Market Update

Thursday, September 22 2011

Markets were soft once again last night continuing the two steps forward two steps back action that has been playing out over the past two months. Markets are reacting to every small amount of macro news flow good or bad but without much conviction.

Last night, markets were up initially as the Fed announced it would sell US$400bn of its Treasury holdings of three year maturities and below and buy US$400bn of maturities in the 6-30 year range with an average duration of 12.9 years. This has been dubbed “Operation Twist” because that’s what the strategy was called in 1961 – the last time the central bank implemented such a strategy. The purpose of this strategy is to drive down the cost of long term borrowing which encourages economic activity (encourages companies to borrow for investment and households to borrow for housing).

However, the markets sold off largely on the Fed assessment that “downside risks to the economic outlook have increased”. Last night’s statement declared “there are significant downside risks to the economic outlook, including strains in financial markets”.  Apparently this was a surprise to the market!

More importantly we think the market continues to wait for an outcome from Europe. The market is trading on small volume without conviction. There is a significant amount of funds in cash or short the market (see below). The market is largely recognised as cheap. However there is no conviction to deploy the cash or close out the shorts while uncertainty remains over Europe. The pressure is building to recapitalise the banks and restructure Greek debt.

Within our portfolios, Fosters has received an increased takeover bid ($5.40 plus dividend). The cash realised from this position in addition to the dividends we are receiving at the end of the month leaves us well placed to pick up some bargains in the current environment.

 

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