With these five pieces of information in mind let’s consider a trade on ANZ below. We will consider trading a put option in this example, however the process of trading a call is identical if you believe a share is going up, instead of down.

Taking (Buying) a Put

You would buy a put if you believe the share is going down. Buying a put gives you the right to sell 1000 of the underlying share at an agreed price on, or before, an agreed date.

Call or Put

We have chosen the share we wish to trade which in our example is ANZ Bank. We believe from our analysis that ANZ is likely to fall from its current price. ANZ was trading at $23.34 on 2 September 2010. We could therefore buy a put option on ANZ.

So we now look up the put options available for ANZ. To do this we go to The Bourse toolbar and click the red O toolbar icon, for Exchange Traded Options. We have a choice of expiry dates and exercise prices to make before we can determine the premium (cost) of the option.

Type in the code of the share, which in our case is ANZ, and then select Put to display a list of Put options that are available on ANZ. You will see a list with different expiry dates in the month column, and different exercise prices in the Strike column. The most actively traded options will be near the current price, which is around $23.34.

Expiry Date

For any option position you must choose the expiry date you wish to trade. At any given exercise price there is a range of expiry dates. The expiry dates start on Oct 2010 which is about three weeks away, and go all the way out to 2014. The more time an option has until the expiry, the more expensive it will be.

As a guideline option traders would normally take options with between six weeks and three months until the expiry. So on the 21st of July 2010 an options trader would normally consider an expiry date of September the same year. Remember you must allow the share time for the expected move to occur. Most of the time decay for an option occurs during the last month so let’s take a look at the November expiry dates.

Exercise Price

Now we can select the exercise price we wish to trade.

With ANZ trading at $23.34 the closest exercise price is $23.50. This would be regarded as the at-the-money option. The $23.00 option is out-of-the-money and the $24.00 option is in-the-money.

An in-the-money option costs more than an out-of-the-money option and is lower risk. The in-the-money option already has some intrinsic value, while the out-of-the-money option is all made up of time value. The different options will behave differently based on the movement in the share.

Premium

It will depend on which option you choose as to the premium that you pay for the option. Assuming that you chose the $23.00 November Put option and you bought the option at market price, you would pay a premium of $1.12 per share. Remember that each option contract is for 1000 shares so the cost of 1 option contract would be $1.12 x 1000 = $1120.

The success of the trade will be determined by the movement of the underlying share, but will also be affected by your choice of option. We will consider three different options and how they perform in different scenarios.

Possible Outcomes

There are three possible outcomes: the share is higher, lower or goes sideways. The change in the price will be determined not only by the direction of the move, but also by how quickly the move occurs. The option is a wasting asset, and the time value decreases as time passes.

Share Moves Down

All put options will increase in value, with the out-of-the-money option increasing the most. The out-of-the-money option could move into-the-money which would result in a sharp increase in value. Call options would decrease in value as the share moves down.

Share Moves Up

All put options will drop in value with the sharpest drop shown in the out-of-the-money options. The chance of the out-of-the-money option having value on, or before the expiry date, has become much less, and consequently the value of the option will drop dramatically. Call options behave in the reverse, with prices rising.

Share Moves Sideways

All options drop in value as time passes, regardless of whether they are puts or calls. Options are decaying assets and lose time value every day they are owned.

The out-of-the-money option will normally provide the biggest return coupled with the biggest downside if the trade does not go in the direction the trader expected.

Trading Puts

There are two main reasons that a trader would trade put options. The first is if the trader wanted to profit from a fall in value in the share. A put option increases in value as the underlying share falls, allowing a trader to buy the options and sell it at a higher price.

Put options, like call options, are wasting assets. The trader must pick both the direction and timing to enter the trade. Strong returns can be made trading put options when shares fall away rapidly, as they did in January 2008. It is important that the expiry date that is chosen provides the trader with enough time for the move to play out, so they can benefit from it. A share moving sideways or upwards is going to cost the trader money.

Investors may want to employ put options as a protection mechanism for their portfolio. The put option increases in value as the share drops, but it also gives an investor the right to sell their shares at the exercise price. If you owned WBC shares and were concerned that the shares might drop, you could purchase put options as protection.

