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The Round Up
7 August 2009
Issue No. 150
The Round Up is a comprehensive daily note produced by the RBS Warrants
team providing an overview of market movements along with quality ideas for
warrant traders and investors.
In today’s issue
Global Market Action Scoreboard
Aussie Market Action SPI Comment, Events & Dividends
SLF (SLFSZX) Self Funding Investment – property sector
Retail (JBH,DJS,HVN - KZP) The Bear Cage – Stimulus spending to end
Reporting this week Reporting Trading – AXA,AWC,NWS,TAH,RMD
Round Up Corner RBS Monthly Market Review – July 2009
Equities
Commodities
Overnight Commentary
United States Commentary
US stocks fell for the second session, the Dow down 24.7 pts, and the S&P 500 off 0.6% and back below 1,000 pts. Jobless numbers
were reasonable, but further falls by P&G and weakess in commodities, coupled with concerns over tonights official unemployment
number, were enough to keep the market in the red.
Eco - Initial Jobless Claims fell to 550k (vs 580k forecast), from 588k, although Continuing Claims rose to 6310k (vs 6291k exp'd) from
6241k. While Chain Store Sales fell a further 5.0% in July, after falling 5.1% in June.
Industrials - Once again Procter & Gamble was the worst on the day, off 4.5% and taking 18.5pts, after the world's largest household-
products maker yesterday reported fourth-quarter profit fell 18 percent as consumers curbed spending on higher-priced skin care and
detergents in the recession, switching to cheaper generic options
Resources - Base metals fell as a rally in the US dollar, following yesterday's unexpected contraction in US services, fueled concern
that the near doubling of prices may be exaggerated, and trimmed demand for commodities as a hedge against inflation. Nickel, zinc
and aluminium all fell 4%, and Alcoa lost 3.6% after the moves.
Retail - Gap Inc rose 8.2% after the largest US clothing retailer raised it's second-quarter earnings forecast to as much as 32
cents/share, above the average analyst estimates of 27 cents/share. Macy's Inc added 5.6% after the dept store raised its 2Q earnings
forecast.
Financials - Citigroup rose 6.1% after another broker said they see 53% upside in the bank, however still expect a further $10bn
raising in 4Q 2009 in order to repay TARP2 by year-end. Morgan Stanley has agreed to pay $950m to redeem warrants that the US
Treasury received in October when it bought $10bn of preferred stock.
Eco - The BoE purchased £50bn in long-dated gilts, the move is a drastic way to lower bond yields. The market reacted positively but
some commentators think the move means the UK economy is in much worse shape than the market thinks it is. The BoE and ECB
kept rates on hold as expected.
Euro Banks - KBC, the largest Belgian lender by market value, helped lift the sector after posting an unexpected profit for 2Q, the
stock soared 22.5%. Belgian rival Fortis was up 5.8%, Natixis jumped 15.8%, SocGen added 3.3% but Commerzbank was off 0.6%
after revealing further losses from their takeover of Dresdner.
UK Banks - The sector was stronger as Lloyds, up 12.4%, continued its strong run. Two brokers said hopes of a recovery look well
founded and reiterated their buy calls. RBS was up 9.75%, Barclays added 5.2% and HSBC was up 5.4%.
Insurers - Zurich Financial, one of the world’s leading insurance groups, rose 1.2% after the Swiss group posted a better-than-
expected net profit in spite of a more challenging market. Legal & General was up 4%, Prudential climbed 1.9% and Aviva ended 5.4%
higher.
Industrials - Household products giant Unilever, up 5.4%, saw support after forecast-beating results. The company reported
unexpected growth in western European sales, helped by price cuts.
Media - Thomson Reuters was also among the top blue-chip risers, up 6.1%, after the news and financial data publisher reported a
better-than-expected quarterly profit, helped by cost cuts, and said it expected 2009 revenue to grow as the financial industry recovers.
Resources Commentary
Miners - The sector was the biggest drag on the blue chips, tracking metal prices lower. BHP fell 0.25%, Rio was off 1.1%, Anglo
dropped 2.1%, Xstrata was 1.3% lower and Vedanta ended down 0.3%.
