Issue 260, 10 February 2014

Play by numbers

Earnings season will hit its stride this week, with big players like the Commonwealth Bank, Rio andTelstra all reporting. My pick of the bunch is CBA and I believe a good result there will only mean goodthings for the rest of the financial sector.

Today in the Switzer Super Report, James Dunn reports on what's ahead for earnings, and the fewthat have reported so far. Paul Rickard researches the best products to park your cash - a must readnow we are in for a period of low rates.

Tony Featherstone examines a contrarian play on emerging markets and Paul Rickard and I talk abouthow important earnings season results are, in our Switzer Super Session video, and what you need todo about them.

Sincerely,

Peter Switzer

Inside this Issue

The best rates on cash

and term deposits

by Paul Rickard

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02 How to play CBA earningsby Peter Switzer

04 Earnings season outlook – pressure to performby James Dunn

06 The best rates on cash and term depositsby Paul Rickard

08 Shortlistedby Penny Pryor

09 Opportunities in emerging marketsby Tony Featherstone

12 Buy, Sell, Hold – what the brokers sayby Rudi Filapek-Vandyck

14 S&P500 in perspectiveby Gary Stone

16 Property market continues at speedby Brittany Ruppert

Switzer Super Report is published by Switzer Financial Group Pty Ltd AFSL No. 286 531

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Important information: This content has been prepared without taking accountof the objectives, financial situation or needs of any particular individual. It doesnot constitute formal advice. For this reason, any individual should, beforeacting, consider the appropriateness of the information, having regard to theindividual's objectives, financial situation and needs and, if necessary, seekappropriate professional advice.

How to play CBA earnings

by Peter Switzer

Wednesday is CBA day, when the bank will have itslatest bottom line show and tell, which is tipped to beover $4 billion, meaning something like an 8% rise inhalf-year earnings!

If this expected scenario does not play out, then bankstock prices will slide but if, as I expect, the bankfollows the analysts’ script, then bank stocks will goup again.

The bank started the year at $77.80 and on Fridayclosed at $73.52 and it’s part of the reason I arguedlast week that if the market went up, say 10% ormore, which I expect, then a 3% jump in the CBA isnot too big an ask. Now let’s throw in the dividend ofat least 5% and then, with grossing up, you’re gettingclose to 10%, which isn’t bad for a genuine blue chipstock.

The analysts think the interim dividend could beraised by 10% to $1.80 and even if the final dividendis held at last year’s $2, you’d pocket $3.80 on$73.52, which is a yield of 5.16%, before grossing up.

Bargain time

Today I saw an old mate, who has been aprofessional investor for wealthy Australians for over40 years. I asked him how he was faring with themarket more volatile and trying to correct? Hisanswer was instructive for all trustees of SMSFs, whoshould be long-term investors.

This is what he said: “I like it when markets fallbecause it means I can buy companies I like andwant to hold at much better prices.”

Sure, you have to read newsletters like this one torealise that once great companies, like David Jones,have a second-rate board, a poor management teamand have failed to embrace an online strategy while

ignoring the customer complaint for decades that “Ican’t get any service at DJs.”

But other companies can be long-term holds, whichyou buy when prices fall. Need reminding? Well, justreflect on the GFC, when the CBA was under $30and Macquarie was under $20!

I’m absolutely certain this year will see stocks headup and I hope I see 6,000 on the S&P/ASX 200 butI’ll be happy with Ron Bewley’s call of 5,850 orShane Oliver’s 5,800. Hell, I’d be happy with 5,600!

I know this will be a volatile year – lots of ups anddowns – and if this current near-correction turnsaround and we see another big spike up, which someUS analysts are tipping, it will only set us up for a bigcorrection some time later this year.

It could be a “sell in May and go away year” as USmid-term election years can be a handbrake on stockprices, but I’d be buying ahead of theNovember-December comeback for stocks.

A valuable lesson

Occasionally, I get some negative feedback, thoughseldom from subscribers to this newsletter. The lastone came from my Switzer Daily website where thisguy said that I was part of “a Wall Street cheersquad” and together we will do irreparable damage toinvestors, again!

Apparently he believed I was talking up stocks beforeLehman Brothers took the market down again but all Icould find was a column from the Wealth section inThe Australian, that I wrote in September 2008, whichseems at odds with his claims.