If you were correct and WBC did drop you now have the right to sell WBC at the exercise price of the put option. Alternatively you could sell the put option for a profit and continue to own the shares. This is known as hedging.

Adding put options to your trading toolkit offers you the flexibility to profit in different market conditions. Share traders are limited to making money from a rising share price, but options traders just want the share price to move.

By Jeff Cartridge
Education Manager

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The information provided within this blog is general advice only and you should consult the services of a financial professional in order to ascertain whether the information is applicable to your investment strategies and risk profile.

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Educated Investor Bookshop

The market started the week lower as investors ruled off the worst August performance in almost a decade, trading volumes were also anemic which was a concern as well. However a huge turnaround in investor sentiment was triggered by better-than-expected economic data in the US, China and Australia, and markets in the US, Europe and Asia are all ending the week higher.

The ABS confirmed that Australia’s economic growth for the June quarter rose a surprising 1.2 percent which is the biggest quarterly gain in economic growth for 3 years. This translates to a 3.3 percent annual GDP growth which significantly exceeded analysts’ forecasts. Asian economic data triggered a surge in share prices worldwide after a surprisingly upbeat trading and economic growth report.

US Markets

US markets ended sharply higher this week on the back of surprisingly good economic data. Investors were spooked early in the week after the Federal Reserve said that the outlook for the US economy would have to deteriorate “appreciably” to warrant any fresh support from the central bank. This eliminated hope of another stimulus package for the US. Then a report that US manufacturing activity expanded in August for a 13th straight month triggered investor optimism that the dreaded “double dip” may be averted.

The CBOE Volatility Index, known as the market fear gauge, has been falling to 23.19 this week, confirming the reversal of investor sentiment. Overnight, the Dow closed up 0.5% at 10,320, while in the broader market the S&P 500 index up 0.9% at 1,090 and the tech-heavy Nasdaq ended up 1.1% at 2,200.

European Markets

European stocks started the week flat but then surged as the new month unfolded. EU economic data has continued to point to a slowing recovery, with the UK manufacturing suffering a sharp slowdown last month amid uncertainty about the extent of public spending cuts. Growth in Europe’s manufacturing industry slowed in August and export demand fell to the lowest levels in seven months. Investors chose to take their leads from the US and Asian economies and followed these markets higher. Overnight in London, the FTSE 100 index closed up marginally 0.1% at 5,371. The German DAX was flat at 6,084, while in France the CAC was down marginally 0.1% at 3,631.

Asian Markets

Asian markets traded higher this week. Chinese markets held on to recent gains, after reports that manufacturing in China grew at a faster pace in August following the weakest performance since early 2009, indicating that the Chinese government-engineered economic slowdown will be limited. Even Japan managed to end the week higher after rebounding off 16-month lows earlier in the week, after the Bank of Japan (BoJ) announced emergency moves to address the strength of the yen. Overnight in China the SSE Composite closed up 1.3% at 2,656, while in Hong Kong the Hang Seng Index was up 1.2% at 20,869 and in Japan the Nikkei 225 Index was up 1.5% at 9,063.

Commodities

Wheat prices are again trading around 2-year highs. Oil prices bounced this week jumping above $US74 again. Overnight the benchmark crude NYMEX for September delivery was up 1.4% (or $US1.05) to settle at $US74.96.

Copper prices also rose. Copper for September delivery was up 0.4% (or 1.4 cents) at $US3.4820. Gold prices rose to 2-month highs, above the key $US1,250 psychological level, and look to be heading for new record highs with December gold up 0.4% at $1,251.00.

ASX News

The ASX market has been boosted by “outstanding” economic reports from the Australian Bureau of Statistics (ABS). On Tuesday, the ABS confirmed that Australia’s economic growth for the June quarter rose a surprising 1.2 percent, the biggest quarterly gain in economic growth for 3 years. This translates to a 3.3 percent annual GDP growth which significantly exceeded analysts’ forecasts. The ABS also confirmed that Australia recorded its smallest current account deficit since the first quarter of 2002.

