You'll be happy, and perhaps even a little surprised, to know markets have resumed normal service. Yes, Foolish readers, markets are heading up… just like we said they would.
The S&P/ASX 200 Index is now up 0.7% over the past five days, and is roaring ahead again on this fine Tuesday, up another 40 points. It seems investors might finally be realising low interest rates are here to stay, and that in comparison to term deposits, stocks are one of the ONLY places you can hope to earn a decent rate of return on your money. All of which means, if you've been waiting on the sidelines for the latest bout of fear and panic to subside… well let me just say now might be the ideal time to dust off your watchlist and buy a stock or two.
The market is jumping higher despite disappointing earnings results from Cochlear Limited (ASX: COH) and investment bank Macquarie Group (ASX: MQG).
Cochlear smashed and my SMSF goes with it
As a part owner in Cochlear, I've taken a kick in the guts, with its shares falling around 10% today. Still the company is forecasting a much improved second half, and I have confidence in the company's longer term future. As CEO Chris Roberts said,
"With the release of the new products, quarter two sales were up over 30 per cent on quarter one. There is sales momentum going into the second half."
My SMSF is certainly hoping the momentum carries on for a long time to come.
Big 4 banks come roaring back to life
While bionic ears are on the nose, the big four banks are roaring back to life in 2014, in turn driving the market onwards and upwards today. It reminds me of 2013 all over again, where bank shares kept on keeping on, gaining upwards of 30% over the course of the calendar year.
Australia and New Zealand Banking Group (ASX: ANZ) today reported cash profits rising to $1.73 billion for the first quarter, fueled in part by a further reduction in recorded bad debts. The bank says it expects revenue growth of between 4 to 5% this year.
Falling bad and doubtful debts have been a key factor driving the banks' earnings in 2013, rather than growth in top line revenues. Analysts suggest Commonwealth Bank (ASX: CBA) could report a ripper result tomorrow, as credit quality in the banking sector improves. With the banks making up a large percentage of the index, a strong performance from the banks this year may see the ASX 200 soar in 2014.
Despite their juicy fully franked dividends, despite the steady growth in earnings, and despite their continued popularity amongst the SMSF Army, I'm not a buyer, certainly at current prices. For me, with local unemployment still rising (read on for more of the gory details), the risks out of China unknowable and unquantifiable, the downside risks are just too high. I'm a huge fan of the investing term Margin of Safety, and with the big four Aussie banks amongst the most expensive banks in the world, the downside risk far outweighs the upside potential.
Australia's car manufacturing industry dead in 2017
One sector that has gone from bad to worse to dead is the automotive sector. Following on from the announcements of Ford Australia and General Motors Holden shutting up shop in 2016 and 2017 respectively, Toyota has confirmed that it will cease making cars in 2017, closing a chapter on five decades of local production.
The Japanese car maker began producing cars in Australia in 1963. As Toyota Australia CEO Max Yasuda noted…
"We did everything that we could to transform our business, but the reality is that there are too many factors beyond our control that make it unviable to build cars in Australia."
A high Australian dollar, high local costs of manufacturing and low economies of scale were all blamed for the end of local production. Add in the world's most competitive car market, with more than 60 brands represented locally, including cheap imported cars flooding in from Chinese manufacturers, and the writing was on the wall.
200,000 jobs at risk
An expert at the University of Adelaide has warned that Toyota's exit means the end of an entire industry and not just the departure of some of its biggest lights. 2,500 employees will directly lose their jobs, but it will be the impact on the support industries that could have a major influence on our economy. As many as 200,000 workers are estimated to be dependent on the automotive industry.
What was I saying above about rising unemployment and the downside risks to bank stocks? Just saying…
While it's impossible not to feel deeply sorry for all the workers who will be affected, car manufacturing in Australia has been on its last legs for some time. It's just a pity that more active steps weren't taken to prepare for this day.
Speaking of "last legs", department stores may have received a temporary reprieve.
David Jones' shareholders win-win
Source: Just Jared
I mentioned last week that department store dinosaur David Jones' (ASX: DJS) management was facing tough shareholder criticism over its handling of the share trading of two of its directors. Now it seems chairman Peter Mason has been given the boot by large shareholders, with both directors and the chairman set to resign within the next three months.
Given Mr Mason approved their share trading just days before the release of an upbeat sales result and following a merger offer from rival Myer Holdings (ASX: MYR), which was at that stage not public knowledge, it seems only fitting that he exit stage left as well.
The 60,000 plus retail shareholders should be cheering the news – it may open the way for CEO Paul Zahra to rescind his resignation and stay on board to focus on the turnaround. It will need a mighty effort given the structural headwinds the department store sector faces.
Tough times continue in mining services sector but there may be an opportunity
Mining services company Forge Group (ASX: FGE) has gone into a trading halt this morning, with the AFR reporting insolvency firm Ferrier Hodgson has been appointed as voluntary administrator by the board….Ouch!!!
Having bought into Forge at 51 cents in November, I sold out last week at 90 cents in what now appears to be impeccable timing. I can't claim to have foreseen today's events, and put it down to dumb luck.
Bradken Limited (ASX: BKN), which manufactures mining equipment, has reported an 18.5% fall in net profits, and forecast a lower full year earnings figure – catching the market unawares.
It beats me as to why falling profits in the mining services sector continue to surprise the market though… You know, the end of the mining boom, companies like BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) cutting back on capital expenditure… that type of stuff.
Anyway, another company doing it tough is Coffey International (ASX: COF) which reported yesterday that its first half net profit has dropped 45%, and it will cut more jobs. Managing director John Douglas said in a statement to the ASX…
"It is difficult to forecast second half earnings performance, in the face of continuing tough conditions".
Shares in Coffey have sunk close to 90% over the past four years. While investors may think the 23 cent share price represents an opportunity, the risk of further falls from here is high.
Is this one diamond poking its head above the dross?
Cardno (ASX: CDD), an engineering, planning and professional services provider earns more than half its revenues offshore, including 52% from the Americas, so a weakening Aussie dollar will boost profits. One third of all revenue comes from the growing oil, gas and energy sector, with total revenues sourced from a multitude of sectors and regions.
With a net debt/equity ratio of 23.9% (as at November 2013), and strong levels of work in hand, Cardno may well be a diamond in the rough. Trading on a prospective P/E ratio of 11.6 and paying a fully franked dividend yield of 6%, Cardno looks to be a better option than Coffey, and one stock you might want to add to your watchlist.
