Click to enlarge

Market Mood: 4 /10 – Concerned

“From Dan Denning in St. Kilda (for The daily Reckoning):

–Psychologists have an explanation for why crowds are prone to do stupid things at crucial moments. It can be action or inaction. But studies show people look to the actions of others to determine what the correct course of action is in an uncertain situation. It’s called social proof. You don’t want to look like an idiot, so you wait to see what everyone else is doing and go along.

–If everyone’s running up the street bashing windows, you’ll experience pressure to join in. On the other hand, if, say, everyone is buying stocks because no one appears to be concerned that they are expensive, you’ll experience subtle pressure to do the same.

–In evolutionary terms, doing what other people are doing is generally a good strategy. It saves you the time and energy of thinking about the decision yourself. And you have to assume that they probably wouldn’t be doing it if it didn’t promote their survival in some way.

–The shrinks call this phenomenon “pluralistic ignorance.” We were reading about it last night over cocktails at Barney Allen’s, right next door to our new head quarters in the heart of St. Kilda. It made a lot of sense, at least if you’re trying to explain why so many people do so little when they have so much to lose.

–Speaking of losing and just what’s at stake as September begins, why don’t we start with where the entire global recovery – and Australia’s resilience – are supposed to reside: Chinese strength. The Shanghai Composite fells 6.7% overnight and is now down over 25% from its highs. Uh oh.

–But it’s not Chinese stocks that worry us. It’s true there is probably a huge bubble slowly deflating in Chinese shares. Chinese banks lent nearly $1.1 trillion in the first half of this year and a lot of that found its way into the stock and real estate markets. But the bigger issue for Aussie investors is whether Chinese industrial stockpiling of raw materials is over.

–If it is, then one of the big drivers of the resource rebound is in real trouble. You got a whiff of that overnight when October crude oil prices fell $2.78 per barrel back under $70. Investors are reconsidering the idea that China can lead a global demand recovery and justify the high p/e ratios reflected on major indexes.

–For example, yesterday’s Age reports that the Morgan Stanley Capital Insights (MSCI) index of Asia Pacific stocks, “are trading at a price-to-book valuation of 1.1 times, above the 30-year average of 0.7 times and around the same level at the peak of the last bull market.” These stocks are priced for an export-boom to America.

–But what if that doesn’t happen? It’s almost certain that it can’t, given the retreating balance sheets of U.S. consumers. That leaves a Chinese growth model that’s not focused on exports. That leaves China buying its own toasters, cars, ovens, toaster-ovens, clothes, capital goods, and textiles.

–Does China have the capacity, along with India, to consume the world out of deflation? Hmm. What do you reckon? We reckon all this is setting up for a traditional September/October correction. And yesterday, there was more evidence to show why that might be.

–The first and second quarters looked good for corporations because of massive cost cutting. This cost-cutting helped stocks beat “analyst’s expectations.” That created a bunch of manufactured enthusiasm about “green shoots.” But you have to ask if the earnings outlook for firms really improved the first half? We’d argue that it didn’t.

–For example, according to Goldman Sachs, 46% of Wall Street firms beat expectations by “a wide margin.” But only 23% of firms actually reported better revenues than initially forecast. And for companies in the S&P 500, sales actually fell by 16% in the second quarter compared to the year before. And that was after a 14% year-over-year sales decline in the first quarter.

–Now you can make more in earnings off declining sales. But we’d suggest that is not a very good sign of health. Companies achieved the higher earnings numbers through cost cutting and tentative restocking of inventories. You reduce your overheads and your cost of goods sold and fire people. That helps you beat “analyst’s expectations.” But it doesn’t really mean your business is primed to throw off higher earnings and cash flows next year.

–This may be why September sucks. As long as analysts are in collusion with reporting firms, you can fool investors for a quarter or two with cost cutting and some earnings engineering. But by the third quarter, the real state of the company is clear for anyone to see. All you have to do is look.

–Amy Lubas from Ned Davis Research tells the Wall Street Journal that sorting through the market now is all about “differentiation.” She says that, “In the initial stage of a recovery from a bear market, the stocks that have fallen the most tend to be the ones that rebound the strongest. After a bottom, the market shifts to more industry-specific and company-specific factors.”

