Get set for a big sprint to Christmas

Here we are at the end of the first quarter of 2007-08 and we’re seeing the benchmark indices, after one solid trading correction, end at record highs led by the ASX20. So what will the second quarter bring in Australian equities?

We’re heading for a massive blowoff to the upside. The ASX200 (now at roughly 6480) will be 7000 by Christmas, led by large cap resources and financials.

A lot of commentators are outright bearish, but you can rest assured that some of this global broker bearishness is based on the fact that their trading books have been caught badly short and they are trying to talk the market down.

The next quarter will see a massive move away from the US dollar – this has already started. US and global investors will scramble for any non US-dollar assets, particularly those that are direct hedges such as Australian resource stocks and gold. We have already seen heavy American investor buying of resources this week, and it’s only the start.

Australian equities will see a mountain of that money as our financials and economy have come through the US sub-prime meltdown unscathed. Our financials will be re-rated when the big bank reporting season confirms we have the lowest-risk financials in the world. Financials, led by Macquarie Bank, will have a huge influence on the market, lifting the ASX200 index to 7000 by Christmas.

Resources will also benefit from huge consensus earnings upgrades, and I think we will get an iron ore contract price settlement that includes a 50% price increase before Christmas. BHP will go to $50, and that adds 150 points to the index by itself. Marius Kloppers takes the BHP Billiton wheel today and he will surprise you all with his aggression.

Then the Australian dollar goes to US93¢ and attracts huge foreign inflows on GDP and interest rate differentials. The Fed will cut again while the RBA will raise again early in the new year, and then you will see resources rally with the Australian dollar.

Merger and acquisition activity will return and top 20 company Brambles will receive a hostile bid from Macquarie Bank and Asciano.

And to top it off the Howard Government will be returned!

Everyone is too bearish. The Bernanke put has been exercised. Hedge funds are so short they will be forced to recover.

I see the latest Russell investment survey of Australian investors sees the highest “bullishness on cash” since the survey was introduced. Everyone is positioned for a pullback that happened in August.

The Australian equity market led by the ASX20 is going to blowoff to the upside in the second quarter, driven by a huge exodus from US dollars. Cash levels are high, dividends need to be reinvested, and the Future Fund is active, in my opinion. The election campaign is going to see news on tax cuts and big spending programs and GDP growth forecasts (4.25% June 2008, 3.5% June 2009) will be revised upwards.

I see a massive short squeeze with associated panic buying into the year end.

It will be a significant rally, led by BHP Billiton, Rio Tinto, Woodside Petroleum, Newcrest, NAB, Commonwealth Bank, Wesfarmers, Westpac, ANZ, St George Bank, Suncorp-Metway, Telstra, Publishing & Broadcasting, QBE Insurance, Brambles and Macquarie Bank. I have it on good authority that Macquarie Bank shorts remain over $1 billion. Good luck buying them back.

Even if you think I am talking total rubbish today, at least ask yourself ‘What if he is right?’. I have written some outrageous strategy notes lately and they have proved extremely accurate. In fact, the most outrageous forecasts have been the most accurate. I need to at least make you think about these scenarios.

I am happy to take the bears on (again). They don’t get what is going on here. This is a flight from the US dollar and a flight into inflation hedges and long-duration, low-risk assets. The ASX20 has all the attributes the global investment world seeks. The Bernanke put has been exercised and people just aren’t getting the huge ramifications of that exercise. Liquidity is being pumped and its going to end up in large-cap Australian equities.

Are you ready for the blowoff? The five cheapest stocks on consensus numbers in the ASX20 are Suncorp-Metway, BHP Billiton, Rio Tinto, Macquarie Bank and ANZ. That’s where we start the buying.

A longer version of this story first appeared in The Eureka Report.