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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Cheap Valuations Spur Bulls to Buy Stocks

Stock-Markets / Stock Markets 2010 Jul 06, 2010 - 09:27 AM GMT

By: PaddyPowerTrader


Best Financial Markets Analysis ArticleWith the major stock market indices oversold on almost every metric and the S&P 500 finding critical support around the 1100, European markets have pushed ahead today. Valuations have reached a 16 month low at 12.5 times earnings and we all know what happed in March 2009! Now equity analysts are raising their earnings estimates for U.S. companies at the fastest rate since at least 2004 just as stocks post the biggest losses in 16 months. Profit for S&P 500 companies will jump 34 percent in 2010, compared with a projected gain of 27% on March 29, according to estimates compiled by Bloomberg. The revision, the most during any quarter in at least six years, came as lower than forecast home sales, manufacturing and private sector job growth sent the benchmark gauge for American equities down 16% since April 23.

Today the European morning BHP Billiton, the world’s biggest mining company, is up 4% while Rio Tinto gained 4.8% as basic resource shares led gains among the 19 industry groups in the Stoxx 600 as copper advanced for a third day on the LME in London.

Elsewhere UK builder Balfour Beatty is ahead by 3.3% after news that the company expects its order book to be ahead of the £14.1 billion reported in December even as it sees some “uncertainties.”

And rival Persimmon climbed 5.7%, the most in two months. Sales in the first six months of the year rose 26% as the housing market recovery enabled the company to increase prices. (see below)

BP is up 3.7% on a brave broker upgrade from RBS to “buy” from “hold,” saying the “pessimistic view on the probable costs of the Macondo spill is currently discounted” in the share price. BP “is a good buy for anyone who has the guts to take the chance,” Shokri Ghanem, chairman of the Libya National Oil Corp., said in a Bloomberg television interview. “The price of the shares are very low. It gives a good opportunity to invest.”

Other oil stocks on the move today include Petroplus Holdings which is better by 6% after Europe’s largest independent refiner was rated “trading buy” at Credit Suisse which increased its price estimate to 21.5 francs from 20 francs.

And Tullow Oil gained 3.5% after saying the Ugandan government is likely to approve its purchase of assets from Heritage Oil Plc “imminently.”

Other stocks to the upside Tuesday include TUI which jumped 7.1% on news Europe’s largest travel company raised its forecast for container shipping, saying it now expects Hapag-Lloyd to “post significantly positive operating earnings.” And EasyJet Plc gained 2% after the airline said its passenger numbers rose 9.4% to 4.5 million in June.

Debenhams Plc, the U.K.’s second-largest department-store company, advanced 5% (rising for a fourth day) on a broker upgrade this time by UBS who upped the stock to “buy” from “neutral,” calling the shares “cheap, cheap, cheap.”

And another stock feeling the tailwind of a recommendation today is Zodiac Aerospace which has powered ahead by 8% after Europe’s biggest maker of airplane seats was upgraded to “buy”from “hold” at Societe Generale.

