IG - Morning Thoughts and Opening Calls - 21July

Morning Thoughts and Opening Calls

Good Morning

Over the weekend, more and more previews of the US reporting season emerged, and most see this week as a weak one.

Why will this week be weak? According to the previews, this week sees the majority of the industrial, natural resources and consumer discretionary and staple stocks reporting. The biggest influencer of the ASX stock performance will be the industrials; with almost a third of all listed industrials reporting this week with the likes of United Technologies, Boeing and Caterpillar the main players.

Caterpillar is of most concern; it has been under immense pressure over the last two weeks with one of the world’s largest shorter (if not the largest), Jim Chanos, seeing the end of the mining not as a slow decline but rather a fast and short drop; and that will (in his eyes) smash Caterpillar’s earnings.
This could have a major effect on Seven Group holdings. As Australia’s only Caterpillar distributor, and if Chanos’ earnings forecast comes to fruition, SVW and the rest of the mining services will be under even more pressure than they already are - downside risk is mounting.

US natural resource companies are probably not as interesting as Canadian resource companies from an Australian centric point of view, but Cliff Natural Resources does report at the end of the week and will provide a slight guide as to the performances of the resource sector.

Having seen the production reports of RIO and BHP last week, those people who think there’s cause for concern versus those that are bullish on the return of the commodity giants are currently fighting an interesting battle.

On one hand the bears see China contracting faster than expected, their thirst for raw materials going backwards and see them no longer being the mass movers they were even as recently as 24 months ago. Then there are those that look at the fact that BHP produced another record iron ore yield, that shipment of ore to China over the last six months alone has ramped up some 20+%, and that BHP were one of the first groups anywhere to predict China’s GDP would move to 6%.
Now we are of the view that if the world’s largest mining company knows that its major client is slowing, but it is still producing iron ore at record levels and sees this continuing, it’s probably ahead of the curve. It does give us confidence that China is well and truly on top of its direction and that BHP is comfortable with this structural change as well. They may not shoot the lights out come August 20 but we can see BHP in line or slightly ahead of expectations.    

Returning to the US earnings season, choppy trading this week is most likely to come from the consumer stocks: MacDonald’s, Netflix, Visa, Amazon, Colgate-Palmolive and the big one Apple all report.

Apple has been on the slide for a year now and is in an interesting positions come Tuesday results. Considering the very poor performance from Microsoft due to the poor uptake of its Surface tablets, has the iPad gained here? Or has the South Korean giant Samsung continued to punch holes in the US giant’s market share with the Galaxy notepad, and could this see Apple continuing its downward shift? We expect the latter to come true.

Moving to the open, we are calling the ASX 200 up 38 points to 5010 (+0.77%) as the ASX takes heart out of Japan’s upper house elections and the US close. Considering the week ahead from the US, the material plays will be in focus. However, as we lead the week off, BHP looks set to punch higher with its deposit receipts; suggesting the stock should add 22 cents today to $34.08 having popped off on Friday. Iron ore was weaker over the weekend; down 20 cents but should not be material to trading today as it remains above $130 a tonne.

Expect a very quiet start to the week today with no global news (anywhere) on the wires until midnight tonight, which is slightly eerie and could mean we ebb and flow throughout the trading session.

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