Tag Archives: Banks

article 3 months old

The Overnight Report: Traders Storm The Bastille

By Greg Peel

The Dow fell 519 points or 4.6% while the S&P dropped 4.4% to 1120 and the Nasdaq lost 4.1%.

Ratings agencies Standard & Poor's, Moody's and Fitch have all confirmed they are not set to downgrade the sovereign debt of France, Europe's second largest economy. Yet French president Nicholas Sarkozy last night cut short his summer holiday to hold an emergency meeting with his finance minister in order to settle on a list of potential deficit-cutting measures which were due to be decided upon at a meeting scheduled for August 24.

The reason for the urgency relates to a trickle that last night turned into a flood. From the moment S&P downgraded US debt the question was then asked: How can France, with its apparent significant exposure to the sovereign debt of the various eurozone basket cases, be considered AAA when the US is not? Surely if America has been downgraded, then France must be next?

For the last few sessions, Europe has been out of the spotlight. Late last week the ECB belatedly moved in to shore up Spanish and Italian debt markets but that positive was overshadowed by the negative of the US downgrade and the resultant market turmoil. Speculation has been rife, but last night a rumour began in European markets that France was about to be hit with a downgrade. It was only a rumour, it might be a result of Chinese whispers, it might be a result of a fraudulent attempt at “rumourtrage”, and it has been denied by the ratings agencies, but global markets are so fragile at present that any rumour is being taken on face value for risk of being accurate.

Traders began to sell down French bonds, which prompted Sarkozy's rapid return to Paris. The shares of French banks, and then all European banks, and then all US banks were sold down double-digit percentages – again. The financial sector led Wall Street down from the open to be over 400 Dow points lower.

Hardest hit was French bank Societe Generale, the CEO of which was moved to respond to the rumours around lunch time New York. Often in these cases, a CEO will paint on a Cheshire grin and disingenuously shrug off accusations of capital and liquidity problems, laughing as he calls the accusations misguided and ludicrous. At that point you know the bank has about two days to live. But last night Frederic Oudea was fuming. His frustration and anger were palpable in his initial statement and later in an interview on CNBC as he assured the market SocGen is fully funded through 2011. He rattled of the list of specific exposures to the various eurozone countries in trouble and acknowledged that they were not tiny but indeed manageable. He noted that SocGen was well inside the Basel III requirements.

When the subject of the American-based ratings agencies was raised, he was dripping bile.

He did enough to turn Wall Street around, for a while. The Dow recovered to be only around 200 points down but then the buying began to dry up. That was not good, and floor operators pointed to a large swathe of short term, leveraged trading positions which had been put on in the past two sessions to try and capture the bounce which were now looking shaky. The sudden rush down to the close tended to indicate they were being reversed.

Of course the risk now is that the ratings agencies will look at the higher cost of French debt as forced by the bond vigilantes, decide France will thus have more difficulty in refinancing, and downgrade as a result. This is what has happened over and over again with Greece, Portugal, Ireland, Spain and Italy. The market sells bonds, the agencies downgrade, the market sells more bonds and the downward spiral continues. The farce will only end the day the world wakes up to the fact ratings agencies are ignorant, incompetent and under criminal investigation. Exactly what purpose do they serve? They have already been shown up for fools in downgrading the US given US bonds have done nothing but rally in price ever since. Last night the US ten-year yield fell 12 basis points to 2.12%.

Here's an idea. How about if the ratings agencies just get it over and done with and downgrade EVERYONE, right now. Huh? If slowing global growth in the face of a massive global debt burden is going to see a cascade from the US to France and everywhere else, then surely, over time, everyone must end up being downgraded. Why not just get it over with and stop the turmoil? Because you know what? If everyone that ever had a AAA now has no more than an AA+, then AA+ becomes the new AAA. In other words, relative ratings imposed by agencies no longer hold any meaning, if they ever did in the first place. Oh and last night the currency of AAA-rated Australia fell two cents to US$1.0179. It's down about 10% since the US downgrade to AA+.

New South Wales is considered a better credit risk than the United States of America. I live here, and I think that's hysterical.

Gold was naturally the recipient of outflowing global funds last night. It's up US$51.30 to US$1795.40/oz and traded briefly above 1800. Gold is often scorned as an investment because it pays no interest, but then nor do short-term US Treasuries. Gold was also preferred last night to the other safe haven – the Swiss franc – because the Swiss government announced it would pursue further efforts to cap the currency. The yen is also seeing steep inflows despite the Japanese Ministry of Finance having a long record of currency manipulation. The euro was carted, as was the pound which one might say has its own issues at present, sending the AA+ US dollar index up 1% to 74.79.

Silver also jumped 4% last night, to US$39.29/oz, but base metals were mixed because the LME closed at the time when Wall Street was recovering. Copper is down 1%.

Oil has fallen steeply these past few sessions as one might expect, but last night, and despite the stronger greenback, Brent crude jumped US$3.68 to US$106.53/bbl and West Texas jumped US$2.79 to US$82.09/bbl. The spark was a surprising drop announced last night in last week's US crude inventories, but there has also been talk that OPEC might step in with production cuts in order to stem the slide. Short-covering drove the rallies.

Funny – it was only a few months ago OPEC was arguing over production increases to cap the oil price in the Arab Spring.

The SPI Overnight fell 99 points or 2.4%.

I have been pointing out for a few days now that markets never ultimately turn on one day's massive selling and that subsequent bounces are usually met with more selling. So far that scenario is playing out. At present, as we have seen, there are plenty of punters who see sufficient value at these lower multiples to pile into stocks. Markets usually only turn when everyone, including the value-seekers, finally give up the market for dead. And that usually happens after the volatility has settled down.

Rudi will be appearing on Sky Business today at noon and then by popular demand, FNArena's own Market Insight program returns at 4pm on BRR. You can watch the show live at www.brr.com.au and it will afterward be available as a vodcast. 

[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: Cavalry Arrives, And It’s Not The Fed

By Greg Peel

The Dow rose 423 points or 4% to 11,239 while the S&P gained 4.7% to 1172 and the Nasdaq jumped 5.3%.

Wow.

Someone might be able to correct me, but I don't believe there has been as volatile a day in the Australian market as there was yesterday – down 5% and up 7% – since I was a young buck yelling myself hoarse in the SPI pit in October 1987. I don't recall a day of such intra-day extremes in 2008.

Realistically there was not a lot of selling on the open yesterday, only selling orders, given the market pretty much opened down 4% before it found action. That sparked a panicked exit from some until the buyers, who have been waiting for it all to get just too silly – and 5% down seemed silly enough – responded. We started to rally until Beijing announced its inflation numbers (more on that in a moment), fell back again for a while, and then the buyers regrouped for an unprecedented assault.