In the column, I argued that a big bounce in stockswas likely, but for the nervous, the 7.5% term deposit

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rates were hard to resist. I suggested not to lock-in fora year as I expected a stocks comeback within sixmonths and it happened in March!

I even said the better play was maybe 50% at 7.5%and 50% in blue chip dividend payers. I was proud ofthat call!

So what’s my point, apart from patting myself on theback?

My critic seems to suggest that it is my job to call themarket perfectly so investors never endure damage.He called it “irreparable damage” but when it comesto stocks, if you are in quality companies that paydividends and you have at least 20, then it would onlybe a devastating depression that would deliverirreparable damage.

The goal for all SMSF trustees is to create a portfolio,which gives a cash flow annually to support a goodlifestyle. If this is done, it means that you can ride theups and downs of the stock market, which willhappen.

It also should mean that you create that perfectretirement world that sees you buy CBA at $30 orMacquarie at $20 during a crisis, because you have agood stream of income that has been built up duringthe good times on the stock market, which tends tobe seven out of 10 years.

I expect stocks to rise in 2014 but if they fall, I will bea buyer and I hope you join me.

Important: This content has been prepared withouttaking account of the objectives, financial situation orneeds of any particular individual. It does notconstitute formal advice. Consider theappropriateness of the information in regards to yourcircumstances.

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Earnings season outlook – pressure to perform

by James Dunn

The summer holidays are a distant memory for thosein the investment business, as the February reportingseason moves into full swing this week.

Most companies will report their results for thehalf-year to December 31, 2013, but there is aninfluential minority that uses the calendar year astheir financial year. This group includes resourcesheavyweights Rio Tinto (RIO), Woodside Petroleum(WPL), Santos (STO), OZ Minerals (OZL), andOilSearch (OSH), as well as Leighton (LEI), QBEInsurance (QBE), AMP, GPT, Caltex Australia (CTX),Australand Property Group (ALZ), Coca-Cola Amatil(CCL), APN News & Media (APN), Adelaide Brighton(ABC), Spark Infrastructure Group (SKI), InvoCare(IVC) and Sydney Airport (SYD).

This week sees some of the market’s heavyweightssliding in to the confessional booth. On Wednesday, Commonwealth Bank (CBA) reports its half-yearresult: broker UBS expects an interim net profit of justover $4.2 billion, compared to $3.8 billion a year ago,and lift its interim dividend by 16 cents to $1.80.

On Thursday, it’s the turn of Telstra (TLS), whoseinterim net profit is expected by the UBS analysts tocome in at about $1.79 billion, up about 12% on the$1.6 billion earned a year ago, and maintain thedividend for the half at 14 cents.

Thursday will also see Rio Tinto’s full-year result: lastyear, the mining giant posted the first net loss in itshistory – of $US2.99 billion ($A2.9 billion) – draggeddown by write-downs in its aluminium andMozambique coal assets. This year, UBS expects Rioto deliver underlying 2013 earnings of about $US9.8billion ($11.1 billion).

Investors are hoping to see sound profit growth fromthe interim reporting season, to justify the highprice/earnings (P/E) ratio expectations.

P/E expansion – effectively, the market beingprepared to pay more for expected earnings – hasdriven a large chunk of the Australian market’sperformance in recent years. The estimated forwardP/E for the S&P/ASX 200 surged by 23% in 2012,and rose by 14% last year. Also pushing share priceshigher has been the element of money flowing out oflow-returning cash and bonds in search of higheryields in share dividends, and capital growth on top.

The pressure is on

The prospective P/E for the S&P/ASX 200 Index iscurrently about 14.1 – 14.2 times earnings,significantly higher than its five-year average of about13.4 –13.6 times. This P/E expansion is morepronounced in some areas of the market: State StreetGlobal Advisors, for example, reckons the forwardP/Es for the market sectors leveraged to the domesticconsumer – banks, media, retail and consumerservices – are trading about 20–30% above normallonger-term levels.

Quite simply, companies are under pressure todeliver earnings growth to justify their mostly elevatedP/E ratings.

For the financial year, analysts’ consensusexpectations are for about 14% earnings growthacross the S&P/ASX 200, led by about 35% growth inresources profits, on the back of the lower Australiandollar and reduced capital spending requirements,and 8% growth for industrials. (The most optimisticprojections expect resources stocks’ profit growth tobe 50% plus for FY 14!) The interim season will go along way toward strengthening the case that thiscould be achieved – or not.