Today’s Market Moving Stories

•Independence day may grab the headlines on July 4th, but it is July 6th that represents a birthday of a different kind as it marks the day that the US dollar was accepted as the monetary unit of the US. It perhaps helps to provide some perspective on the EUR’s infancy when one sets its 11 years against the 225 years reign of the USD. Yet it is the USD that is under pressure for now, the index falling 4.5% since the start of June largely on the growing fashion to fret about a US double-dip. The traditional data vacuum in the week following US non-farm payrolls would typically be filled with an extension of the mood but the lack of an impetus from last Friday’s release has left the USD and the market languishing. It looks likely to be a relatively flat birthday celebration.
•EU Economic and Financial Affairs Commissioner Olli Rehn has revealed a backup plan for troubled banks saying that should any government exhaust national funds in helping a troubled lender, it could turn to “EU financial backstops as a second line of defence”, tapping into the €500bn safety net. This mechanism would be conditional on a programme of restructuring, and recapitalisation needs being addressed. He emphasised the importance of the stress tests to “reinforce confidence in the economy” and dispel the “doubts about the health of the European banks.” Rehn said that “the Commission is in favour of full transparency and advocated the extension of the banks stress test and the publication of the results by the end of July.
•Reuters reported the ECB president Trichet would meet with Europe’s top banks on 21 July to discuss the stress tests ahead of their publication two days later. Sources suggested that 16 German banks would be stress-tested.
•Spanish savings banks may be hiding losses on home loans by taking non-performing mortgages out of securitized transactions, according to CreditSights Inc. By carrying the bad loans on their own books the so called cajas sidestep downgrades to their mortgage backed securities.
•In the UK the second quarter was positive for business against a backdrop of growth, but a double dip recession cannot be ruled out according to the British Chambers of Commerce (BCC). In its latest quarterly economic survey, the BCC said the manufacturing sector in particular benefited from improved export orders and domestic sales, which boosted employment expectations and investment plans among Britain’s producers and suggested growth continued in April to June. The BCC found that domestic sales of manufactured goods were at the highest level since the final quarter of 2007, and exports were at the highest level since the third quarter of 2006, suggesting a weaker pound was boosting business abroad. The survey of 5,600 businesses found that confidence among manufacturers increased, but worsened within the services sector. The BCC said that risks to growth remained, and that the rising costs of raw materials was putting pressure on businesses.
•Martin Weale, director of the National Institute of Economic and Social Research was appointed yesterday to the Bank of England’s MPC. He replaces Kate Barker, who left at end of May. He won’t have a vote on Thursday, so the MPC will have to wait until August meeting before getting back to full strength. The MPC is ordinarily a committee of 9, only 8 can vote on Thursday. The FT says he’s neither particularly worried about inflation nor a double-dip, but recognising that public spending cuts will slow the recovery. Hence his appointment is unlikely to tip the committee either towards restarting quantitative easing or raising interest rates. He has been a prominent advocate of tight fiscal policy and looser monetary policy, arguing for the government to pay down debt and increase savings. Commenting on last month’s emergency Budget, he said Mr Osborne was “not ambitious enough” and called for additional spending cuts or tax increases of 1 to 2 per cent of national income (£30bn).
•This is starting to look careless. First, we lose Treasury Chief Secretary David Laws after he resigned in May due to an expenses scandal. Now, last night, head of the newly created OBR (Office Of Budget Responsibility) resigns. His name was Prof Alan Budd is a consultant to a well known London hedge fund. The office, meant to be independent, but it is still an office of the UK Treasury. His departure may give rise to suspicions the office is not as independent as he supposed when he agreed to take the job, or as public as the markets have been led to believe. Strangely, its not reported in UK edition of FT, only Telegraph has it. So we might get a delayed reaction in GBP when news filters through, although sterling took the new of Laws’ resignation in its stride last month, so any reaction likely to be marginal.

Which Way Euro?

The most accurate foreign-exchange forecaster says the euro will continue to weaken and may approach parity with the dollar as the European Central Bank buys more government bonds to support the region’s economy. Shaun Osborne, chief currency strategist at TD Securities in Toronto, said the euro will depreciate to $1.13 in the third quarter, $1.08 by year-end and may near $1 in 2011 before recovering. Osborne, whose predictions were within 4.1 percent of the mark on average, according to data compiled by Bloomberg, was echoed by the nine following most accurate forecasters anticipating a lower euro in the next two quarters

But in a case of you pays your money and takes your chance, the euro may surpass $1.30 after yields on German government bonds exceeded those of Treasuries for the first time in three months amid concern the U.S. recovery is losing momentum. “It seems more likely the euro has hit bottom,” with European bond markets showing some improvement while the U.S. economy struggles again, said Minoru Shioiri, chief manager of foreign exchange trading at Mitsubishi UFJ Morgan Securities Co. in Tokyo. Spain’s “successful” bond auction last week helped deflect attention from Europe’s debt and currency woes, he said.