–So if you’re differentiating, what are you looking for? You’re looking for the companies that have trimmed their operating overheads to become more efficient, that’s for sure. But what you really want is a firm that increases its revenue growth without greatly increasing its capital spending (the secret of capital efficiency, as we have written about before).

–There is good news and bad news for commodities here. The good news is that you can always find companies with ore bodies and assets that are exposed the higher prices that come with higher demand. The bad news is that you cannot generally assume demand for all commodities will rise, or that supply will stay constrained. You have to find out which commodities are correlated to the new kind of domestic-driven growth from the Chinese economy and which are not.

–That’s a full time job. It’s what we’re up to at Diggers and Drillers. And for now, the short answer is that we like LNG, lithium, rare earths, hot rocks, and precious metals. We do not, however, like commercial real estate one bit.”                     Source: www.dailyreckoning.com.au

Until next week,

TIM MOFFATT

MINC FINANCIAL SERVICES
LEVEL 13, 234 GEORGE STREET SYDNEY NSW 2000 • PO BOX R578, ROYAL EXCHANGE NSW 1225 AUSTRALIA
D.+61 2 8965 0426  M+61 (0) 417 820 712 T.+61 2 8965 0400   F.+61 2 8965 0460
E.tim.moffatt@thinkminc.com.au

MINC ONLINE • MINC STOCKBROKING • MINC FUNDS
www.thinkminc.com.au

This email was sent by Minc Financial Services Pty Limited ABN 24 126 999 433 AFSL No. 317201 (MFS), a Market Participant of ASX.

GENERAL ADVICE WARNING:

Please note that any advice provided in this email is GENERAL advice only, as the information or advice given does not take into account your particular objectives, financial situation or needs. Opinions, conclusions and other information expressed in this email are not given or endorsed by MFS, unless otherwise indicated. Therefore, before you act on any of the information provided in this email, you must consider the appropriateness of the information having regard to your particular objectives, financial situation and needs and if necessary, seek appropriate professional advice.

This email is confidential. If you are not the intended recipient, you must not view, disseminate, distribute or copy this email without our consent. MFS does not accept any liability in connection with any computer virus, data corruption, incompleteness, or unauthorised amendment of this email.

After beginning to aggressively call for a retracement/correction early last week, on Friday the All Ords finally showed signs of cracking; falling to our first identified support zone @ 4250. Top to bottom this was a fall of 5.1%.

I don’t think we can hang our hats up and with confidence & say that the inevitable correction is over. The primary up swing since March has lasted 174 days to date and has seen the All Ords rally 44.8%. A typical correction should shed 20% off the previous primary move. Last weeks late retracement fails to meet this criterion. In summary; I’m going with the flow, without conviction. Dancing closer & closer to the exit.

This week the reporting season reaches its climax (finally). It has all unfolded in a very orderly fashion; “most management outlook guidance has been cautiously optimistic, and at worst outlook is expected to be “challenging”. These results support the ‘sustained recovery theme’ and bode well for the longer-term market outlook” – nothing new here. There have been comments out of the press today suggesting companies have been using the GFC as an excuse to hide underlying fundamental problems… doesn’t surprise me.

Other news, the press today suggested WOW will be destroying shareholder value through its aggressive move into the ‘home hardware’ space. WOW’s was certainly under pressure to “do something” that would create future growth and support its demanding multiple (trading on 18.0x FY10 earnings, with only ≈10% EPS growth, & 3.9% ff div yield). The market has taken the view this move is a big positive, pushing WOW up 4% since the announcement. Yet, remember it took WES 2 years to turn around Bunnings, and WOW is starting from a pretty low base… this is going to take time & money, and I doubt there will be any material flow through to underlying earnings for at least 2-3 years. My view; tomorrow WOW will report a better-than-expected result & dividend, and this will be the time for traders to lighten (buy the rumour & sell the fact).

