 By Greg Peel
The Dow rose 96 points or 1.0% while the S&P climbed 0.9% to 1097 and the Nasdaq gained 0.9%.
Apple posted a strong result after the closing bell, as did Texas Instruments, but I'll get to that in a moment.
Wall Street's regular session was yet another of me leading you leading me. Some positive earnings results, including equipment maker Eaton, publisher Gannett and toy maker Hasbro set an early positive tone, and sent the US dollar downward once more. Further comments from the New York Fed regarding the "testing" of the reversal of repurchase agreements also weakened the greenback. This "testing" is a precursor to a Fed exit strategy for monetary stimulus, which might have been positive for the dollar, except that the Fed stated that in no way could these tests be taken to imply an interest rate rise was near. So the US dollar dropped instead, to a new 14-month closing low of 75.37.
As the US dollar dropped, commodity prices soared once more. Gold jumped back US$13.10 to US$1062.10/oz. In London, aluminium, nickel and tin jumped 2% and copper, lead and zinc rose over 3%.
Oil jumped US$1.08 to US$79.61/bbl.
Commodity price increases across the board sent the prices of gold, material and energy stocks higher on Wall Street. As stocks rose, the dollar continued to weaken. Oil traders were buying on the back of the weaker dollar and strong earnings results. In London, one trader told Basemetals.com "It is being governed by the weight of money. It is not going up on demand; rather it is money flows".
Stocks rally, the US dollar drops, commodity prices rise, stocks rally, the US dollar drops...
Volume on the NYSE was decidedly light last night, adding to volatility. But implied volatility as measured by demand for option protection is now at a two-year low. The VIX dropped to 21.35 last night, and is clearly headed towards "complacency" territory. A lack of options demand and a VIX under 20 is often a precursor to a market top.
That was the story of the day-session. After the bell, tech leaders Apple and Texas Instruments reported their quarterly results.
Apple has a reputation for "sand-bagging", which means deliberately understating earnings guidance so to always look good at result time. But an earnings per share of US$1.82 still blew away Wall Street's US$1.42 estimate, and revenue of US$9.87bn easily beat the expectation of US$9.42bn. What's more, sales of 7.4m iPhones were much greater than expected, and iPod sales were also through the roof. It was a brilliant result, at least as measured against expectation, and Apple shares are up 7% in the after-market. On that basis, Apple shares should hit an all-time high tonight.
In Apple's shadow was Texas Instruments, which posted an EPS of US42c to US39c expectation and US$2.88bn revenue to US$2.82bn. Its shares are up 2%.
It should not, nevertheless, come at a huge surprise that US tech stocks are performing well. Apart from the obvious attraction of the game-changing iPhone, tech is a huge export sector that is benefiting from the weaker US dollar. Last night the Nasdaq traded right to its previous 52-week high of 2180 before backing off to close at 2176. One presumes tonight will see a new high, all things being equal.
Similarly the Dow crossed over the 10,100 mark before shrinking back to 10,092, and the S&P 500 just pipped 1100 before closing at 1097.
The Aussie dollar has gained close to another cent since Friday, marking US$0.9280. The SPI Overnight was up 43 points or 0.9%.
Lost in the wash last night was the monthly US housing industry sentiment index release from the National Association of Home Builders. After three months of gains, last month's reading was 19, and analysts expected a rise to 20 in October. But instead the index fell to 18, with concern about the November expiry of first home-owner tax credit stimulus cited as the sticking point. The NAHB is lobbying the government to extend this stimulus package for fear the apparent recovery in US housing will reverse.
Once again the gap between Wall Street and Main Street is clearer. Tonight sees the release of September housing starts, which will make interesting reading, but with Apple leading the way maybe this result will also be lost in the wash. Tonight also sees the earnings result for Caterpillar - a bellwether of global economic growth. Wall Street is obviously expecting good things, given Cat shares were up 6% last night.
Also reporting tonight are Coke, DuPont, Pfizer and UTX.
And on a personal note, Happy Anniversary to all my colleagues and peers present on the floors of the ASX and SFE on this day 22 years ago. It was the day in 1987 - which also happened to be a Tuesday - the stock market opened 25% lower and we all thought the world would end. Fortunately it didn't, so we were all back to experience a similar feeling around this time last year.
[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.]
Tag Archives: Telecom/Technology
Is Telstra All About Shareholder Value?
By Chris Shaw
Australia's telecommunication mastodon Telstra ((TLS)) has responded to proposed reforms of the telecom industry by lodging a submission to the ongoing Senate inquiry. It is no surprise the company has stated its opposition to significant parts of the proposed legislation that could see separation forced upon the company.
According to analysts at Macquarie, the fact submissions have now been tabled and the inquiry is underway means the big issue is will the legislation get passed and if so what form will it take? The broker assumes the legislation, effectively forcing Telstra to split into separate operational entities, will be passed largely in its current form by late November. This will require seven senators from the minor parties voting in favour.
As such Macquarie suggests the Telstra response is an attempt by the company to influence the views of these senators, as they can cause material amendments to the legislation in return for voting in favour. In the view of RBS Australia, the submission by the company draws a clear line in defence of shareholder value while still working towards a cooperative outcome wth respect to the National Broadband Network or NBN, which it sees as the right balance for the company to take.
One point the company has made is it will not be forced into separation regardless of the legislation that is introduced, the broker noting if the Government's preference is for the NBN it can park the Bill and continue negotiations rather than making a decision that could destroy value in the company. Any discussions would include subjects such as spectrum and any possible divestments such as cable payTV company Foxtel.
The broker suggests the fall in the share price on Friday was caused by shareholders showing nerves about the possibility of further confrontation with the Government, but it takes the view it is better for the company to stand up and protect long-term value even at the expense of some short-term share price weakness.
Macquarie analyst are of the view that any delays or amendments to the legislation are likely to be viewed as favourable outcomes for Telstra, at least on a relative basis. In the broker's view, the risks are priced into the stock at current levels, so Macquarie sees no reason to shift from its Outperform rating on the stock.
RBS Australia agrees, noting the stock at present remains well below its valuation based price target of $4.40. RBS suggests a worst-case NBN outcome could see material value destruction, but the broker also sees value at current levels that would be recognised by any NBN deal that worked for both the company and the Government.
Citi is not as positive and rates the stock as a Hold, taking the view the Telstra submission contained both valid and less valid points.The valid ones include the need for greater checks and balances rather than Ministerial and Regulator power being as strong as what is currently implied in the proposed legislation.
On the other side the broker estimates the downside risk of not doing a deal over the NBN will be greater than in a co-op model, which leads it to suggest the stock is likely to be range bound until there is some agreement reached. Citi's target is $3.40, which is within its $3.00-$3.50 range as negotiations continue.
Overall the FNArena database shows a total of eight Buys and two Holds, with an average price target of $3.89. Shares in Telstra today are slightly higher and as at 3.15pm the stock was up 4c at $3.20. Over the past year it has traded in a range of $2.93 to $4.46.
