Switzer on Saturday

Going down the mine

Founder and Publisher of the Switzer Report
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As most of the southern parts of the country shivered through the week, I was lucky enough to spend Friday at Noosa, but I didn’t bring my swimmers as I attended the Noosa Mining and Exploration Conference as a guest of the broking firm Morgans. Yeah, I had to sing for my supper by doing a panel session at the end of the day but the day’s fare was really worth consuming.

In case you’ve never been to a miner’s show-and-tell conference, it stars junior miners and service providers, where generally a CEO or founder has 15 minutes to tell you why their company is worthy of consideration. It comes with the obligatory disclaimer but I always find that most of these stories sound compelling, though I know I’d have to do a hell of lot of homework before I’d consider putting our hard-earned funds into these speculators.

One that caught my eye was a Melbourne company called Cleanteq, which is in the water business. Robert Friedland recently invested $3.5 million into this $13.8 million market cap operation.

Friedland is a mining investor but apparently owned the apple farm commune in the US, which once had a famous member called Steve Jobs. Jobs, for a time, virtually lived on apples and his biographer Walter Isaacson said it was his time in the commune that led him to name his company Apple.

The company’s CEO says Friedland calls CleanTeq’s founder, Peter Voigt, the Steve Wozniak of water. I’ll get these guys on my TV show and do some digging before I think of investing in them but they look interesting. But please note, I’m definitely not tipping them at this stage.

I have to say I had a great time at the conference with the people attending reminding me of a cross between Indiana Jones and Tom Waterhouse.

I met up with an ex-Rio Tinto executive, John Innes and, after talking to him, observed that his colleagues of his vintage look like people who’ll never get their mining addiction out of their system. He laughed and said his wife would agree with that in spades!

Knox’s notes

Aside from the excitement of being bombarded by potential spec stocks, another high point of the day was the economic lecture from Morgan’s chief economist, Michael Knox, who stars on my TV show every second Monday. High point? Give me a break and don’t forget that I taught economics at the University of NSW for over 14 years!

Here are Knoxy’s notes in a nutshell:

  • The best economic indicator for the US is the Chicago Fed National Activity Index, which currently says that US growth is above trend.
  • Crude steel production in May was the second highest level in history.
  • He tips iron ore at US$108 a ton and steel demand is increasing (Good news for BHP and Rio).
  • He predicts a solid drop in the $A by year’s end, which will help miners and other exporters. (Could be 80 US cents by year’s end and in the 70s by 2015!)
  • He links lower US budget deficits to a rising greenback and, therefore, a falling dollar but he’s also very pessimistic on gold for those brave enough to punt the precious, unpredictable metal!

Stock tips of the week

Over the week, I’ve been pushing my experts to give me quality companies that will do well on a lower dollar. The usual suspects (mentioned by people I trust) have come up with CSL and Flight Centre. Gary Stone stuck his neck out with WorleyParsons but showed an encouraging chart that indicated that the share price could be building a platform to take off from. And when I add in Knox’s view on the dollar, this WorleyParsons play might not be as courageous as it first looked.

The gutsy play – going down the mine!

We all know mining services companies have really copped it and this mining conference I attended had some interesting, relevant companies but are there any reasons to risk a speculative play on these sorts of companies?

Well, try this. The dollar predictions plus the mining cycle might be telling us that a long-term investor could think about positioning themselves for when the dollar dives.

Now remember, dollar forecasting is one of the hardest things in the world but even the RBA Governor is going out of his way to warn us that it will happen.

In fact, many of the show-and-tell brigade at this conference pointed out that the industry is at the bottom of the cycle and, when it turns, those positioned early will do well.

I asked Michael Knox when does the cycle spike up?

He linked the upturn in the cycle to his call on the dollar, so a slide in the dollar drives up the earnings of exporters and other dollar sensitive businesses and will, undoubtedly, help our stock market.

But wait, it’s not all blue skies

Knox reckons the S&P500 is over-valued and a correction is likely. Current fair value, based on his model, is 1772 but this morning the S&P500 is around 1978! He says even by year’s end the index should be at 1898.

In fact, Gary Stone’s charts are also telling the same story that the US key index is due for a fall but Knox says our market is short of fair value.

Quarter two we should be at 5494, quarter three 5700 and by the last quarter, he forecasts 5878. Yesterday we finished at 5531.7 on the S&P/ASX 200 index.

He is saying that while the Yanks have a capacity to sell off, we might move into a phase where we don’t sell off as badly and we might rise more quickly than Wall Street. I think it’s more likely to happen when that damn dollar dives.

In fact, a big Wall Street slump would, in all likelihood, take our dollar down with it.

That’s his story and I wouldn’t be running it if he didn’t have a good track record but if company earnings come out on the high side and Janet Yellen gives out messages that rates will not be rising any time soon, then the real world of stock markets could ignore the theoretical world of fair value.

On the other hand, fair value is based on linking companies’ earnings to share prices, which historically have been the main driver of what we pay for stocks in the long run.

Conclusion?

With the scary months of September (the worst for the US) and October (the worst for us) looming and with the Yanks so far from fair value, I remain cautious. And the further the S&P 500 moves away from fair value, the more likely a sell off happens. However, it will be a great buying opportunity, if US economic data and earnings remain positive – and they will!

