The Entire Market Was Up 3%.
Published by strudy1 August 7th, 2008 in Daily Diary, Find Profitable Shares.The ASX was a rash of gains yesterday. The entire market was up 3%. It was like an allergic reaction that makes you feel awesome. Bit by bit, it spread through the whole bourse. The only companies that escaped its wondrous infection were energy companies and gold firms.
We seem to be breaking out in something ourselves today. It’s not awesome. We’ve quarantined ourselves inside our bedroom.
But even from our vantage point, we can see that this is no ordinary market, reader. When people get emotional they act like a herd. And when the market is acting like a herd, everyone runs in the same direction. Check out the Wednesday stampede:
You can dice that salami any way you like. Almost everything moved in the same direction. Gold miners and energy firms got nice and cheaper, thanks to falls in the price of oil and gold.
That struck us, because we spent yesterday considering the contrasting nature of commodities. While shares in a market like this tend link arms and play follow the leader, commodities don’t. That makes our job in Diggers and Drillers a little easier. There’s a lot more variety in the resource market.
(Editor’s Note: If you’re after variety, by the way, now’s a good time to join D&D. Our publisher’s just about to send you a new offer. It’s cheap. Keep an eye on your inbox.)
Shares have definitely linked arms in the past month. But you can’t put all of yesterday’s gains down to blind greed. We haven’t forgotten the Three Es: Energy, the Economy, and Earnings season. All of them had some sort of effect yesterday.
Banks Climb as Market Prices in Interest Rate Cut
For a start, everyone loves an interest rate cut. We don’t have one yet, but that doesn’t deter a horde of rampaging investors with a little bit of knowledge. So financials and retail stocks caught the buying bug.
The whole financial sector soard 5% in fact. Even the money markets are beginning to act as though the cash rate is 25-50 points lower. You’ll note the Bank Pain Index to your right has eased considerably this week. You can pretty much put that all down to traders’ expectations. They think a cut’s coming. They’ve moved early, pushing down short-term market interest rates.
What we want to know is whether markets rates will keep dropping.
If so, banks earnings will benefit. If not, they’ll continue sliding. We’re going for option B. And if their costs stay high, there’s every chance the Big Four will keep their rates up if the RBA cuts. But that isn’t a good thing. It means they’re running faster to stay in the same place. They’d be keeping prices high to maintain earnings, not grow them.
For Australia’s central bank meanwhile, things are way off the charts. It used to have a nice, easy formula of raising or lowering rates in response to consumer inflation. That plan’s holding up like a pavlova under an elephant. If it cuts rates this year, it’s basically admitting that.
We see the big drivers of inflation coming from gaps in supply (think oil) in the near future. That makes the RBA’s economic policy far less relevant than it used to be. Petrol prices are the new Reserve Bank of Australia.
Aussie Dollar Pushes Up Two Sectors
One of the victims of interest rate speculation has been the Aussie dollar.
Our falling currency might’ve helped push the miners up yesterday. Some of them (notably Rio and BHP) report their earnings in US dollars. Most commodities are traded in greenbacks. It makes sense. But this means that a rising Aussie D reduces earnings from the Australian shareholder’s perspective.
Manufacturers too. Our blazing currency hasn’t helped them sell anything overseas.
But while our dollar takes a rest, both of these types of companies could turn out to be short term trades.
Three Surprisingly Good Bottom Lines
As for Earnings results…the market got a bunch of good ones yesterday. But it was the most surprising, wacky collection of winners you’ve ever seen. Imagine Willy Wonka and a handful of Oompa-Loompa’s taking out the men’s 4×400m relay gold medal. Now you’re getting close.
The oddities began with this: online ticket portal Webjet (ASX:WEB) increased its profits by 134% last year. Airline prices are soaring. Yet this company managed to profit from that somehow. Its share price added 11%.
The only thing more Australian than a backyard clothesline is a football player being remanded in police custody. Hills Industries (ASX:HIL), the firm responsible for the Hills Hoist clothesline, somehow pulled off a 16th straight profit record.
That’s not bad. Especially when you consider how it must be hurting from steel prices.
And sleep specialist Resmed (ASX:RMD) added 66% to its net profit. Actually, that’s not surprising at all. This market’s enough to give anyone insomnia.
By Allan Robinson.
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