Telstra's implied dividend yield is now close to 10% (on FY11 consensus projections).
The Overnight Report: Now?
By Greg Peel
The Dow fell 203 points or 2.1% while the S&P plunged 2.6% to 1029 and the Nasdaq wiped off 3.1%.
Before we start asking the obvious question, being is the pull-back finally upon us?, we have to take two points into consideration.
Although the US stock market has not exactly been surging into blue sky this past week, it has been otherwise resilient against some weaker economic data. The last couple of trading days in particular have clearly featured "window dressing", in which fund managers push up prices at the end of the quarter to enhance return performance. That's point one. Point two is that we know that there was still a lot of "cash on the sidelines" as the end of the quarter approached, evident in any dip being enthusiastically bought. Fund managers who have missed the rally do not want to show an ongoing underweight in equities in their quarterly reports.
It's all about the relative performance of funds, and about avoiding redemptions and encouraging new flows. Fund managers care little about how their own fund's return stacked up against any particular index over the quarter. They care only about how their fund stacked up against competitors in the same category. It is relative performance, not absolute performance, which draws fresh investment (and that goes for "absolute return" funds as well). If an investor is making a decision about which fund to choose for the December quarter, he will look at the one which is underweight equity and performing relatively poorly and decide that fund must be a loser.
If fund managers end up buying at the highs at the end of the quarter in such an exercise, what do they care? They just need to get the money in the door and then they have another three months to worry about how best to manage it. So before we start talking about last night being the start of the long awaited pull-back, we have to "correct" the market back to where it might otherwise be if you remove the end-of-quarter fluff.
Take away the fluff, and what are we left with? Well the reality is that US economic data released over the last week or so have not been good. As I have long suggested, the first phase of the rally from March was driven by "green shoots" and the second phase was driven by affirmation of the green shoot proposition when data turned from "less bad" to "good". But "good" gave us a total 50% rally, so to move the market higher yet again we really needed "very good", otherwise what had transpired to date was already baked well into prices.
In the past week or so the US has been disappointed by results which have either fallen short of "very good" expectations, such as one or two of the home sale numbers and recent jobless data, and results which have been simply negative, including industrial production, durable goods, consumer confidence and the Chicago index. And then last night it got worse.
Despite manufacturing representing only 20% of US output (services 80%), the monthly ISM manufacturing index is a closely watched figure. Last month it moved into "expansion" territory for the first time post-GFC, marking 52.9 on the 50-neutral index. Given economists now expect every data release to be better than the last, consensus had September reading 54. Instead the index fell to 52.6.
Is this enough to ring desperate alarm bells? Of course not. It's still an expansion result, and economic recovery was never going to be in a perfectly smooth "V" no matter what anyone has suggested. But the point is that the stock market has been priced for that "V".
Then there was the weekly new jobless claim figure - of particular importance this week given the release of the official September employment numbers tonight. Economists had expected a rise in claims from 530,000 to 535,000, but they rose to 551,000. There was, however, a tick down in continuing claims, from 6.13m to 6.09m.
And there was actually some good news as well. Pending home sales rose again, and consumer spending leapt a higher than expected 1.3% in August after rising only 0.3% in July. The latter figure was, however, "clunked".
So on Wall Street last night we had no more fluff-buying and mostly weak data. And then there was Fed chairman Ben Bernanke's regular testimony to the House Financial Committee in Washington.
In response to questions, Bernanke told the Committee that suggestions by the rest of the world to establish a new reserve currency were not good for the US dollar (thanks Scoop) but that he didn't see the dollar's status as under any immediate threat. He also noted that while inflation remained low there was no problem in supporting the economy (monetary policy) but that the government needed to keep its "economic house in order" (fiscal policy) lest the dollar's value was threatened.
These comments were taken by the Street as a "strong dollar policy" stance from the Fed, and despite the fact it is a hanging offence in America not to be supportive of a strong dollar, Bernanke was hinting that if he had to, he would put interest rates up. He doesn't have to just yet because of low inflation, but he might have to if the government stuffs up the budget.
And so the US dollar shot up 0.6% on its index to 77.21. When the dollar goes up, the stock market goes down. And there we have the three reasons why the Dow was down 203 points last night.
But the Dow got off lightly. In a case of "the bigger they are the harder they fall", the three sectors which have led the 50% rally to this point are financials, materials and tech, and they were thus the three most hammered last night. Financials and materials have big weightings in the S&P 500, which was down 2.6% to the Dow's 2.1%, and the Nasdaq is tech-laden, so it was down 3.1%. A stronger US dollar is bad for tech because the sector is an American export leader, and bad for materials because commodity prices fall as a result.
On the latter point, I noted last night that commodity prices are also subject to end-of-quarter window dressing given the sheer number of commodity funds in action. So the big commodity price rallies of Wednesday were all given back last night. Base metals all fell 1.5 to 4%, including copper down 3%. Gold fell US$8.60 to US$998.50/oz.
Oil was a little more confused. From its US$70.61/bbl close on Wednesday oil initially fell to US$69.13 on the stronger dollar and weak data but bounced again on the consumer spending numbers. Oil likes consumer spending. At the 2pm close oil was actually up US21c to US$70.82/bbl but turned weaker again in post-Nymex trade. (Note that the FNArena Cockpit price is always a later read on the global WTI price, and today it shows down US36c to US$70.25/bbl.)
None of the above was ever going to be of much help to the Aussie of course, so it gave back all of the previous 24 hours by falling over a cent to US$0.8697.
Australia had its First of October yesterday, with a bit of weakness to kick things off. The SPI Overnight was thus only down 75 points or 1.6% to the S&P 500's 2.6% last night. Our equivalent manufacturing index, released yesterday, was nevertheless a positive result compared to the negative US result.
If the ASX 200 does go into a bit of a slide for a week then perhaps the RBA might not roll the cannons forward just yet. But if not, then I reckon we're in for a shot across the bow on Tuesday. And that might be the pull-back signal anyway.
It is also notable that US economists have been mostly wrong, wrong, and more wrong on economic data release forecasts this past week or two. In each case they have erred to the upside. Where does this put US stock analysts? Have they, too, over-estimated forecast third quarter earnings? We begin to find out in a couple of weeks.
Readers please note: NSW switches to daylight savings time this weekend. For the next month, the close of New York will be at 7am Sydney time rather than the 6am close of the winter months. At the beginning of November the US switches out of daylight savings time, meaning New York will close at 8am Sydney time. I will be endeavouring (as I have always done in the summer) to get this report out before 9am Sydney, but bear in mind I can't do a lot until markets have actually closed.
The Dow fell 203 points or 2.1% while the S&P plunged 2.6% to 1029 and the Nasdaq wiped off 3.1%.
Before we start asking the obvious question, being is the pull-back finally upon us?, we have to take two points into consideration.