I am reminded of the scene in the 1980s movie Trading Places when Eddie Murphy says to Dan Aykroyd “Now?” and gets a no, then “Now?” and gets a no, before finally getting a “Now!”.

Media reports suggest the market turned on rumours the Fed was going to announce QE3 last night. I believe that's rubbish. The Fed was to hold a scheduled meeting and there's been talk of QE3 for a month or more, particularly in the last few trading days. If someone had “started a rumour” about QE3 the response would have been “Gee, thanks Scoop”.

I suggest the market simply became too oversold and all that was needed was for the first trickles of all that cash that's been sitting in investment portfolios to suddenly be converted into stock investments. If we need to find a trigger, we could look to various announcements from the big banks that they were materially cutting their fixed rates on mortgages. And also that RBA chairman Glenn Stevens made an unsolicited statement (a very rare occurrence) that the central bank was conducting open market operations as it does every day and had noticed no signs of dysfunction – of any credit crunch.

Funnily enough, the two are almost contradictory. Media reports suggest the big banks were “backing the predictions of the futures market” in assuming the RBA would cut rates. This, again, is rubbish. There may be some truth that Westpac (and thus St George) is backing its own economist's outlier call, but the reality is the banks can use the futures market to hedge their short term money. That's what the futures market is there for – it's not there to “predict” the future. Contrary to the rantings of moronic politicians (pardon the tautology), Australia's banks are locked in vicious competition. Yesterday's monthly home loan demand data showed a steep fall. The banks need to lower rates to attract customers and market share and the futures market is currently offering a capacity to lock in those rates in the short term. Banks do not “predict”.

The fact that the RBA found no tightening of money markets tends to shoot down expectations of a rate cut in September at this stage. We recall that the RBA was very, very close to raising in August and the only thing stopping it were debt issues in Europe and the US. Financial markets have become more volatile since but aside from the S&P downgrade, which had been on the cards for months, the only other thing that's changed is that the ECB is in supporting Spanish and Italian bonds. The RBA is only going to cut if an “emergency” is upon us. This is not 2008. Banks are not illiquid and the world is not leveraged to the hilt. The most likely outcome at this stage is that the RBA will hold fast in September, noting that inflation expectations will have eased on the recent drops in commodity prices.

Another “trigger” was in the Chinese data itself. While CPI inflation ticked up to 6.5% from 6.4% – the highest level since June 2008 – and panicked the market once more, closer scrutiny showed that non-food inflation actually fell. (Note that Beijing does not publish a “core” inflation level such as those Western central banks rely on.) While the price of food, and especially pork, is a lot more significant to the poorer Chinese, there are seasonal and weather issues behind the 14.8% food price inflation reading and economists have been expecting a peak soon. The non-food measure backs up expectations of a general peak in Chinese inflation. Even though the PBoC was never going to tighten in the face of global calamity, these data provide relief from global anxiety.

There was always a possibility, of course, that inflation could return if the Fed announced QE3, thus downgrading the US dollar, and thus forcing commodity prices back up as was the case in early 2008. So let's now move to last night's Wall Street action.

Whether or not the market was expecting a QE3 announcement, Wall Street opened with the Dow up a couple of hundred points. I have noted in recent reports that actual QE3 – meaning quantitative easing in the form of Fed purchases of US Treasuries – has never appeared to be on the cards. The Fed has previously intimated that were the US economic recovery to continue to falter, and inflation give way to disinflation, then it would consider fresh measures. Those measures, however, would not take the form of Treasury purchases. Rather the Fed had suggested it would ratify the “extended period” for “exceptionally low rates” first and perhaps lower the central bank rate on US commercial bank deposits, making the “parking” of money by the banks less attractive and lending into the economy more attractive.

So as it was, when the Fed statement was released at 2.15pm New York time, it simply suggested that:

“The committee currently anticipates that economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013".

That was it. It wasn't even a ratification of the time frame, given “likely to warrant” is not “they will be kept at”. It's less of a pledge and more of a prediction. But it is pretty much exactly what the Fed had suggested it would do. I noted yesterday that the Fed is not in as potent a position as it was in 2008. In 2007, the Fed funds rate was 5.25%. By December 2008, that rate had been cut to zero (0.00-0.25%). By March 2009, the rate had been effectively cut into the negative (QE1) and it was cut further into the negative in September 2010 (QE2). Since the credit crisis began, the Fed balance sheet has been quadrupled. There is a lot less room to move today.

The Fed has also suggested in recent times that it, alone, cannot be expected to carry the can. It would not act, Bernanke pointed out, if there were not fiscal measures also applied to support stimulus. Since then we've gone the other way – a dysfunctional Congress has applied “anti-stimulus”. It is significant that the Fed set its time frame to mid-2013. It takes the low rate period to beyond the next US election.

The Fed has said to the government, “We're giving you time to get your house in order”. The Fed has said to Wall Street, “It's time you guys pulled your fingers out as well”. 

So was that very bad news? The statement noted that in 2011, the US economy had grown at a “considerably slower” pace than previously anticipated. That in itself might be enough to scare away stock investors but the Fed also noted some of the weakness can be attributed to the ramifications of the Japanese earthquake. And let's face, did Wall Street really need the Fed to inform it the US economy was growing more slowly than anticipated?

Anyway, there was clearly a cohort of traders who were simply expecting a proper QE3 announcement. It didn't come, so they sold it. Indeed, all hell broke loose. The Dow plunged about 400 points to be down about 200 points. But the real action was in other markets, particularly in the “safe haven” trades.

The Swiss franc exploded up 5%. For a single day's move in a currency, and one that has recently seen a rate cut intended to cap the buying, that is an extraordinary move. Spot gold traded up US$60 from Monday's New York settlement to almost US$1780/oz. Investors ploughed into US bonds – yes, the one's that are meant to be worth less now, not more – sending the two year yield to a historical record low of 0.17%, the five-year also to a record low, and the ten-year to 2.04% – almost the 2008 record low. That was around another 20bps drop in the tens. 

But then, as had been the case in Australia yesterday, a bugle sounded in the distance. 

And in rode the buyers, and they had numbers. They were looking at a US stock market so oversold that the average dividend yield offered a significantly higher return than a US bond. They were looking at that scenario continuing through to mid-2013 on the Fed's suggestion. They were looking at a retailer of electronic gadgets (Apple) now the biggest company in America by market cap, having overtaken the mighty Exxon-Mobil. This was no short-covering rally. The volumes on the upside were just as huge as the volumes had been on the downside in previous sessions. This was real.