The seasonally adjusted deficit improved by almost $11 billion to $5.64 billion in the June quarter, as commodity exports boosted earnings. The improvement was primarily driven by a sharp rise in the value of commodity exports which was largely due to a shift to shorter-term contracts. The value of iron ore and mineral exports surged 43 percent with a 39 percent jump in prices, while coal exports jumped 52 percent with a steep rise in both prices and volumes. This sale of rural goods also rose 6 percent on the quarter. Investor sentiment turned around on this news and pushed the markets significantly higher.

Our View
Markets have surged higher this week after a dismal August, and the ASX is testing the top of the trading range that has been in place for the past four months. We would expect to see some consolidation next week, where the 4600 level will be key.

The US releases its Non-Farm Payrolls report tonight which will set the tone for next week.

The S&P ASX200 is currently trading at 4540, at the upper quarter of the current trading range. The key resistance level on the ASX is around 4600 and the key levels for our index next week are 4650 and 4400, with pivot at 4500. The momentum is to the upside and the 4600 level is key resistance near term.

By Michael Hevern
Head of Research

Markets Hold On To Gains Ahead of US Unemployment Report

U.S. and European markets continued higher overnight. The early gains resulted from better-than-expected U.S. housing and retail sales reports. Commodities rose again pushing miners higher.  Asian markets generally traded higher after a positive U.S. lead and better-than-expected Chinese Auto sales figures. The ASX is likely to trade higher again today, but expect to see some profit-taking ahead of the weekend.

The SPI Futures is just below the key resistance level of 4600 the ASX is set to open higher again as the SPI Futures closed up 0.7% (or 33 pts) at 4,562. Materials and financial stocks led the market’s broad-based gains yesterday, but the gains were restrained by data showing a lower-than-expected trade balance for July. Australia’s seasonally adjusted balance on trade in goods and services narrowed to a surplus of $1.89 billion in July from a surplus of $3.44 billion in June.  The key levels for our index today are 4600 and 4450. M&A activity continues to drive specific stocks. Expect to see our market trade higher as the earnings season comes to an end (see below). Expect to see some profit-taking.

US Markets

U.S. stocks continued their rise overnight. Reports showing jobless-benefits claims declined, plus an unexpected increase in pending-home sales (up 5.2 percent), along with a better-than-expected rise in August retail sales, supported rises in consumer companies such as Home Depot, Walt Disney and Wal-Mart Stores. Retailers also rose after they reported sales for the key back-to-school buying month of August coming in better-than-expected. The broader gains were led by the Mining, Industrials and Consumer Discretionary sectors which were all up over 1.2 percent. Tech stocks also trading higher on M&A activity.  The much anticipated Non-Farm Payrolls figures will be reported tonight.  The Dow closed up 0.5% (or 51 points) at 10,320, while in the broader market the S&P 500 index up 0.9% (or 10 points) at 1,090 and the tech-heavy Nasdaq ended up 1.1% (or 23 points) at 2,200.

European Markets

European stocks closed higher.The rises were restrained by reports that growth in Europe’s manufacturing industry slowed in August and export demand fell to the lowest levels in seven months.  Most U.K. stocks advanced, extending the benchmark index’s biggest rally in almost two months. However U.K. house prices fell the most in six months in August as increased supply of property gave buyers more bargaining power.  German stocks advanced despite a report showing retail sales in Germany, Europe’s largest economy, unexpectedly fell for a second month in July.  In London the FTSE 100 index closed up marginally 0.1% (or 5 points) at 5,371, the German DAX was flat at 6,084, while in France the CAC was down marginally 0.1% (or 3 points) at 3,631.

Asian Markets

Asian stock markets traded higher.  Japanese markets ended higher for a second straight session, as exporters received a boost from the better-than-expected Chinese and U.S. manufacturing data and automakers in China rallied after a report of strong sales in August.Shares of Chinese automakers jumped after China’s overall automobile sales in August rose 55.7% from the same month last year.  In China the SSE Composite closed up 1.3% (or 33 points) at 2,656, while in Hong Kong the Hang Seng Index was up 1.2% (or 245 points) at 20,869 and in Japan the Nikkei 225 Index was up 1.5% (or 13582 points) at 9,063.