That’s about all for now. LGL is looking very strong (up 7%) after we called it a short-term technical trade this morning in the Minc Daily. The big ‘symmetrical triangle forming’ in the Gold price is yet to break either way, but it is inevitable, and when it does, expect a big move.

Click to enlarge

Market Mood: 4 /10 – Concerned

Until next week,

TIM MOFFATT

MINC FINANCIAL SERVICES
LEVEL 13, 234 GEORGE STREET SYDNEY NSW 2000 ∙ PO BOX R578, ROYAL EXCHANGE NSW 1225 AUSTRALIA
D.+61 2 8965 0426  M+61 (0) 417 820 712 T.+61 2 8965 0400   F.+61 2 8965 0460
E.tim.moffatt@thinkminc.com.au

MINC ONLINE ∙ MINC STOCKBROKING ∙ MINC FUNDS
www.thinkminc.com.au

This email was sent by Minc Financial Services Pty Limited ABN 24 126 999 433 AFSL No. 317201 (MFS), a Market Participant of ASX.

GENERAL ADVICE WARNING:

Please note that any advice provided in this email is GENERAL advice only, as the information or advice given does not take into account your particular objectives, financial situation or needs. Opinions, conclusions and other information expressed in this email are not given or endorsed by MFS, unless otherwise indicated. Therefore, before you act on any of the information provided in this email, you must consider the appropriateness of the information having regard to your particular objectives, financial situation and needs and if necessary, seek appropriate professional advice.

This email is confidential. If you are not the intended recipient, you must not view, disseminate, distribute or copy this email without our consent. MFS does not accept any liability in connection with any computer virus, data corruption, incompleteness, or unauthorised amendment of this email.

Over the last few days you could feel the momentum turning, the bulls have quietened down and moved onto the back foot, while pessimistic views (pleasantly humbled over the last 5 months) are beginning to appear again (from many sources: news wires, MINC’s morning meeting, market commentators, and our illustrious economic leaders). There is now a general consensus out there that the market has over-shot, rallying to far & fast ahead of the real economy.

So it now seems like we’re at the start of a corrective cycle. The S&P500 (our global proxy) has been finding significant resistance and has been rolling over for the last 2 weeks, confirming a medium term trend change last night. While the All Ords has continued to make new highs over the past two weeks, it will not escape the effects of falling global markets. Expect continued weakness in the weeks ahead. See the 6 month chart of the S&P500 below for confirmed short-term trend change (Click to enlarge):

Downside Targets:

• S&P 500 – First stop 930 or 5% (uptrend line / red line on the chart above), then 880 or 10% downside from current levels.
• First stop 4250 or 3.5% on the All Ords, then 4000 or 10% downside from current levels.

Interestingly Gold last night did not rally as a ‘safehaven’ asset class, and Silver was gutted… part of this was the due to a stronger $USD, but the fall was a bit of bearish divergence; precious metals usually find support during market routes. Watch this space closely. NCM looks weak, while LGL has been trading like a complete dog after breaking down through $2.80 major support.

The reporting season has continued to unwind in an orderly fashion, with most (or a vast majority) beating expectations. As I outlined last week, earlier released reports tend to outperform, while underperformers come out of the woodwork towards the end of the reporting season. To-date most management outlook guidance has been cautiously optimistic, and at worst outlook is expected to be “challenging”. These results support the ‘sustained recovery theme’ and bode well for the longer-term market outlook, but keep it into perspective, everything is relative… As I’ve said time and time again; BHP is an essential stock in every Australian’s portfolio, yet it doesn’t mean you would pay $38 to become an owner ≈ The world is recovering, but it doesn’t mean today is a good time to buy the market…

Be patient & opportunistic; buy when others are despondently selling, sell when others are despondently buying.

Market Mood: 4 /10 – Concerned

Be aware that as the markets continue to retrace, I will be moving steadily more optimistic territory – assuming no big changes to the underlying fundamental scene.