Although the US stock market has not exactly been surging into blue sky this past week, it has been otherwise resilient against some weaker economic data. The last couple of trading days in particular have clearly featured "window dressing", in which fund managers push up prices at the end of the quarter to enhance return performance. That's point one. Point two is that we know that there was still a lot of "cash on the sidelines" as the end of the quarter approached, evident in any dip being enthusiastically bought. Fund managers who have missed the rally do not want to show an ongoing underweight in equities in their quarterly reports.
It's all about the relative performance of funds, and about avoiding redemptions and encouraging new flows. Fund managers care little about how their own fund's return stacked up against any particular index over the quarter. They care only about how their fund stacked up against competitors in the same category. It is relative performance, not absolute performance, which draws fresh investment (and that goes for "absolute return" funds as well). If an investor is making a decision about which fund to choose for the December quarter, he will look at the one which is underweight equity and performing relatively poorly and decide that fund must be a loser.
If fund managers end up buying at the highs at the end of the quarter in such an exercise, what do they care? They just need to get the money in the door and then they have another three months to worry about how best to manage it. So before we start talking about last night being the start of the long awaited pull-back, we have to "correct" the market back to where it might otherwise be if you remove the end-of-quarter fluff.
Take away the fluff, and what are we left with? Well the reality is that US economic data released over the last week or so have not been good. As I have long suggested, the first phase of the rally from March was driven by "green shoots" and the second phase was driven by affirmation of the green shoot proposition when data turned from "less bad" to "good". But "good" gave us a total 50% rally, so to move the market higher yet again we really needed "very good", otherwise what had transpired to date was already baked well into prices.
In the past week or so the US has been disappointed by results which have either fallen short of "very good" expectations, such as one or two of the home sale numbers and recent jobless data, and results which have been simply negative, including industrial production, durable goods, consumer confidence and the Chicago index. And then last night it got worse.
Despite manufacturing representing only 20% of US output (services 80%), the monthly ISM manufacturing index is a closely watched figure. Last month it moved into "expansion" territory for the first time post-GFC, marking 52.9 on the 50-neutral index. Given economists now expect every data release to be better than the last, consensus had September reading 54. Instead the index fell to 52.6.
Is this enough to ring desperate alarm bells? Of course not. It's still an expansion result, and economic recovery was never going to be in a perfectly smooth "V" no matter what anyone has suggested. But the point is that the stock market has been priced for that "V".
Then there was the weekly new jobless claim figure - of particular importance this week given the release of the official September employment numbers tonight. Economists had expected a rise in claims from 530,000 to 535,000, but they rose to 551,000. There was, however, a tick down in continuing claims, from 6.13m to 6.09m.
And there was actually some good news as well. Pending home sales rose again, and consumer spending leapt a higher than expected 1.3% in August after rising only 0.3% in July. The latter figure was, however, "clunked".
So on Wall Street last night we had no more fluff-buying and mostly weak data. And then there was Fed chairman Ben Bernanke's regular testimony to the House Financial Committee in Washington.
In response to questions, Bernanke told the Committee that suggestions by the rest of the world to establish a new reserve currency were not good for the US dollar (thanks Scoop) but that he didn't see the dollar's status as under any immediate threat. He also noted that while inflation remained low there was no problem in supporting the economy (monetary policy) but that the government needed to keep its "economic house in order" (fiscal policy) lest the dollar's value was threatened.
These comments were taken by the Street as a "strong dollar policy" stance from the Fed, and despite the fact it is a hanging offence in America not to be supportive of a strong dollar, Bernanke was hinting that if he had to, he would put interest rates up. He doesn't have to just yet because of low inflation, but he might have to if the government stuffs up the budget.
And so the US dollar shot up 0.6% on its index to 77.21. When the dollar goes up, the stock market goes down. And there we have the three reasons why the Dow was down 203 points last night.
But the Dow got off lightly. In a case of "the bigger they are the harder they fall", the three sectors which have led the 50% rally to this point are financials, materials and tech, and they were thus the three most hammered last night. Financials and materials have big weightings in the S&P 500, which was down 2.6% to the Dow's 2.1%, and the Nasdaq is tech-laden, so it was down 3.1%. A stronger US dollar is bad for tech because the sector is an American export leader, and bad for materials because commodity prices fall as a result.
On the latter point, I noted last night that commodity prices are also subject to end-of-quarter window dressing given the sheer number of commodity funds in action. So the big commodity price rallies of Wednesday were all given back last night. Base metals all fell 1.5 to 4%, including copper down 3%. Gold fell US$8.60 to US$998.50/oz.
Oil was a little more confused. From its US$70.61/bbl close on Wednesday oil initially fell to US$69.13 on the stronger dollar and weak data but bounced again on the consumer spending numbers. Oil likes consumer spending. At the 2pm close oil was actually up US21c to US$70.82/bbl but turned weaker again in post-Nymex trade. (Note that the FNArena Cockpit price is always a later read on the global WTI price, and today it shows down US36c to US$70.25/bbl.)
None of the above was ever going to be of much help to the Aussie of course, so it gave back all of the previous 24 hours by falling over a cent to US$0.8697.
Australia had its First of October yesterday, with a bit of weakness to kick things off. The SPI Overnight was thus only down 75 points or 1.6% to the S&P 500's 2.6% last night. Our equivalent manufacturing index, released yesterday, was nevertheless a positive result compared to the negative US result.
If the ASX 200 does go into a bit of a slide for a week then perhaps the RBA might not roll the cannons forward just yet. But if not, then I reckon we're in for a shot across the bow on Tuesday. And that might be the pull-back signal anyway.
It is also notable that US economists have been mostly wrong, wrong, and more wrong on economic data release forecasts this past week or two. In each case they have erred to the upside. Where does this put US stock analysts? Have they, too, over-estimated forecast third quarter earnings? We begin to find out in a couple of weeks.
Readers please note: NSW switches to daylight savings time this weekend. For the next month, the close of New York will be at 7am Sydney time rather than the 6am close of the winter months. At the beginning of November the US switches out of daylight savings time, meaning New York will close at 8am Sydney time. I will be endeavouring (as I have always done in the summer) to get this report out before 9am Sydney, but bear in mind I can't do a lot until markets have actually closed.
Note also that Monday is a public holiday in NSW. The ASX is open for trading, but broker research will be all but non-existent. To that end, FNArena will come in an abridged version on Monday. (It makes no difference to this report as there isn't one on a Monday.)
More Years Of Solid Growth For iiNet
By Chris Shaw
Since it acquired Westnet in May of 2008, internet service provider iiNet ((IIN)) has delivered two good six monthly results, culminating in net profit increasing to $25.6 million in FY09 against the $19.9 million the company earned in FY08.
In the view of RBS Australia, the company looks set to deliver solid growth for at least another 3-5 years before it is likely to experience any impact from the establishment of the National Broadband Network (NBN), so the broker has today initiated coverage on the stock with a Buy rating and a price target of $2.73.