Commodities

The Dollar Index  down marginally -0.2% at 82.38 on higher Euro, while the Australian Dollar last traded higher at 90.55. Commodities were generally higher.

Oil prices jumped above $US74 again. The benchmark crude NYMEX for September delivery was up 1.4% (or $US1.05) to settle at $US74.96. Copper prices rose, Copper for September delivery was up 0.4% (or 1.4 cents) at $US3.4820. Gold prices are around 2-month highs, are above key $US1,250 level, with December gold was up 0.4% at $1,251.00.

Key News International Drivers Today

US – Increased pending-home sales, along with a better-than-expected rise in August retail sales. Companies continue to report earnings this week.

Markets Overview

Markets Hold On To Gains Ahead of US Unemployment Report<

SPI: Above key Level 4400 – SPI up 0.7% at 4,562….

ASX News Today

The SPI Futures is just below the key resistance level of 4600 the ASX is set to open higher again as the SPI Futures closed up 0.7% (or 33 pts) at 4,562. Materials and financial stocks led the market’s broad-based gains yesterday, but the gains were restrained by data showing a lower-than-expected trade balance for July. Australia’s seasonally adjusted balance on trade in goods and services narrowed to a surplus of $1.89 billion in July from a surplus of $3.44 billion in June.  The key levels for our index today are 4600 and 4450. M&A activity continues to drive specific stocks. Expect to see our market trade higher as the earnings season comes to an end (see below). Expect to see some profit-taking.

AMC- Will investment $400 million for an upgraded paper recycling facility in Sydney.

AVX- Avexa is hiring a corporate advisory firm to undertake a review of the biotech firm.

BHP- BHP Billiton has revised its bid for offer to take over Canadian fertiliser producer Potash Corp.

COU- Countplus the Accounting and financial firm has settled a 17th acquisition, and plans to a December listing of spin-off from Count Financial.

CXY- Cougar Energy shares plunged to 3-year lows amidst talk of collapse.

FGL-Fosters Group CFO Angus McKay has resigned to join ports and rail operator Asciano.

JHX – Brokers keep BUY rating despite James Hardie the building materials group, said it’s lostcourt appeal against $US330 million tax charge.

MOS- Mosaic Oil the oil and gas explorer, has received an independent report that supports the takeover offer made by AGL Energy.

MTS- Metcash the grocery and hardware wholesaler, says underlying earnings per share in FY11 is likely to grow 6 to 8 percent.

RIO- Rio Tinto Ltd has officially opened its $US1.5 billion Brockman 4 iron ore mine in WA Pilbara region.

Economic Reports:

Negotiations continue to resolve hung parliament

Companies:
DOM – Dominion Mining Ltd Full year 2010 Preliminary results

Dividends

ALL – Aristocrat Leisure Ltd
FXJ – Fairfax Media Ltd

Market Summary
ASX – to open Higher
US & UK/Europe – hold on to gains
US ADRs –  Broadly Higher!!!…

BHP up 0.1% &

RIO down 0.3%;

AWC up 0.8%

ANZ up 0.8% &

NAB down 0.1%

NEM up 1.8%,

JHX up 0.8%,

NWS up 1.3%

Commodities Stock Index up 1.0%
Gold Stocks Index up 1.9%
Oil Stocks Index up 0.8%

>By Michael Hevern
Head of Research

QiChen is an Anji based manufacturer of bamboo flooring products, employs around 300 employees and has  a  factory  capacity  of  1 million  sqm.  The  company  is  among  China’s  leading  manufacturers  of bamboo flooring;  its  facilities  are  located  1km  from  Style’s  wholly  owned  production  plant,  Anji Yafeng Bamboo Products Ltd (AYF).  QiChen has been a Style block supplier since 2006. QiChen  is  a  vertically  integrated  manufacturer  (from  bamboo  strips  to  finished  product)  with particular strengths in block production and supply chain management.

