Tag Archives: Banks

article 3 months old

The Overnight Report: And Back To The Business Of Bickering

By Greg Peel

The Dow closed up 146 points or 1.3% while the S&P gained 1.1% to 1175 and the Nasdaq added 1.2%.

The problem with the highly addictive series In Europe Tonight is that after a while the story lines seem to be a bit familiar, as if the writers were becoming stuck for fresh ideas. After the master stroke of introducing the possibility of a Eurotarp definitive solution to the script, suddenly we're back to the same old scenes.

But then we didn't really expect news of a proposed “solution” would be the end of of it, did we? The bottom line is that prior to last weekend's G20 meeting which appears to have given birth to the Eurotarp concept or something like it, European officials had negotiated a 21% haircut for holders of Greek sovereign debt, being mostly European banks and the bulk of the holdings being mostly French. The fact that the markets have already priced Greek debt down to 50 cents in the dollar would nevertheless suggest that a realistic solution could only be to meet the market and make the haircuts 50%. Otherwise it's just another band-aid on the other band-aids.

And that's the way Germany sees it, with Holland chiming in for good measure. Meanwhile France disagrees, and the ECB does not want to start again on negotiations with bondholders that were so painstaking in the first place. Oh God here we go again. Surely the point of a definitive Eurotarp, whatever form it takes, is to bring fantasy in line with reality and protect the banks first before doing the deed which simply has to be done. That's what the money is intended for. Otherwise the markets will affect their own solution and believe me, it won't be pretty.

News of fresh disagreement in Europe hit the wires late in the New York session last night at a point at which ongoing euphoria had sent the Dow up 320 points despite having risen 272 points the night before. It was credited with taking the wind out of Wall Street's sails, but then again only a fool would have expected the new Eurotarp plan to pass without further inevitable fannying about. There are many reasons why the rally lost its way.

Firstly we can simply suggest it was overdone to that point, exacerbated by short-covering and end of quarter rebalancing back into equities having spent the quarter hiding out in Treasuries. We note that the US ten-year yield was up another 11 basis points to 2.01% having hit 1.67% as its low only days ago. Secondly we can suggest that short-term traders decided a couple of 2% up-days on quickfire longs meant time to take profits. But perhaps we should more realistically note that there are plenty of traders who believe any rally at this point is worth selling into, because it ain't over yet and will probably get worse before it finally gets better.

There was also a rash of very substantial earnings downgrades from bank analysts late in the session for the likes of the your Goldman Sachs and Morgan Stanleys ahead of the US quarterly reporting season, which begins in a couple of weeks.

If we look at yesterday's euphoric trade in Australia, we can also look at short-covering and portfolio rebalancing from funds and we can also wonder why on earth Australia was sold off so heavily on Monday. And we can note that with the Aussie back under parity, US investors have the opportunity for double-whammy upside in buying Aussie dollars to buy Aussie stocks.

We note that the 3.6% gain was the largest single day's effort since December 2008, and then we can note that the market didn't bottom out then until March 2009.

The euphoric turn-on-a-dime was also evident in commodity markets overnight, as commodity funds mimicked their stock market counterparts in just needing to reestablish positions, having dumped them aggressively late last week. At London, where metals trading closed before the late Wall Street sell-off, aluminium rose 2% and everything else was up 4-6%. West Texas crude was up US$4.21 or 5% to US$84.45/bbl.

Brent crude managed only a 3% gain, rising US$3.20 to US$107.14/bbl. A milestone was reached in the European oil market last night as the first post-revolution exports of crude left Libya. This first trickle signals that pressure should now come off Brent crude supplies, which were already otherwise under pressure from waning North Sea supply. We should see some tightening of that Brent-WTI spread now, albeit nothing has changed in Oklahoma where excess storage capacity remains minimal.

Currency-wise, the euro rallied again and the US dollar index fell another 0.3% to 77.75. This, combined with the turnaround in commodity prices and yesterday's rally on Bridge Street, means the Aussie is up another half a cent to US$0.9904. Gold continues to claw its way back on the lower dollar, rising US$20.30 to US$1649.70/oz last night.

Gold nevertheless may be facing a threat on the horizon. On Thursday week the ECB will make a rate decision, and markets suspect Trichet cannot avoid a cut. A move of 25bps is expected, but talk is that 50bps is on the cards. Perhaps the only thing holding Trichet back would be the fact he will look like a complete idiot given he raised the cash rate only months ago around about the time Italy was imploding. But then Trichet really doesn't need any help to look like an idiot.

If there were a 50bps rate cut for the eurozone then the euro would fall, the US dollar would rise, and if there is no need for Europe to seek gold gain as a safe haven then the gold price must surely fall. The offset is that by leveraging the EFSF into a Eurotarp, Europe is basically conducting quantitative easing on a grand scale which suggests monetary inflation and thus support for gold. Gold may now bounce around in a range before the next real move is obvious.

The SPI Overnight was up 28 points or 0.7%.

What Wall Street would dearly love to do is to put Europe behind it so focus can return to the local economy and its problems or otherwise. Last night the Conference Board consumer confidence index ticked up by an insect's appendage, albeit from a very low level. The Case-Shiller house price index for July rose 0.9% but is still down 4.1% year on year. The Richmond Fed manufacturing index rose to minus 6 from minus 10, but is thus still in contraction.

It's very hard to gauge how the world's largest economy is performing when Europe trumps everything. As noted, in a couple of weeks the US September quarter earnings season will begin and there are plenty of commentators who believe earnings forecast must come down in the light of all that has occurred this quarter. Take last night's bank earnings downgrades for example. We might have a bit of a “confession session” over the ensuing period of guidance downgrades. But if we don't, well, then maybe strong US earnings and progress in Europe could be the catalyst this market needs.

Stay tuned.

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

article 3 months old

The Overnight Report: Throw A Tarp Over It

By Greg Peel

The Dow rose 272 points or 2.5% while the S&P gained 2.3% to 1162 and the Nasdaq struggled with a 1.4% gain following some negative speculation about slowing Apple iPad sales.

A couple of weeks ago, US Treasury secretary Timothy Geithner was invited to join a meeting of eurozone finance ministers to share his 2008 experience and provide some advice on what to do about Europe. Geithner said “lever up” the bail-out fund and create a European version of the 2008 US Troubled Asset Relief Program (TARP). He may have been invited, but his mere presence was resented by what can only be considered a bunch of card-carrying morons. But then they are politicians.

Following another couple of weeks of dangerous market volatility, in which Greece was expected almost any day to default, the latest news in the wake of last weekend's G20 meeting of finance ministers is that Europe will now do exactly what Geithner suggested. At least, what the CNBC network was able to exclusively report on last night can be deemed a Plan A among other possibilities.

