The Reserve Bank of Australia (RBA) has potentially got itself into a pickle. However, from a cosmetic, crowd pleasing perspective it will not be an unpopular one in the short term. In the long term, that could be a different story.
The RBA has recently made intentions clear that it will reduce interest rates at its September meeting. Therefore interest rate markets have now built in at least a 0.25% cut, although some commentators are even predicting a 0.5% cut based on nothing more than the fact that the RBA has cut by at least that amount on the previous two occasions since 1996 following a period of monetary tightening.
What’s the problem with that you may ask. Surely the Westpac/Melbourne Institute Leading Index – released yesterday – indicates that “the likely pace of economic activity three to nine months into the future, was 2.0% in June, well below its long term trend of 3.9%.”
This, according to Westpac chief economist Bill Evans “is the slowest growth rate of the Index since July 2001 and the sharpest fall in the growth rate since 2000.”
Although that may be the case, – and who are we to argue with statistics – another set of numbers from the Australian Bureau of Statistics (ABS) has recently told everyone that inflation for the last quarter was at least 1.5%, or 6% annually. Well above the target range.
It would appear that the higher interest rates may be on the verge of actually having an impact on spending, and therefore slowing down some areas of the economy. Some sectors of the economy such as the resources industry however, will probably continue on regardless. But at least some slowing in the economy should assist with putting the handbrake on further rises in inflation.
This, you would think is the goal of higher interest rates. Yet just as its impact is starting to be felt the RBA looks everyone in the eye, gets cold feet and decides to cut rates. Will that help to stop the economy from growing? Possibly, and it will also mean that there is more money floating around to be spent, which will… you guessed it, put a bit more pressure on inflation.
Of course, the RBA may have planned it perfectly. We shall wait to see.
Brambles Gets Whacked
For shareholders in Brambles [ASX:BXB] it wasn’t a pretty day yesterday as the company released its annual results and promptly got hammered – almost – into the ground. Shares fell by 13% as the market didn’t take too kindly to a profit result that was lower than analysts had anticipated, and a forecast that indicated growth for the 2009 year could be slower due to the global economy. Really it’s the analysts that should get slammed for getting it so wrong, but that’s another story.
Although we did notice on the newswires that several brokers had taken the opportunity to reset their target prices for Brambles shares with Credit Suise, Citi, UBS, ABN Amro and Morgan Stanley all cutting target prices. In the case of Credit Suisse it has set a new target price of $8.10 compared to the previous target of $14.45 before. And most no longer have it as a buy recommendation.
Genuine long term investors will probably give a little chuckle, check their cash balance and top up their holding.
Technically, It’s an Oversold Blue Chip
Aside from the technical feast that Gabriel has for us below, this week he has been looking over the whole market, especially the blue chips to see what has been oversold from a technical perspective.
So, what has Gabriel come back to us with? Aristocrat Leisure [ASX:ALL], which this morning trades at around $5.30, an improvement on the low $4.50 hit late last month, but still a long way short of the $15.19 that was the 52 week high last October.
We haven’t done the in-depth research to say either way if it is a buy, a hold or a sell, but Gabriel tells us that the reason Aristocrat stood out for him was because “I picked up stocks that meet several criteria in terms of global patterns and momentum values, where the oscillators RSI [Relative Strength Index] and MFI [Money Flow Index] both show bullish signals after the stock reached oversold area.”
Gabriel has picked through a few other ‘blue chips’ which he considers to be oversold and has passed them over to Al Robinson where you will be able to check them out in the next Diggers & Drillers.
Cheers.
Kris Sayce
PS. We also asked Gabriel to take a look at the small cap end of the market. He has come back to us with one of the stocks recommended in the Australian Small Cap Investigator. Naturally we don’t want to give the game away and spoil it for those with a subscription, but we thought it would be interesting to show you what Gabriel has come up with anyway.
For those curious to know what the stock is, all will be revealed to subscribers tomorrow in the ASI Weekly Update.