And so the buyers chased the market up to the close, and hence a 429 point up-day in the Dow. That was about a 600 point rally – the sort of moves not seen since 2008.

The Swissy retreated, but not by much. Gold fell back to be only up US$24.80 from Monday at US$1744.10/oz. And US bond yields also bounced, but only in the long end, with the ten-year back to 2.19%. Why only the long end?

Well the Fed has as good as shut down the US short term money market. Traders in overnight to two-year money are pretty much out of a job because there is no reason for prices to move at all until mid-2013. The market will still operate comfortably, but rates are as good as fixed.

Just out of interest, before the Fed announcement the US Treasury held a scheduled auction of three-year notes. They settled at the lowest yield in history, and foreign central banks bought a whopping 48% compared to a running average of 34%. 

Standard & Who??

It was also a wild ride in commodities. At the depth of the post-Fed stock selling, both benchmark crudes “tanked” again before closing. West Texas fell to just above US$75. Trade continues on the electronic Globex exchange thereafter nevertheless, and now Brent is up US$1.35 to US$104.96/bbl and West Texas is up US83c to US$82.14/bbl from Monday's prices.

The LME closes at 2.30pm NY and the Fed statement came out at 2.15pm. Metal price movements to that point were all over the shop but mostly slightly higher, but they are yet to respond to the late turnaround in sentiment.

And the humble Aussie? As noted, currency markets had one of their wildest sessions in history last night. Having fallen below parity in Australia yesterday, the AUD was holding just over parity after the Fed announcement. Then it rallied nearly two cents to US$1.0375. The US dollar index is now down 1% to 73.95.

The SPI Overnight is up 114 points or 2.9%.

What now? Have we turned? As I've been saying for the last couple of days, sharp rallies are a common occurrence after enormous falls. They often manage only to find sellers who were too slow to move the first time around and thus they ultimately fail. Thereafter, we usually drift lower before the “real” turn, to lower levels than before.

However, I will say that these sharp rally incidences in the past have often been driven mostly by short covering and not by actual buying, which is often apparent through volumes being a lot lower on the way up than they were on the way down. This time the volumes last night to the upside (which is measured by “up-tick” trades) matched the huge volume seen on Monday on Wall Street the way down.

This is a good sign. But that's all I would say at the moment. The market is still fragile.

One last comment. At the depths of yesterday's market in Australia you could buy the shares of a big bank at a fully franked yield greater than the interest rate cost of a margin loan to buy them – ie, positive carry. If's that not an oversold market I don't know what is. Sure – share prices can fall further and dividends can be cut, but the Aussie banks are not in the same position they were in 2008. They are today among the most highly capitalised banks in the world, they are carrying provisions against disaster, and their payout ratios are not as high as they were pre-GFC. 

[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: Ugly

By Greg Peel

The Dow fell 634 points or 5.6% to 10,809, the S&P fell 6.7% to 1119 and the Nasdaq fell 6.9%.

At the end of the day the selling was just too overwhelming. As we saw in Australia yesterday, there are those in the market who consider stocks to be oversold and considered the S&P downgrade of the US to be of less significance in an already de-rated market than doomsayers might suggest. The ASX 200 rallied back from an initial plunge of around 100 points to be only down about 25 points but when Asia opened to the downside and didn't bounce, the sellers swamped the buyers.

Wall Street's also attempted a rally, taking the Dow from 600 points down before 3pm to around 330 down half an hour later. The buying surge at that point looked it might gain momentum but it is in the last hour when margin call selling hits the market, as well as redemptions, if any windows are open. The suggestion is that hedge funds were leading the exodus, many having been established post 2008 and looking good up until recently. Volume on all US stock markets was enormous by recent standards. 

Selling in Europe was no less ugly, and across the globe the worst performing sector was financials. Despite the Fed declaring that no US bank would be required to increase capital as a result of the downgrade, all banks in the US and Europe were down double digit percentages. Bank of America has its own problems as well and was down 20%. Government-sponsored agencies such as Fannie Mae and Freddie Mac were, “by default”, also downgraded by S&P.

The obvious question is: Is that it? Last night saw the biggest plunge since 2008, volume was heavy and the VIX volatility index leapt 50% to 48 – well into panic territory and also the highest level since 2008. But then the same question we're asking on a day when the Dow is down 634 we were asking last Friday on the 512 drop and on the Wednesday with a 266 point drop. This is not a market to play in. Buying opportunities should not be exploited until volatility eases unless you are a very bold day-trader. There is no doubt a sharp rally of a day or more around the corner but that is very unlikely to represent the turn. Turns only come when no one is expecting them, and if you miss the first few percentage points on the true recovery rally – if and when it comes – then you're not missing much.

Retail investors are heavily weighted in cash, both in Australia and globally. There is thus less of a chance of a wholesale retail dump, although clearly long term investors are still holding proportions of equities and hurting. If at this point you are doing no more than crossing your fingers and willing a bounce, then ask yourself if that is sensible. The risk is still very much to the downside and sharp rallies, as noted, likely temporary at this stage. If you can afford to be more circumspect then your portfolio is better positioned on a longer term basis.

History shows that the impact of a credit downgrade does not last long. The problem is this is not a credit downgrade in isolation. Indeed, on the strength of the selling one would argue the downgrade really doesn't have that much to do with it. Fears of a recession had already manifested. Debt issues in Europe were beginning to look insurmountable. Note, however, that at 1119 the S&P 500 still needs to fall another 8.7% to hit the July 2010 low of 1022 – the last time recession fears were heightened. That was saved by QE2. The Fed meets tonight.

Wall Street does not expect QE3 to be announced tonight but the Fed will need to say something calming. QE2 was announced in August last year after Wall Street had bounced off the July low and failed again before hitting its final 2010 low in late August at 1047. The Fed has already suggested that while QE3 is standing by it will not take the same form as QE2, being that of buying US bonds. It may simply be a definitive time frame for zero interest rates and a reduction in the Fed's bank deposit rate. Fiscally, there is nothing the US Administration can do. It's just been forced to go the other way and tighten.

So the US government is impotent and the Fed less potent in its options than in 2008. It must be acknowledged, however, that a Fed decision to lower its deposit rate would be made because US banks are holding too much cash and not releasing it into the economy via lending. This is the diametric opposite of the situation in 2007-08. Australian banks are very well capitalised now and still carrying provisions against disaster. Across the whole economy, from US mega-banks to humble investors, cash levels are historically high. 

As stocks were sold off in the “risk out” trade last night, their risk partners in the form of commodities were also dumped. Brent oil was down US$6.05 or 5.5% to US$103.83/bbl. West Texas fell by the same amount but 7% to US$80.78/bbl. Aluminium fell 1.5%, copper 4%, nickel and zinc 6% and lead and tin 7%.