What the market does have in its favour are thebenefits of the lower Australian dollar for miners andothers with overseas earnings, and strengthening

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consumer spending for those with a domestic focus.

Over the last few reporting seasons, investors haveseen plenty of focus from companies on cost control,which has been admirable, but companies can’t cuttheir way to growth. The market really needs to seeconcrete signs of top-line (revenue) improvement.

Spending again

According to broker CommSec, Australian retailspending clocked in at $264.2 billion in 2013, up 3.2%, and the strongest calendar-year growth in fouryears. Real spending rose 0.9% in the Decemberquarter after a 0.8% rise in the September quarter –the best back-to-back gains in 18 months. That willhelp stocks exposed to domestic spending, as will theprevailing low-interest-rate environment.

With some results already in, this trend is evident. Forexample, speciality home appliance retailer JB Hi-FI(JBH) reported a strong set of numbers, with sales up6.8% for the December half-year to $1.94 billion andnet profit up 10% to $90.3 million, and a 5 cent (10%)lift in the dividend, to 55 cents.

Fashion retailer Country Road (CTY), which is alsoat the mercy of consumers’ willingness to part withtheir cash, saw its first-half profit surge to an all-timehigh, up 72% to $38 million, on the back of a 27% liftin revenue, to $424.6 million. While Country Road didnot give official guidance for the full-year, it did flag“improved results” for the remainder of the year.

Debt collections business Credit Corp (CCP)delivered results ahead of previous guidance, withrevenue up 25% to $84.1 million, and underlying netprofit up 12% to $14.6 million: even better, thecompany upgraded expectations for the full year.Breathing-products medical device maker ResMed(RMD) disappointed analysts with weak revenuegrowth, but the company maintained both its marginsand its confidence in its full-year earnings guidance.

Companies forecast to surprise on the upside bybroker UBS

CSL (CSL) Feb 12Ansell (ANN) Feb 17Sonic Health Care (SHL) Feb 18

Arrium (ARI) Feb 18GWA Group (GWA) Feb 18.Fairfax Media (FXJ) Feb 19Fletcher Building (FBU) Feb 19Ramsay Health Care (RHC) Feb 25Henderson Group (HGG) Feb 26

Companies forecast to surprise on the downsideby broker UBS

Leighton Holdings (LEI) Feb 19Cochlear (COH) Feb 11Carsales.com (CRZ) Feb 12UGL (UGL) Feb 17Asciano (AIO) Feb 18Cardno (CDD) Feb 18Coca-Cola Amatil (CCL) Feb 18Suncorp Group (SUN) Feb 19Insurance Australia Group (IAG) Feb 19AMP (AMP) Feb 20Trade Me Group (TME) Feb 19Treasury Wine Estates (TWE) Feb 20Monadelphous Group (MND) Feb 20Wotif.com Holdings (WTF) Feb 26Worley Parsons (WOR) Feb 26

Important: This content has been prepared withouttaking account of the objectives, financial situation orneeds of any particular individual. It does notconstitute formal advice. Consider theappropriateness of the information in regards to yourcircumstances.

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The best rates on cash and term deposits

by Paul Rickard

The Reserve Bank made it pretty clear on Friday in itsbi-annual Statement on Monetary Policy- “a period ofstability in rates is likely”. So, no change to the RBAcash rate of 2.5% in the foreseeable future.

However, while the RBA won’t be changing its cashrate, it doesn’t mean that the markets won’t start todo some of the heavy lifting for them. Financialmarkets don’t like stability for very long – andmarkets only move in one of two directions, up ordown. If we have come to the bottom of the downcycle, it means market-based rates (bank bill andbond rates) can ultimately only go one way – andthat’s higher.

The markets will need reasons to take interest rateshigher, such as the threat of higher local inflation, aplummeting Australian dollar or more likely, rising USbond yields. While these triggers may not beimmediate, the direction on market interest rates isnow pointing up.

What does this mean for retail investors, such asSMSF trustees like you and me?

As bank cash accounts are implicitly (and oftenexplicitly) linked to the RBA cash rate, don’t expectany improvement in interest rates in the short term.Maybe in the fourth quarter of 2014 rates could startto move higher.