Peter  Torreele,  Chief  Executive  Officer  of  Style,  commented  “This  agreement  enables  Style  and QiChen  to  bring  their  complementary  strengths  together  and  create  a  dynamic  and  efficient manufacturing base benefiting from full vertical integration, exceptional quality control and strong R&D. “

The  QiChen  Agreement  allows  both  companies  to  enjoy  economies  of  scale  by  sharing manufacturing assets and management expertise.  Via this agreement, strand woven blocks will be produced in QiChen facilities while finished flooring will be produced in Style’s AYF facility.

www.stylelimited.com

http://www.traderdealer.com.au/Fundamentals/syp

VIC’s main asset is a series of mining tenements in the Harper geological district. The Harper geological district is South of the town of Vallenar in the Third Region of Chile. Icarus is part of an international investment group specialising in opportunities in the resource sector globally. The Agreement provides for the division of VIC’s tenements in Chile into a “Northern Region” and a “Southern Region” of approximately equal size. VIC will retain the Northern Region and Admiralty (through a wholly owned subsidiary) will retain a direct interest in the Southern region.

The sale consideration has been structured in two parts, the first being guaranteed payments of US$4 million and the second being a royalty agreement on production. Icarus has agreed to procure access to the port concession at Punta Alcalde to Admiralty’s subsidiary for export of its own product on reasonable commercial terms when constructed. Icarus has agreed to procure VIC to enter into a put and call supply agreement with Admiralty’s subsidiary, whereby final product produced by that subsidiary in the future can be sold to VIC.

Icarus’ representative, Dr Andrew Walker, notes “this is an excellent deal for Admiralty’s shareholders and a good deal for Icarus. We are well resourced and intend to immediately roll out and scale up production of iron ore fines for sale to our clients. We fully expect to deliver up to US$50 million to Admiralty as a combination of guaranteed payments and ongoing royalties over the next five years as our mining operations expand and the port is constructed. In addition, Admiralty will receive an ongoing royalty for the life of the mine”.

www.ady.com.au

http://www.traderdealer.com.au/Fundamentals/ady

Telstra BigPond is Australia’s largest Internet service provider with one of the best known brands in the country. Telstra offers a full range of products and services and compete in all telecommunications markets throughout Australia, providing 9.2 million fixed line services and 9.7 million mobile services. Emerging from a collective of music industry experts, Valleyarm is positioned as Asia Pacific’s leading digital distributor, publisher and marketer of independent music and video content, along with representation in southern and eastern Africa. Valleyarm specialises in digital distribution, publishing and online marketing of music and video content focused primarily on content and services within the Asia Pacific region.

www.transolcorp.com.au

http://www.traderdealer.com.au/Fundamentals/tnc

Markets Surge on Surprisingly Upbeat Economic Data

U.S. and European markets bounced overnight. The early gains resulted from comforting Chinese PMI manufacturing data and Australia’s growth reports and were added to once the U.S. ISM Manufacturing report came in better-than-expected. Commodities rose sharply pushing miners higher.  Asian markets generally traded higher on the Aussie Growth and Chinese PMI reports. The ASX is likely trade higher again today.

The SPI Futures is above the key level of 4400 the ASX is set to open higher again as the SPI Futures closed up 1.7% (or 75 pts) at 4,568. The key levels for our index today are 4600 and 4450. M&A activity continues to drive specific stocks. Expect to see our market trade higher as the earnings season comes to an end (see below).  The market will again be supported by yesterday’s rosey 2Q GDP report, which showed GDP is tracking at a better-than-expected annualised 3.3%.

US Markets

U.S. stocks traded sharply higher overnight, as investors tried to forget their worst August in nearly a decade.  Strong manufacturing data in China and the U.S. and growth figures from Australia set the tone for investors. U.S. manufacturing activity expanded in August for a 13th straight month, with the ISM manufacturing better-than-expected rising to 56.3, from 55.5 in July, as the improving numbers were fueled by strong employment and production data.  The gains were broad-based with Energy, Consumer Discretionary and Industrial sectors all up over 3.5 percent.  The Dow closed up 2.5% (or 255 points) at 10,269, while in the broader market the S&P 500 index up 3.0% (or 31 points) at 1,080 and the tech-heavy Nasdaq ended up 3.0% (or 63 points) at 2,177.

