End of the month and for those investors superstitious enough to obey that old US adage of ‘sell in May and go away’ it would have proved a losing strategy.
Sharemarkets were mostly positive for the month, although it hasn’t been without some scares over inflation, oil and investment banks.
Now in the US, the thinning market business for June and July will have to withstand another difficult quarterly reporting season that kicks off next week. US banks, especially regional banks, retailers, property groups, airlines and some energy companies are on broking watch lists.
In fact any significant oil and energy consumer in the Standard & Poor’s 500 will be watched closely: as will the big oil groups which boosted earnings by 26% in the first quarter and offset lacklustre returns from many domestic industrials (exporters did well, on the whole) and financial stocks.
Bloomberg reported Friday that the 468 companies in the S&P 500 which have reported quarterly results since April 7 have posted an 18% average fall in earnings, dragged down by an 88% plunge in profits at financial companies. Excluding them however, earnings rose 7.7%, boosted by that 26% rise by energy companies and an 11% gain for technology stocks.
Here in Australia it’s the closed period before June 30 for most companies, although we should watch for earnings downgrades. The domestic economy will dominate activity and we are likely to see a lot of earnings downgrades from broking analysts for the coming new financial year.
In the US the Dow gained 1.3% last week, the S&P rose 1.8% and Nasdaq jumped a sharp 3.2%.
For May, the Dow lost 1.4%, but the S&P 500 gained around 1% (its second monthly gain in a row) and Nasdaq added just on 4.5%.
In Australia, shares fell Friday to be down just over 1.4% for the week.
Falling commodity prices and rising concerns about the strength of domestic demand hurt sentiment.
And we should also be watching the US for any tightening of rules covering trading in commodities by so-called index-long funds which have been wrongly blamed for much of the surge in the prices of oil, wheat, corn and soybeans. It’s an election year in the US and politicians are nervous and in full blame mode and searching for culprits.
The corpulent political support for ethanol has probably had a greater impact on food prices, along with the Australian drought over the past two years. Oil prices have been hit by shortages, poor production levels (Indonesia is leaving OPEC after being a foundation member) and America’s energy over consumption (a third more than Europe per head of population).
But despite falling in the last two weeks of the month, Australian shares still managed a 1.1% gain through May with financials down 3% but energy stocks up nearly 20% on the back of the surging oil price. (Woodside hit $A70 a share on Friday for example and we had the intense speculation in coal seam methane stocks like Origin, Santos, Arrow and Queensland Gas.)
A look at the month’s hot stocks and sectors shows that iron ore, coal and energy were the stars. Sundance Resources jumped more than 66% (iron ore), Felix Resources rose 58%, Emeco Holdings (heavy equipment) up 43%, Fortescue Metals, up 43%, Arrow Energy, up 42%; beach Petroleum, up 38%, Paladin Energy, up 37.4% (uranium), Riversdale Mining (coal) up 35%, Santos, up 32% and Oil Search jumped 29%.
The losers were Allco Finance (not a surprise) down 58%, B&B Power off 29%, Transfield Services down 27%, Perilya off 26%, PMP down 26%, Independence Group fell 22%, Mirvac down 21.6%, Macquarie Communications dropped 20.7%, Hills Industries down19.8% and Minara Resources fell 18.4%.
The fall in the financials sector is despite the initial boost to sentiment from Westpac’s move on St George. That failed to have any lasting impact and investors are still wondering how bad debts from the likes of Octaviar, Opes Prime, Centro, Allco and City Pacific might impact earnings over the remainder of the year.
The Utilities and Energy sectors both gained in the month, but financials, telecoms and consumer discretionary all eased.
We are also seeing more and more companies warning of higher energy and currency costs: Campbell brothers, the mining services group was an example of the impact of higher currency costs last week on full year earnings of more than $5 million. Qantas and Virgin Blue are the best examples of the damage being down by higher oil prices.
OneSteel and BlueScope, our two big steel groups, will find it a bit tougher in the December six months from higher energy and raw material prices and the dollar. And while the rising prices of steel imports should help, both companies will be raising their selling prices as well.
The AMP’s Dr Shane Oliver says there’s every chance Australian shares are heading for more weakness.
"Our view is that shares are likely to see further weakness in the short term. Shares simply rose too far too fast into mid-may, the May to October period is often difficult for shares and the full economic fallout from the US housing slump, credit crunch and high oil prices is yet to be seen.
"Inflation worries also have the potential to upset share markets in the short term. Australian shares are also yet to see the full fallout from the rise in local interest rates and the strong $A and are vulnerable to weaker commodity prices over the next few months along with “tax loss selling” in June.
"Shares could fall 5% or more from current levels.
" However, while we are likely to see further weakness over the next few months, shares sho