Another difference between the various “rout” days of 2008 and now is in the gold market response last night. In 2008 gold was mostly sold heavily in such sessions as desperately overleveraged investors were forced to raise cash wherever they could. Last night gold rallied US$55.90 or 3.4% to US$1719.30/oz from its level on Friday night. It is sovereign debt risk in the spotlight now, not investment bank risk. Gold was last night one of two safe havens. 

Silver rallied 2% to US$39.05/oz, somewhat splitting the difference between commodity and precious metal currency. But the other safe haven was the ironic one. When Greek debt gets downgraded, the world sells it. US debt was downgraded and last night the world bought it with their ears pinned back, sending the benchmark 10-year yield down 22 basis points to 2.33%. That's a 9% rally in an asset now deemed to be worth less than it was on Friday.

The now AA+ rated US dollar also rallied last night in index form, but only by 0.4% to 74.83. The dollar was fighting moves into the Swiss franc and yen but the euro and pound were hammered. And the AAA rated Aussie has also been pounded against the AA+ rated dollar since Friday night, falling two and a half cents to US$1.0187.

Rather makes a mockery of the downgrade, and for that matter any credit agency ratings. At the end of the day a downgrade of the reserve currency is almost by definition absurd given the reserve currency is the global benchmark. Until someone else has more guns and more printing presses than the US, it will remain AAA “by default” and everyone else can be rated around it. The world sold the debt of AAA nations to buy AA+ US debt last night.

And AAA Australia, which avoided recession, is not trading above its stock market lows of 2010. We've already smashed those and are smarting from the amount of foreign investment now being double-whammy hit on both price and currency and subsequently dumped. After yesterday's 3% fall in the physical market the SPI Overnight is down another 156 points or 3.9%, which brings it roughly into line with the fall in S&P 500 last night but to a much lower equivalent level.

China's monthly data dump is today. 

[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

Oz Residential Construction Improvement Not Expected Until 2012/13

- BIS Shrapnel releases Building In Australia 2011 report
- Oz building commencements tipped to recover from 2011/12
- Commercial and industrial building the key driver
- Residential construction improvement not expected until 2012/13

By Chris Shaw

The Australian housing market has seen limited activity with respects to dwelling starts in recent months, but the outlook for building construction overall is not all bad according to BIS Shrapnel's Building in Australia 2011 report. The report suggests the market will see a moderate recovery in building commencements from 2011/12.

The recovery will follow an estimated 12% decline in 2010/11, which BIS attributes almost entirely to the winding down of the construction related “Building Education Revolution” program. The fall-off from the end of this program is expected to more than offset an emerging recovery in commercial and industrial building.

It is this recovery in commercial and industrial building BIS managing direction Robert Mellor expects will be a key driver in any improvement in building commencements in 2011/12. Also important will be increased construction in the health care sector.

As Mellor points out, improvements in the Australian economy since the GFC have created a more conducive environment for commercial and industrial development. As well, $7 billion in new hospitals and other health care facilities are due to commence in 2011/12.

Mellor expects residential building will make only a minimal contribution in 2011/12, due largely to a decline in activity following the expiry of the First Home Owner's Grant Boost Scheme. There will also be a winding down of public housing stimulus by the Federal Government.

While first home building will decline, Mellor expects a healthy rise in multi-unit residential starts, which reflects an improved financial environment allowing developers to better fund new apartment projects.

Residential dwelling construction is expected to improve in 2012/13 on the back of improved economic growth through 2011/12 and higher overseas migration in response to increasing labour requirements. What should also drive the dwelling construction market in Mellor's view is activity is well below underlying demand nationally. These shortfalls are most apparent in the Queensland, Western Australian and New South Wales markets.

While BIS Shrapnel is forecasting two interest rate rises in 2011/12, which would take the variable rate to 8.2% by next June, Mellor suggests accelerating economic growth should continue to support a rise in residential demand. This should be most pronounced in those states where the shortfalls mean pent up demand pressures are emerging.

By 2012/13 Mellor expects the value of new residential building commenced should have increased by as much as 10%. These gains should be relatively equal across new houses and multi-unit dwellings, with the upturn to be concentrated in Queensland, WA and New South Wales.

Mellor sees these three markets as experiencing a rapid rise in dwelling deficiency, while activity is also likely to pick up given affordability has improved following solid income growth and weak price gains in recent years.

Any improvement in residential building should be short-lived in Mellor's view, as a ramping-up of resource sector investment and a subsequent skills shortage should drive up wage cost inflation. This should see the Reserve Bank of Australia turn more aggressive with respect to interest rates in 2013, BIS forecasting a peak in the variable rate of 9.4% in the second half of that year.

This will impact on affordability, so creating a downturn in residential construction before any upturn can fully play out. An ensuing economic downturn expected by BIS will see the value of residential building starts decline by 15% over 2013/14 and 2014/15 according to Mellor.

Any such downturn is likely to result in a substantial underlying deficiency of dwellings in most states, while Mellor sees prices in most states also declining in real terms. This will bring about a subsequent improvement in affordability.

During this period Mellor sees only moderate performance from the non-residential building sector and an easing in engineering construction building as mining investment projects are completed. This should free up capacity for residential construction into the next cycle, so new dwelling construction is forecast to reach a higher level from 2016.

In terms of state-by-state performance, Mellor is forecasting 15% growth in total building commencements in New South Wales in 2011/12, following by 14% growth in 2012/13. Residential construction growth should be very strong over these years.

Victoria in contrast is expected to record moderate declines in total building construction over the next two years, with both the residential and non-residential sectors expected to contract slightly. In Queensland 2011/12 should be fairly flat, before growth of 16% in 2012/13 as a sharp rise in residential construction kicks in.

In the South Australian market total building commencements are forecast to increase by 45% in 2011/12 given a rise in health sector building, before commencements decline by 32% in 2012/13 as projects are completed.

Mellor is forecasting a 28% rise in total building construction in WA for 2011/12 thanks primarily to activity in the non-residential sector, before a 5% decline in 2012/13. Tasmania is expected to deliver weak results in both years, BIS forecasting declines of 4% and 23% respectively as both residential and non-residential construction activity levels fall.

For the Northern Territory Mellor expects total construction growth of 24% this year given a rise in building in the social and institutional sectors, then a decline of 3% in 2012/13. In the ACT, total building commencements should weaken by 31% in 2011/12 given a correction in residential construction activity following a strong 2010/11. In 2012/13 Mellor expects the ACT market will record an increase of just 1%.
 