It seems complicated, but the idea is for the proposed EFSF (which itself is yet to be passed through the last of the eurozone parliaments) to provide funds to the European Investment Bank – the bank jointly owned by eurozone members – to create a Special Purpose Vehicle. An SPV is an “off balance sheet” entity which protects the capital of the bank in question, and it will then lever up those funds and buy distressed eurozone sovereign debt. The issued bonds can also be placed with the ECB as collateral so that the ECB can provide emergency loans to European banks holding that distressed debt.

Got it? Just think of it in simple terms. Sovereigns, and banks holding sovereign debt, can swap that debt with the EFSF. This is the same idea as was proposed for the original US TARP when the plan was to buy up all the toxic mortgage assets on US bank balance sheets and put them in a “bad bank”, leaving the US banks to all become “good banks” once more.

Never mind that the US soon abandoned that idea and went straight to bank capital injections instead. The reason there was that mortgage CDOs were too hard to price given they did not trade on an exchange. Eurozone sovereign debt trades on exchanges so pricing here is clear, meaning the TARP can work in principal.

What is potentially a big positive for this plan is that it does not involve increasing the size of the EFSF. The EFSF at E440bn is still to be ratified by all parliaments and any talk of increasing it would only bring another break-down of the proceedings and further dangerous delays, one would assume. What the plan does involve is complexity and leverage, which might also be called smoke and mirrors. The real plan here is to suggest to the markets that Europe has unlimited funding, so short more sovereign debt at your peril. Collectively we're a lot bigger than you are.

Problem solved? Well there is just that small matter, as always, of the seventeen eurozone parliaments having yet another bill to pass. When the US Treasury put its final TARP bill proposal to Congress in 2008, it was three pages long. Paulson, Geithner and Bernanke were hoping for rapid passage. But by the time Congress was finished with it, it was 300 pages long and full of concessions. The interim couple of weeks were extremely volatile in the markets.

So don't assume the rocky ride is over yet. 

Markets had an inkling before the weekend that something positive might be nigh, which is why Wall Street was tentatively up on Friday night. Why, then, was Australia sold off yesterday having started more confidently as well? The simple answer is those dirty foreigners. They took the opportunity to follow through on the big commodity dump which had occurred, thanks to commodity funds, over the previous couple of days. And where best to sell commodity stocks than in Australia? And let's not forget gold.

I noted in my Monday Report yesterday that having fallen sharply, gold likely had another US$100 to fall before it came back to the longer term trend line. I was, however, not necessarily expecting this to happen all at once in yesterday's Asian session. Gold settled above US$1650/oz in New York on Friday night but by late yesterday afternoon in Sydney had fallen to below US$1550/oz. London then came in and started buying, and New York grabbed the baton. The result is that gold is now at US$1629.40/oz, down US$27.80 from Friday's close. The trend line was found and the buyers reemerged.

Commodity prices were ultimately relatively steady by the close last night. Metals in London were mostly flat, and in copper's case unmoved, although tin decided to rebound 6%. Brent crude was virtually unchanged at US$103.94/bbl while West Texas gained US39c to US$80.24/bbl.

The Eurotarp news provided a boost for the euro, sending the US dollar index down 0.5% to 77.95, which in turn allowed the Aussie to reclaim 0.6% to US$0.9849.

The safe haven trade du jour – US Treasuries – saw more selling as the ten-year yield rose another 10 basis points to 1.90% while the VIX volatility index just managed to dip under the 40 “panic” level to 39.

Was selling in Australia out of place yesterday? Well the SPI Overnight is up 105 points or 2.7%.

Volatility is therefore very much still with us, and there will be more volatility to come. Markets, as I have often noted, never turn when they're volatile, only when they've given up. The volatility of the last few days has also been exacerbated by low volumes – not many investors want to play in this violent market – and to top things off this week brings the end of the September quarter. If the mood remains positive all week, then there may be some solid buying from funds looking to reestablish equity holdings ahead of the cut-off.

Or maybe one or more eurozone member politicians will come out and denounce the Eurotarp plan, vowing to vote against it, and everything can fall apart once more. Or perhaps Plans B,C and D will be put forward instead and argued over while the markets quietly slip into the void. Nothing is certain at this stage.

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

article 3 months old

The Monday Report

By Greg Peel

Do we finally have a step in the right direction? It's always a bit hard to tell with G20 finance ministers or leaders meeting because they're always very big on grand statements while scant on detail and questionable on follow-through. “We pledge to do whatever it takes” is a favourite which is often dusted off and rolled out each time. Everyone then goes home and forgets all about it.

So a grain of salt must be added to our assessment of this weekend's developments. The IMF has said it will issue decisive policy actions to shore up the euro and support the global economy. It will review available resources and eurozone members will do whatever is necessary to solve the global debt crisis. Goodo. Of course there was no detail on how this would be done and no mention of whether “whatever is necessary” still means months of individual parliamentary debate and procrastination.

If we move away from the motherhood statements, nevertheless, and listen to what those inside the meeting are reporting, we find that the G20 is preparing for an orderly default in Greece. Side meetings in Washington over the weekend were focused on ways to recapitalise European banks and prepare eurozone economies for default. The time line suggested involves Greece being granted one more bail-out tranche to get it through October and then orderly default following in November.

If this is all true, and the time line is achievable, then hallelujah they've finally figured it out. There was no talk, however, of increasing the size of the proposed EFSF and the current EFSF is still awaiting final approval votes from several eurozone parliaments. One assumes that in order to sufficiently recapitalise European banks and shore them up against the losses they will take (and very much deserve to take) on sovereign default then a lot more than the currently proposed E440bn fund will be needed.

If we are optimistic, nonetheless, we can enter this week feeling a little more positive than we were toward the end of last week.

Anticipation of what has come out of the G20 meeting began on Friday in the Asian session as commentary began to flow from Washington. This allowed the Australian market to recover some of its initial drop following a bad night on Wall Street, and thereafter Wall Street had a quieter session, bouncing around in a tighter range before finishing to the upside. The Dow closed up 37 points or 0.4% while the S&P gained 0.6% to 1136.

The big loser on Friday night was nevertheless gold, which fell US$79.00 to US$1657.20/oz following heavy falls earlier in the week. Gold is now around US$150 below its peak. It's a big move but nobody is really that surprised. Gold's price chart had accelerated away from its longer-term trend line over past months and whenever this has happened in the past, a pullback to the trend line inevitably occurs. Traders suggest another US$100 may have to be lost before we can start again.

The reasons for gold's drop are basically four: (1) Anticipation that the eurozone problems would be more decisively addressed at the G20 meeting following promising early statements on Friday reducing the risk trade element; (2) Operation Twist from the Fed which requires no additional money printing and thus implies no further monetary inflation; (3) aforementioned gravity finally catching up with a very crowded trade and (4) cash-raising to pay margin calls for leveraged stock and commodity positions.

While you might expect gold bulls to be feeling a bit down at heel this morning they won't be, because blow-off corrections like this provide a cheaper entry point for longer term gold investment. We're still wandering through the mine field, and if the recapitalisation of European banks requires monetary stimulus then that monetary inflation trade is still viable. If nothing else, the ECB must currently be rethinking its decision to raise its cash rate earlier in the year in the middle of all the panic.

