Switzer on Saturday

Earnings in. Yellen has spoken! What now?

Founder and Publisher of the Switzer Report
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Earnings season has been the big news this week. While we haven’t got out of the current market range of 5510 to 5570, the Friday close of 5515.5 on the S&P/ASX 200 index, although down 26 for the day, has to be a good story that only Janet Yellen could ruin or improve.

Judging from Wall Street overnight, she looks to have done neither.

The local profit season should be more important but really, the week has been dominated by the speech of US Federal Reserve chair Janet Yellen at Jackson Hole, Wyoming. And what she said didn’t take stocks higher, though that’s not because she was negative on the US economy.

In simple terms, Ms. Yellen said the case for an interest rate rise has strengthened in recent months and even a September hike’s odds had shortened to a 30% chance, after being nearly a ‘no chance’ a few months ago. Interestingly, it was something her Vice Chairman, Stanley Fischer, said at the conference that made the market give up on positivity and made more players think that ruling out September for a rate rise could be a risky play!

What intrigues me is that a lot of commentary says that when a rate rise is expected, the market will sell off first, even if it eventually says: “Hey, she only did it because she knows the economy is strong, so we better start buying again.”

This from Adrian Day, the CEO of Adrian Day Asset Management on CNBC, supports my argument.

“I think what happens is when Janet Yellen says something like the labor market is strengthening, the market says ‘sell,’ and it’s not until we digest the full speech that we go higher.”

Clearly, Yellen wants the first rise this year to be well received by the market or else we’re really up the creek without a paddle!

Let’s get back home and without much of Friday’s trade and results included, AMP’s Shane Oliver gave us a ‘match report’ update on the show-and-tell season for our top companies.

On first blush, the news doesn’t look great but with a bit of lippy on these piggish profit numbers, we start to look half decent.

“While overall Australian listed company profits have fallen by around 8.5% in 2015-16, thanks largely to the resources slump, it is notable that 62% of companies have actually seen their profits rise on a year ago and the median company has seen profit growth of around 4%,” Shane pointed out. “And 54% have seen their share price outperform the market the day results were released, which adds to the view that results haven’t been worse than expected.”

More importantly, just like with individual companies, it’s the outlook that really carries the most weight, so it’s this that I really like from Shane.

“Overall profits are on track to return to growth in 2016-17, as the slump in resources profits reverses and non-resource stocks see growth,” he speculated. “2016-17 earnings growth is expected to be around 8%, with mining companies now seeing the fastest rate of upgrades.”

Those who have punted on the big miners since their lows will hope Shane and others on my TV show are on the money with this call, as it is becoming an increasingly held view.

swos-20160827-001Source: AMP Capital

swos-20160827-002Source: AMP Capital

And while this is a nice surprise for long suffering supporters of the likes of BHP and Rio, the shock of the week had to be Woolworths. It stumps up a $1.2 billion loss and the share price spikes as high as $26.05 on Thursday! In fact, it’s been a good month for the stock and it shows how bad smells around a company make the share price stink. This sorting out of its Masters disaster has been the WOW-factor move that Woolies badly needed.

The standout stars this week were Qantas and I bet Alan Joyce wanted to tell his critics to “eat my shorts” after that record result. And so too would have Deborah Thomas, who runs Ardent Leisure and reported strongly this week. I actually asked her on my TV show if she wanted to pass on that sentiment to those who said she was over-promoted but she graciously declined!

Fortescue did well and the 12-cent dividend excited the market. Twiggy Forrest and his CEO Nev Power have done well.

On the flipside, Christine Holgate doubled her profits at Blackmores but its share price was clobbered losing 20% over a trading day. The market darling started the week at $160 and ended at $129 and it shows that any slow patch reports combined with question marks over China and its possible regulatory changes hurt this stock, even if it doubles its profit!

The stock market is a hard marker and often simply says: “That was then, this is now.”

