A more modest, less than 1% recovery yesterday for our market after Wall street’s exuberant jump tells us that we in Australia are a bit more circumspect about the outlook.
US investors seem desperate in comparison to pile into shares: the battered banks and financial stocks had their biggest rebound in 17 years and yet no one wanted to own them the day before.
All this on a better than expected poor result from Well Fargo, and then a better than expected poor result from JP Morgan? Don’t think so.
US banks are retrenching: Citigroup is slicing off bits and selling them (as is GE, the second biggest company in the US). Merrill Lynch is another selling off its best assets to keep its nose above the waterline.
Other banks are doing the same; all are cutting lending; securitisation is dead, fee income is weak and profits rare in some parts of their businesses. That is not the way to generate earnings, let alone grow earnings, which drives share prices higher.
It is a well-run bank, but its not the saviour of the US banking industry.
An end to the relentless fall in US housing prices gold that key and we will get another update next week on the state of the sector with more information on the state of prices and home sales.
Here we have the June quarter Consumer Price Index to confront: it will be high; above 1% by most estimates for the quarter, but the Reserve Bank has conditioned us to look past that out into 2009-10 when it seems inflation slowing.
So if there’s a spate of ‘rate rise looms’ stories and comments from the more exciteable in the market commentary teams, ignore them.
More earnings from Listed Investment Companies are expected in the coming week and should confirm that its been a rough half for them: and the first significant result is due from GUD Holdings next Thursday.
It sells the Sunbeam brand of homewares. They are mostly imported, so GUD has benefited from the stronger dollar, but the retail sector has been doing it tough and the company’s comments on that sector and Sunbeam will help us.
The BHP Billiton production report will be a major influence on the market and possibly the future direction of that bid for Rio Tinto.
The bloom is going off the resource sector as China slows and other major economies slump (See separate story). In times gone by that usually saw big investors and their friends rotate into either banks and financials, or consumer staples.
Bank and financial stocks have had two solid days, but they are still twitchy and a series of poor reports in the US could send them lower.
But with the market off 28% from its peak last November 1, and most of that fall happening in 2008, and especially since Mid-May, some brokers and analysts are wondering if the bottom of the trough is nigh.
JPMorgan told clients yesterday that the ASX 200 Index is nearing its bottom.
"We do not have much further to fall,” the JPMorgan strategists wrote in a client note. "With the market now close to what we think is a recession multiple, the environment is becoming more conducive to looking for contrarian names.”
" Our model of the Industrials (non-Resources) PE indicates that stocks are trading about 10% cheap after allowing for a reasonable degree of earnings risk," JPMorgan said.
"The problem with a PE approach is that the market may be saying something about longer-term earnings prospects as well as about risks in 2008-09. The background for corporate profitability over the next 5 years looks a lot less benign than the conditions which drove margins to record highs over the 1993-2007 expansion.
"The Industrials are not so cheap that value alone will make them outperform Resources stocks if the commodity cycle holds up.
"Neither do Resources stocks look expensive on our PE model. The reason to tilt away from commodity exposure is a negative one: the weakness of global growth, including emerging economies, is undermining the demand story.
"However consensus forecasts for Industrials now assume 10% earnings growth in the year to June 2009 (this has actually crept higher as analysts have shaded 2008 numbers).
"Our view is that 2009 is likely to see a 5-10% decline in Industrials earnings; if we are right the PE would appear to be about 10% cheap.
"This is encouraging, but some discount is warranted.
"For one thing there is more downside risk to earnings next year than there is upside risk.
"Secondly, this model uses relationships that held good during a bull market.
"The risk of applying them now is that equities have become more risky on a sustained basis and therefore will trade more cheaply relative to bonds than they have in the past."
So from what JP Morgan said, there’s some value there, but there are still downside risks for next year.
Australian and international equity markets are offering extraordinary long-term investment value according to Russell Investments’ July-quarter Markets Barometer.
Russell, while warning of likely further volatility in the near future, said investors can currently maximise returns if they take advantage of the "opportunity to buy future growth and profits at significantly discounted prices".
According to Russell, the combined price/earnings ratio (PE) of developed global equity markets is now trading near 18-year lows at 12.5 times.
Concurrently the consensus earning per share (EPS) forecast, as calculated by international equity analysts, is for growth of some 12 per cent over the proceeding 12 months.
Meanwhile the Australian equity market’s one-year forward PE is sitting at around 12 times – signif