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

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

Ratings downgrades outnumbered upgrades over the past week by 15 to 11, bringing the total proportion of Buy ratings by the eight brokers in the FNArena database to 53.2%. This is down from 53.7% last week. Given the share market sold off quite heavily during the week, this is quite a remarkable observation. Obviously, expectations are being re-adjusted and more optimism is now disappearing from expert models.

Among those enjoying upgrades over the week was Echo Entertainment Group ((EGP)), where ratings were lifted on both valuation and strong near-term operating momentum grounds. Valuation was also the argument behind upgrades for Wesfarmers ((WES)) and Australand ((ALZ)), while upgrades continued for Premier Investments ((PMV)) following a recent strategic review.

On the downgrades side recent share price strength saw ratings cut for Aston Resources ((AZT)), while valuation was also the driving force behind downgrades for both OceanaGold ((OGC)) and Panoramic Resources ((PAN)). Mount Gibson ((MGX)) also saw two downgrades, both coming on the back of a poor June quarter production report and some emerging mine life and strategy issues.

While Aston experienced downgrades to ratings there were also modest increases to price targets, these reflecting potential upside if the company was to become a target given ongoing consolidation in the Australian coal sector.

Gindalbie ((GBG)) also enjoyed an increase in price target, along with a rating upgrade, on the back of changes to iron ore price forecasts, but target changes over the week were far more pronounced on the downside. 

These included Panoramic and OceanaGold as higher cash costs were built into broker models, as well as GUD Holdings ((GUD)) as brokers digested a slightly weaker than expected full year earnings result. Price targets for Navitas ((NVT)) were also lowered as a tougher outlook was factored into expectations.

Gindalbie's increase in price target was supported by increases to earnings estimates, while earnings forecasts were also lifted for Kathmandu after management delivered better than expected earnings guidance for FY11.

An initiation of coverage for Sandfire ((SFR)) saw a fall in consensus earnings estimates, while also bringing to the market an Underweight rating to offset the two existing Buy ratings in the FNArena database. 

The downgrades for OceanaGold also extended to cuts in earnings estimates, while to reflect lower coal sales in the June quarter there were reductions to forecasts for Aquila ((AQA)). As well, following a generally weaker than expected quarterly result from Macquarie Bank ((MQG)) both earnings forecasts and price targets were reduced across the market. 
 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 EGP 14.0% 43.0% 29.0% 7
2 WES 38.0% 63.0% 25.0% 8
3 CNA 60.0% 80.0% 20.0% 5
4 PMV 33.0% 50.0% 17.0% 6
5 GBG 83.0% 100.0% 17.0% 6
6 ALZ 33.0% 50.0% 17.0% 6
7 CHC 67.0% 83.0% 16.0% 6
8 GUD 67.0% 83.0% 16.0% 6
9 CPA - 29.0% - 14.0% 15.0% 7
10 ORG 75.0% 88.0% 13.0% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 SFR 100.0% 33.0% - 67.0% 3
2 AZT 100.0% 50.0% - 50.0% 4
3 PAN 100.0% 67.0% - 33.0% 3
4 OGC 100.0% 67.0% - 33.0% 3
5 MGX 63.0% 38.0% - 25.0% 8
6 AIZ 100.0% 75.0% - 25.0% 4
7 WEB 50.0% 25.0% - 25.0% 4
8 KMD 100.0% 80.0% - 20.0% 5
9 NVT 29.0% 14.0% - 15.0% 7
10 BHP 75.0% 63.0% - 12.0% 8
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 AZT 11.530 12.053 4.54% 4
2 GBG 1.098 1.133 3.19% 6
3 CPA 0.964 0.991 2.80% 7
4 PNA 4.527 4.587 1.33% 7
5 OZL 15.161 15.299 0.91% 8
6 KMD 2.153 2.170 0.79% 5
7 ORG 18.506 18.580 0.40% 8
8 CNA 120.800 121.200 0.33% 5

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 PAN 2.707 2.383 - 11.97% 3
2 GUD 10.637 9.748 - 8.36% 6
3 OGC 4.133 3.800 - 8.06% 3
4 NVT 4.709 4.350 - 7.62% 7
5 JBH 21.036 19.709 - 6.31% 8
6 ALZ 3.090 2.985 - 3.40% 6
7 SFR 8.565 8.293 - 3.18% 3
8 WES 34.171 33.128 - 3.05% 8
9 WEB 2.305 2.255 - 2.17% 4
10 BHP 54.244 53.069 - 2.17% 8
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 GBG 0.343 0.786 129.15% 6
2 NHC 17.713 28.568 61.28% 3
3 TPM 10.225 14.375 40.59% 4
4 PMV 33.598 40.810 21.47% 6
5 KMD 14.725 17.487 18.76% 5
6 SIP 2.886 3.029 4.95% 7
7 AGO 40.243 41.671 3.55% 7
8 CPA 7.029 7.186 2.23% 7
9 CDI 4.900 5.000 2.04% 4
10 CWN 52.575 53.363 1.50% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 SFR 12.500 - 3.233 - 125.86% 3
2 OGC 21.917 16.332 - 25.48% 3
3 PAN 28.350 21.575 - 23.90% 3
4 AQA 7.825 6.000 - 23.32% 4
5 MQG 325.557 282.629 - 13.19% 7
6 MGX 48.574 42.600 - 12.30% 8
7 DJS 32.650 28.925 - 11.41% 8
8 HZN 2.843 2.585 - 9.07% 4
9 GUD 85.717 79.000 - 7.84% 6
10 CNA 741.000 683.200 - 7.80% 5
 

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

Brokers Still Like The Banks

- Analysts now expect weaker credit growth
- Yet earnings impact not as significant
- Yields are strong and banks are defensive 


By Greg Peel

At FNArena's last update on the Big Four banks at the end of June, the current market correction (now worth about 13%) was only warming up. It began with renewed problems for Greece before spreading to Spain and Italy, and on to the US. In the interim, not only has the US economic recovery stalled but Australia posted a negative GDP and is suffering a severe consumer downturn.

At the end of June, bank analysts were unconcerned about the impact of a resurfacing eurozone debt crisis on the fortunes of Australian banks. While there was some risk of increased offshore funding costs as a result of higher global risk premiums, credit growth remained subdued in Australia. This allowed for a somewhat ironic twist that if the banks didn't have to borrow much more to fund low credit growth, then the impact of higher interest costs would be less.

Bank analysts have long expected an eventual recovery in business credit demand in Australia, although they have been forced into continually pushing out their expectations along the time curve. At end-June bank analysts were not exactly forecasting strong earnings growth for the banks, they just didn't see the need for the sell-off. Hence if we review the table below from that time, we see significant upside in each bank to its consensus target price.