What should support earnings in the next year or so, in the broker's view, is the ongoing on-net migration of Westnet customers, as on its estimates there are 35,000-40,000 such migrations due to occur in the coming year. As well, FY10 will see the company enjoy a full year of earnings from the migrations completed in FY09, which the broker expects will support an increase in margins.
This upward trend in margins should continue through to FY12 on the broker's numbers, with a peak of just over 19% achievable in its view. As the NBN gains traction RBS expects margins will decline to something in the order of 15% as the company becomes more of a service provider.
The scale benefits of moving customers on-net is one element to the company's growth outlook, but the broker also expects further acquisitions, especially before the NBN is established and such a strategy becomes tougher to implement.
The other issue with the NBN is it may require the company to invest more in capex to reposition itself, but the broker is forecasting an increase in free cash flow in the next couple of years and in its view this should leave the group well placed to do so if required.
In terms of earnings forecasts, the broker is forecasting earnings per share (EPS) outcomes of 21.8c in FY10 and 25.6c in FY11, which compares to the 16.6c generated in FY09. This puts RBS slightly ahead of market consensus according to the FNArena database, which currently stands at 21.1c in FY10 and 25.2c in FY11.
Given its earnings estimates the broker has a discounted cash flow based valuation on the stock of $2.73, which is where it set its price target. This implies a P/E (price to earnings ratio) of 12.5x FY10 earnings. Its target is at the upper end of the range among brokers covering the stock as only JP Morgan is higher at $2.77, while Macquarie has a target of just $2.05.
Both brokers rate the stock as a Buy, JP Morgan on valuation grounds and to reflect its view the profit result for FY09 was a solid one thanks to better than expected outcomes for both costs and revenues. JP Morgan sees this as setting up the company nicely to deliver another solid result in the coming year.
Macquarie was a little less optimistic with its profit result commentary when it reviewed the stock last month, suggesting while the FY10 outlook was good, the questionmarks are increasing with respect to earnings in later years given increasing competition in broadband in particular. Given this, the broker wants to further review its outlook but at present it retains its positive view.
Overall the FNArena database shows the company is rated as a Buy by the four brokers to cover the stock, with an average price target of $2.51. Shares in iiNet today are slightly higher and as at 11.15am the stock was up 3c at $2.17, which compares to a range over the past year of $1.00 to $2.31.
On current consensus forecasts, the shares offer a dividend yield of 4.6 in FY10 and of 5.5% in FY11.
Pipe Networks’ Extra Potential
By Chris Shaw
Fibre optic network and infrastructure provider Pipe Networks ((PWK)) has delivered a strong FY09 earnings result, reporting net profit of $10.5 million on sales of just under $50 million for the year.
The result didn't surprise the market given recent earnings guidance from management, though as Citi points out, operating cash flows of just more than $24 million were better than the $13 million it had expected thanks to a favourable working capital outcome.
The result itself has caused brokers to make minor adjustments to forecasts, Bank of America Merrill Lynch lifting its numbers given it now expects slightly higher domestic revenues in coming years. BA-ML also anticipates improved margins given any extra domestic sales should be on the group's existing fibre network rather than requiring new construction spending.
As a result the broker's earnings per share (EPS) forecasts now stand at 36.8c for FY10 and 36.7c for FY11, while Citi is forecasting 38.3c and 30.8c respectively. With RBS Australia forecasting 33c and 42.7c respectively, consensus EPS estimates according to the FNArena database now stand at 36c for FY10 and 36.7c for FY11.
While this doesn't suggest much in the way of earnings growth, Bank of America Merrill Lynch sees earnings risk as to the upside, largely as the company has now completed the final splice and transmitted the first light signal on its cable between Sydney and Guam.
Testing of the cable will run for the next month and a full launch is set for early in October, with the broker anticipating over time the cable will see the company double its revenues and net profit with capacity for even more to be achieved as more of the cable's capacity is used up.
RBS Australia is similarly positive on the outlook for the PPC-1 cable as on its numbers demand should grow annually by around 40% over the next few years, which it suggests is strong enough growth to offset expected pricing pressures.
Citi agrees and also points out the company is well placed to benefit from increasing bandwidth demand domestically, a trend it expects will continue as the National Broadband Network continues to move closer to reality. The other positive in the broker's view is with FY09 likely to prove to be the peak for capex for the company, its free cash flow position will strengthen going forward.
What the broker doesn't like is the value on offer at current levels, as it notes the stock has rallied by around 60% since the start of the year. To reflect this the broker has retained its Hold rating, while both RBS Australia and Bank of America Merrill Lynch, the other two brokers to cover the stock in the FNArena universe, both rate the shares as a Buy.
The average price target for Pipe Networks has increased to $5.51 from $4.82, with RBS Australia the most aggressive in lifting its target to $6.04 from $4.82, while Citi increased its target to $5.20 from $4.35. Shares in Pipe Networks today are stronger and as at 12.00pm the stock was up 7c at $4.89. This compares to a range over the past year of $1.88 to $5.18.
Fibre optic network and infrastructure provider Pipe Networks ((PWK)) has delivered a strong FY09 earnings result, reporting net profit of $10.5 million on sales of just under $50 million for the year.
The result didn't surprise the market given recent earnings guidance from management, though as Citi points out, operating cash flows of just more than $24 million were better than the $13 million it had expected thanks to a favourable working capital outcome.
The result itself has caused brokers to make minor adjustments to forecasts, Bank of America Merrill Lynch lifting its numbers given it now expects slightly higher domestic revenues in coming years. BA-ML also anticipates improved margins given any extra domestic sales should be on the group's existing fibre network rather than requiring new construction spending.
As a result the broker's earnings per share (EPS) forecasts now stand at 36.8c for FY10 and 36.7c for FY11, while Citi is forecasting 38.3c and 30.8c respectively. With RBS Australia forecasting 33c and 42.7c respectively, consensus EPS estimates according to the FNArena database now stand at 36c for FY10 and 36.7c for FY11.
While this doesn't suggest much in the way of earnings growth, Bank of America Merrill Lynch sees earnings risk as to the upside, largely as the company has now completed the final splice and transmitted the first light signal on its cable between Sydney and Guam.
Testing of the cable will run for the next month and a full launch is set for early in October, with the broker anticipating over time the cable will see the company double its revenues and net profit with capacity for even more to be achieved as more of the cable's capacity is used up.
RBS Australia is similarly positive on the outlook for the PPC-1 cable as on its numbers demand should grow annually by around 40% over the next few years, which it suggests is strong enough growth to offset expected pricing pressures.
Citi agrees and also points out the company is well placed to benefit from increasing bandwidth demand domestically, a trend it expects will continue as the National Broadband Network continues to move closer to reality. The other positive in the broker's view is with FY09 likely to prove to be the peak for capex for the company, its free cash flow position will strengthen going forward.