Term deposit rates are more likely to see someupward pressure, although the professional marketsare only pointing (at this stage) to a 0.25% increase inthe 90-day bank bill rate later this year. So, if you arerolling over term deposit monies in the coming weeks,take advantage of the very marginally positive yieldcurve and invest a little long, but not too long. Aroundsix to nine months might be the pick.

There is no harm in seeing whether we can make our

cash work harder. Here is our regular review of whatthe banks are paying, for cash or on a fixed termdeposit, to help you do just that. But it’s not alwaysjust about the interest rate. Make sure youunderstand the accounts terms and conditions beforeyou roll anything over.

Bank accounts

I am somewhat aghast at the number of questions Iget along the lines “is this bank safe?”. Well, maybenot if you don’t believe in government guarantees –for me it is largely an irrelevant question. Known asthe ‘Financial Claims Scheme’ and administered byAPRA, the Government guarantees deposits(including term deposits) of up to $250,000 on a ‘peraccount holder per financial institution’ basis. That is,your fund can have $250,000 in total with Bank A,another $250,000 with Bank B, another $250,000 withBank C etc. – and all deposits will be covered by theguarantee. (see http://www.apra.gov.au/CrossIndustry/FCS/Pages/default.aspx ) A financial institutionincludes banks, credit unions, building societies etc.

So, the question is: how many accounts do you want,and is it worth the effort to change or open a newaccount?

Let’s start with the rates and features for those banksoffering tailored SMSF cash accounts.

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If interest rate is the key determinant, then UBankand RaboDirect are the clear leaders. UBank, with itsbonus rate of 3.96% that is paid in any month whenthere is no withdrawal, edges out RaboDirect. Of themajors, Westpac with its integrated “two account”structure of a ‘working account’ and ‘savingsaccount’ (the latter paying 2.70% on the wholebalance) is better than the CBA.

However, if your SMSF has more than two trustees ortwo directors – you can’t open an account withUBank!

If transactional ability is important, then it is hard to gopast the major banks. The online banks (and someregionals) require a ‘linked bank account’ for makingpayments/transfers out, and don’t offer BPay. Thiscan be somewhat self-defeating for an SMSF, as youwill then need to maintain a second account with a

bank that provides transactional capabilities,potentially incurring a monthly fee of up to $10 permonth.

UBank has attempted to address this and a linkedaccount is not mandatory. While it offers a ‘payanyone’ facility, this is capped at $20,000 per dayand payments in excess must be done via a linkedaccount.

Term deposits

If you can get through the hassle of the account“opening process” (ING Direct is probably thestandout with the easiest process), then interest rateis really the only consideration. One proviso – ask thebank about the notice they provide when your TD isset to mature and how easy it is to advise them ofyour new instructions. With some TDs set toautomatically rollover into a new deposit of the sameterm at the standard rate (rather than the “headline”or “blackboard special” rate), the new rollover ratecan come as a nasty shock to investors who forget toadvise their bank.

These are the latest rates:

Rates as at 7 February 2014, for deposits of $50,000and upwards. Interest paid on maturity, or annuallyfor 5-year term.

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Important: This content has been prepared withouttaking account of the objectives, financial situation orneeds of any particular individual. It does notconstitute formal advice. Consider theappropriateness of the information in regards to yourcircumstances

Shortlisted

by Penny Pryor

It’s reporting season this week, and that has caughtthe attention of our Switzer Super Report experts.Commonwealth Bank, Telstra and RIO are allannouncing over the next few days (see JamesDunn’s article).

Earnings reports

Director Paul Rickard was busy with the banks lastweek.

“I bought some Commonwealth Bank (CBA) lastWednesday when they got down near $72. I feel thatthe ‘market consensus’ about the banks beingoverpriced is now overdone – and I am looking toCBA’s report on Wednesday to re-ignite momentumin this sector,” he says.

Paul likes the bank’s tight cost control, steadymargins, low bad debts and a small increase inrevenue, which he believes should lead to a prettyimpressive result.

As for the other behemoth reporting this week –Telstra (TLS) – Paul believes at around $5.01 it alsostarts to look like value.