Base metals also had another bad night on Friday as similar liquidation continued from the speculative side of the market. Copper fell another 4% as did zinc, and lead fell 8%. Nickel, which had fallen 17% on Thursday, managed to bounce 7%. Brent crude fell US$1.52 to US$103.97/bbl and West Texas fell US66c to US$79.85/bbl.

Despite further falls in commodity prices the Aussie managed to recover a bit of ground, rising half a cent to US$0.9787 as the US dollar index fell 0.2% to 78.30. The US ten-year bond yield bounced back 9 basis points to 1.81%.

The SPI Overnight fell 9 points but we should see that reversed this morning on the assumption the news from Washington provides some relief.

This week should see a renewed focus on US economic data if volatility driven by Europe subsides somewhat. Tonight sees the Chicago Fed national activity index and new home sales, Tuesday night the Case-Shiller house price index, the Richmond Fed manufacturing index, and the Conference Board consumer confidence index. Wednesday it's durable goods and Thursday pending home sales, along with the second revision of the US June quarter GDP. Economists are expecting an improvement to 1.2% from the previous revision down to 1.0%. Friday brings the Michigan Uni consumer sentiment measure, the Chicago PMI and personal income and spending.

The US Treasury will auction two, five and seven-year notes over the week which will mark the first auctions following the Fed's Twist announcement.

It's a quiet week for data in Australia, with new home sales on Wednesday and the RP Data-Rismark house price index on Friday along with private sector credit. Today brings another significant load of stocks going ex-dividend before the ex-divs start to peter out over the next couple of weeks. In their place will be a rising tide of Annual General Meetings.

Have we seen the bottom? It's too early to say. Experience has made us cynical about any policy measures being expediently implemented in Europe. If the bottoming script is to play out as it has in the past, we have to drift lower yet on lower volatility before one day a bottom will be put in place and it won't be recognised immediately.

In the meantime the VIX volatility index in the US remains above 40 implying Wall Street is still hedging its bets. It also means, however, that investors have put a floor on their downside.  

For further global economic release dates and local company events please refer to the FNArena Calendar.

article 3 months old

The Overnight Report: Ghosts Of Lehman

By Greg Peel

The Dow fell 391 points or 3.5% while the S&P lost 3.2% to 1129 and the Nasdaq dropped 3.3%. In Europe the FTSE lost 4.6%, the DAX 5.0% and the CAC 5.3%.

“You're on your own,” said Ben Bernanke in the Fed's policy statement on Wednesday. Or at least that's the way Wall Street heard it. The initial sharp sell-off post Wednesday night's release was followed last night with a risk-off trade of no hesitation after Wall Street had had a chance to sleep on it.

What traders can't shake is a feeling of creeping dread brought about by the fact Bernanke declared “significant” downside risk to the US economy and then did not follow it up with what might be considered “significant” monetary stimulus. Operation Twist looks like little more than accounting adjustment rather than any “shock and awe” policy response. And if the idea is to place the ball back in the Congressional court, God help us. On Wednesday the Republican majority Congress voted down a temporary six-week supply bill after objecting to US$3.3bn funding for the FEMA – the Federal Emergency Management Agency charged with the task of responding to disasters. It seems clear the Republican agenda is to stamp on the Administration any way possible and it appears as if financial market turmoil plays into Republican hands.

If that's the case, this will be the state of play until November 2012.

This weekend brings a meeting of officials from the World Bank and the IMF and there is hope some sort of rescue will be announced. It's a vague hope – the responsibility of saving the world is not in the hands of these two organisations. Last night a report quoted a French official as declaring that the sixteen European banks which only scraped over the stress tests applied by the ECB mid-year will need to raise fresh capital immediately. Therein lies the crux of the matter and the clue to the solution.

For who in the private sector will provide the capital? French banking giant BNP Paribas last night pulled the old “everything's fine” routine while executives were visiting Qatar. Such a visit is another echo of 2008 when US banks sought capital injections from Middle Eastern sovereign wealth funds.

The positives to come out of last night's rout might be (a) the Dow bounced from being 527 points down to close 391 points down, and the S&P 500 recovered from a brief flirtation below the August low of 1119, amidst talk among the contrarians of preparing for a spectacular buying opportunity, and (b) a complete Lehman-style collapse may be the only thing that will spur European officials into decisive action.

The negatives include the response in commodity markets, which made stock markets appear to have a quiet day. Aluminium and zinc were down 4%, lead 7%, copper 9%, tin 11% and nickel an astonishing 17%. Volumes on the LME were near record-breaking as commodity funds hit the dump button and stop-loss orders were triggered in a cascade. “Real” commodity traders stood aside.

Brent crude dropped US$4.87 or 4% to US$105.49/bbl and West Texas fell US$5.41 or 6% to US$80.41/bbl.

Not helping commodity markets was yesterday's “flash” Chinese manufacturing PMI estimate from HSBC which marked a tick down to 49.4 from the actual reading in August of 49.9. Under any other circumstances for any other number, one might consider a move to 49.4 from 49.9 as hardly worth noting. But this is China – the only economic power with the capacity to save the global economy through growth. The August PMI has rebounded slightly from the July PMI suggesting China's forced slowdown had bottomed out. This tick down was very unwelcome from a confidence perspective.

It was certainly enough to help the ASX 200 to a new 2011 low, breaking through the 3986 closing low after the US downgrade in August. The good news is China has plenty of stimulatory capacity left and can take its foot off the brakes of its economy any time. And the RBA is one of few central banks in the developed world with plenty of scope to lower rates.

The latter may have already been priced into the Aussie over the last 24 hours given its three cent fall to US$0.9740. The US dollar index jumped 0.8% last night to 78.45. Gold did not play safe haven, rather it played source of cash for margin calls elsewhere as it fell US$45.80 to US$1736.20/oz. US bonds did play safe haven as the benchmark ten-year yield fell 16 basis points to 1.71%.

The VIX volatility index jumped 11% to 41 which, under the circumstances, seems light on. In the desperate days post Lehman the VIX hit 90.

The SPI Overnight fell 76 points or 1.9%.

Amidst all the mayhem, the Conference Board announced its leading US economic index rose 0.3% in August following rises of 0.6% in July and 0.3% in June. Given August was a very weak month for equities, and stock prices feature as part of the leading index, this was quite a result. The Board did, however, warn that a dip into recession was likely if a lack of confidence is sustained.

Which brings us back, once more, to that word “confidence”. The US economy would most likely being bungling along in low positive growth mode were it not for Europe. Europe is China's biggest export market. Europe's answer to its woes is to forcibly slow growth through austerity measures and to prop up bankrupt states lest the whole common currency concept be seen to be a failure. In the meantime European officials are risking a run on the banks. Who is Lehman?

When will Europe finally respond sensibly?