Energy - Crude fell on oversupply concerns but stocks were mixed in the UK and Europe. BP was off 1%, Shell was up 1.1%, BG
Group fell 0.1%, Total added 0.2%, Repsol also climbed 0.2% but Statoil ended down 0.4%
SPI Commentary
The SPI traded up 74pts or 1.75% to 4291. Open at 4216 with a low of 4216 and a high of 4300. Volume 28,136. Overnight the SPI
trading down 17pts to 4274.
*SPI report taken from the 9:50am open to the 4:30pm close on the previous trading day. Charts taken from IRESS
Monday AUS NSW Bank Holiday, AIG/PWC Manufacturing PMI, ANZ job ads
US
Tuesday AUS Existing house prices, nominal retail trade, real retail trade, RBA cash rate decision
US ISM, construction spending, personal income, personal consumption, core PCE deflator
Wednesday AUS AIG/CBA services PSI, trade balance
US Pending home sales, ADP employment report
Thursday AUS AIG/HIA consruction PCI, employment, unemployment rate
US Non-manufacturing ISM, factory orders
Friday AUS RBA Statement on Monetary Policy
US Average hourly earnings, unemployment rate, non farm payrolls, consumer credit
*Dates are indicative only and may change
Upcoming Dividends
Technicals
Source: IRESS
The chart above shows SLF over the past 18 months. After bottoming in March 2009, the ETF has developed a
sustained medium term uptrend with higher lows and current resistance at $7.50. A breakout of $7.50 would be a
bullish signal for a continued advance of the uptrend
SPDR S&P/ASX 200 Listed Property Fund (SLF) seeks to closely track, before fees and expenses, the returns and
characteristics of the S&P/ASX 200 Listed Property Trust Index. The approach is designed to provide a portfolio with low
portfolio turnover, accurate tracking, and low costs.*
The Index comprises the leading listed property vehicles in Australia and represents diversified exposure to the Australian
listed property market. Exposure is diversified geographically across Australia’s major population centres and by sector
across a range of property types, including industrial, commercial, retail and hotel/tourism.*
*Source: IRESS
The breakdown of the S&P/ASX 200 Listed Property Index is as follows:
SLF vs XJO (ex property trust) performance over the past 3 years
Source: IRESS
The chart above compares the returns from the S&P/ASX 200 – Ex-property and SLF. It can be seen that the listed
property sector has been a big underperformer compared to the rest of the market and this underperformance has
increased over the past month, despite property companies improving their balance sheets. Look for this
underperformance to reverse as the listed property companies de-risk and sell underperforming assets.
Using SLFSZX to gain exposure to listed property index
Take advantage of upside in the S&P/ASX 200 Listed Property Index through an RBS Self Funding Instalment, SLFSZX.
Self Funding Instalments (SFIs) are a simple way to gain long term geared exposure to ASX-listed shares while receiving
many of the major benefits of share ownership including exposure to share price movements, dividends and franking
credits.
* Listed property has significantly underperformed the rest of the market, particularly in the most recent rally
* A major concern for the smaller property trusts has been refinancing debt, however banks are more likely to re-
finance the property trusts rather than taking the properties onto their own balance sheets and then having to
manage them
* Occupancy rates are still high, particularly in retail property which makes up a large proportion of the overall
SLF portfolio (predominantly WDC)
* Major property compmanies have undergone capital raisings to improve their balance sheets and de-risk
* SLF offers an attractive yield with any franking credits an added bonus
* SLF gives you exposure to the whole sector, which reduces the risk of being exposed to problems of any
individual company.
STRATEGY – Using SLFSZX and WDCKZR to gain exposure to listed property ex-WDC
For investors out there who are looking to gain exposure to a basket of listed property stocks without the 46% exposure to
Westfield Group (WDC), a strategy to consider would be long SLFSZX and then short WDC thorugh WDCKZR MINI
short. This strategy would give you upside exposure to all the stocks in SLF except WDC.
Source: IRESS
The chart above shows the relative performance of the major retailers and the S&P/ASX 200 since the beginning of
2009. JBH has been the standout performer followed by DJS and then HVN. All three have significantly outperformed
the XJO
JB Hi Fi (JBHKZP)
Since hitting a $17 peak in 2007 JBH retraced back to $7 in line with the overall market in 2008. However since
November 2008 the stock has staged a big recovery and sales growth has continued despite the economic downturn.