What the broker doesn't like is the value on offer at current levels, as it notes the stock has rallied by around 60% since the start of the year. To reflect this the broker has retained its Hold rating, while both RBS Australia and Bank of America Merrill Lynch, the other two brokers to cover the stock in the FNArena universe, both rate the shares as a Buy.
The average price target for Pipe Networks has increased to $5.51 from $4.82, with RBS Australia the most aggressive in lifting its target to $6.04 from $4.82, while Citi increased its target to $5.20 from $4.35. Shares in Pipe Networks today are stronger and as at 12.00pm the stock was up 7c at $4.89. This compares to a range over the past year of $1.88 to $5.18.
A Brighter Outlook For Oakton
By Chris Shaw
A 48% fall in profit to $14.3 million for the full year showed FY09 was a tough time for IT group Oakton ((OKN)), the year being marred by a sharp downturn in demand for the company's services at the same time as it was experiencing a blowout in contract costs.
But as Bank of America Merrill Lynch points out in its post result review, the company has now restructured the business and this should see operating margins improve, while signs of improving demand for IT services suggest the worst is largely behind the group.
UBS makes the point the lower result for FY09 means the company is now cycling low comparable earnings, meaning earnings growth in FY10 and FY11 is likely to be above average. Already FY10 suggests some improvement as the broker notes the company is now running at 9.5% overhead costs to sales against the reported 10.3%, which implies around $1.5 million of cost savings are yet to flow through to earnings.
As well, the broker suggests even assuming flat sales in FY10 the fact the company has reduced staff levels implies it should achieve improved staff utilisation rates, which would indicate some improvement to earnings. To reflect this UBS has lifted its forecasts, increasing its earnings per share (EPS) estimates for FY10 to 24c from 22c and for FY11 to 28c from 24c.
Bank of America Merrill Lynch has similarly lifted its numbers to reflect an expected improvement in margins, its forecasts increasing by around 20% in both years to EPS of 25.5c and 33c respectively. In contrast, Credit Suisse makes relatively minor adjustments to its numbers, its new EPS numbers standing at 25.2c for FY10 and 27.9c for FY11. Consensus EPS estimates according to the FNArena database now stand at 24c and 27.5c respectively.
With a profile of improved earnings leverage to a pick up in IT services demand Bank of America Merrill Lynch sees the stock as a Buy at current levels and to reflect this it has lifted its price target post the result to $3.50 from $2.50. Similarly the changes to its earnings estimates post the result has seen UBS increase its target on the stock to $3.35 from $2.75 previously. At the same time it has upgraded to a Buy on the stock from Neutral previously.
Credit Suisse argues against turning more positive on the stock however (a view seemingly backed up by Macquarie) as its view is while there remains some doubt as to the group's future earnings growth outlook, the shares are unlikely to trade beyond a market multiple. Its $2.80 price target, up from $1.90, implies a FY10 P/E (price to earnings ratio) of 10.5x, which CS suggests is an appropriate discount to the the broker's small cap basket ratio of 12.6x. As a result, there is no change to its Underperform rating.
Overall the FNArena database shows a total of four Buys, two Holds and one Sell rating, the average price target increasing to $2.93 from $2.19. It should be noted not all brokers to cover the stock have yet updated for the company's earnings result.
Shares in Oakton today are stronger and as at 1200pm the stock was up 10c at $2.95. This compares to a trading range over the past year of $0.52 to $4.48.
A 48% fall in profit to $14.3 million for the full year showed FY09 was a tough time for IT group Oakton ((OKN)), the year being marred by a sharp downturn in demand for the company's services at the same time as it was experiencing a blowout in contract costs.
But as Bank of America Merrill Lynch points out in its post result review, the company has now restructured the business and this should see operating margins improve, while signs of improving demand for IT services suggest the worst is largely behind the group.
UBS makes the point the lower result for FY09 means the company is now cycling low comparable earnings, meaning earnings growth in FY10 and FY11 is likely to be above average. Already FY10 suggests some improvement as the broker notes the company is now running at 9.5% overhead costs to sales against the reported 10.3%, which implies around $1.5 million of cost savings are yet to flow through to earnings.
As well, the broker suggests even assuming flat sales in FY10 the fact the company has reduced staff levels implies it should achieve improved staff utilisation rates, which would indicate some improvement to earnings. To reflect this UBS has lifted its forecasts, increasing its earnings per share (EPS) estimates for FY10 to 24c from 22c and for FY11 to 28c from 24c.
Bank of America Merrill Lynch has similarly lifted its numbers to reflect an expected improvement in margins, its forecasts increasing by around 20% in both years to EPS of 25.5c and 33c respectively. In contrast, Credit Suisse makes relatively minor adjustments to its numbers, its new EPS numbers standing at 25.2c for FY10 and 27.9c for FY11. Consensus EPS estimates according to the FNArena database now stand at 24c and 27.5c respectively.
With a profile of improved earnings leverage to a pick up in IT services demand Bank of America Merrill Lynch sees the stock as a Buy at current levels and to reflect this it has lifted its price target post the result to $3.50 from $2.50. Similarly the changes to its earnings estimates post the result has seen UBS increase its target on the stock to $3.35 from $2.75 previously. At the same time it has upgraded to a Buy on the stock from Neutral previously.
Credit Suisse argues against turning more positive on the stock however (a view seemingly backed up by Macquarie) as its view is while there remains some doubt as to the group's future earnings growth outlook, the shares are unlikely to trade beyond a market multiple. Its $2.80 price target, up from $1.90, implies a FY10 P/E (price to earnings ratio) of 10.5x, which CS suggests is an appropriate discount to the the broker's small cap basket ratio of 12.6x. As a result, there is no change to its Underperform rating.
Overall the FNArena database shows a total of four Buys, two Holds and one Sell rating, the average price target increasing to $2.93 from $2.19. It should be noted not all brokers to cover the stock have yet updated for the company's earnings result.
Shares in Oakton today are stronger and as at 1200pm the stock was up 10c at $2.95. This compares to a trading range over the past year of $0.52 to $4.48.
The Overnight Report: Get Me In!
By Greg Peel
The Dow rose 188 points or 2.1% while the S&P jumped 2.3% to 976 and the Nasdaq posted its twelfth consecutive up-day with a 2.5% gain.
After Wednesday's brief wobble, Wall Street took off with a vengeance last night. The sharp move brought suggestions of short-covering by those who thought the rally may had peaked, however the bulls were quick to point out volumes were pretty solid for a summer holiday period. Moreover, there was other evidence to suggest the buying was real.
The US dollar was mixed last night, but the index moved higher to 79.07. Usually the dollar is sold off when Wall Street rallies. But bond yields surged, suggesting there was money flowing out of safe haven bonds and back into the stock market, and the failure of the US dollar to drop might suggest offshore buying of US stocks as well. The ten-year bond yield leapt 4.4% or 15 basis points to 3.70%.