On the grocery giant, Paul says: “Woolworths(WOW) produced a strong result last week and in amarket that is down 3.5% since 1 January,Woolworths has risen by 3.3%. Though it’s nowgetting a little expensive.”

Peter Switzer agrees with this view, it is just an “OKbuy” at these levels.

“If we get a big correction, I’d be trying to getWoolies around $32 something. It might not happen,as there are others like yours truly who want in, in the$32-mark. That said, I might have to be happy with a$33 plus price.”

Mike Kendall, executive director of JB Were,focussed on the energy stocks when he appeared onSwitzer TV on Sky Business last week.

“Energy is one of the places to be over the next twoor three years, particularly with the big gas revenuesand Drill Search (DLS) is one of those thematics, so Ithink it’s one to keep an eye on,” he said.

“I think energy should be part of most shareholders’portfolios.”

Mike likes Drill Search’s recent good productionreports and its exposure to the Cooper Basin on theQueensland/South Australia border region.

Atlas Iron (AGO), which had a good run up of around10% recently, is also on Mike’s radar.

He says that although the stock has been “all overthe shop for a while” their recent production reportsare encouraging and it offers an option to those whocan’t afford to buy the giants BHP and RIO atsignificant volumes.

“We’ll actually see the stock price move up as theeconomy moves forward.”

Update

As for Peter’s shortlisted LogiCamms last week, itdid suffer from a “we won’t do as well as wethought” announcement, but Peter says the responsewas a gross market overreaction.

Peter is still hanging in there, viewing it as a goodcompany over the long term, but just wishes histiming could have been better!

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Important: This content has been prepared withouttaking account of the objectives, financial situation orneeds of any particular individual. It does notconstitute formal advice. Consider theappropriateness of the information in regards to yourcircumstances

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Energy

Opportunities in emerging markets

by Tony Featherstone

Contrarians will lick their lips at the latest rout inemerging markets (EMs). The tapering of USeconomic stimulus, concerns about China andcommodities, and worsening fiscal imbalances in keydeveloping nations have smashed EM currencies andequity markets this year.

EM currencies in January had their biggest sell-offsince 2009, and the FTSE Emerging Markets Indexshed 9.9% in the three months to 31 January 2014.Over three years, the index has an averageannualised loss of 3.7%, versus 9.7% for developedmarkets.

Is this savage underperformance a cheap entrypoint? A higher allocation of EM equities makessense in the next 12-18 months, but a portfolio tiltnow is premature. EMs are cheap for good reason –the risks of contagion across the region are rising.They will get cheaper yet, despite somemuch-needed stability in EM currencies and equitymarkets this week.

The question is not whether to buy EM equities, butwhen.

The bull argument

As an asset class, EMs have much to offer long-termportfolio investors, such as self managed superfunds. A 2010 OECD report, “The Emerging MiddleClass in Developing Countries”, predicted the globalnumber of middle-class consumers earning orspending US$10 to US$100 daily would soar from1.84 billion in 2009 to 4.88 billion in 2030, with Asiaaccounting for most growth.

Economic benefits from increased urbanisation andindustrialisation, and the demographic dividend froma higher proportion of younger people in theworkforce, add to the positive long-term outlook for

emerging economies.

Economist Nouriel Roubini wrote in The Guardian lastweek: “…the threat of a full-fledged currency,sovereign debt and banking crisis (in EMs) remainslow. … Over time, optimism about emerging markets isprobably correct.”

A September 2013 Vanguard US white paper, “TheOutlook for Emerging Market Stocks in a Low GrowthWorld,” had a positive long-term view.

“The long-run outlook for emerging markets could stillbe quite positive, even if their economies grow moreslowly than in the past. Further, we believe thesemarkets have an important role in diversified equityportfolios,” that report said.

A high-growth portfolio could have a benchmarkallocation of about 8% in EM equities within theinternational equities component, according to theASX. That falls to 5% for a growth portfolio, 3% in abalanced portfolio, and zero in moderate andconservative portfolios.

The bear argument

A lot can go wrong. The main factors smacking EMsare unlikely to be resolved soon. Uncertainty aboutthe speed of withdrawal of the US Federal Reserve’squantitative easing program is a huge cloud overEMs, for it increases the risk of further fund outflowsto developed markets, and currency collapses anddebt defaults.