European Markets

European stocks closed higher.  EU markets were buoyed by the upbeat China and Australian economic reports. The German market is still out performing and bounced off key monthly support levels overnight, as stocks are now trading at their cheapest levels relative to earnngs since 2008. However, in the U.K. investors had to battle with poor U.K. manufacturing data, as U.K. manufacturing suffered a sharp slowdown last month amid uncertainty about the extent of public spending cuts. The PMI index dropped from 56.9 to 54.3, where a figure above 50 means that companies are reporting rising activity. Growth in activity is at its lowest in nine months and manufacturing output is now expanding at its slowest rate in 11 months. The slower growth came as the equivalent index for the eurozone hit a six-month low, last week. In London the FTSE 100 index closed up 2.7% (or 141 points) at 5,366, the German DAX up 2.7% (or 159 points) at 6,084, while in France the CAC was up sharply 3.8% (or 138 points) at 3,623.

Asian Markets

Asian stock markets generally rose, as strong economic data from Australia and China helped investors move to a “risk-on” bias. The much anticipated Chinese , figures released Wednesday showed the China’s official Purchasing Managers Index (PMI) rose to 51.7 in August from 51.2 in July, while a separate PMI produced by HSBC also rose to 51.9, confirming Chinese manufacturing remains in expansion mode. Investors Chinese PMI manufacturing data showed the government-engineered economic growth is stabilizing at a moderate pace. Chinese companies are reported to be preparing an alternate bid for Canada’s Potash Corp. Even Japan managed to close higher after rebounding off 16-month lows earlier in the week.  In China the SSE Composite closed down -0.6% (or -16 points) at 2,623, while in Hong Kong the Hang Seng Index was up 0.4% (or 87 points) at 20,624 and in Japan the Nikkei 225 Index was up 1.2% (or 10296 points) at 8,927.

Commodities

The Dollar Index  down -0.9% at 82.46 on higher Euro, while the Australian Dollar last traded flat at 89.13. Commodities were generally higher.

Wheat prices climbed 3%. Oil prices jumped above $US74 again.  The benchmark crude NYMEX for September delivery up sharply  3.0% (or $US2.12) to settle at $US74.048. Copper prices rose, Copper for September delivery was up 3.1% (or 10.3 cents) at $US3.4640. Gold prices are around 2-month highs, are above key $US1,200 level, with December gold was down marginally -0.2% at $US1,244.20.

Key News International Drivers Today

US – U.S. manufacturing activity expanded in August for a 13th straight month. Companies continue to report earnings this week.

Markets Overview

Markets Surge on Surprisingly Upbeat Economic Data

SPI: Above key Level 4400 – SPI up 1.7% at 4,568….

ASX News Today

The SPI Futures is above the key level of 4400 the ASX is set to open higher again as the SPI Futures closed up 1.7% (or 75 pts) at 4,568. The key levels for our index today are 4600 and 4450. M&A activity continues to drive specific stocks. Expect to see our market trade higher as the earnings season comes to an end (see below).  The market will again be supported by yesterday’s rosey 2Q GDP report, which showed GDP is tracking at a better-than-expected annualised 3.3%.

AEC- Ammtec has unanimously rejected a revised offer from chemicals manufacturer Campbell Brothers, saying it does not reflect Ammtec’s strong earnings outlook.

AGO- Atlas Iron has boosted its reserve figures, which should support its aim of increasing production to 12 Mtpa by the end of 2012.

BHP- Japanese steelmakers have agreed with BHP to a seven percent cut in coking coal prices for the three-month period ending 31 Dec’10.

BHP- Canada’s Potash Corp says BHP Billiton is calling its customers “to sow seeds of doubt and confusion about the future” of the Canadian company.

CXG- Coote Industrial has posted a $124.6 million annual loss due to significant writedowns on its assets.

CXY- Cougar Energy says it may need to fold, unless the the Qld government lifts an Environmental Protection Order which has stopped work at its Kingaroy CSG pilot plant.

LEI- Leighton has finalised a $220 million contract in the United Arab Emirates (UAE) to complete its landmark “Buildings by Daman” project at Dubai International Financial Centre.

NUF- Nufarm the agricultural chemicals supplier, has maintained its annual profit guidance, but has increased its net debt estimate.

NWS- News Corp grew its profits thanks to “Avatar” and a rebounding advertising market.