At its July policy meeting, the RBA described credit growth as “modest”. At its August meeting yesterday, the RBA suggested credit growth is now “very subdued by historical standards”. At end-June economist consensus was for a rate rise in August. Today, well, economists have no idea what the hell's going to happen.

Bank analysts nevertheless agree with the central bank's assertion that credit demand has weakened. Today two brokers – Goldman Sachs and RBS Australia – have said as much in respective reports.

Goldmans is now expecting “significantly” lower credit growth than previously assumed, forecasting a recovery of only 7-8% per annum over the next three years. That's half the growth rate of the five years leading up to the GFC. Nor can the analysts rule out further deterioration given the current cautious Australian household.

RBS still expects a more positive outlook for business credit growth ahead, but has now pushed out the expected timing of any improvement. It is notable that the RBS analysts were once skeptical of consensus rebound expectations and had long ago assumed a slower recovery, but now even they are shifting out into time.

In both cases, the analysts do not expect the impact on bank earnings to be proportionately equivalent.

Remembering that a bank effectively makes its money on the simple difference between its borrowing and lending rates, the irony is that earnings risk is reduced if they don't do much lending. Margins are more stable, bad debt risks lower, costs of doing business are lower, and capital requirements are more stable. There is therefore more potential risk of volatility of bank earnings in a boom-bust period (let's say 2004-09) than there is in a “chugging along in a quiet market” period (let's say 2010-??). Add that all up and Goldmans suggests that significantly lower credit growth should only lead to a subsequent 1-3% reduction in bank earnings.

RBA takes a different tack, comparing economists' consensus expectations for both credit growth and the labour market. The former we know are weak, but that latter remain strong. Given the resource sector employs less than 2% of the Australian workforce, RBS suggests there is a disconnect at work.

Taking labour market expectations, RBS suggests these imply business credit growth of 7-9%. Given exogenous (offshore) events are impacting on business confidence and thus the timing of a credit growth recovery, RBS has downgraded its bank earnings forecasts by 2-3%.

[RBS makes no suggestion that it is consensus labour market expectation that is unbalanced against credit growth expectation, meaning the analysts are not seeing a sudden jump in unemployment perhaps through retail sector lay-offs, for example, which is not beyond the realms one would assume.]

While this FNArena bank update draws specifically on only two broker reports, other brokers have been conspiratorial in their silence. Because when we compare the same table as above now updated to yesterday's closing prices, we note two things. One is that consensus target prices have ticked down only marginally, and the other is that the number of Buy ratings on the Big Four from the eight brokers in the FNArena database has increased from 14 to 17.

The target price adjustments have meant that those same upside-to-target percentages so significant in June remain stable in August – 10% for the Commonwealth ((CBA)) and around 20% for Westpac ((WBC)), ANZ ((ANZ)) and National ((NAB)). But this time I have also added a dividend yield figure.

The reason why I have should be obvious – those yields look pretty significant, particularly when one adds on the gross-up for 100% franking (not included in the table). Note that these are FY12 consensus forecast yields, meaning July 2011-June 2012 for CBA and October 2011-September 2012 for the other three.

What are the risks in investing in the Big Four banks today? Well, as we watch the market tanking the obvious answer is “share price downside”. Sentiment aside, downside risk can come from increased borrowing costs, increased bad debts, lower earnings and reduced payouts. But an interesting change has occurred.

In 2007-08, the bulk of Australia's bank analysts made a glaring mistake in assuming that because bank stocks were historically considered “defensive”, they thus would be a port in the storm of the credit crisis. The problem is that Australia's banks had switched from being defensive in the twentieth century to very cyclical in the noughties boom – so much so that they were always going to cycle down with all the other cyclicals in the bust. It took a while for bank analysts to figure this one out.

Today, analysts are suggesting that low credit growth will not impact too much on bank earnings. In other words, by any definition, Australia's banks are once again “defensive”. And those yields provide a buffer against further downside. All that is needed is for the market to adjust to this new (yet old) view as well.
 

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 Great Australian Nightmare

- Australian house prices are among the most unaffordable in the world
- the problem is nation-wide and not restricted to cities
- AMP sees little relief in sight


By Greg Peel

The rule of thumb is that house prices cross over into “unaffordable” territory when the median house price exceeds five times the median income. This suggests that unless you are earning $100,000 per year after tax then a house worth more than $500,000 in Sydney, for example, is unaffordable to you. I would wager, nevertheless, that there are plenty of people in Sydney on incomes of less than $100k with mortgages a lot bigger than $500k at present, which is why there were warnings from some economist circles prior to the GFC that Australia's debt-to-income ratio was dangerously overblown. It would all end in tears, they said.

It has ended in tears for many, but not for any vast majority of Australian mortgage-holders. The GFC saw Australian house prices dip around 10% net and then recover to new highs, before more recently plateauing. This is in stark comparison to the US, where the average house price has fallen by a third, and to other Western countries such as Ireland, Spain and to a lesser extent the UK. All along the issue in Australia has been one of lack of housing supply, countered by immigration rates, that have led most economists to assume Australian prices simply cannot fall. Never mind that Australia's household debt-to-GDP ratio exceeded that of the US before the GFC.

Australia's household debt blow-out nevertheless goes a long way to explaining why consumer spending has done nothing but trend down since the GFC, and savings trend up. This is not something that can be achieved overnight, and only now, some three years later, does the RBA suggest levels of debt, income, and savings are reaching what used to be historical norms.

In the meantime, there seems little end in sight to Australia's housing unaffordability. The economists at the AMP note that the past decade saw the median Australian house price more than double to $417,000 while at the same time the median income rose only 50% to $57,000. As the following graph depicting the ratio of the two shows, the unaffordability spike in the noughties was quite dramatic. And the broken line suggests that a return to affordability could be achieved if house prices now remained flat, but they would have to remain flat for another eight years.

Is that possible?

It was only ten years ago when Australian housing was considered affordable, AMP notes, but on a global scale it is now “severely” unaffordable. Maybe we should blame the Sydney Olympics, along with loose monetary policy and bank lending post 9/11. But it's not just a story about Australia's largest city. AMP notes unaffordability in Australia is “all-pervasive”, impacting on every state and territory, city and town. City-wise, back in 2011 houses in 50% of suburbs Australia's five major cities were considered affordable, but now that number's fallen to 4%.

As the following table from the AMP shows, Australia is very expensive compared to a range of other Western nations.

