On Friday night the S 500 closed the week on a high, up 0.57% on the day to finish as 1517 points its highest level for the week, as earnings
season took over once more. Over the weekend S futures have risen approximately 0.29%, however we are very aware that Google CEO Eric Schmidt sold nearly half of his
2.3% stake in the company. The sale is believed to be worth up to $2.51 billion and we will be watching the Nasdaq
futures very closely when they come online at 10am and the effect that has on the wider US markets.
This week however is all about our local market and with our regional partners celebrating Chinese New Year this week,
the Aussie market will need to lead itself rather than relying on China and Japan. On Friday we finished at 4971 points,
our highest level since April 2011 (the top of the bounce after the Japanese tsunami). This means the ASX has now
retraced the full drop of the euro-mess, China’s hard-landing fears, and the impact of the second round take of the
Federal Government’s mining tax. What is different from 2011 and 2013 is the reasoning for market to be at this level.
Over the last seven months the market has gained 986 points (or 24.75%) and as is well-known the main driver of this
growth has come from seven or eight majors stocks, namely the big four banks, Wesfarmers, Woolworths and Telstra. The
question that analysts and strategists alike are asking is; do the stock fundamentals match the movements in these
stocks?
This week, parts of this question will start to be answered, with the likes of CBA, CSL and Rio Tinto all reporting
their first-half earnings. If earnings from last week are anything to go by, we are expecting indifferent to slightly
disappointing results.
Cochlear, for example, reported flat sales volumes and EPS and revenue lines on that came in on the downside. With COH
trading at 30-31 times earnings on the figures, the market took this poor result as all it needed to see COH drop almost
15% for the week. The question is; will the market do the same to CSL (which is currently sitting on similar PEs) who
report on Wednesday?
NCM also came out last week with a result that showed a 51% drop in revenue, with cash flow looking worse as Cadia East
and Lihir continue to strip out funds for their expansions, however on comparison to evaluations by Goldman Sachs and
Credit Suisse, the result came in ahead of expectations. The market therefore took the impaired result as factored in
and NCM rallied almost 4% at the close on Friday. With RIO having already flagged $14 billion of impairments to its
aluminium and coal projects, will an inline profit report see it following NCM’s leads and leg higher?
The main results this week will be CBA, having moved up almost 33.5% since the June low last year, and with analyst
expecting a very flat year in banking revenue, will the current yield play in CBA continue to stack up for the bank?
Fundamentals will start to kick in sooner or later, with margins and capex the main focus as analyst drill down below
headline figures. However our take on it is that in the short term, yield will continue to win out. With rates looking
like they will drop in the next three months, a CBA fully-franked dividend of $1.57-$1.59 is a return of 4.84% on
extrapolations. Forecasts however believe the full-year yield will be closer to 6%, meaning the second half dividend
will come in around $2.25-$2.30 at current share price. That is a major selling point for retail investors hunting for
returns. We only have to look at Telstra’s result last week. Where management forested a very low single digit growth
for the year, it did however reconfirm its 28 cents full-year dividend and that saw TLS up 1% on the results. It will be
a very interesting week to see if fundamentals or trading strategies win out.
Moving to the open, we are calling the ASX 200 down seven points to 4965, with Asian traders away from their desks
today. We are expecting to see BHP coming off slightly today, with its ADR pointing to a 0.5% drop to $37.77. However we
do note that iron ore is still at $155.1 per tonne. The pause today will give the market time to gear up for the major
part of the local reporting season which kicks off in earnest on Wednesday.