AFR marketwrap
April 24, 2008
Derivatives
Traders climb aboard recovering banks
Despite a dip on Tuesday, the Australian sharemarket made good ground this week, forming a solid uptrend line from the low on Tuesday up to Wednesday’s close. On Wednesday the banking stocks and Telstra were the favourites of derivative traders, pushing BHP and Rio further down the list of the most-active warrant stocks.
“Everyone had been awaiting the ANZ result and there were no nasty surprises from the first cab off the rank to report in the sector,” says Pia Cooke, associate director in the equity division at Macquarie Group.
ANZ in fact led the upward charge, while the other banks held off making their upward run until later in the day, when buying appeared in NAB and a large volume was booked in what looked like a switch trade out of Westpac into ANZ. “But by the end of the day the banks were all up three to four per cent,” says Ms Cooke.
Following a poor performance the previous day, ANZ surprisingly ended the day 10 per cent higher then the previous week’s close at $22.03.
“I think people are now comfortably buying [ANZ] for its dividend, knowing there will be no unexpected bad news in the next week or so,” Ms Cooke says, pointing out that for smaller traders, not subject to the rule of holding for 45 days in order to gain franking credits, the traditional dividend yield play could be a smart strategy.
The strategy involves buying instalment warrants over the stock ahead of the ex-dividend date, capturing the dividend and then selling the instalments.
To be successful, this requires the stock to at least hold its price, and hopefully gain further ground, during the period before and after the shares go ex-dividend, to benefit from fully franked dividends. If the stock is buoyant, as bank stocks often are at this time, the tax benefit of franking is augmented by capital gains.
Traders and investors are subject to a 45-day minimum holding period to be eligible for franking credits (for tax already paid by the company) unless they are claiming less than a total of $5000 in any one year.
Also among top warrant stocks this week were Babcock and Brown and Telstra, both benefiting from some renewed confidence as the overall market rose.
Although BHP did not top the most active warrants as it often does, it was not forgotten by traders this week as it jumped to its high for the year of $45.11, just off its all-time high and up 7 per cent for the week, providing traders with solid returns on the long side.
Brambles, the subject of favourable recommendations from warrant issuers Macquarie Group and CitiWarrants, made some headway after a big dip the previous week on unfavourable news from the US concerning possible loss of a big customer there in its pallet business.
Trading at $10.15 before the announcement, Brambles dipped 11.5 per cent following the news, which seemed overdone to analysts. This week it traded in a wide range without making real ground, but is still on traders’ watch lists.
Good news in the pharmaceutical sector focussed attention on CSL this week after higher US sales of its key vaccine product and strong results from major competitor, Baxter. Traders who followed buy recommendations from warrant issuers did well as the stock finished Wednesday’s session 8 per cent up from the previous Friday’s close.
In the oil sector, Woodside was propelled by new record prices for crude, but Oil Search did not benefit as much from the price spike.
Trader and educator Peter Mathers of The Trading Lounge says he has been poking around in the penny stocks this week, looking for example at the oil sector where Australian Worldwide Exploration (AWE) seemed to be looking for a breakout on the upside after some consolidation at the $3.00 level.
Otto Energy (OEL) was another stock that gave good gains this week after breaking up through 34c, Mr Mathers says. “Canarvon Petroleum (CVN) has made a nice pattern above 50 cents; I’ll buy that after it comes back,” Mathers says.
He is still following the fortunes of coal stocks and maintaining a long position in Macarthur Coal (MCC), looking for it to move to its next trading level of $15.60, which would suggest a new target of $18 or higher. “It’s been moving up on lower volumes,” Mathers says. “The support level is $15 but I wouldn’t trust it,” he adds, pointing out that a recent big share sale had left it a possible takeover target.
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Stephen Calder
Ph (02) 6681 6773 Mob (0439) 739 676
24 April 2008 8:51 AM
© 2008. This draft has been provided for fact checking purposes only. Initial rights in the work have been assigned to AFR MarketWrap (John Fairfax Publications) by the author. Copying or distribution without permission of both is a copyright infringement. Editorial changes are likely to be made prior to final publication. The headline will almost certainly change.