JBH is perhaps one of the key beneficiaries of the Governments cash handouts which were made as part of the stimulus
package. In June JBH upgraded FY09 NPAT expectations and store growth guidance. However the upgrade is now more
than priced into the current share price and JBH is approaching the big resistance level at $17. With stimulus spending
likley to dry up and unemployment set to continue to rise, the stock looks fully priced. Play a pullback off $17 resistance in
JBHKZP
Source: IRESS
• JBH upgraded FY09 NPAT expectations to cA$92m and upgraded to its store growth guidance, now anticipating
160 large-fit stores and 50 small-fit stores
• Sales/earnings growth rates will surely come under pressure in FY10F
• JBH now trading on over 18x P/E and a ~2% dividend yield
• While the company is likley to continue to underpin earnings growth through its store rollout, the stock looks fully
priced
• RBS Research target price $15.35
• Play short at $17 resistance through JBHKZP
HVN released its FY09 sales last week which came in line with RBS Research expectations. However the concern going
forward for HVN is the ability to continue to achieve sales and margin growth in FY10. The lack of further fiscal stimulus to
assist sales in FY10F combined with an Irish business that remains in steep profit decline suggests a tough 1H10F and
possibly FY10F is on the cards. RBS target price $3.50 with a HOLD recommendation. The stock has encountered
resistance at the $3.50 level a number of times. Play HVN downside through HVNKZP
Source: IRESS
• While FY09 sales matched RBS Research expectations, we note they were supported by the Olympics, two fiscal
stimuli and small business tax breaks in Australia.
• In the absence of further fiscal stimuli, we question whether a modest underlying improvement in Australia’s
economy will be sufficient to leverage this higher market share during the next 12 months into strong profit growth.
• In addition, Ireland appears to be getting worse
• Any increase in unemployment is likley to have an impact on HVN particularly in the bigger ticket items space.
Source: IRESS
• Although DJS upgraded guidance, the upgrade provides little insight into the drivern of the revised outlook (fiscal
stimulus vs cost-out vs improved underlying consumer sales)
• RBS Research believe it is too soon to assess a recovery in discretionary retail, and David Jones in particular.
• Stronger than expected sales growth in May and June were likely due to fiscal stimulus spend. July sales are
forecast to turn negative again
• The recent run in the share price looks overdone and the stock is now above RBS Research $4.65 target price.
• Play downside through DJSKZP
Date Code Company Y/E NPAT (Abs) Div EPS 2H Long Short
(pre abs) div Product Product
5 Aug AXA AXA Asia Pacific Dec AUD 273.0 10.0c 26.3c 18.5c AXAKZE AXAKZQ
6 Aug AWC Alumina Ltd Dec AUD -16.9 0 0.0c -2.4c 0.0c AWCKZR
6 Aug NWS News Corporation Jun USD 1756.0 -5675 13.2c 67.1c 7.2c NWSKZI NWSKZR
6 Aug TAH Tabcorp Holdings Jun AUD 494.1 0 62.9c 89.8c 27.9c TAHKZF TAHKZQ
7 Aug RMD ResMed Inc Jun USD 146.3 0 0.0c 189.6c 0.0c RMDKZD RMDKZS
The top five and bottom five performing S&P/ASX 200 stocks
The top five performers from the S&P/ASX 200 (price) Index for the month included Mincor Resources (+41.9%), Pacific
Brands (+39.2%), WA Newspapers (+38.3%), Goodman Group (+37.8%) and Eastern Star Gas (+36.3%). The bottom
five performers were Carnarvon Petroleum (-17.2%), Hastings Diversified (-16.5%), St Barbara (-15.2%), Transpacific
Industries (-14.6%) and Tower Australia (-11.4%).
For further information please do not hesitate to contact us on the details below
Contact
Equities Structured Products & Warrants
Toll free 1800 450 005 www.rbs.com.au/warrants
Trading Products Team
Ben Smoker 02 8259 2085 ben.smoker@rbs.com
Robbie Taylor 02 8259 2018 robbie.taylor@rbs.com
Ryan Corrigan 02 8259 2425 ryan.corrigan@rbs.com
Investment Products Team
Elizabeth Tian 02 8259 2017 elizabeth.tian@rbs.com
Tania Smyth 02 8259 2023 tania.smyth@rbs.com
Robert Deutsch 02 8259 2065 robert.deutsch@rbs.com
Mark Tisdell 02 8259 6951 mark.tisdell@rbs.com
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