FYI | Aug 15 2011
(This story was originally published on Friday, 12th August, 2011. It has now been repeated to make it available to non-paying members at FNArena and to readers elsewhere).
By Rudi Filapek-Vandyck, Editor FNArena
A bit of unusual formula this time. As financial market experienced some truly historic volatility in the week past, below are some of the most poignant and interesting comments and insights I gathered from the global research that went past my desk and inbox this week. A wise man once said, when in doubt ask the experts (instead of making stuff up yourself). There is at present no agreement in the world's expert community about anything, other than that there is uncertainty and disagreement, but I am sure the following graphs and snippets can serve a valuable purpose.
Enjoy.
"We apply the same valuation methodology to the ASX 200 as we did for the S&P 500. We find that the market is trading on a PE of 15x through-the-cycle earnings, more or less in line with long-run average. Relative to bonds, the Australian market is roughly 35% cheap. At worst, the market is fairly valued – at best, it is cheaper than it has ever been over the past few decades. (Credit Suisse)
"The decline in the S&P500 to 1200 represents a 12% correction since the April 2011 peak surpassing the average equity market correction heading into recession. However, in order to fully discount recession it would require the S&P500 falling to 975. According to analysis from our Credit Research team, the correlation between the ISM and year-on-year changes in the S&P500 points to a fair value levels of the S&P500 around 5% below current levels. The more encouraging news is that if the ISM remains at current levels for the rest of the year, then the fair value of the S&P500 is marginally higher than current levels due to favourable base effects from last year." (Deutsche Bank)
"We do not believe the US economy is going to slide into recession as the forces that normally form the basis for a break—rising interest rates and tightening credit conditions in the face of elevated levels of credit-sensitive demand— are noticeably absent. However, a slower-growth economy is at greater risk in the face of additional shocks. Moreover, we are concerned about lasting damage if the economy is unable to generate above-trend growth and strong job creation for an extended period of time. Persistent underutilized resources will weigh on potential growth, limit budget improvement, and risk a reemergence of disinflationary dynamics." (JP Morgan)
"The risks to the global economy are rising rapidly and the options for addressing them are narrower than at any time since the start of the crisis in 2008. Regardless of how different the drivers are in Australia, we think local stocks will continue to trade cheaply under these conditions." (JP Morgan)
"We expect leading indicators to decline further in the coming months with, for example, ISM manufacturing reaching 45. The financial shock will lead to more inventory rundowns with less investment and consumption spending. However, we expect some signs of improvement in Q4, with China bottoming out first – trailed by both the US and the euro area. We expect the debt crisis to be a major downside risk over the coming months. However, falling commodity prices are expected to contribute positively to growth, particularly in China. The post-earthquake rebound in Japan, lower bond yields and very low inventories will also underpin production in Q4, leading to a turn in leading indicators." (Danske Bank)
"The [Chinese] trade data are sending an important signal. Raw materials demand has been subdued for some months. Volumes of iron ore and crude oil imports are below their respective decade trend lines at present and have been close to flat since March, indicating lacklustre heavy industrial activity. This is absolutely consistent with the softening of the IVA, electricity and PMI series." (Westpac)
"Over the past week our US Economics team has been forced to revise their forecasts for 2011Q4 GDP growth from 4.3% to 3%. On our estimates this will reduce US oil demand growth in the second half of this year by as much as 200k/d. Given expectations that US oil demand would grow by only 100kb/d in 2011 the latest downward revisions in US GDP growth imply US oil demand will actually contract by 100kb/d this year." (Deutsche Bank)
"While we find little evidence though that AUD’s day-to-day relationship with risk sentiment has changed – it remains a highly risk-sensitive currency – there does appear to be a “structural” aspect to AUD’s strength. We find broader AUD moves are increasingly related to moves in key metals such as copper. In our view these are the key prices to watch in judging AUD’s vulnerability to weakening global growth prospects. While a retest of the year’s lows in AUD/USD below 0.98 seems increasingly likely, falls beyond this point will then be dependent on how metals prices move from here (noting also the signal they give on the RBA outlook)." (Deutsche Bank)