China is another risk for EMs. Should its growth slowmore than expected, commodity prices will continueto slide, creating problems for developing nations thatrely on commodity exports.

Moreover, the combination of slowing economic

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growth in EMs, worsening current account deficits,and elections in several key nations this year, is adangerous trifecta. If developed nations struggle toimplement fiscal austerity during low growth, whatchance do emerging countries have to reform theireconomies without great pain and possible socialunrest?

The Bank of International Settlements last weekwarned: “At some point over the next few years,central banks in the advanced economies willincrease short-term interest rates and reduce theirholdings of government and other bonds. How thispolicy shift will unfold is not known, and uncertaintyabout the policy path could unsettle global bondmarkets.”

It added: “Downward pressures on someemerging-market currencies could be accentuated,increasing the local currency cost of servicing dollardebt. Higher long-term rates, currency depreciationand more volatile markets could make even moredifficult the choices emerging-markets’ central banksface on their policy rate, on the exchange rate, on thelong-term interest rate and on the best use of theirbalance sheet.”

Long-term relative valuations are another issue.Vanguard’s white paper said: “The gap betweenemerging-market and developed-market valuationshas shrunk considerably over the past decade, andare now fairly similar. Thus, the rising valuations inemerging stock markets have already contributed toreturns. With valuations where they are today(September 2013), investors should be cautiousabout expecting a repeat of the past decade.”

Look for opportunities in the second half of 2014

Contrarians face a conundrum: high and rising risksin EMs this year, and a narrowing valuation gapbetween EM and developed-market equities in thepast decade; versus the strong medium- andlong-term prospects for emerging economies.

How EMs perform this year is anybody’s guess. Myview is continued high volatility and further losses inthe first half of 2014, followed by more stability as theconcerns about the US, China, and commodity pricesslowly recede.

For the next few months, the sidelines look the safestplace in EMs.

Gaining EM exposure

SMSFs wanting higher emerging exposure in thesecond half have a choice between managed fundsand exchange-traded funds. I like exchange-tradedproducts, but prefer active managed funds for EMs.Paying for professional investors, who can deal withvolatile markets, and choose the right countries withinthe EM basket, could be worth it.

The Aberdeen Emerging Opportunities Fund has afour-star Morningstar rating and $1.16 billion in assetsunder management at 31 December 2013. It had thehighest ranking over five and seven years, with anannualised return of 13.5% and 7.3% respectively.

The Arrowstreet Emerging Markets Fund has alsoperformed well over five years, with an 11.1% annualreturn. It also has a four-star Morningstar rating.

SMSFs that prefer exchange-traded products shoulduse the Vanguard FSTE Emerging Markets SharesETF or the iShares MSCI Emerging Markets ETF.The Vanguard ETF is slightly cheaper, but both are asimple, low-cost way to gain exposure to EMs via theASX.

Listed Investment Companies (LICs) that specialise inemerging companies are another option. The AMPChina Capital Growth LIC traded at an 18% discountto its pre-tax net tangible assets at December 2013.The Emerging Markets Master Fund and AsianMasters Fund traded at a slight premium.

A less-considered, lower-risk way to play EMs isthrough multinationals with a large and growingpresence in developing countries. The iShares Global100 ETF is an interesting idea – exposure to theworld’s largest companies that benefit from growth indeveloped markets and, increasingly, EMs.

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Source: ASX

Tony Featherstone is a former managing editor ofBRW and Shares magazines.

Important: This content has been prepared withouttaking account of the objectives, financial situation orneeds of any particular individual. It does notconstitute formal advice. Consider theappropriateness of the information in regards to yourcircumstances.

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Buy, Sell, Hold – what the brokers say

by Rudi Filapek-Vandyck

Australian shares may have become a little cheaperin the first six weeks of the new calendar year, butcertain stocks are simply too cheap. This was thedominant theme last week, with stockbroking analystslifting recommendations on the likes of AMP,Goodman Fielder, Qantas and Echo Entertainment.

In the good books

AMP (AMP) was upgraded to Neutral fromUnderperform by Macquarie.

Despite the problems in life insurance, Macquarie hasdecided to upgrade AMP to Neutral fromUnderperform. This reflects the decline in the shareprice and contraction in the price/earnings multiple,as well as reduced regulatory impact. The brokerconcedes the issues are not behind the company.Lapse rates remain elevated and claims trends arenot improving. Nevertheless, the share price is nowmore appropriately factoring in the situation.