The result of such high prices is quite simply a barrier to entry to Australia's first home buyers who by definition are mostly young. Boomers and Gen-Xers who bought the family home prior to the twenty-first century are sitting pretty, and in some cases laughing all the way to the bank. It does now mean, suggests the AMP, that The Great Australian Dream is simply that – a dream. Even if the average Australian first home buyer does succeed in living the dream, “high house prices mean taking on very high levels of debt,” says the AMP, “that will constrain their lifestyle for many years into the future”.

It doesn't seem to be deterring everyone nevertheless – there are new entrants to the Australian property market every day. But what are the chances of prices returning to the “affordable” range? On that, the AMP has the last word:

“Significant, widespread house price drops appear unlikely in Australia, meaning that housing will remain unaffordable for many years to come".


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

China Leading Global Equities?

FNArena has added another video to its Investors Education section on the website by ATW founder and trader Jerry Simmons.

The observation stands on its own merits: the Chinese share market has led global equities and risk assets at crucial turning points since the GFC. Think late 2008-early 2009 and think mid-2010. ATW's Jerry Simmons has picked up on the theme, which might not be unimportant given Simmons' technical analysis shows the outlook for Chinese equities is bullish right now.

In addition to the Chinese equity market, Simmons observes the CRB Index, widely used as a proxy for commodities, has been putting doji bars on price charts. These technical signals often indicate a pending reversal in trend.

While gold is attracting a lot of attention these days, Simmons points out there are two strong major resistance zones at US$1605-1625 and then at US$1665-1695/oz. If the precious metal (or should that be "currency" ?) manages to break through this resistance, there's already another zone of strong resistance waiting at US$1730-1733/oz. Initial strategic support is located at US$1575-1580/oz.

Copper is looking bullish too and it would appear resistance at US$4.42/lb will be put to a test. On the other hand, a break below 4.20 could seriously damage the bullish structure, Simmons believes.

His analysis suggests the outlook might have turned bullish for financial stocks in the US.

To view the ATW Strategic Prep Video click HERE or visit the FNArena Investors Education section of the website.

Here's the direct link: http://www.fnarena.com/index4.cfm?type=dsp_front_videos&vid=48

All views expressed are Jerry Simmons's, not FNArena's (see our disclaimer).

Jerry Simmons has over 25 years of full-time trading experience. He is the senior partner and head mentor for the “Masters” Programme within the education system at New York based Advanced Trading Workshop (ATW). ATW recently set up shop in Australia through the establishment of ATW Australia (since mid-2010).

FNArena is pleased to have Jerry Simmons as a highly valued contributor to its service which aims at both educating investors and assisting them with their own market analyses.

The above mentioned videos can be accessed via the FNArena Investor Education section at http://www.fnarena.com/index4.cfm?type=dsp_front_videos)

About ATW Australia
Founded in June 2010, ATW Australia is a “one-stop-shop for all a trader needs to succeed”: quality education for new traders, superb advanced trading education, fast unfiltered data, a world-leading trading platform, customer oriented competitive brokerage, quality ‘Made in the USA’ specialized trading computers, trading magazines, and the all-important psychological mentoring and coaching for traders. The trading educational products are provided by the Advanced Trading Workshop, Inc. in New York, all other services are provided by a network of partners that were chosen based on their superior products and services in their specific field of expertise. FNArena is one such partner.

To learn more visit www.advancedtradingworkshop.com.au.

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.

article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

In a big week for ratings upgrades the FNArena database has recorded a total of 24 ratings increases in the week ending on Friday 25th July, against just 11 downgrades. This brings the total proportion of Buy ratings on stocks covered by the eight brokers in the database to 53.9%, up from 53.2% last week.

One stock enjoying upgrades to ratings during the week was Coal and Allied ((CNA)), a largely in-line quarterly production report being boosted by changes to coal price assumptions and recent share price weakness to generate two broker upgrades.

Super Retail ((SUL)) was also upgraded on relative valuation grounds following ongoing reviews of the retail sector, while recent share price weakness improving the value on offer was behind upgrades for Independence Group ((IGO)) and Flight Centre ((FLT)).

Gindalbie ((GBG)) has addressed some of its equity requirements by announcing a raising and this was enough to prompt one upgrade in rating, others enjoying upgrades over the past week include Peet ((PPC)), Macquarie Group ((MQG)) and REA Group ((REA)).

Retail stocks dominated the downgrades side of the ledger as brokers adjusted models following last week's downgrade to earnings guidance from David Jones ((DJS)). Aside from DJS, Premier Investments ((PMV)) and Myer ((MYR)) experienced downgrades, while more difficult operating conditions similarly saw ratings for GWA Group  ((GWA)) and Paladin ((PDN)) lowered.

In terms of changes to price targets during the week, increases were all relatively small in magnitude and reflect modest changes to earnings forecasts. Those with targets increasing included Super Retail, Gindalbie and Iluka ((ILU)).

It was a different story for decreases to consensus price targets, with revised estimates across the retail sector seeing targets cut by 7-23% for the likes of David Jones, Myer, Premier Investments and Harvey Norman ((HVN)). In keeping with its downgrade in rating Paladin also experienced a near 20% cut in consensus price target, this reflecting ongoing production issues.

In contrast to Paladin, Energy Resources of Australia ((ERA)) enjoyed some increases to earnings forecasts to reflect management lifting annual production guidance following the re-starting of operations.

Eastern Star Gas's earnings forecasts also rose during the week, while Iluka also enjoyed a modest overall increase in earnings forecasts. Those companies experiencing cuts to earnings estimates included Coal and Allied given changes to underlying assumptions, while Rio Tinto ((RIO)) and Santos ((STO)) also faced cuts following what in both cases were mixed June quarter production reports.

 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 SUL 17.0% 50.0% 33.0% 6
2 WOW 38.0% 63.0% 25.0% 8
3 IGO 25.0% 50.0% 25.0% 4
4 FLT 63.0% 88.0% 25.0% 8
5 CNA 40.0% 60.0% 20.0% 5
6 NWS 33.0% 50.0% 17.0% 6
7 PPC 83.0% 100.0% 17.0% 6
8 GBG 67.0% 83.0% 16.0% 6
9 REA 43.0% 57.0% 14.0% 7
10 ANN 29.0% 43.0% 14.0% 7

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 CEU 33.0% - 17.0% - 50.0% 6
2 NHC 67.0% 33.0% - 34.0% 3
3 PMV 50.0% 17.0% - 33.0% 6
4 ESG 75.0% 50.0% - 25.0% 4
5 GWA 67.0% 50.0% - 17.0% 6
6 RRL 50.0% 33.0% - 17.0% 3
7 MAP 67.0% 50.0% - 17.0% 6
8 AUB 75.0% 60.0% - 15.0% 5
9 PDN 57.0% 43.0% - 14.0% 7
10 STO 88.0% 75.0% - 13.0% 8
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 CEU 0.480 0.538 12.08% 6
2 RRL 2.560 2.850 11.33% 3
3 SUL 7.358 7.575 2.95% 6
4 ANN 14.271 14.600 2.31% 7
5 WOW 29.446 29.725 0.95% 8
6 MAP 3.555 3.586 0.87% 6
7 NWS 20.400 20.450 0.25% 6