Until next week,

TIM MOFFATT

MINC FINANCIAL SERVICES
LEVEL 13, 234 GEORGE STREET SYDNEY NSW 2000 • PO BOX R578, ROYAL EXCHANGE NSW 1225 AUSTRALIA
D.+61 2 8965 0426  M+61 (0) 417 820 712 T.+61 2 8965 0400   F.+61 2 8965 0460
E.tim.moffatt@thinkminc.com.au

MINC ONLINE • MINC STOCKBROKING • MINC FUNDS
www.thinkminc.com.au

This email was sent by Minc Financial Services Pty Limited ABN 24 126 999 433 AFSL No. 317201 (MFS), a Market Participant of ASX.

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Please note that any advice provided in this email is GENERAL advice only, as the information or advice given does not take into account your particular objectives, financial situation or needs. Opinions, conclusions and other information expressed in this email are not given or endorsed by MFS, unless otherwise indicated. Therefore, before you act on any of the information provided in this email, you must consider the appropriateness of the information having regard to your particular objectives, financial situation and needs and if necessary, seek appropriate professional advice.

This email is confidential. If you are not the intended recipient, you must not view, disseminate, distribute or copy this email without our consent. MFS does not accept any liability in connection with any computer virus, data corruption, incompleteness, or unauthorised amendment of this email.

I have nothing of any real significance to add on last week. The markets remain heavily overbought, with more bearish divergences appearing every day in both domestic and overseas markets. Adding cash positions by selling overbought stocks & taking trading profits remains a prudent tact. Remain focused on ‘special situation’ trade ideas.

The only factor I see underpinning our market in the short-term has been the positive start to the Australian reporting season this week; with BHP, CBA, CPU & JBH posting better-than-expected results. To date, there have been no significant worse-than-expected results, (although these tend to emerge towards the latter end of the reporting season). Guidance for FY10 (fiscal 2010) has been very conservative, with management rarely willing to give an upbeat outlook, or even an revenue or NPAT expectations. The real economy still appears to be relatively weak… another bearish divergence.

Market Mood: 4 /10 – Concerned

Until next week,

TIM MOFFATT

MINC FINANCIAL SERVICES
LEVEL 13, 234 GEORGE STREET SYDNEY NSW 2000 • PO BOX R578, ROYAL EXCHANGE NSW 1225 AUSTRALIA
D.+61 2 8965 0426  M+61 (0) 417 820 712 T.+61 2 8965 0400   F.+61 2 8965 0460
E.tim.moffatt@thinkminc.com.au

MINC ONLINE • MINC STOCKBROKING • MINC FUNDS
www.thinkminc.com.au

This email was sent by Minc Financial Services Pty Limited ABN 24 126 999 433 AFSL No. 317201 (MFS), a Market Participant of ASX.

GENERAL ADVICE WARNING:

Please note that any advice provided in this email is GENERAL advice only, as the information or advice given does not take into account your particular objectives, financial situation or needs. Opinions, conclusions and other information expressed in this email are not given or endorsed by MFS, unless otherwise indicated. Therefore, before you act on any of the information provided in this email, you must consider the appropriateness of the information having regard to your particular objectives, financial situation and needs and if necessary, seek appropriate professional advice.

This email is confidential. If you are not the intended recipient, you must not view, disseminate, distribute or copy this email without our consent. MFS does not accept any liability in connection with any computer virus, data corruption, incompleteness, or unauthorised amendment of this email.

Even the big-boys are getting FOMO fever (it’s spreading faster than Swine), with Citigroup and Goldmans in the last week upgrading basically all the ‘big 4’ banks, most to a “BUY” recco. I find it fascinating the market still hangs on their every word, apparently nobody remembers that these are the same analysts/firms that were recommending only a “HOLD” or a full fledged “SELL” 30-40% lower…

Don’t get me wrong, I’m certainly no bear, but markets have a strong tendency to overshoot – both to the upside and the downside, and this market is getting frothy. Again (yes I have now been calling for a broader market pullback for nearly 2 weeks) I suggest caution.

To avoid being all doom & gloom, I’ll touch on a (very bullish) undeveloped long-term theme I’ve been throwing around my head.

-       As I see it, the US Government started the last commodities bull market – through excessively loose monetary policy (leaving interest rates too low, too long) that transformed into a housing boom (housing development needs significant copper, steel, energy, etc). The cycle was assisted significantly in its latter days with China’s exceptionally strong industrial demand.