Echo Entertainment (EGP) was upgraded to

Outperform from Neutral by Credit Suisse and to Buyfrom Hold by Deutsche Bank. Credit Suisse believesEcho is in a good position regarding new Queenslandlicences because it is the incumbent. The governmentwill announce the winner of the Brisbane tender inearly 2015. The government has also stated it isunlikely to issue a new casino licence on the GoldCoast. Credit Suisse calculates that, based on thestock trading at 5.8 times FY15 forecasts, it is one ofthe cheapest casino stocks in the world. Echo’sresult was a slight beat on the earnings line but amiss operationally, with Queensland casinos inparticular disappointing for Deutsche Bank. Thebroker, nevertheless, feels earnings may havebottomed, with costs reduced and domestic gamingshowing signs of improvement. See also EGPdowngrade.

GPT (GPT) was upgraded to Outperform from Neutralby Credit Suisse.

Price target has fallen to $4.00 from $4.12, but therating has been lifted to Outperform from Neutral, asthe analyst believes the immediate outlook haseffectively been de-risked by the companypre-informing the market about its earnings guidancefor the December half. There are still somereservations, in particular given the company’sdifficulties executing on significant acquisitions.

Qantas (QAN) upgraded to Add from Hold by CIMBSecurities. All the bad news is captured in the shareprice, in CIMB’s view, and the upcoming resultscould become a catalyst if management outlinesmore details around the cost reductions and potentialasset sales. The broker is therefore upgrading to Addfrom Hold and raising the target to $1.39 from $1.14.CIMB is quoting history, suggesting the time to buyairlines is when things are bad and that time is now.The broker thinks any action that management takesis likely to be viewed positively by the market.

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SEEK (SEK) was upgraded to Buy from Neutral byDeutsche Bank. Deutsche Bank expects solidearnings growth in the first half, with a supportivecombination of pricing power and new products. Therating is upgraded to Buy from Hold as the stock hascome off its highs and underlying conditions improve.

Westpac Banking Corp (WBC) was upgraded to Buyfrom Neutral, Low Risk by BA-Merrill Lynch. Westpaclagged its peers in the December quarter, butseasonal factors alone suggest to the broker there’simprovement in the months ahead. WBC’s capitalratio is the most attractive after the regulatorychanges and the bank offers a stronger return onequity than peers.

In the not-so-good books

Commonwealth Bank (CBA) was downgraded toUnderperform from Neutral, Low Risk by BA-MerrillLynch. The broker believes CBA is set to post astrong first half result but that it’s already in the price,with the stock trading at a substantial premium to itsunderlying return. The broker also notes theimpending regulatory changes will affect CBA themost and impact on return on equity.

Echo Entertainment (EGP) was downgraded toReduce from Hold by CIMB Securities. On the backof the first half results, CIMB finds there’s littlereason to change a cautious stance. Revenue growthremains weak and profit growth looks to be negativein the short term. Moreover, there is an informationvacuum when it comes to the potential of Brisbaneand the broker does not see this changing this year.See also EGP upgrades.

Trade Me (TME) was downgraded to Hold from Buyby Deutsche Bank. Deutsche Bank analysts report asmall number of real estate agents have angrily voted

with their feet and taken their listings to competitorrealestate.co.nz. While to date this is a smallresponse to recent fee increases, who is to say thiswon’t grow larger? Trade Me is the market leaderand will ultimately come out on top, predict theanalysts, but at the least it will be forced to increasemarketing spending.

FNArena tabulates the views of eight major Australianand international stock brokers: BA-Merrill Lynch,CIMB, Citi, Credit Suisse, Deutsche Bank, JPMorgan, Macquarie and UBS.

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S&P 500 in perspective

by Gary Stone

World equities indices have wobbled over the lastthree to four weeks, sending shivers through theinvesting world. The financial commentary brigadealways looks for a reason whenever equity marketsretrace. On this occasion, blame has been pinned onthe Fed tapering QE by $10 billion a month to $65billion.

The bigger picture

The weekly chart below (Ch.1) dates back to the end of2007 and shows the minus 56% 2008 bear market onthe left part of the chart. Since the trough in March2009, the S&P 500 has risen 170% to its recent peakin mid January.