I'll be on Sky Business today at 2pm. 

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

article 3 months old

The Overnight Report: Like We Did Last Summer

By Greg Peel

The Dow closed down 283 points or 2.5% while the S&P lost 2.9% to 1166 and the Nasdaq fell 2.0%.

As was correctly anticipated by the market, last night the Fed announced it would sell US$400bn of its Treasury holdings of three year maturities and below and buy US$400bn of maturities in the 6-30 year range with an average duration of 12.9 years. It's not the Fed's label, but this has been dubbed “Operation Twist” because that's what the strategy was called in 1961 – the last time the central bank implemented such a strategy.

In 1961 the Dow was 700 when the Twist was applied and by 1965 it was 1000. That might sound encouraging, except that the Dow spent the next 16 years oscillating in a range of roughly 700-1000. Only in 1982 did it break out. Can we make a comparison to those far off times?

As is typical on the release of a Fed statement, traders tried to act quickly before they'd even read the whole document. The Dow jumped very briefly at 2.15pm, then spiked down, then rallied briefly, then plunged. One might argue this is because a Twist does not constitute actually quantitative easing. Wall Street did not get QE3. But then if every man and his dog was anticipating a Twist in place of QE3, why such negativity?

The answer might be that traders went straight to the important policy strategy paragraph before they looked closely at the previous paragraph. At its last meeting in August, at which the Fed announced its fund rate would be zero for two years, the assessment was that “downside risks to the economic outlook have increased”. Last night's statement declared “there are significant downside risks to the economic outlook, including strains in financial markets”.

On Tuesday it was the IMF downgrading its global economic forecasts, and last night it was the Fed. The IMF is always miles behind the curve so can be quickly dismissed, but even in the Fed's case one can still say “thanks Scoop”. Hands up anyone who hasn't felt over the past couple of months that the economy was facing significant downside risks or that financial markets were becoming strained. Anyone? Anyone? Bueller?

The result was nevertheless a sharp sell-off in which buyers stood aside and computers led the charge. There is a general feeling that Operation Twist does not do enough, particularly if downside risk is now “significant”, and that really the Fed is just hand balling the problem back to Washington. Bernanke has indicated often enough lately that it's up to Congress to sort itself out and agree to positive fiscal measures. The Fed is not going to carry the can alone. Instead, the Fed will concentrate on mortgages by lowering the long-end yield as well as reinvesting the expiring mortgage securities and Fannie and Freddie agency paper it has on its balance sheet.

It's all well and good, but the US thirty-year yield is already near all time lows. Mortgage rates have never been lower (outside of the post GFC period), but banks are very wary of who they lend to, what their job is and just what sort of deposit they can put up. Wall Street can't really see Chubby Checker leading the US economy out of the wilderness. With all that is going on in Europe, something more aggressive would have been better received.

It has nevertheless been the trend of late, when the Fed announces a major policy change, that Wall Street reacts strongly in one direction in the last hour or so of the session, thinks about it overnight, and then comes back and goes the other way the next day. Plenty of smart traders simply stay out of the initial mayhem. As to whether that will be the case tonight remains to be seen. In the meantime, the US bond market was quick to make the relevant adjustments.

The two-year yield rose 3 basis points to 0.20%, the ten-year yield fell 8 basis points to 1.87%, and the thirty-year yield fell 21 basis points to 2.99%. The Fed is forcing a flattening of the yield curve in order to make mortgages cheaper, but as noted the banks still have to be willing to lend the money. Banks need to be able to borrow cheap and lend dear to operate, and a flat yield curve kills off their margins. Financial stocks were amongst the hardest hit last night. Never mind that the banks are still holding vast amounts of cash on deposit at the Fed earning interest. The Fed has previously noted the option of dropping that interest rate to zero (or perhaps lower) but has yet to play that trump card. Maybe Bernanke's saving that one up as he puts the pressure back on Congress.

The Twist is also positive for the US dollar, and it rose 1.1% to 77.80 on its index. A strong dollar is bad for commodities, so gold fell US$22.80 to US$1782.00/oz. Nickel, tin and lead all dropped 3% while the other base metals were steady, but the last trades on the LME occurred 15 minutes after the Fed statement. West Texas crude fell US$1.00 to US$85.92/bbl while Brent fell only US18c to US$110.36/bbl.

The Aussie commodity currency plunged over two cents to US$1.0042.

The SPI Overnight fell 105 points or 2.6%. Subtract 105 from yesterday's close in the ASX 200 at 4071 and you get 3966. The August low was 3986.

The world is facing a crisis of confidence. The debt problems of 2008 have not gone away, just resurfaced in the form of public debt which is controlled by politicians. Seventeen governments can't reach an agreement in Europe. One government can't find consensus in the US. The World's Greatest Treasurer spends all of his waking hours arguing about half a dozen refugees. The central banks of the world are saying to politicians: you get your own house in order first.

Is it any wonder.

Around and around and up and down we go.

One observation to make about the Fed's new policy is that the flatter the yield curve, the more valuable the yield from stock dividends. Dividend stocks had already become the investor's choice in the US and after last night they are even more so. In Australia there are also plenty of opportunities to earn an attractive margin over fixed interest as well.

Would Woolworths ((WOW)) fit into that category? Tune in at 4.30pm today for FNArena's Market Insight. Just click on the box on the website with the picture of the handsome bloke and Rudi. 

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

article 3 months old

Australian Stock Sectors: Some Thoughts

By Greg Peel

Amidst the current gloom of global economic uncertainty, stock brokers are mostly still forecasting stock indices to be higher than they are now by year-end. Such forecasts nevertheless come with 'bear case” caveats such as “unless Europe blows up,” and so forth. At present the majority attitude seems to be that the crisis in Europe will be resolved just before it is too late, that the Fed will ensure the US does not slide away, and that China is in a more immune position from developed world weakness in 2011 than it was in 2008. Even if it isn't, China still has plenty of gunpowder left in the stimulus capacity keg, analysts note.

Goldman Sachs analysts, for one, are forecasting a year-end target for the ASX 200 of 4460 and an end-2012 target of 5000, assuming the “bear case” does not come into play. That end-2012 target looks pretty good from here if you're a trader – it represents a 22% return (or 17.5% pa). But if you're a longer term investor still riding the stockmarket rollercoaster, you'll note that the ASX 200 first breached 5000 in 2006, fell back through in 2008, and has since rebounded to be at or near 5000 no less than five times.

Stock analysts are prone to being perennially positive, given they would be sacked from their brokerages for business-destroying negativity, but assuming one needs or wants to hold an equity component in one's investment portfolio then a look at the various sectors is helpful. Here follows some thoughts from analysts.

I noted above a belief that China is more immune to developed world weakness in 2011 than it was in 2008. Many thought China was immune in 2008, but at that time China's domestic economy was almost non-existent by comparison to its export economy. Today China's export economy still stands to suffer from weakened demand from Europe and the US but its domestic economy is now the world's leading economic growth engine. The ongoing “industrialisation and urbanisation” theme in China goes a long way to explaining why in 2011, unlike 2008, the prices of key commodities have not been crunched as stock prices have. In the case of iron ore and coal, for example, prices are steady to higher.