The VIX volatility index dropped to 23. When this latest rally began on the back of Goldman Sachs, clearly short-covering was the immediate driver. The VIX leapt back up as traders caught short barrelled quickly into call options to cover their upside risk. Now those options are being sold, suggesting faith in the rally.
So the buying seems real. However, while volumes last night were good they were only good in the context. The S&P 500 has now added 11% in ten days in a period where average volumes remain very summer holiday-light. Low volumes tend to exacerbate the volatility of a market, and in this case the market has only gone one way after short-coverers put fear into the eyes of those still on the sidelines waiting in cash. That's why the VIX index is down despite the apparent volatility. A market is not actually volatile if its direction is constant. With each day of rally, more and more cash has been converted into stock.
It could thus be called a "fomo" rally - fear of missing out.
The Dow passed 9000 last night for the first time since early January. The S&P looks like it now wants to try for 1000. Adding to the enthusiasm these last few days have been several upgrades from major houses - Goldman and Credit Suisse being but two - of year-end S&P targets to over somewhere 1000. But these are year-end upgrades, not next week upgrades. Somewhere in between we have a little period we call September-October. Be warned.
The initial catalyst for last night's rally was the June existing home sales number. It rose 3.6% to its highest level since October, representing three consecutive months of increase. That hasn't happened since 2004. The median house price was marked as down 15.4% over twelve months, but that's 4% higher than the May reading and again the best level since October. Inventories of existing homes for sale fell from 9.8 month's worth to 9.4 months. That's also very encouraging, although 6 months is the historical average.
It was also noted that inventories of lower values homes are being snapped up, bringing down the average. Inventories of higher value homes are still running at around 20 months.
Next came the weekly jobless figures. New claims for the week rose by 30,000 to 554,000 seasonally adjusted, which was above the 550,000 expected by Wall Street. However, the numbers were elevated by coordinated auto factory shutdowns. The important news was that the number of continuing claims fell 88,000 to 6.22m. That number peaked at 6.9m earlier in the year. Ben Bernanke expects unemployment to continue rising, but Wall Street liked the opposite new trend suggested by continuing claims. (See also "The Good, The Bad And The Ugly From The US Labour Market" , FNArena Weekly Analysis, July 20, 2009).
On the earnings front, Post-It note maker 3M was the highlight with a US$1.20 EPS to the Street's US94c forecast. That represented a 17% drop in profit, but 3M beat on the revenue line and also lifted year-end sales guidance. The Dow component's shares were up 7.5% on the day.
Leading telco and exclusive iPhone ISP AT&T posted US54c to a US51c forecast on a 15% drop in profits. But the revenue line was of interest because while land-line revenues are collapsing, as one might expect, wireless revenues are surging given the company's iPhone deal. Wall Street liked the result, and the shares were up 2.5% for the Dow component.
Un-government-funded automaker Ford surprised the Street with a US$2.3bn profit for the quarter, having posted a US$8.7bn loss the quarter before. But this number was affected by significant debt reduction, such that the "apples to apples" comparison was a small loss for the quarter. This was still much better than the Street expected, and Ford shares rose 9.4%.
Another driver of the recent rally as far as traders are concerned relates to the Obama health policy. The Administration's attempt to introduce universal healthcare is socially popular, and an election plank, but the idea of raising high-end income tax, capital gains tax and payroll tax (which mostly affects SMEs) to pay for it is not. The bill is wavering in Congress, as not even all Democrats are convinced. Realistically, the middle of a GFC is not a great time to introduce costly social reform, from a purely economic point of view. The general electorate might like the idea of taxing greedy Wall Street villains to fund the health of honest Main Street, but increasing taxes in a recession is just the sort of policy that can bring about Depression. That is Wall Street's fear.
The healthcare sector has laboured on Wall Street recently under the weight of fear that public sector healthcare will take away from the private sector. As the bill looks less and less likely to pass, investors are getting back into the listed healthcare sector. But higher taxes are a more general market impediment. If these do not eventuate, then that's good for the whole market.
There was also surprisingly good news from across the pond. In May, UK retail sales dropped 0.9% as the country slipped further into deep recession. Economists nevertheless expected a rebound of plus 0.3% in June to account for summer clothing sales. But it's been an unseasonably warm summer, and the actual figure was plus 1.2%. The FTSE 100 stock index is now up 9 days in a row.
Tonight the UK reveals the first take on its second quarter GDP.
At present, oil goes up when the stock market goes up, particularly if stronger housing numbers are involved. This is in contrast to the first half last year, when the stock market went down when oil went up. Last night oil jumped US$1.76 to US$67.16/bbl, despite a slightly stronger US dollar.
Base metals were a tad confused nevertheless, particularly after having a pretty good run of late. Tin rose 2.8% but the others swapped 1% gains or losses.
Gold fell US$2.50 to US$948.80/oz, while the Aussie, which topped US$0.82 yesterday in local trade, was down a third of a cent over 24 hours to US$0.8131.
The SPI Overnight was up 61 points or 1.5%, suggesting more 2009 blue sky.
Can the S&P 500 push on to 1000? Well it won't get any help from the after-the-bell earnings reports.
Credit card issuer American Express, internet retailer Amazon and software giant Microsoft all reported quarterly earnings after 4pm NY. The former two beat on the EPS line, but Microsoft failed to do so. All three missed on the revenue line, with Microsoft missing significantly. Clearly the tech sector has been driven hard this last week, and it was more of the same last night, and such misses were not going to inspire further confidence.
Amex is down 4% in the after-market, Amazon is down 6% and Microsoft is down 8%. Amex and Microsoft are Dow components. All things being equal, the next leg up may not be tonight. Tonight is a Friday, as is today on the local bourse. Fridays are often a good excuse to take profits after a week of gains.
The Overnight Report: Seven Day Wonder
By Greg Peel
The Dow closed up 67 points or 0.8% while the S&P added 0.4% to 954 and the Nasdaq also added 0.4%.
It was a close run thing for the S&P 500, which only snuck into positive territory right on the death after stumbling mid-session, but by its measure Wall Street is now up seven sessions in a row. That's virtually unheard of. The Dow is there too, but the Nasdaq has now hit twelve days of gains. Are you thinking what I'm thinking?
The market tried to sell off at lunch time last night but still the buyers came back. But after such a solid streak, a down-day is around the corner. This doesn't mean the rally is all over necessarily, but markets just do not go up in straight lines for too long. We still have to complete this solid week of earnings reports, plus another solid week, plus some stragglers thereafter. By that stage we'll be into the Australian year-end season.
I tipped a new high in the ASX 200 yesterday, but I was clipped by the profit-takers. Action this week has been reminiscent of the earlier attempt to break through the January high back in late May. Such milestones do not surrender without a fight, given short term traders see them as good enough places to cash in on a psychological basis. Thus on Monday we just pipped the previous 4062 high before settling back to 4050. Yesterday we pushed right up to 4083 before settling back to 4050. It looks like 4050 is the number to conquer.