The old cliché that markets don’t rise (or fall) in astraight line, is quite evident in this 6-year chart,however it is amazing that investors forget thiswhenever even a small retracement occurs in equityindices. As soon as red ink appears on the back ofsome negative news, fear levels start rising, fueled bythe noise from market commentators.

The fact is that negative news is always around, evenwhen markets are rising, but maybe the marketsaren’t ready to react negatively at that particulartime. And when they do, the noise brigade magnifiesthe then current negative news, discounting anypositive news that may also be around, until themarkets start rising again. And so the roller coasterrolls on…

The recent high close of 1850 reached on 15 Januarywas just over the 127.2% Fibonacci extension of the2008 bear market, shown by the top green horizontalline in Chart 1 below, taking the S&P 500 to 274 pointsabove the 2007 high. The 127.2% Fibonacciextension is a typical area for price action to take abreather, as is 138.2%, 161.8% and 200%, althoughthere is some way to go before these are reached.

Zooming in

The daily S&P 500 chart below (Ch. 2) zooms in on the last two or so years from October 2011. Four commonFibonacci retracement levels are shown by the bluehorizontal lines in Chart 2 below.

Note the retracements that have occurred for theentire run-up shown on the chart. Each of these hasbeen either of a 14.6%, 23.6% or 38.2% Fibonacciretracement. The most recent retracement reachedthe 14.6% level before jumping over the last twotrading days.

Technically this retracement is not over until, in thefirst instance, the S&P 500 closes above 1798.8 andthen above 1850.8. Until then, a deeper retracementis still possible, however becomes less likely as theS&P 500 continues to rise.

If the S&P 500 does falter from here in the short tomedium term, then a 23.6% or 38.2% retracement toaround the 1660 – 1670 or 1555 – 1565 zones,respectively, will not be that serious, given the run-upthat has occurred since October 2011. At somestage, another 38.2% or deeper retracement willoccur as markets cannot continue with such shallowretracements.

In this instance, if equity markets fell further fromwhere they are, a retracement in the order of 38.2%would take the S&P 500 back to around its high beforethe 2008 bear market, shown on the daily chart aboveby the lower green horizontal line.

In the meanwhile, accept that markets do not rise, orfall, in straight lines and that retracements along theway in a bull market are normal.

Gary Stone is the founder and managing director ofShare Wealth Systems.

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Chart 1

Source: Beyond Charts

Chart 2:

Source: Beyond Charts

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Important: This content has been prepared withouttaking account of the objectives, financial situation orneeds of any particular individual. It does notconstitute formal advice. Consider theappropriateness of the information in regards to yourcircumstances

Property market continues at speed

by Brittany Ruppert

The auction market gained some speed last week asbuyers and sellers from capital cities across thenation continued to settle into 2014. There was a totalof 966 auctions held last week, with an averagenational clearance rate of 69.8%. This is a significantincrease from this time last year, when auctionvolumes and clearance rates sat starkly lower at 667and 55.4% respectively.

Source: RP Data

Sydney led the pack, with a huge clearance rate of81.2% across 358 auctions. This is up from 121auctions (clearance rate 75.0%) the previous week.

Melbourne, likewise, experienced significant auctionvolume increases, with 334 auctions, compared to104 in the previous week. However, clearance rateswere lower at 68.8%, compared to 74.7% theprevious week.

Perth upped its numbers to 43 auctions, and a 52.4%clearance rate, after a quiet first week of February.Tasmania lagged behind with a clearance rate of30.8% across 14 auctions.

Source: RP Data

Meanwhile, home values stayed flat over the week onaverage. All capital city home values decreasedslightly over the week, except for in Sydney wherevalues increased fractionally by 0.5%. The annualchange remains high, with a 10.3% increase duringthe 12 months until 9 February 2014.

Source: RP Data

The general increase in auction volumes andclearance rates this week gives credence to earliercomments from RP Data predicting strong figures for2014.

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Important: This content has been prepared withouttaking account of the objectives, financial situation orneeds of any particular individual. It does notconstitute formal advice. Consider theappropriateness of the information in regards to yourcircumstances

Did you know?

In our Switzer Super Sessions video Peter Switzer and Paul Rickard talk about whether or not this is thecorrection we have to have and how important earnings season results are to it all.

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