Weekly Broker Wrap: Always Darkest Before Dawn?

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            [1] => ((APN))
            [2] => ((BHP))
            [3] => ((ILU))
            [4] => ((IRE))
            [5] => ((NAB))
            [6] => ((WES))
            [7] => ((WPL))
            [8] => ((AWC))
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    [1] => Array
        (
            [0] => TEN
            [1] => APN
            [2] => BHP
            [3] => ILU
            [4] => IRE
            [5] => NAB
            [6] => WES
            [7] => WPL
            [8] => AWC
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)

This story features BHP GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: BHP
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Rudi Filapek-Vandyck, Editor FNArena

It's always darkest before the dawn. Now, THAT's one helluva big cliche, but no doubt it has been going through many share market insider's mind this past week. Europe was teetering on the brink and politicians on the old continent started talking "Global Depression" and "Deflation"; not exactly the type of words investors want to hear when share markets are down and cheap and trading volumes thin, even for the post-2007 era. Then suddenly, without prior indication, the Federal Reserve and five other major central banks injected new liquidity for anyone looking to borrow US dollars and risk assets had one of their best weeks in a long time.

Chinese authorities chimed in with a loosening of the reserve ratio requirements for struggling Chinese banks, more than offsetting weaker than expected manufacturing data for November. We all know the cliche: it's darkest before dawn, but when exactly have we really seen the darkest moment in this elongated GFC Chapter Deux?

There seems to be a remarkable consistency in market updates by asset strategists at leading investment banks on Wall Street and elsewhere; expect another six months of "muddling through" (another one of those annoyingly popular, ever-recurring expressions) but things should start picking up from mid-year onwards. Analysts at Danske Bank this week went as far as to align this outlook with a "normal" (well, more or less) up-leg in the global business cycle, stimulated by this week's events. Plus what is yet to follow, of course. The week ahead should see, among other things, the European Central Bank cut interest rates, by at least 25 basis points, and probably some additional support for struggling European nations and their solvency-stricken banks.

The Reserve Bank In Australia might do its bit too, though not everyone is agreeing on the likelihood for another 25bp cut on Tuesday. The general "feel" is that if December turns out not the month for another rate cut, than surely February will be. The RBA doesn't convene in January.

Whether another six months of cloudy skies with little rays of sunshine is good or bad news is all up to what investors are looking for. It does not, by any means, imply equities and commodities cannot put on a good old fashioned relief rally in the meantime. As a matter of fact, US-based trading guru Dennis Gartman suggested as much in Friday's edition of his daily The Gartman Letter. It was yet another variation on the "shorts might have to look for cover while others might not want to miss so close to year end" thematic. Gartman is far from the only one on this matter. One term that keeps on floating around is "melt-up"; if it occurs it means exactly the opposite of the more commonly known "melt-down".

The funniest analogy, I thought, came from the head of a trading desk being interviewed on CNBC, acknowledging he had been advising everyone on the floor to duck and seek shelter beneath their desks. THAT's how bad things were looking earlier in the week. But then we discovered, continued the same expert voice, that everyone else had already done the same thing. In other words: safety and protection are genuinely expensive at the moment, and risk is cheap. Whether this means cyclical equities and commodities are in for a big catch-up rally this side of Xmas cannot be predicted with a 100% accuracy, but such anecdotes do indicate the odds for such a rally are shortening by the week.

A survey by BA-Merrill Lynch found that hedge funds have now all but abandoned equities, apparently reducing net long positions by one third to the lowest level since 2008. Cash levels in the industry are now approaching 7% (on average). Darkest before dawn? One would surely hope so!

Analysts at both RBS and Citi put the focus on the Australian media sector this week. I take it that it came as no surprise the general theme in both sector reports was… darkest before dawn. Things are really looking dire right now for publishers in Australia, acknowledged both teams of analysts. Both see sufficient forward looking indications of improvement to advise their clientele that buying cheaply priced media stocks could prove a profitable decision for the year ahead. Citi's preferred ranking order is SEEK ((SEK)) on top, followed by Southern Cross Media ((SXL)), Seven West Media ((SWM)), Fairfax Media ((FXJ)), Ten Network ((TEN)) and finally APN News & Media ((APN)). RBS's favourites are Seek and Fairfax while clients are advised to sell Ten Network.

Strategists at UBS refreshed their strategy ideas this week and the result was yet another confirmation that risk is cheap and therefore more attractive. UBS advises a tilt in equity portfolios towards resources, financials and cyclical industrials. Out of these three, UBS advocates the best risk-return opportunities may be amongst domestic cyclicals -despite structural headwinds and investor apathy- because of the extreme low valuations and the capacity for more RBA easing into bad global news.

Market strategists at Goldman Sachs left their Conviction List unchanged, which means that BHP Billiton ((BHP)), Iluka ((ILU)), Iress ((IRE)), National Australia Bank ((NAB)), Wesfarmers ((WES)) and Woodside ((WPL)) all retained their spot on the Buy side, and Alumina Ltd ((AWC)) remains o sole mio on the Sell side.

Many an expert seems to agree the immediate outlook for most commodities seems subdued, if not sluggish, though this doesn't take into account more liquidity improvements from central banks or yet another stimulus program in China or QE3 by the Fed, let alone Quantitative Easing in Europe (assuming the Germans go overboard at some stage). What has happened is that forecasts for Chinese GDP growth have been pared back as low as 7% for the quarters ahead. I guess this answers the question whether the Chinese needed any convincing from the Federal Reserve to join in with the global coordinated liquidity push this week.

Probably not (and that's assuming they'd been asked).

Among the first 2012 outlook reports being published, BA-ML came up with the most predictable title (thus far), but well-chosen in that it summarises what 2012 will be all about: We're All Europeans now.

Report the strategists: "Historically, Europe has had a small impact on other regions, but the banking and confidence linkages from Europe have grown over time. In a worst case scenario, if the European crisis spins out of control, a global recession is likely."

BA-ML also offers the two key players in this tragedy that have the power to prevent worst case scenarios: ECB and Italy. Now we know what to look out for.

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