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 PDN 4.023 3.193 - 20.63% 7
2 PMV 6.742 6.183 - 8.29% 6
3 HVN 3.315 3.084 - 6.97% 8
4 GWA 3.460 3.228 - 6.71% 6
5 GBG 1.158 1.098 - 5.18% 6
6 MYR 3.210 3.054 - 4.86% 8
7 ABC 3.535 3.384 - 4.27% 8
8 WBC 25.170 24.233 - 3.72% 8
9 WES 35.475 34.171 - 3.68% 8
10 ANZ 25.844 24.906 - 3.63% 8
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 ROC 1.701 2.996 76.13% 4
2 HZN 2.780 4.068 46.33% 4
3 TPM 9.300 10.225 9.95% 4
4 AWE 10.957 11.571 5.60% 7
5 HGG 17.294 18.058 4.42% 5
6 NWH 22.700 23.700 4.41% 3
7 ILU 111.263 114.100 2.55% 8
8 NWS 128.147 131.305 2.46% 6
9 SUL 51.733 52.867 2.19% 6
10 FLT 179.600 183.525 2.19% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 PDN 9.165 5.631 - 38.56% 7
2 GBG 0.529 0.343 - 35.16% 6
3 GRR 13.850 11.350 - 18.05% 4
4 STO 58.913 49.713 - 15.62% 8
5 WDC 70.838 63.238 - 10.73% 8
6 FMG 80.506 72.735 - 9.65% 8
7 WHC 41.550 38.400 - 7.58% 6
8 NCM 207.963 194.438 - 6.50% 8
9 CNA 792.280 741.000 - 6.47% 5
10 MAP 8.659 8.116 - 6.27% 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: The Pendulum Swings

By Greg Peel

The Dow rose 202 points or 1.6% while the S&P gained 1.6% to 1326 and the Nasdaq added 2.2%.

Wall Street was off to a flier last night on before-the-bell developments which included US earnings results and signs of positive moves in Europe.

European officials are due to meet on Thursday night to discuss the best option for dealing with Greek debt and how the situation can be contained to ease the contagion fears that have spread all the way to Italy. Up to now, everyone had come around to the idea of a partial default on Greek debt – one which would imply the burden being shared by bondholders as well as eurozone taxpayers – but the stumbling block had been the ECB. The central bank's largely anachronistic president Jean-Claude Trichet has maintained, as recently as last weekend, that if the ratings agencies call a partial default a default then the ECB can't hold Greek debt as collateral.

But blow me down if last night someone didn't see the sense in perhaps tweaking those rules. It must be a tough decision – should we head off the complete and total collapse of the European Union and the global financial markets which would potentially send the world into a severe and extended depression at the risk of upsetting a tired, old, increasingly irrelevant banker?

Austrian central bank chief and ECB board member Ewald Nowotny last night suggested that perhaps a short-term partial default could be accommodated under the rules so to avoid outright default, which would otherwise be inevitable given Greece can no longer make its interest payments. At last, a light at the end of the tunnel.

With that news the euro traded higher, and Europe was further appeased by strong demand for a Spanish sovereign bond auction held last night, albeit the interest rate was a lot more expensive than at the previous equivalent auction.

IBM (Dow) had already posted its solid result after the bell on Monday night, and in last night's trade it closed up 5.7%. Before the bell Coca-Cola (Dow) posted its result and provided a very strong “beat”, sending shares in the usually dour staple up 3%. IBM and Coke together represented a good deal of last night's move in the 30-stock average.

Bank of America (Dow) didn't help. Both it and Goldman Sachs missed on their results, sending both down around 1%, but America's largest holder of non-agency mortgages – Wells Fargo – posted a very strong result which sent its shares rocketing 5.7%.

Amidst the excitement of earnings results, there was also good news on the housing front. Bad weather had delayed many housing projects before May but with the skies having cleared, May saw a 14.6% jump in housing starts to 629k units when economists had forecast 570k units.

By lunch time the Dow was up 100 points, and then around 1.30pm President Obama made an impromptu press statement. It appeared the “gang of six” which has been leading the debt ceiling/budget cut negotiations had reached a level of resolution the president found workable. Concessions were made on both sides. For once it really did look like America could avoid a default of its own.

It was always going to happen of course, particularly given mounting pressure from major US banks and corporates, but even if the handshakes are made on this deal there remains one not insignificant stumbling block. The subsequent bill still has to be passed by the House.

We are reminded of 2008, after the fall of Lehman, when a hastily prepared and brief bill proposing the TARP was put to the House. Knowing that they had the Administration by the you know whats, every self-serving, parochial, popularity-seeking representative saw the chance to blackmail the government into providing home state rewards as a trade-off. After another week the brief TARP document had grown to hundreds of pages of conditions as global stock markets free fell in the meantime. Will we go through the same process again?

If the risk trade was the winner across the markets last night, gold was the victim. Good news was always going to be a trigger for profit-taking and psychological levels like 1600 are good places to do so. Gold fell US$16.30 to US$1588.80/oz. Silver dropped 4%.

Base metals have been waiting quietly for something to happen either way, and last night the dam broke to the upside. All metals were up 1.5-2.5%. Oil joined in, with Brent rising US$1.01 to US$117.06/bbl and West Texas US$1.57 to US$97.50/bbl. 

The US dollar was caught between all sorts of influences. The euro was stronger but the local debt resolution was positive and there was some movement out of the safe haven of the Swiss franc. The dollar index is down 0.3% to 75.13. But it's a lot more straightforward when it comes to the global risk proxy, and the Aussie has jumped 1.2% to US$1.0733.

The SPI Overnight rose 49 points or 1.1%.

After the bell it was the turn of tech heavyweights Apple and Yahoo to report, and on much better than expected sales of iThings Apple shares are up over 5% in the after-market. Yahoo was unable to match the excitement, nor the stunning earlier result of competitor Google, and its shares are down 1.5%. Let's not forget though that despite not being a Dow stock, Apple is the second biggest company in the US by market cap after Exxon. So a big move for Apple means a big move for Wall Street.

A lot of confidence has been placed in the US earnings season, but it had seemed positive results may yet be overshadowed by pan-Atlantic debt issues. Have we turned a corner? It's all up to politicians in Europe and the US. 

[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.]