-       Fast forward to mid 2009 and it is being reported that the Chinese government is using excessively loose monetary policy to help stimulate their domestic economy. Chinese Real Estate is said to be going ‘gangbusters’, and the Shanghai market has doubled since November 2008. The longer monetary policy stays loose = more cash in the system trying to find a home (pardon the pun) = more business/capital investment occurring = more commodity demand… you get the picture.

-       Now if you also throw in the argument that the $USD is set to continue its devaluation against all other global currencies (caused by the substantial budget deficit & loose monetary policy), then you would expect demand for tangible assets (copper, gold, silver, nickel, etc) to increase substantially, while commodity prices (measured in $USD) to increase considerably.

The compounded effect from these sources; 1) roaring Chinese capital investment demand, 2) tangible assets (wealth protection) demand, & 3) prices rising as the $USD falls, could result in the real commodities “Super Cycle”…. This story makes it hard to get too bearish in the short-term…

Market Mood: 6 /10 – Comfortable (Short-term: 4 /10 – Concerned)

Until next week,

TIM MOFFATT

MINC FINANCIAL SERVICES
LEVEL 13, 234 GEORGE STREET SYDNEY NSW 2000 • PO BOX R578, ROYAL EXCHANGE NSW 1225 AUSTRALIA
D.+61 2 8965 0426  M+61 (0) 417 820 712 T.+61 2 8965 0400   F.+61 2 8965 0460
E.tim.moffatt@thinkminc.com.au

MINC ONLINE • MINC STOCKBROKING • MINC FUNDS
www.thinkminc.com.au

This email was sent by Minc Financial Services Pty Limited ABN 24 126 999 433 AFSL No. 317201 (MFS), a Market Participant of ASX.

GENERAL ADVICE WARNING:

Please note that any advice provided in this email is GENERAL advice only, as the information or advice given does not take into account your particular objectives, financial situation or needs. Opinions, conclusions and other information expressed in this email are not given or endorsed by MFS, unless otherwise indicated. Therefore, before you act on any of the information provided in this email, you must consider the appropriateness of the information having regard to your particular objectives, financial situation and needs and if necessary, seek appropriate professional advice.

This email is confidential. If you are not the intended recipient, you must not view, disseminate, distribute or copy this email without our consent. MFS does not accept any liability in connection with any computer virus, data corruption, incompleteness, or unauthorised amendment of this email.

The S&P500 (our global market proxy) has a RSI (relative strength index) of 94.6, remember; a reading above 70 is considered ‘overbought’, and this index is maxed out at 100. A reading this high is an exceptionally uncommon occurrence; since 1980 the S&P500’s RSI has been above 94 six times; 1 time the market continued to rally (1987 pre crash), 1 time the market drifted sideways (2004), 2 times we got a minor retracement (1991 & 1992) and 2 times their was a large correction (1990 & 2001). What does this all mean… I’m not really sure… food for thought.

I am still of the view this market is too hot, the recent strength in the “penny dreadful” (micro capitalisations) stocks is a pretty good indicator we are getting close to some general market weakness. Penny dreadful stocks tend to rally once the “quality” stocks become fully priced/expensive… I.e: when quality stocks are fully priced investors turn to the next best thing… cheaper lower quality coys – pushing their prices higher. Once the penny dreads become fully priced, be very very wary.

So where does this take us, I think this market is about 1) taking selected profits, & 2) staying focused on special situation trades / investments.

Market Mood: 6 /10 – Comfortable

Until next week,

TIM MOFFATT

EQUITIES & DERIVATIVES DEALER

HC SECURITIES PTY LTD
LEVEL 26, 25 BLIGH STREET SYDNEY NSW 2000 • GPO BOX 5392, SYDNEY NSW 2001
D.+61 2 8965 0426  M.+61 (0) 417 820 712  F.+61 2 8917 2999
E. tmoffatt@hcsecurities.com.au W. www.hcsecurities.com.au

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If you’re interested in playing a short-term fall in the market, a few of the cyclicals and financials look vulnerable: MCC, OST, CBA, BEN, NAB, LEI, WES. NOTE: only for very short-term speculation/hedging.