On that basis, RBS Australia posits that the local mining services sector is the new “defensive”. This seems odd given mining is traditionally a cyclical business unlike the traditional defensives of utilities, telcos and consumer staples, for example, but then China and its emerging market friends have rather turned the tables. RBS believes mining services is one of the few Australian sectors with a positive outlook for FY12, given both aforementioned commodity price robustness and the unaltered capacity expansion plans of the major Australian miners.

Among the “small” stocks in the sector, RBS believes Bradken ((BKN)) remains a standout investment while the analysts are also positive on Ausdrill ((ASL)), Emeco ((EHL)) and Imdex ((IMD)).

Nor does RBS believe a positive outlook is limited to mining, given energy is also in the frame. RBS analysts note a research paper released by the Reserve Bank of Australia last week which indicates the central bank agrees with those in the market very positive on the longer term outlook for LNG. The RBA suggests Australia could see “LNG exports approach coal and iron ore in terms of their contribution to total export earnings over the coming decade”.

Were that to occur, RBS points out that the result could ultimately be an Australian current account in surplus rather than just a trade balance in surplus. (The current account is the sum of the trade balance and the capital account. The capital account is determined by payments to offshore entities representing interest on loans, dividends on investment, royalties on licences and so forth.) However the swing factor will be the level of imports of capital equipment required for resource sector engineering and construction works, RBS suggests.

“We see these imports forming part of a boom in engineering construction,” say the analysts, “with Australian domestic final demand likely to surge, but with the net GDP impact depending on the imported share of the construction bill and the dynamics for household consumption”.

The LNG element also plays into RBS' positive view on the mining and energy services sector. Once we move away from mining and energy, things start to look a bit different.

RBS has surveyed 40 of the top 100 home builders in Australia in order to asses current conditions in the building materials sector. Assessments of current sales conditions were generally poor (42%) or average (also 42%) with only 16% seeing conditions as good. Of the respondents, 64% indicated a deterioration of sales levels in the past six months, suggesting further downside, RBA notes. Key issues were a lack of buyer confidence, affordability and finance constraints and the continued absence of first home buyers in the market.

Aside from sales levels, respondents further noted the level of inquiries had also declined in the past six months, which RBS sees as a clear leading indicator.

The analysts believe conditions will continue to turn down in Victoria, Queensland and Western Australia for the rest of 2011 with conditions in New South Wales remaining flat at best. They see a “material” decline in national housing starts through to mid-2012 to a level representing a “traditional deep cycle bottom”.

As for investment in building material stocks, RBS believes Adelaide Brighton ((ABC)) and James Hardie ((JHX)) are relatively immune to the weak domestic cycle while CSR ((CSR)) is a Buy on valuation grounds. The analysts retain Hold ratings on Boral ((BLD)) and Fletcher Building ((FBU)).

Ongoing stock market volatility is playing into the hands of Challenger Financial's ((CGF)) annuity sales business, leading Citi analysts to rate Challenger as their top pick in the diversified financials sector. Annuities guarantee an investor a fixed return over a preset long term period. Such returns are never particularly exciting but they do take one off the stock market rollercoaster.

Ongoing volatility is also benefitting the Australian Securities Exchange ((ASX)) through increased trading volumes, mostly in derivative products. This has helped to offset market concern about the entry of competition into the stock exchange space, while Citi suggests strong positions in clearing, settlement, market data and technical services along with new product development support ASX revenues.

For other non-defensive components of the diversified financials sector, Citi suggests market leverage is the key. In selecting their sector pecking order the analysts have included those stocks most leveraged to a market rebound. In so doing, they note, they are assuming that the Citi equity strategists' call for a market recovery ahead is accurate.

Citi's descending order of preference in the sector is Challenger Financial, ASX, Henderson Group ((HGG)) and Macquarie Group ((MCG)) all with Buy ratings, followed by ING Financial ((IFL)), Computershare ((CPU)) and Perpetual ((PPT)) with Hold ratings.

Weak business confidence is an issue for Australia's IT services sector. On that basis, BA-Merrill Lynch has made cuts to its earnings forecasts for its stocks under coverage, with average reductions of 2-8% taking Merrills' FY12-13 forecasts to below consensus.

Merrills notes that valuations for stocks in the sector currently appear cheap and mid-term fundamentals remain solid, but near term the analysts warn of a value trap. The analysts favour stocks with recurring revenues, strong cash generation and exposure to the latest structural driver, “cloud” computing. On that basis Technology One ((TNE)) and Reckon ((RKN)) are the analysts' favoured plays.

Merrills also has Buys on CSG Ltd ((CSV)) and SMS Management & Technology ((SMX)) but only on valuation grounds, meaning investors must be wary of that “valuation trap”. The analysts have downgraded Oakton ((OKN)) to Neutral and have Underperform ratings on ASG Group ((ASZ)) and DWS Advanced Business Solutions ((DWS)).

article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

The past week has been another one where ratings upgrades have easily outnumbered downgrades, the eight brokers in the FNArena database lifting recommendations on 18 stocks and cutting ratings for just nine companies. Total Buy ratings now stand at 58.7%, up from 58.2% last week.

Sigma Pharmaceuticals ((SIP)) was among those being upgraded during the week, this on the back of a better than expected interim earnings result. Nufarm ((NUF)) has lifted guidance leading into this month's full year result and this prompted one upgrade in rating.

Sector reviews have generated upgrades for Oil Search ((OSH)) , Newcrest ((NCM)) and Oz Minerals among the resource plays, while beneficiaries among the industrials have been Ramsay Health Care ((RHC)) and Toll Holdings ((TOL)).

Among those companies receiving downgrades to ratings were Ansell ((ANN)) as part of a healthcare sector review and Qantas ((QAN)) on the back of a review of the transport sector. Envestra ((ENV)) also saw its overall rating drop following a valuation downgrade and an initiation of coverage.

The better than expected result from Sigma also translated into price target increases, while sector reviews also generated higher targets for Newcrest, Ramsay, Toll, Oil Search and Panoramic Resources ((PAN)).

Targets have fallen for Aquila (AQA)), Mincor Resources ((MCR)), Independence Group ((IGO)) and Western Areas ((WSA)) following the sector reviews, while targets for CSL ((CSL)), Qantas and Nufarm also fell post reviews.

Sigma was one of the leaders in terms of increases to earnings forecasts, while better than expected results from Perseus Mining ((PRU)) also saw an increase to estimates for the coming year. A review of the outlook for DUET Group ((DUE)) generated an increase in forecasts for the company, while a tour of Star City's upgraded facilities has produced some increases to numbers for Echo Entertainment ((EGP)). 