This all makes sense but the Fed looks like it doesn’t want a big stocks sell off and the market might be simply ignoring other signals that say a stock dumping is overdue.

For those prepared to gamble on a sell off, fund managers, who expect it to happen, are holding cash levels of 35% or so. That’s big and means they think a buying opportunity is coming. However, they can be wrong because none of them have ever traded/invested with a Fed doing so much to keep stock prices from falling.

This is why my conclusion is inconclusive!

That said, my solid conclusion is that our market spikes higher when our dollar follows Knoxy’s script.

Top stocks – how they fared

Numbers that moved the market:

This week, David Murray’s interim Financial Services Inquiry (FSI) report shook shares in the big four, after suggesting that there might need to be a “further increase in the capital requirements on the financial institutions considered to be systemically important domestically”.

The Chinese economy grew 7.5% year-on-year during April and June, beating expectations.

Tensions in Gaza, as well as the horrific crash of the Malaysian Airlines Boeing 777 in Ukraine, caused US stocks to tumble on Thursday night.

The week ahead:

Australia:
Monday July 21 – State of the States (July)
Tuesday July 22- Speech by Reserve Bank Governor
Tuesday July 22- Speech by Reserve Bank Assistant Governor
Wednesday July 23 – Consumer Price Index (June quarter)
Wednesday July 23 – Speech by Reserve Bank Deputy Governor

Overseas:
Tuesday July 22 – US Consumer Prices (June)
Tuesday July 22- US Richmond Federal Reserve index (July)
Tuesday July 22- US Existing home sales (June)
Thursday July 24 – US, Europe, China “flash” manufacturing
Thursday July 24 – US New home sales (June)
Friday July 18 – US Durable goods (June)

The Reserve Bank hogs the spotlight next week, with three speeches to be made by Reserve Bank officials. On Tuesday, Reserve Bank Governor Glenn Stevens will address the Anika Foundation, and Assistant Bank Governor Guy Debelle will participate in the 2nd Latin America Australia Investors Forum. On Wednesday, there will be a speech made by the Reserve Bank Deputy Governor, Philip Lowe at the RMB Internationalisation Round Table. Also on Wednesday, a key measure of inflation in Australia – the Consumer Price Index (CPI) – will be released for the June quarter.

Plenty of important data from overseas will also be released next week, particularly in the US. On Tuesday, the US issues their Consumer Price Index and data on existing home sales in June, and the Richmond Federal Reserve Index for July. On Thursday, the US will release June data on new home sales, and on Friday, June data on US durable goods. Influential flash manufacturing gauges will come from the US, Europe and China on Thursday.

Calls of the week:

Fed boss Janet Yellen’s review of the US economy was carefully crafted – she said that “although the economy continues to improve, the recovery is not yet complete” and defended her call to keep interest rates low in her speech before Congress.

Media mogul Rupert Murdoch opened the chequebook and offered US$80 billion for the Time Warner business – owner of an enormous host of television assets like HBO, CNN, Warner Bros., and the list goes on! Time Warner initially rejected the offer – looks like a higher bid will be required.

Basking in the glory after nominating Wotif.com as a prime takeover target back in April, Tony Featherstone updated his takeover target list in the Switzer Super Report. He has added OzForex to the list.

And Treasurer Joe Hockey probably regrets letting this threatening cat out of the bag, after expressing how he would bypass the Senate by ordering spending cuts if needed. “If the Senate chooses to block savings initiatives, then we need to look at other savings initiatives that may not require legislation” he said.

Food for thought

Experience is not what happens to you; it’s what you do with what happens to you – Aldous Huxley

Last week’s TV roundup

David Murray joins Peter Switzer to explain his interim report into our financial system, including his views on borrowing in superannuation. What do we need to be worried about, and what do we have to look forward to?

It’s been a really good year for IPOs – so what are the best ones and how do you pick a great one? In this special Super Sessions update, Peter Switzer and Paul Rickard discuss exactly what to look out for to grab a quality IPO.

Chris Richardson from Deloitte Access Economics gives the Aussie economy a health check – what state is it really in? He also discusses with Peter about when interest rates will move, and in what direction.

Many investors are perplexed that the market keeps going up – just where is this long overdue correction? To help us tell the future and comment on if there is a correction out there, our reliable chart man, Gary Stone from Share Wealth Systems, joins Peter Switzer.

Stocks Shorted

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short – which could suggest investors are expecting the price to come down. The table also shows how this has changed compared to the week before.

This week, the biggest mover – by far – was Altas Iron (AGO) who had its position sold short increase by 2.18% to 12.10%. In second place was Acrux (ACR), who had its position sold short increase by 1.35% to 14.71%.

My Favourite charts:

Dwelling commencement starts for apartments are at record highs – rising 4.2% to 20,922 in the March quarter. Switzer Super Report director, Paul Rickard, says this is a definite sign of “developers responding to demand” and suggests that this might signal “an end to the property boom in around 12 to 18 months’ time.”

Apartment building starts surge

Sales of sports utility vehicles (SUVs) or four-wheel drive vehicles (4WD) rose by 0.2 per cent to record high – here’s a chart showing their surge in popularity since January 1995!

SUVs are the Aussie car of choice!

Top five clicked on stories

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