Into the medium-term, the market seems to have some significant positive momentum, and it looks very likely to push higher/make new highs. Global economic data continues to improve, reports from one of our dealers on a recent business trip suggests Shanghai is all hustle & bustle again (after being in the doldrums in February), etc, etc, So I’m still in the ‘Comfortable’ camp, and unless anything materially changes in the short-term, I’ll be moving to ‘Confident’ or even ‘Bullish’ on any decent market pullback.

Some of the SPP’s (share purchase plans) we are trading are looking exceptionally good: MCC is currently trading 30% above the purchase price, MLE trading 22% above the purchase price, AIO is trading 21% above the purchase price…

For now that’s all she wrote….

4) Although it is early days, this reporting season looks to be setting the same tone as the February reporting season, being; earnings are “less negative” and are also “beating expectations” (analysts are too bearish)…. Remember what happened during the last reporting season >>> the stock market bottomed and rallied hard for the following 3 months.

5) Finally, and I have to remind myself about this constantly, it is not the right time to be overly bearish, considering we are coming out of >55% broader market falls.

On another topic, I found a very interesting chart from one of the market bloggers in the US, it certainly made me stop and think about my negatively skewed view on gold. See the bullish long-term reverse head & shoulders below:

This seems to be a market poised on the edge, ready to break up or down. I still have no conviction either way… and find the ambivalence quite unnerving.

 On the negative foot:

- unemployment in the US and Euro zone continues to rise (9.5% in both the US & Euro),

- most of the big brokers are now holding ‘comfortable-to-confident’ market views; and are pushing the ‘sustained recovery’ theme – this makes me very wary. When everyone is doing the same thing, markets will adjust….

- markets never go up in a straight line. And bear markets almost always end with some sort of retest of the previous lows,

- the economic news coming out of the USA is being viewed by market commentators as “positive”, but really it is only “less negative”. Consensus estimates for USA 2Q09 GDP growth is now -1.6%, this is still a nasty number. Yet, the trend is reversing (from -5.7% 1Q09), so its hard to get too bearish.

On the positive foot:

- market momentum is still positive (despite the recent 2-3 week retracement),

- long-term indicators remain oversold,

- Australia has avoided a technical recession to date (although the recent dive in exports is unnerving) and GDP growth has only stalled (not reversed).

-unemployment in Australia is still at historically low levels (although still trending up),

- the market is still a massive 44% below the 2007 peaks (plenty of recovery upside),

- the Shanghai market is going gangbusters (up 76% in 9 months) indicating their economy (and demand for our resources) is on the mend

This is a real stock pickers market. Going forward, stock calls will be made in a separate note/blog and sent out on an ad-hoc basis. I will begin posting this out as soon as it is operational.

Watch out for DJS >>> the recent FY09 earnings upgrade appears to have been driven by the K Rudd stimulus payments (not longer-term consumer recovery trends). FY10 management guidance was still cautious (suggesting downside earnings risk as the stimulus spending wanes). On forecast multiples DJ’s is pricy, with downside earnings risk in 1H09 throwing the risk/return ratio against the investor.

Regards,

TIM MOFFATT

EQUITIES & DERIVATIVES DEALER

 HC SECURITIES PTY LTD

tmoffatt@hcsecurities.com.au

http://www.hcsecurities.com.au/wo_registration.php

HC Securities is a Corporate Authorised Representative (# 297316) of Independent Advisor Solutions Pty Ltd (AFSL # 314614).

This email, and any associated files, is intended solely for its addressee. The contents are confidential and may be legally privileged or subject to copyright. If you have received this email in error, you are unauthorised to use the information in this email in any way. Please notify the sender by return email immediately and then delete it from your computer. Email transmission cannot be guaranteed to be secure or error free and there is a risk messages may be corrupted, intercepted or lost in transmission. Therefore we do not accept liability for any viruses, errors or omissions in the contents of this message or attachments which arise as a result of email transmission.

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