Higher retrievals expectations result in a lift in forecasts for Graincorp ((GNC)), while the likes of Santos, Newcrest and Oz Minerals enjoyed increases to forecasts post commodity price and sector reviews.

Not all resource stocks were beneficiaries as forecasts for Aquila, Mincor ((MCR)), Gindalbie ((GBG)), Australian Worldwide Exploration (AWE)) and OneSteel ((OT)) have been cut over the past week. A deterioration in market conditions led to cuts in estimates for Macquarie Group ((MQG)), while forecasts were also lowered for Ten Network ((TEN)) and Woolworths ((WOW)). 
 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 SIP - 57.0% - 14.0% 43.0% 7
2 AQA - 50.0% - 25.0% 25.0% 4
3 MCR - 50.0% - 33.0% 17.0% 3
4 WSA 17.0% 33.0% 16.0% 6
5 NUF 25.0% 38.0% 13.0% 8
6 OSH 75.0% 88.0% 13.0% 8
7 RHC 13.0% 25.0% 12.0% 8
8 NCM 63.0% 75.0% 12.0% 8
9 OZL 38.0% 50.0% 12.0% 8
10 TOL 13.0% 25.0% 12.0% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 ANN 57.0% 43.0% - 14.0% 7
2 QAN 88.0% 75.0% - 13.0% 8
3 ENV 20.0% 17.0% - 3.0% 6
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 SIP 0.420 0.573 36.43% 7
2 NCM 44.626 45.376 1.68% 8
3 RHC 18.593 18.793 1.08% 8
4 TOL 5.199 5.254 1.06% 8
5 PAN 2.333 2.338 0.21% 4
6 OSH 8.440 8.448 0.09% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 AQA 8.470 7.720 - 8.85% 4
2 MCR 1.085 1.017 - 6.27% 3
3 QAN 2.468 2.349 - 4.82% 8
4 NUF 4.975 4.819 - 3.14% 8
5 IGO 6.603 6.410 - 2.92% 4
6 ANN 14.504 14.326 - 1.23% 7
7 WSA 6.457 6.430 - 0.42% 6
8 CSL 33.330 33.305 - 0.08% 8
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 ROC 0.020 0.140 600.00% 4
2 SIP 3.029 4.286 41.50% 7
3 PRU 21.600 24.600 13.89% 6
4 NCM 189.063 204.063 7.93% 8
5 BPT 5.020 5.280 5.18% 5
6 DUE 10.844 11.169 3.00% 8
7 EGP 20.763 21.038 1.32% 8
8 STO 56.313 56.913 1.07% 8
9 GNC 80.447 81.130 0.85% 6
10 OZL 116.375 117.250 0.75% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 AQA 5.900 3.075 - 47.88% 4
2 MCR 16.400 9.000 - 45.12% 3
3 GBG 0.786 0.600 - 23.66% 6
4 MQG 282.629 265.886 - 5.92% 7
5 TEN 8.475 8.350 - 1.47% 8
6 WOW 182.250 180.600 - 0.91% 8
7 SAI 30.300 30.038 - 0.86% 8
8 AWE 8.729 8.671 - 0.66% 7
9 OST 24.771 24.629 - 0.57% 7
10 CTX 111.167 110.567 - 0.54% 6
 

Technical limitations

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.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

The Overnight Report: Central Bankers Of The World Unite

By Greg Peel

The Dow rose 186 points or 1.7% while the S&P gained 1.7% to 1209, recapturing that important 1200 level, and the Nasdaq added 1.3%.

We're getting closer. 

There is a certain irony in the fact that last night marked a rather significant third anniversary on Wall Street. As world authorities scrambled to address what is seen as a potential plunge into a credit freeze and liquidity crisis in the global banking system, it was remembered that it was September 15, 2008, when Lehman Bros went under. It serves as a stark reminder of what did happen, why it happened, and why it could happen again.

For three years Europe has failed to adequately address the issue of excessive sovereign debt in the eurozone. You can say all you like about Club Med profligacy and corruption (anyone who read Paul Sheehan's article in the Fairfax press yesterday will know he won't be offered any complimentary moussaka anytime soon) but at the end of the day someone made a decision to lend those sovereigns the money. They took a calculated risk in a free market and they lost.

The problem, however, is that they haven't actually lost. The reason the EU-IMF-ECB has been desperately trying to prop up Greece for two years is not because they fear what the standard of living would become in Greece were that nation to default on its debt. It is because they fear what impact a default would have on the balance sheets of those European banks which hold most of that debt, that is, the losers. Hand-outs to Greece (and friends) have come with conditions of strict budget cuts and austerity measures – measures which prevent those economies from ever generating enough income to get on top of their debt commitments. Two years of “no change” simply proves that such an approach has been flawed from the beginning.

In 2008 there was a raging debate about the “moral hazard” of using US taxpayer funds to recapitalise US banks and prevent their collapse. While those banks were clearly the culprits in their lending on mortgages, to allow them all to fail would have been to plunge the world into a Depression which would have made the Great one seem like a garden party. But moral hazard or not, it was done, it was done (relatively) swiftly, and today the US taxpayer has had the bulk of that investment returned with a profit. The US economy is not exactly strong today as a result, but nor is it depressed.

The US Troubled Asset Relief Program (TARP) allowed US banks to write down toxic debt on their balance sheets to zero and to then get on with banking life in the new, post subprime environment until such time as they were able to raise their own capital from the private sector and pay back their obligations to the government. What many possibly don't appreciate is that while those toxic debt instruments were valued as zero by the market at the time, a large chunk have since matured without default. In other words, they returned in market value from zero back to 100 cents in the dollar, or equivalent. All that was needed was time, and a removal of irrational panic from financial markets.

Now simply substitute the sovereign debt of Greece, or Portugal, or Italy in 2011, for subprime CDOs in 2008. What if those bonds were written down on bank balance sheets to zero and government funds were injected into those banks such that they could return to simple banking again in a new, post sovereign debt crisis environment? If irrational panic can be removed from financial markets, there's a good chance that over time those banks can repay those government funds and raise capital once more from the private sector.

For Greece and friends, the impact of default would be harsh, and deserved, but at least it would be over with. Budgets would still need to be strictly contained but they would not have to be so prohibitive as to prevent any chance of economic growth. Look at Russia in 1998 and look at Russia now. The moral hazard argument may still be relevant, but so too is the argument that if nothing decisive is done in Europe, and soon, we'll be back in 2008 again. One only has to look at the recent sharp rise in the global interbank lending rate to know that a credit freeze is just around the corner.

So can Europe finally get its act together in time?

Last night it was announced that the European Central Bank in coordination with the Bank of England, the Bank of Japan and the Swiss National Bank, and with the cooperation of the US Federal Reserve, would provide emergency US dollar liquidity facilities to those European banks edging dangerously close to a liquidity crisis which would ultimately freeze global credit markets once more. In the past few months European banks have been finding it increasingly difficult to attract the dollar funds they need to service their operations. It's hardly surprising, given institutions across the globe have become more fearful that they would never see that money again and as such have tightened their lending.

