed their direction from early gains into minor losses.

The good news is, however, that technical analysts en masse continue to expect the US dollar to come under pressure in the weeks ahead. This should thus bode well for equities and commodities.

Technical market analysts at Barclays Capital have now also joined the queue of experts predicting more USD weakness in the short term. The analysts continue to believe that the underlying trend for the USD is now upwards, but for now, they believe a counter-trend correction should be expected.

Extra note: what really makes the Barclays' technicians market analysis odd is that technical charts for precious metals do not look bullish at all. This raises the question: will gold and silver continue to miss out on the upside for the likes of crude oil and copper?

Or, alternatively, are we experiencing the last push for commodities, including crude oil and copper, that are starting to exhibit signs of being overbought, but possibly still on their way up?

The latter scenario would fit in the framework as painted by analysts at Danske Bank this week. Danske Bank notes global economic growth is slowing down, which would be a negative for equity markets later in the year. But in the short term positive momentum appears to prevail.

Almost hidden in between paragraphs of generally positive commentaries, Dankse Bank has inserted the following sentence: “Note, however, that another correction in equities could be in sight before long.”

Such a view would be in line with analyses sent in by regular content contributor Charlie Chartchecker whose indicators seem to suggest equity markets are likely to reverse course from late March onwards.

Investors should note there is no consensus whatsoever about what may lie ahead, and what are the possible consequences and responses.

Note, for example, the observation from Westpac Senior International Economist, Huw McKay, in a report published on Friday:

“On a recent trip to the US I was able to visit the Chief Economists of the big four on Wall Street today – Goldman; Morgan Stanley; JP Morgan and BoA Merrill. I have never before seen such a disparity in their views on the likely profile for growth and the Fed's likely response.”

That picture of dis-unity was again reinforced by an analysis released by market strategists at Morgan Stanley who state that, on the basis of historical analysis of US bond market developments, stocks in materials, energy, and industrials sectors should soon start outperforming the broader market.

This prediction is based upon the fact that the US yield curve should start flattening, led by the short end of the market, from September onwards. As markets are also expected to become more cautious as both inflation and interest rates will be moving away from their cycle-lows, selective defensives should come back in vogue as well, predicts Morgan Stanley.

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