Unlikely upgrades for these two ASX stocks as earnings continue

Welcome to Charts and Caffeine - Livewire's pre-market open news and analysis wrap. We'll get you across the overnight session and share our best insights to get you better set for the investing day ahead.

MARKETS WRAP

• S&P 500 - 4,140 (-0.16%)
• NASDAQ - 12,644 (-0.1%)
• CBOE VIX - 21.29 (+0.66%)
• FTSE 100 - 7,482 (+0.57%)
• STOXX 600 - 439.04 (+0.76%)
• US 10YR - 2.748%
• USD INDEX - 106.38
• WTI CRUDE - US$90.49/bbl
• GOLD - US$1788/oz

EARNINGS RECAP AND PREVIEW

Aurizon shareholders were not thrilled by the company's decision to cut its payout following a 15% fall in after-tax profits. It was even worse at Suncorp where net interest margins (NIMs) collapsed by another 14 basis points to come in under 2%. Cash earnings also fell by more than a third during the last twelve months - and that's in spite of insurance premia increasing. The dividend there was more than halved to a relatively paltry 17c/share.

Today, it's the moment of truth for such names as Megaport and News Corp. 

STOCK TO WATCH

The biggest story of yesterday, by a country mile, went to Oz Minerals following BHP's surprise $25/share takeover offer. In an initial review of the bid by BHP (which was labelled "undervalued" by Oz Minerals management), Ords raised its rating for OZL to Accumulate from Lighten (two notches). The target price has also been hiked to $27.40 from $16.

Talk about an opportunistic move!

Then, there's the story that went a little more under-the-radar: Redbubble being moved to overweight by UBS. The upgrade is essentially a story of "it can't get worse than what's already priced in"! That is, an extreme disinterest in the once-loved tech name plus a cheap valuation could provide an easy "beat" for the stock's earnings.

But there are such things as falling knives. Redbubble reports August 17th.

THE CHARTS

Two charts, same overarching theme - if history is to repeat itself, then market pricing has a long way to go before satisfying that history.

I have to confess - this first correlation is not one that I had heard of until it was posted to FinTwit. But upon a closer look at this chart and some detective work, I realised that this particular pair of events is more or less correct.

At the Sohn Conference in June, well-known investor Stanley Druckenmiller (of Duquesne Capital fame) noted two records that haven't been broken yet. 

1. Once inflation gets above 5%, it’s never come down unless the Fed Funds rate has gotten above the CPI. 

2. Once inflation has gotten above 5%, it’s never been tamed without a recession.

The second one has been noted, even by yours truly on this very website when he referenced the achievements of former Fed Chair Alan Greenspan: 

Asset Allocation

Mission Impossible: Will global central banks nail the "soft landing"?

View

The first correlation is the point that the chart shown above is trying to make. Every time the blue line eclipsed the red line (more or less), inflation has slowly but surely come down. It must beg the question - why isn't the Federal Reserve moving rates by 100 basis points at a time yet? I'm sure that will spark some fiery debate in the comments - and in the markets.

The second chart that I'm featuring was spotted by my colleague (and Rules of Investing host) David Thornton. The chart is the correlation between US CPI (the blue line) and the yield you get on a two-year note stateside. The differential between these two numbers (the green number or the red shade in the second graph) has not been this large for 50+ years. 

And, again, just like the first chart - the instrument in focus had to eclipse CPI before inflation cooled down again. Conclusion? The bears may have more to run with their argument yet.

THE QUOTE

We have warned for some time now that markets have been unrealistically sanguine since the July FOMC, in betting that the Fed will imminently dial back the pace of (aggressive) tightening.

And that misguided, overly dovish-leaning position has come home to roost after an all-around blockbuster US jobs data; especially with Fed speakers also chiming in on the preference for more front-loaded and upsized rate hikes amid overriding inflation risks.

Today's quote of the day comes from Vishnu Varathan at Mizuho Bank - and he is not holding back. The US jobs report on Friday was, indeed, a blockbuster. The number of jobs created was double the consensus analyst expectation, all while hourly earnings are still running at half the rate of inflation. 

All attention now turns to the US inflation print on Wednesday at 10:30pm AEST. I suggest getting a coffee and staying up for this one.

Today's report was written by Hans Lee.

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