What I liked

  • The ANZ/Roy Morgan consumer confidence rating rose by 3.6% to 121.8 in the week to August 21 – the highest reading since late 2013. Confidence is up 7.8% over the year and well above the average of 112.4 since 2014.
  • Our earnings were down collectively 8% but we aren’t panicking and selling off and the positive outlook for our company profits is helping positivity.
  • Wall Street has not overreacted to Janet Yellen’s comments at Jackson Hole. The take out for me is that if the data on jobs was unbelievably strong next week, then September is a chance but if it’s good without being great, then expect a rise in December after the election.
  • Eurozone business conditions PMIs continue to point to resilience, with the composite PMI for August rising slightly to a solid 53.3, a level that’s consistent with ongoing moderate growth.
  • US durable goods orders rose by 4.4% in July, against a forecast of 3.3%.
  • US new home sales surged by 12.4% in July to a seasonally adjusted annual rate of 654,000 units. The result was the highest reading in nearly nine years and well ahead of expectations.

What I didn’t like

  • Some negative growth and stock market forecasts from some investment bank smarties, who might be talking their book or else they’re damn smarter than me and a lot of my experts!
  • Oil prices dipped when the Saudi energy minister subdued expectations that his country might agree next month to limit output. If oil prices fall, stocks will too and there’s little chance that an oil producer deal will be so tight that the price would spike too high to hurt the very slowly improving world economy.
  • The Japanese manufacturing conditions PMI improved slightly in August but remains weak at 49.6, indicating continued weak growth in Japan.
  • China’s MNI business sentiment indicator for August fell but retains most of the gains it has seen since its low earlier this year.
  • The Richmond Fed manufacturing index in the US fell from +10 to -11 in August.
  • Construction work fell in the June quarter — Western Australia (down 19%), followed by Northern Territory (down 3.2%), NSW (down 1.3%) and Tasmania (down 0.4%), Victoria (up 5.2%), Queensland (up 2.7%), the ACT (up 0.5%) and South Australia (up 0.1%).

The Big Watch

Well, with earnings pretty well in and Yellen’s speech done and dusted, what’s up next? I’m keen to see our latest business investment numbers on Thursday and then it will be the US jobs report out on Friday, US time. This resilience of the stock market has surprised me a little but I damn well like it!

Basically, like Janet, we’re all data dependent and I hope it doesn’t disappoint.

Top stocks – how they fared

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The week in review

What moved the market?

  • Markets waited nervously ahead of Janet Yellen’s speech at Jackson Hole. The US dollar was firming while the gold price weakened.

  • A stronger US dollar meant that commodity prices eased back.

  • A raft of earnings reports meant the market rewarded the winners and punished the losers – but Woolies was an exception to the rule!

Calls of the week

  • This week Charlie Aitken said he’s backing Treasury Wine Estates as a great vintage that keeps on pouring the good stuff!
  • A fisherman in the Philippines made the call to keep a 34-kilogram pearl under his bed for 10 years as a good luck charm. Believed to be the world’s biggest, little did he know it was worth approximately $130m! What a pearler!

pearl

AILEEN CYNTHIA AMURAO/SWNS.COM

The week ahead

Australia

  • Tuesday August 30 – Building approvals (July)
  • Wednesday August 31 – Private sector credit (July)
  • Wednesday August 31 – New home sales (July)
  • Thursday September 1 – Home value index (August)
  • Thursday September 1 – Performance of Manufacturing (August)
  • Thursday September 1 – Business investment (June quarter)
  • Thursday September 1 – Retail trade (July)

Overseas

  • Monday August 29 – US Personal income (July)
  • Tuesday August 30 – US CaseShiller home prices (June)
  • Tuesday August 30 – US Consumer confidence (August)
  • Wednesday August 31 – US ADP National Employment (August)
  • Wednesday August 31 – US Chicago purchasing managers (Aug)
  • Thursday September 1 – US ISM manufacturing (August)
  • Thursday September 1 – China Purchasing managers (August)
  • Friday September 2 – US International trade (July)
  • Friday September 2 – US Factory orders (July)
  • Friday September 2 – US Non-farm payrolls (August)

Food for thought

You don’t learn to walk by following rules. You learn by doing, and by falling over.

– Richard Branson

Last week’s TV roundup

Stocks shorted

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table also shows how this has changed compared to the week before. This week one of the biggest movers was Worley Parsons with a 1.8 percentage point increase in the amount of its shares sold short.

20160826-ShortStocks_v2

Chart of the week

Consumer confidence jumps to near three-year high

confidence

This week consumer confidence jumped by 3.6% to 121.8 – the highest level since November 2013. Confidence levels are also well above the average of 112.4 (red line) since 2014.

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