The announcement represents the first real step towards alleviating the European debt crisis in two years. It has taken the critical decision process away from the politicians of seventeen parliaments. Those parliaments can now feel a lot less nervous about voting in the E500bn European Financial Stability Facility (EFSF). Votes should be completed in the next month or two, and in the meantime Greece will get the next tranche of the bail-out funds it needs to pay the bills for the time being.

It is quite possible that by even as early as this weekend, it will be proposed the EFSF take on a new look with a slightly different agenda, or at least that the EFSF will be complimented with another facility – a TARP. US Treasury Secretary Timothy Geithner will meeting his EU counterparts in Warsaw tonight and it is assumed by Wall Street that he's carrying his handbook on “How to create and implement a troubled asset relief program”. It is the first time the US “finance minister” has ever been invited to join the finance ministers of Europe in one of their meetings. Why might that be?

Geithner's visit, and last night's announced central bank intervention, point to a global and more decisive solution being sought for Europe. Wall Street clearly likes the idea.

And as such it was a “risk on” session last night. The euro rallied, sending the US dollar index down 0.8% to 76.26. The US ten-year bond yield jumped 10 basis points to 2.08%. Gold fell US$31.30 to US$1789.80/oz. The Aussie is up 0.7% to US$1.0338.

Base metals rallied 1-2% in London. The world's benchmark oil price jumped US$2.94 to US$115.34/bbl. West Texas crude rose US74c to US$89.75/bbl.

The SPI Overnight gained 46 points or 1.1%.

We're getting closer. It's not over yet by any stretch of the imagination, and yawning downside risk still exists, but we may now be moving in the right direction. A Euro-TARP would not, of course, “solve” the problem. But like its predecessor, it will alleviate panic and buy time. That's the most that can be hoped for at this point. Let us not forget, amidst all of this European calamity, that sitting in the background are emerging economies, led by China, which are growing at a rapid pace.

Let us also not forget there is a potential safety net sitting under the world's biggest economy. Remember QE3? That talk seems like an eternity ago. 

Last night it was revealed the US CPI jumped 0.4% in August on the headline, and 0.2% on the core. Annualised core inflation has now hit 2.0% growth for the first time since November 2008. This result would tend to suggest QE3 will not be called upon, at least not in any sense of an emergency expansion of the Fed's balance sheet.

US industrial production rose 0.2% in August when 0.0% was expected. The Philadelphia Fed manufacturing index has risen this month to minus 17.5 from minus 30.7 in August – still in contraction, but at a slower rate. The Empire State equivalent has fallen this month to minus 8.8 from minus 7.7 in August.

America is by no means out of the woods of a possible return to recession. One does wonder, nevertheless, what psychological impact a definitive policy in Europe might have on US, and global, business and consumer confidence. 

If you happen to be around in the Sydney CBD today you can catch a special celebrity appearance by Rudi in the foyer of the ASX in Bridge St for a live recording of BRR's Round Table at 3pm. Or catch it at brr.com.au.

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

article 3 months old

The Overnight Report: Europe Stands By Greece

By Greg Peel

The Dow closed up 140 points or 1.3% while the S&P gained 1.4% to 1188 and the Nasdaq added 1.6%.

When will anyone ever learn? So slow are ratings agencies to catch up with what's going on around them that we cannot even be sure Moody's downgrading yesterday of the ratings of Societe Generale and Credit Agricole – two of France's largest banks – was not related to the Second World War. And Moody's in particular has a reputation of being the slowest of the three major agencies, but then again that's like being the fattest bloke on The Biggest Loser.

Ask yourself: why is the Australian stock market down 20% from its April high? Might the answer have anything to do with Europe? Perhaps Greece, and its possibility of default, might be part of that? And who, as we have long known, holds a lot of Greek sovereign debt? Oh yes – the French banks.

Let's take SocGen for one. Since March its share price has fallen 72%. It is a truth universally acknowledged that SocGen will need an injection of capital in order to survive any restructuring of eurozone sovereign debt – haircuts or default, orderly or disorderly. Yet now, and only now, have the Moody's analysts realised perhaps SocGen's credit isn't quite as good as it was. Brilliant! Next they be telling us Enron's looking dodgy. 

Why anyone would sell down the Australian market sharply on the announcement of a discredited US ratings agency downgrading a bank or two in France is thus anyone's guess, but then the current market is all about jumping at shadows. The funny thing is that after the close of the Asian session yesterday, when the northern hemisphere sat down to enjoy the next instalment of In Europe Tonight, the producers had cut that bit out of the script. It certainly happened, but wasn't deemed important to the plot. SocGen shares traded higher from the bell, as did Credit Agricole shares.

Indeed France's CAC stock index closed up 1.9% on the session, and Germany's DAX – and don't forget German banks also hold loads of toxic eurozone debt and may well be next in Moody's sights – leapt 3.4%. Oh and shucks, the overnight ASX 200 futures are up 1.8%.

I had noted in yesterday's Report that Merkel and Sarkozy were due to make an announcement last night regarding the Greek situation once they had spoken to Prime Minister Papandreou. It might be safe to assume that while Merkozy weren't yet entirely sure what they were going to say, they weren't going to say “too hard, we give up”. Electing to sell ahead of that announcement was always going to be somewhat of a risk. And it's proved to be so.

The upshot is that Greece does not want to leave the eurozone, and neither France nor Germany want Greece to leave either. Greece will stay in no matter what happens, even if the only option is default. And that option is getting close to being a given. Greece will get its next E8bn bail-out tranche at the end of the month ahead of all member parliaments voting on the EFSF, which will take another month. Once the EFSF is in place it is assumed, albeit not confirmed, that an “orderly” default of Greek debt will follow.

Merkozy nevertheless had stern words for Papandreou, insisting that austerity and asset sale targets must be met or he'll be right back in the Naughty Chair. A contrite Papandreou said that it would be so.

That news was enough to send European stock markets rallying and Wall Street following through. There was a brief stumble early in the New York session when it was thought Austria had just voted against the EFSF, but it turned out that Austria had merely delayed the vote. On that misinterpretation the Dow was briefly down 100 points, but it soon reversed and rallied and by 3.30pm was up 280 points. Volume was light, and short-covering evident, so the last half hour saw a fall-back on profit-taking. Either way, the world did not end last night. And there's more to the story than just the Merkozy announcement.

Speaking at a conference early in the session last night, US Treasury secretary Timothy Geithner said, emphatically, there was “no chance” of financial failure in Europe, a la Lehman. Geithner is off to Warsaw tomorrow to attend the scheduled regular meeting of the EU finance ministers, and it hasn't been lost on Wall Street that this is the first time America has been included in what is normally a Euro-only membership. Why now? Could it be, perhaps, that it was then New York Fed President Geithner who, in 2008, was instrumental in orchestrating the TARP – the near US$1 trillion package used to recapitalise all of America's major banks?

