Double Dip recession fears again hit the market

August 20th, 2010  by Patrick Pecci

Closing Data

	Current	Change	%
Dow Jones	10,271.21	-144.33	-1.4%
NASDAQ	2,178.95	-36.75	-1.7%
S P 500	1,075.63	-18.53	-1.7%
FTSE 100	5,211.29	-91.58	-1.7%
Nikkei 225	9,362.68	122.14	1.3%
ASX 200	4,479.02	11.02	0.3%
COMEX Gold - Dec 09	1235.4	4.00	0.3%
COMEX Silver - Sep 09	18.327	-0.07	-0.4%
COMEX Copper - Sep 09	331.85	-3.10	-0.9%
WTI Spot	74.43	-0.99	-1.3%
AUD-USD	0.8928	-0.01	-0.6%
Aluminium	2,094.00	-52.00	-2.4%
Copper	7,442.00	88.50	1.2%
Lead	2,103.50	-15.50	-0.7%
Nickel	22,200.00	325.00	1.5%
Tin	21,495.00	45.00	0.2%
Zinc	2,098.50	-7.00	-0.3%

For the past few months market sentiment can be likened to a yo-yo or see-saw, with strong corporate results, in many cases beating consensus estimates, contradicting weak economic numbers and employment figures. Last night in the US we saw weekly jobless claims jump to 500,000, its highest level since November of last year. These economic numbers, combined with an unexpected fall in the Philly Fed manufacturing index (Survey of about 250 manufacturers in the Philadelphia Federal Reserve district which asks respondents to rate the relative level of general business conditions), triggered a 144 point fall on the Dow and 18.5 point fall on the S&P 500. Oil dropped a dollar to US$74.50 and high yielding currencies like the AUD, NZD and CAD all finished at session lows.

The market does not like uncertainty, however uncertainty creates excellent trading opportunities and medium to long term entry into quality stocks. Lets put things into perspective here also; Australian and global companies have very strong balance sheets. They have managed to weather the GFC well by reducing debt, in some instances having no debt at all, raising capital and having a war chest of cash and/or credit facilities to enable them to grow organically or via acquisition in the future. In relation to the latter, this week alone we have seen multi-billion dollar takeover bids, with BHP approaching Potash Corp. of Saskatchewan Inc with a price tag of US$43Billion, that's right, US$43 Billion, and last night Intel announced a bid for McAfee for a more modest US$7.68Billion. Let me note also that BHP’s bid is a straight cash bid, no scrip swap, no hybrid, just straight HARD cash.

So why are these strong corporate numbers not reflecting in the economic figures emerging from Federal Governments? Why aren’t companies, with such strong balance sheets and plenty of cash not hiring? Well economic figures are lagging indicators; in fact, employment numbers are usually the last to turn as the business world carries on its daily grind. It almost feels like a catch 22...companies are hoarding cash after weathering the GFC, hidden under a  “comfort blanket of cash”, keeping them warm and safe during “uncertain” times, not quite ready to pull the trigger and recommence hiring, even though they are in a position to do so. This form of capital management is good for shareholders but not so good for the economy, hence the weaker economic numbers. However once the hiring starts, generating stronger consumer confidence and more money circulating around the economy, all economic stakeholders, whether they are financial institutions, miners, retailers, governments, shareholders and more importantly Mr & Mrs Joe Citizen, will benefit greatly, and the current uncertainty and double dip fear will begin to fade away.

On a more specific note, we like BHP, QBE, OSH, LEI, BSL, WOR & WBC on this dip.

Happy trading and have a good weekend.

Contact your Freeman Fox Stockbroker on 07 3031 9960 or 1800 003 369 Ext 7.

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