Equity / Company News

•The U.K. government is making contingency plans for a possible collapse of BP as worries grow over the Gulf of Mexico oil spill, U.K. newspaper The Times reported Tuesday, without directly citing sources. Talks led by Department for Business and Treasury officials reflect growing concern about the implications of a corporate failure of BP, the report said the government is worried about the political ramifications of a BP collapse, as well as the potential effect on millions of retired people whose pensions involve BP dividends. U.K. Prime Minister David Cameron and Energy Secretary Chris Huhne are set to discuss BP’s future with U.S. officials during a July 20 trip to Washington, the report said the Department for Business declined to comment on the contingency plans. Separately, Libya’s oil chief says that Libya’s SWF (Libyan Investment Authority) should buy a stake in BP
•Xstrata, Rio Restart Work on Australian Mines After Tax Accord. Xstrata , the biggest exporter of power station coal, resumed work on a A$6 billion mine and Rio Tinto Group revived a study for an iron ore expansion after Australia reduced a planned resource profits tax. Initial work and exploration totalling A$186 million will restart at three coal projects in Queensland state1
•Bellwether UK homebuilder Persimmon today issued a positive trading update ahead of its H1 results due in August in which it saw completions up 16% to 4,657. Asking prices were 8% higher at £168,500, which implies 3% underlying price growth. The group rezoned large portions of its land bank and 85% of its plots now have permission for traditional housing. The land bank was also boosted by the acquisition of 4,000 plots in the last 6 months and terms have been agreed for a further 3,500.
•Tullow issued a trading statement this morning for H1 2010. Critically government approval for the sale of Heritage’s Ugandan interests to Tullow is expected to be resolved soon. Positively, Jubilee Phase 1 remains on track to deliver first oil by November-December 2010. Although the percentage of successful exploration and appraisal wells has declined from last year, eight out of eleven (73%) were successful to date in 2010. Looking ahead Tullow have a busy drilling schedule in H2 with 3 wells having already commenced drilling in Ghana and Uganda with a further 12 expected by year end. Outside of Ghana and Uganda, Tullow have seven potentially transformational wells planned to commence over the comingmonths. Sierra Leone (2), Liberia (1), Mauritania (2), Guyana (1), French Guiana (1). The exploration story is far from over and after underperforming its sector in H1 a period of outperformance is likely after a resolution to the Uganda deal and any significant success from its active exploration in H2.
•Bilfinger Berger , Germany’s second-largest construction company, pulled the initial public offering of its Australian unit Valemus after investors balked at the price the company was seeking. Plans to sell stock in the unit between A$2.20 and A$2.50 apiece “cannot realistically be achieved,” Mannheim-based Bilfinger said in a statement yesterday. Australia’s benchmark S&P/ASX 200 index has fallen 14 percent this year and declined 3.1 percent since the IPO to raise as much as A$1.39 billion was announced June 8.
•A seemingly well founded Reuters report yesterday indicated that Carrefour is seeking to sell its operations in Thailand, Malaysia and Singapore, and have already appointed Goldman Sachs and UBS to manage the process. These 3 countries represent only around 15% of the Group’s Asian sales (China, Indonesia and Taiwan are the main territories), although the report suggested that Carrefour are expecting to achieve USD1bn in proceeds. This would be consistent with the Group’s strategy to focus upon territories where it has a leading presence. Tesco and Casino have been mentioned as potential buyers although we would be very surprised if either pursued the transaction given both are committed to deleveraging.
•A report in the German weekly Wirtschaftswoche quotes the daughter of L’Oreal heiress Liliane Bettencourt as saying speculation that she wants to sell the 31% family stake to Nestle are not true.

And finally For The Techies

By The Mole

The Mole is a man in the know. I don’t trade for a living, but instead work for a well-known Irish institution, heading a desk that regularly trades over €100 million a day. I aim to provide top quality, up-to-date and relevant market news and data, so that traders can make more informed decisions”.© 2010 Copyright PaddyPowerTrader - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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