QBE- QBE Insurance says CEO Frank O’Halloran will remain and dismissed reports it’s searching for a new boss.

Economic Reports:

AIG Services Index
Negotiations to resolve hung parliament

Companies:

MTS – Metcash Ltd Full year 2010 AGM

Dividends

IAG – Insurance Australia Group Ltd

Market Summary

ASX – to open Higher
US & UK/Europe – Sharply higher

US ADRs –  Broadly Higher!!!…

BHP up 5.5% &

RIO up 7.3%;

AWC up 7.0%

ANZ up 5.1% &

NAB up 6.0%

NEM up 2.3%,

JHX up 0.2%,

NWS up 4.3%

Commodities Stock Index up 2.7%
Gold Stocks Index down 0.5%
Oil Stocks Index up 4.0%

By Michael Hevern
Head of Research

Trade Figures

Yesterday the Australian Bureau of Statistics (ABS) confirmed that Australia recorded its smallest current account deficit since the first quarter of 2002. The seasonally adjusted deficit improved by almost $11 billion to $5.64 billion in the June quarter, as commodity exports boosted earnings.

The improvement was primarily driven by a sharp rise in the value of commodity exports, largely due to a shift to shorter-term contracts. The value of iron ore and mineral exports surged 43 percent with a 39 percent jump in prices, while coal exports jumped 52 percent with a steep rise in both prices and volumes. Sales of rural goods also rose, up 6 percent on the quarter.

Economic Growth

Yesterday the ABS confirmed that Australia’s economic growth for the June quarter rose a surprising 1.2 percent, the biggest quarterly gain in economic growth for 3-years. This translates to a 3.3 percent annual GDP growth which significantly exceeded analysts forecasts. It is reassuring that the private consumption drove the result. The public spending contracted in the June quarter, while consumer spending grew at a much stronger than expected 1.6 percent in the quarter, up from 0.5 percent in the March quarter.

There is no doubt that the Labor Government will claim credit for these figures, saying these robust figures are due to the stimulus measures they undertook, which were designed to get Australia through the GFC. Treasurer Wayne Swan described the report as “outstanding”.

Overseas Economic Growth

China remains the key focus for world economic growth. Yesterday the much anticipated Chinese PMI manufacturing report surprised to the upside. Manufacturing in China grew at a faster pace in August after the weakest performance since early 2009, indicating that the Chinese government engineered economic slowdown will be limited. The purchasing managers’ index (PMI) rose to 51.7 from 51.2.

The U.S. recently downgraded their second-quarter economic growth (GDP) to 1.6 percent. Last night we got another view of the U.S. economy with their leading indicator, the ISM manufacturing index, and unemployment data will be out on Friday.

The Trade

Trading volumes have been anemic in the month of August which is a concern. Investors should be using their time to evaluate stocks that outperformed in the recent earnings period.

The Aussie dollar rose on this “outstanding” news, as did the share market. However investors should note that September is the worst month for stocks in the U.S. and the Aussie market is seasonally weak mid-September through to mid-October.

Since April our markets have been closely correlated to stock price movements on Wall Street, so it is a time for caution. However this may be giving Aussie investors a chance to enter the markets at a lower level, as many stocks are undervalued and are very oversold on a technical basis. On a contrarian basis, investor pessimism is at levels not seen since March 2009, which was the low of the market rally out of the GFC.

Pick the stocks you want to own in your portfolio and use any weakness in the markets to accumulate a position. In the near term it will pay to protect your position, through options.

By Michael Hevern
Head of Research

HLG CEO and Managing Director, Laurie Voyer, welcomed today’s project announcement which highlights HLG’s ongoing commitment to the Dubai market. “While there has been an adjustment to the Dubai building market, there are still a number of prospects for us with clients who value quality and creative delivery mechanisms. “Our reputation in Dubai is second to none, and we have a proven track record in delivering high quality buildings across the Emirate,” he said. “Dubai remains part of the Group’s ongoing growth plans,” he said. Mr Voyer said that the Group is pursuing a number of other opportunities across the Middle East and that he expects to be able to announce further new projects over the coming months. “We’re seeing significant opportunities in large-scale infrastructure across the region,” he said.

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