Last night the Chicago Fed activity index showed improvement from negative 2.3 in May to negative 1.8 in June, which is its highest level since October. In this index zero is the neutral point, and it has been negative since August 2007. But all focus is on earnings at the moment.
Caterpillar is a significant Dow component which makes full-scale Tonka toys most noticeably for the mining industry. More than 50% of Caterpillar's sales are global exports, so the company is a good bellwether for global mining and construction activity. The company comfortably beat the Street on earnings per share, posting US74c to the market's US22c estimate. While that may be outstanding, it has to be put into the context of representing a 66% drop from the June quarter last year. And the company is expecting the September quarter to be even tougher, perhaps to the point of posting a loss.
Yet Caterpillar shares finished the day up nearly 8%, leading the Dow to its outperformance. The reason was not so much the EPS result, but guidance from the company that despite a weak Q3 ahead, it did see improvement on the horizon. On the back of some US$1.7 trillion of global government infrastructure stimulus, Caterpillar actually upgraded its year-end profit expectations. US infrastructure stimulus is not much more than a trickle at this stage, management noted, but China is really leading the way. The company also lost money in the June quarter on pay-outs to laid off staff, which will not be repeated.
The positive mood was nevertheless tempered by poor results in the banking sector. Three smaller banks posted quarterly losses as they struggled to deal with rising bad debts. And the CIT group rescue is now under a cloud, with management suggesting the extra US$3bn pledged by bondholders this week will still not be enough to save the company.
Ben Bernanke made a perfunctory trip up Capitol Hill to testify to the House Finance Committee last night, and said nothing new. The Fed chairman reiterated his view that the US economy would recover by year-end but that subsequent growth would be very sluggish, and that unemployment would continue to rise. When asked about an exit strategy from excessive monetary stimulus, Bernanke said there was one. He didn't elaborate.
They were the highlights of the day session. Trading lacked the vigour of recent sessions given the previous re-rating strength of stock performances leading up to results releases. The US dollar index ticked up slightly last night, allowing base metals and gold to take a breather. All base metals fell 1-2% in London while gold gave back a mere US50c to US$948.80/oz.
Oil stuck with the rally however, no doubt keen on Caterpillar's forecast. It rose US74c to US$64.72/bbl.
The Aussie marked time at US$0.8167, while after a stuttering day yesterday on the local bourse the SPI Overnight added 15 points or 0.4%.
The real action then began after the closing bell in the New York as some big names posted their earnings.
First up was alleged coffee retailer Starbucks, which noted a 6% decline in same-store sales. EPS came in at US24c to the Street's US19c nevertheless, and the shares are up a tidy 10% in the after-market. Starbucks has, however, closed a lot of stores across the globe in a push to counter flagging revenues, including in Australia where actual coffee is preferred.
Next came search engine and web advertiser Yahoo, which posted an EPS of US10c to the Street's US8c. Revenues were nevertheless down 13% and third quarter guidance was posted below Street estimates. Cynics noted Yahoo has a new CFO who probably pitched low for conservatism's sake, but the shares are down 4% in the after-market.
Advanced Micro Devices is a tech company which makes...um...advanced micro devices. (AMD is Intel's biggest competitor in the market for pc chips). AMD bucked the trend to date by posting a US62c loss to the Street's US53c expectation, and you can't do that in this market. The shares are down 13%.
But the biggie for the night came last, and that was tech darling Apple. Apple shares are already up over 100% from their nadir in March, and only settled back 0.9% in the day-session ahead of the announcement. And it was a good 'un.
The company posted core EPS (sorry) of US$1.35 against US$1.19 expectations, and also beat comfortably on the revenue line. In this case analysts are most interested in just how many Macs and iThings the company sold across the globe, and the numbers were quite spectacular. Apple shares are up 4.5% in the after-market.
So it was a mixed suite for a Tuesday evening, providing little guidance as to what tonight may bring from the bell. Mostly positive, might be the response, but can Wall Street go 8 days in a row (13 for the Nasdaq)?
The Overnight Report: Goldman Sachs Delivers
By Greg Peel
The Dow closed up 27 points or 0.3% while the S&P rose 0.5% to 905 and the Nasdaq added 0.4%.
It was a fluctuating market on Wall Street last night - not surprising given Monday night's surge. The Dow was down as much as 46 and up as much as 30 but the tight range belied a lot of rocking and rolling in between as earnings reports and economic data fought it out. Volume was once again very light.
The highlight of last night's session was the quarterly earnings release from Goldman Sachs. Goldmans has long been considered the king of the investment banks, and throughout the GFC the king of all banks. But this hasn't stopped Goldmans being hit along with everyone else, despite entering the GFC short CDOs. Heavy leverage saw the investment bank topped up with TARP money and forced to become a commercial bank. When Lehman went under last year Goldmans posted a record loss of US$3.3bn over four months.
But the TARP money has since been repaid, and Wall Street has long considered Goldmans one of few banks likely to come racing out of the GFC over time. Expectations have been growing of a possible US$2bn profit for the June quarter, culminating in Monday night's 6% share price surge following an upgrade to Buy from Meredith Whitney.
Goldmans did not disappoint, posting a US$2.7bn profit for an earnings per share of US$4.93 to Wall Street's forecast of US$3.54. The shares only closed up 0.2% last night nevertheless, given the bank's strong run of late.
The earnings season is off to a flying start. Alcoa provided the first positive result, and results to date have remained upbeat. Healthcare/staple defensive Johnson & Johnson also posted last night, reporting a loss of 3.5%. But earnings per share of US$1.15 still managed to beat expectations of US$1.11.
Immediately after the closing bell, chip-maker Intel provided its numbers. In short, Intel blew Wall Street away with a US18c EPS to an expected US8c. Revenues and margins were also much better than forecast, as was third quarter guidance from the company compared to analyst forecasts. Wall Street had become concerned that the new range of super-cheap notebook computers appearing on the market would have carved a hole out of Intel profits, but this was not to be. Intel shares are up nearly 8% in the after-market.
Suddenly there is exuberance in the air. But there are always bears, and the bears were quick to point out that the feature so far in the reporting season - albeit very early on - is better than expected profits derived from greater than expected cost cutting efforts (which of course includes staff). On the other side of the balance sheet, sales volumes are weak. The potential here is to set up for a good June quarter which will not be matched down the track now that companies have been pared to the bone.
But Wall Street believes the saviour of the US economy will be inventory rebuilding. Last night it was revealed May business inventories fell 1.0% in the US. How do we take this? Is it disappointing that inventories have fallen rather than grown as hoped?
Firstly, May is a bit ancient history. Secondly, economists were expecting a 0.8% fall to mark the fifteenth consecutive month of inventory reduction. So it can be taken as good news that inventories were still falling in May, suggesting warehouses must be very close to being empty and will need to be restocked. Wall Street will be hoping for signs of the turnaround soon. But one mustn't forget - building inventories is one thing, selling the stuff is another.