"To add some perspective, in the 7 months of reported data, Australia has only added 41K jobs. This is the lowest amount of jobs added in the first 7 months of a year since 2003." (BA-ML)
"The leading indicators of employment, such as the employment component of the NAB business survey (which fell from +5 to -2 in July –falling in negative territory for the first time since mid-2009), now signal that employment may actually contract in coming months." (JP Morgan)
"The weakness in US oil demand provides a cautionary tale to US growth optimists. The last time US oil demand was falling was in 2007 and early 2008. In our view, this was a leading indicator of the economic troubles that would hit the US in the middle of 2008. Consequently, we find this precedent worrying since total oil demand has been trending lower since last summer. In fact, the yearover-year growth rate turned negative in April 2011 and shows little indication of turning positive." (Deutsche Bank)
"Recall that the RBA did undertake a precautionary rate cut in 1998 when the Asian crisis intensified, Russia defaulted on its debt and LTCM collapsed. And that was despite strong growth in the Australian economy at the time (and the RBA's forecasts for growth were also strong). Similarly in 2008, the RBA was one of the first central banks to cut rates. Thus, history demonstrates that the RBA can change direction quickly. Moreover, they tend to act, before their rhetoric changes." (Macquarie)
"Sensitivity to rising funding costs is much less than it was around the time of the crisis. According to our banking analysts, [Australian] banks have $94 billion of re-financing requirements over the next 12 months. This compares with $140 billion of funding requirements in 2009, of which $70 billion came from domestic sources, and $70 billion came from offshore sources. If $70 billion of re-financing were to come from domestic sources over the next year, only $24 billion would be required from foreigners. This would only be one-third of the global financial crisis requirement!" (CS)
"We find that the ISM index is a six month leading indicator of Asian export, which in turn has had a loose positive correlation with dry freight rates. Although trends in US business confidence may keep Asian export growth well supported for the next few months, heading into the fourth quarter risks to Asian export growth are becoming increasingly skewed to the downside." (Deutsche Bank)
"Of the global cyclicals, miners could be supported by a 2008-style policy response from China if global growth weakens. But China is not a magic pudding: its stimulus policies have costs. The 2009-10 vintage has left the economy with inflation pressure, a banking system problem and the makings of a public debt problem. A new round of credit-financed public works and property development may push the economy into dangerous territory." (JP Morgan)
"Compared to bonds, equity markets look cheap on forward earnings estimates. For investors with a long-term outlook, equities can be purchased. But earnings risk, coupled with the escalating European sovereign debt crisis and seasonal risk that is yet to peak, suggests our defensive approach continues for those with a short-to-medium term outlook. This means a preference for bonds over equities, developed over emerging markets, large caps over small caps and defensive sectors over cyclical sectors." (Macquarie)
I close today's collection of expert quotes with Societe Generale's Albert Edwards, who correctly predicted in early 2008 global equities were in for a deflation of historic proportions and who has remained bearish ever since.
"The bulls still point to booming US profits to sustain the market. The problem is that US whole economy profits growth is slowing extremely rapidly (see chart below) and this tends to lead stock market measures. Profits growth is the biggest determinant of corporate expenditure growth which helps explain the weakness in business spending this year."
"Similarly those hoping for emerging market growth to sustain the global economy should think again. Actually emerging markets are slowing even more rapidly than developed markets (see chart below)."
(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)
P.S. I – All paying members at FNArena are being reminded they can set an email alert for my Rudi's View stories. Go to Portfolio and Alerts in the Cockpit and tick the box in front of 'Rudi's View'. You will receive an email alert every time a new Rudi's View story has been published on the website.
P.S. II – If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.
P.S. III – I will present at an ATAA meeting near Newcastle on Saturday. The ATAA presentation will take place at the Kahibah Bowling Club, 63 Kenibea Avenue, Kahibah (near Charlestown) between 11.30-3pm (luncheon break in between) on Saturday, August 13. Note the meeting starts at 10am.