Funny that Larry Fink, BlackRock CEO and adviser to Europe should also happen to suggest, at the same conference Geithner attended last night, that what Europe's now needs is a TARP. The bottom line is that Wall Street rallied last night because everyone knows something decisive has to be done in Europe this time – no more muddling through, bickering and procrastinating – and the obvious answer is to stop trying to prop up the sovereigns to save the banks but to prop up the banks instead and then let the sovereigns deal with it. It ain't rocket surgery.

For more on the TARP option see What To Do About Europe?

The euro closed higher on the session last night, sending the US dollar index down 0.25% to 76.86. The Aussie is down half a cent to US$1.0263 because it was mostly Seppos bailing out of our market yesterday. Gold came off US$13.10 to US$1821.10/oz.

Copper traders have become a bit nervous of late and last night copper was down 2%, marking the biggest fall among the base metals. Brent crude was up US51c to US$112.40/bbl while West Texas lost US$1.66 to US$88.56/bbl.

Having received tepid demand for Tuesday night's auction of US ten-year bonds, last night the US Treasury got away US$13bn of thirty-years quite comfortably, with the 3.31% settlement yield being lower than expected. Foreign central banks bought 39% compared to a 41% running average, maybe because they're now looking seriously at buying rather cheap eurodebt instead.

As noted, the SPI Overnight was up 72 points or 1.8%.

Incidentally, it was revealed last night that US retail sales rose only 0.1% in August, which was a bit disappointing when a 0.3% rise was forecast. But who cares? It's all about Europe. Stay tuned.

Rudi will be appearing on Sky Business today at noon. He'll be presenting on UNSW campus from 6-8pm later on the day.

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

In a week characterised by post profit season sector reviews the eight brokers included in the FNArena database have on balance lifted ratings, with 11 upgrades against seven downgrades. Total Buy ratings now stand at 58.2%, up from 57.6% last week.

Among energy sector plays both Horizon Oil ((HZN)) and Oil Search ((OSH)) scored upgrades, the former a reflection of changes to estimates following full year earnings results and the latter following a sector review. United Group ((UGL)) and DUET ((DUE)) enjoyed upgrades on valuation grounds, while recent share price weakness has seen ratings lifted for both Sonic Healthcare ((SHL)) and Nufarm ((NUF)).

On the downgrade side, strong post profit result share price performance saw ARB Corporation's ((ARP)) rating cut, while it was a similar story for Domino's Pizza ((DMP)). Adjustments to sector expectations meant downgrades for Western Areas ((WSA)) and Discovery Metals ((DML)), while a disappointing earnings result saw Paladin's ((PDN)) rating cut. Valuation was the reason given for a downgrade for Primary Healthcare ((PRY)), while ratings for Charter Hall Office ((CQO)) have also been adjusted on the back of a corporate offer for the company.

Primary Healthcare saw minor changes to earnings estimates this week, these enough to prompt an increase in price target. It was a similar story at both Sonic Healthcare and ARB Corporation, while targets were also adjusted higher for both UGL and Oil Search.

Targets as well as earnings were cut for Paladin on the back of its disappointing earnings report, while similar changes were made to models for Independence Group ((IGO)) following a result stockbrokers labeled "disappointing".

Lower nickel price assumptions have prompted a cut to both earnings and price target for Western Areas, while a post result review has seen the price target for Horizon Oil trimmed slightly. Near-term earnings headwinds being factored in have also resulted in a cut in target for Nufarm.

Elsewhere, the shift to a more conservative view impacted on earnings expectations and price target for Bank of Queensland ((BOQ)), while a disappointing trading update saw similar changes for CSR ((CSR)). Post a debt refinancing, earnings forecasts for Elders ((ELD)) have been reduced, while higher overhead assumptions mean a trimming of estimates for Beach ((BPT)).

Softer consumer conditions have resulted in cuts to earnings for Thorn Group ((TGA)), while tough market conditions have caused brokers to lower earnings estimates for Macquarie Group (MQG)) as well.

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 IGO 25.0% 67.0% 42.0% 3
2 HZN 75.0% 100.0% 25.0% 4
3 OSH 75.0% 88.0% 13.0% 8
4 UGL 50.0% 63.0% 13.0% 8
5 DUE 38.0% 50.0% 12.0% 8
6 SHL 63.0% 75.0% 12.0% 8
7 NUF 13.0% 25.0% 12.0% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 ARP 75.0% 50.0% - 25.0% 4
2 DML 50.0% 33.0% - 17.0% 3
3 WSA 33.0% 17.0% - 16.0% 6
4 DMP 83.0% 67.0% - 16.0% 6
5 CQO 43.0% 29.0% - 14.0% 7
6 PDN 57.0% 43.0% - 14.0% 7
7 PRY 63.0% 50.0% - 13.0% 8
8 GNC 60.0% 50.0% - 10.0% 6
9 DLX 50.0% 43.0% - 7.0% 7
10 IFN 63.0% 57.0% - 6.0% 7
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 PRY 3.340 3.379 1.17% 8
2 SHL 12.708 12.784 0.60% 8
3 ARP 8.675 8.700 0.29% 4
4 UGL 14.706 14.723 0.12% 8
5 OSH 8.440 8.441 0.01% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 PDN 3.194 2.816 - 11.83% 7
2 IGO 7.105 6.603 - 7.07% 3
3 IFN 0.629 0.604 - 3.97% 7
4 WSA 6.673 6.457 - 3.24% 6
5 GNC 8.890 8.675 - 2.42% 6
6 DLX 2.927 2.876 - 1.74% 7
7 HZN 0.445 0.438 - 1.57% 4
8 DML 1.590 1.570 - 1.26% 3
9 CQO 3.432 3.410 - 0.64% 7
10 NUF 5.006 4.975 - 0.62% 8
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 BOQ 74.613 106.275 42.43% 8
2 TEN 7.638 8.475 10.96% 8
3 PRU 20.100 21.600 7.46% 6
4 ENV 3.920 4.180 6.63% 5
5 CQO 23.643 24.600 4.05% 7
6 SKE 18.650 18.767 0.63% 3
7 ASX 215.771 216.600 0.38% 7
8 RMD 15.383 15.440 0.37% 8
9 PRY 25.913 26.000 0.34% 8
10 QRN 16.625 16.675 0.30% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 AQA 11.867 3.075 - 74.09% 4
2 PDN 5.971 2.082 - 65.13% 7
3 CSR 24.838 18.700 - 24.71% 8
4 IGO 30.620 26.974 - 11.91% 3
5 ELD 6.125 5.500 - 10.20% 3
6 BPT 5.460 5.020 - 8.06% 5
7 WSA 62.967 58.633 - 6.88% 6
8 TGA 21.200 20.293 - 4.28% 3
9 MQG 282.629 270.600 - 4.26% 7
10 GRR 11.350 10.900 - 3.96% 4
 

Technical limitations

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.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.