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Australian Stocks: What Happened Today?

Australia | Aug 22 2014

By Mathan Somasundaram, Baillieu Holst Quant Strategy

Summary: Aussie market popped again in the morning and then gave it all up. Market now trading at similar stretched valuations as early July when we last went negative short term. We have not seen any substantial earnings upgrade in the large caps to change the valuation bands while the market has bounced from the lows in mid-August when we turned short term positive. We continue to remain positive long term, but short term bumps are expected when market runs too far ahead of reality. The day started with government using RBA comments over Treasury comments to justify their selling of the budget.

The reality of the situation is the investment community bashed corporates to deliver yield for the last 12mths and now that they have, we are quick to complain they are not growing. In a low growth environment corporates are not magicians, but will take low risk approach at all times. Management are paid on where the share price is trading and not how the company is growing. Corporates cut costs and improved yield at the expense of growth. Now the share prices are at post GFC high, the management are going to get paid at the top of the range…you get what you pay for. The problem is the unsustainable situation …i.e. we should not be getting yield from Resource stocks, we should be getting growth…but it is what we are willing to pay for right now.

When interest rates start to rise in 2015Q3, the dynamics will change back to the norm. For now we will all keep our eye on Jackson Hole this weekend. Sadly I expect them to be vague and repeat the same “need to see strong employment” rhetoric for US while Euro is most likely to talk the “wait and see” rhetoric. If the market sees any sign of interest rates going higher sooner than expected in US or further risk to Euro growth, we may see some red.

Trading idea of the day: Acrux (ACR)…we have been positive on this stock since the selloff in early Jun to below $0.80…now $1.98…after releasing multiple market and sales updates. ACR was smashed on potential heart risk from their main product by an overall industry warning by FDA. We were looking at the rebound to get to $2, but ACR is still has substantial shorts and any clarity from FDA or better sales data in the near future will trigger short covering and drive this stock substantially higher.

Market Move: Aussie market was up 0.12% with turnover was just below $4.9bn. S&P/ASX200 closed at 5645.6, up 6.70 points.

Macro Events: Tonight – EU August consumer confidence, US July existing home sales, US July leading index, US August Philadelphia Federal business outlook, US Jackson Hole Conference.

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Baillieu Holst Ltd
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