And so we move to retail sales. US retail sales rose 0.6% in June against an economist expectation of 0.5%. On the face of it, this is an encouraging result. This is the best result in five months, and this time last year Americans were receiving stimulus cheques (or "checks") making annual comparables a challenge. However, the positive result was heavy influenced by the rise in petrol prices (gasoline, sorry) and a big jump in auto sales as Chrysler and GM dealers on death row started jettisoning stock at throwaway prices. Just about every other category of retail sales showed a drop for the month. Take out auto/gasoline and the result was down 0.2%.
Those gasoline prices have again raised the spectre of inflation. In May, the US purchasing price index (PPI) - the measure of wholesale price movements - rose only 0.2% but in June it rose 1.8%. Economists were expecting only 0.9%. Gasoline added 6.6% and food prices were also higher, rising 1.1% in June following a 1.6% drop in May. This is the biggest PPI rise since November 2007.
The Fed has been shouting from the rooftops that it is deflation - not inflation - the US should worry about as excess credit is unwound. This stance provides justification for the Fed's quantitative easing program. However when assessing the PPI, the Fed is interested only in the core reading (ex of food and energy prices). You can argue all you want whether it is realistic or selective to do so, but core PPI rose only 0.5% in June. But in May, it fell 0.1%. So it's not all oil and wheat.
It may have something to do with the fact oil is not the only commodity which surged in June. And the commodity buyers were back in force last night - not in oil, which fell another US17c to US$59.52/bbl - but in base metals. Copper, aluminium and zinc all rose 2-3% while nickel and tin rose 5-6%.
Strength in London was attributed to three factors: the US dollar was marginally weaker in the London session (although it ultimately rose a tad by the end of New York to 80.12 on the index); earnings reports were favourable and encouraging; and there is now tightness in near-month markets.
Basemetals.com reports the copper forward curve is now in near month backwardation. For the inexperienced, this means there is strong demand in the short term as inventories continue an unseasonal drop, mostly due to strength in Chinese buying. This puts upward pressure on spot prices over forward prices. Copper is not the only metal to see recent inventory take-offs, but a strike at two Vale nickel mines in Canada announced overnight was also a factor in nickel's steep rise.
Gold also rose again last night - US$5.50 to US$925.40/oz - mostly in response to an inflation-hinting PPI.
The Aussie dollar has surged over a cent to US$0.7933 over the space of 24 hours, belying little movement in the greenback. But it was all about yesterday's extraordinary surge in Australian stocks, fuelled not just by a light-volume short-covering rally Monday night on Wall Street but by another astounding jump in monthly confidence, this time from the business community.
Damn the torpedoes.
The SPI Overnight added another 35 points or 0.9%.
And just to top things off, late in the Wall Street session a BA-Merrill Lynch analyst released a report declaring the US recession to be over.
The Overnight Report: Losing Faith
By Greg Peel
The Dow closed up 44 points or 0.5% while the S&P added 0.3% to 898 and the Nasdaq lost 0.5%.
The mixed results within the indices told the story of last night's session. Given most of Wall Street was already off on the long weekend when Thursday's surprisingly poor jobs data were released, the market opened lower from the opening bell. It then recovered, with the S&P all but square 15 minutes from the closing bell, but to take the Dow move alone as a positive session would be a blinkered view.
The feature of last night was a switch out of the risk sectors such as materials, consumer discretionary and tech and into the defensive sectors of consumer staples and utilities. While such switching provided a net square result for the stock markets, it indicates a growing loss of faith in the integrity of the rally. Stock markets peaked at the beginning of May and have drifted sideways - albeit not without some volatility - ever since, as investors await more positive data to confirm just why the markets are up 40% in the first place.
Wall Street has placed great faith in the tech sector and it has outperformed the broad market, up 12% for the year. But tech is a risk trade, relying on a recovering global economy, growth in emerging markets, and a weaker US dollar which boosts export revenues. At the first sign of nervousness Wall Street races back into the dollar and switches out of the risk trade. That's why the Nasdaq bucked last night's trend. The Dow, on the other hand, is weighted towards consumer staples with such names as Kraft, Johnson & Johnson, Proctor & Gamble and McDonalds. Hence its outperformance last night.
One might say that the best indicator of risk appetite at the moment, and a proxy for the global economy, is the oil price. Last night oil fell US$2.68 to US$64.05/bbl to continue its recent pullback from over the US$70 mark. The herd of investors is finally coming around to believing oil and other commodities have run too far and run ahead of themselves.
From New York's point of view, base metals were also weak, although the bulk of that weakness was delivered in London on Friday night when the US was on holiday. Last night in London base metals were mixed on small moves, but the net to New York was falls of 1-3%.
The US dollar strengthened early in the session as investors moved back into the safe haven, reaching as high as 81 on the index before the close of commodity markets. Speculation was also rife that the G8 meeting, which commences in Italy on Wednesday, would feature a commitment to supporting the greenback. However as late buying hit Wall Street, albeit into defensive stocks, the US dollar index drifted back to be slightly lower on the session at 80.33.
The Aussie barely moved as a result on the measure from Thursday night, marking US$0.7978. Gold was weak in the face of a stronger dollar, with safe haven investors also having been frustrated in recent weeks by gold's failure to go anywhere much. It fell US$7.10 to US$924.70/oz.
Early weakness on Wall Street belied what was otherwise a positive result for the monthly ISM services (non-manufacturing) index. Services covers everything from IT to accountants, restaurants, hairdressers and telephone sanitisers (What ho, pass the gin and tonic)*. While economic focus tends to be on the "real" world of manufacturing, the services industries actually account for about 75% of the US economy these days. The June figure was expected to rise to 45.5 following a 44 in May, but instead posted 47.
This is a typical "less bad", "green shoots" result, but Wall Street has become a bit frustrated with green shoots. It wants leaves and flowers and fruit, but is clearly impatient. Remember that a reading under 50 still implies contraction in such an index, so one might now suggest that until some of these indices actually pass the 50 mark, Wall Street will not be excited anymore.
Another indicator of growing nervousness, or frustration, is the VIX volatility index. Having reached as low as 25 recently, the VIX has been rebounding again, rising another 4% last night to 29. If it reaches back over 30 it would indicate Wall Street again has an appetite for put option protection, and thus fears a pullback. But so far any decent pullback has been met by reasonable buying, although we must also remember it's summer holidays in the northern hemisphere and volumes are very light. Will the late buyers continue to be keen?
The SPI Overnight fell 1 point having already fallen 1.2% on the physical yesterday. For Australia, the move out of the commodities trade has a greater weighting. BHP Billiton ((BHP)) was down 4% and Rio Tinto ((RIO)) 7% last night in London after New York provided the weak lead but there's a little bit of catch-up involved here.
*For Douglas Adams fans.