Switzer on Saturday

Hurricanes Kim, Gerry, CBA and Telstra rocked stocks but there is a morning after!

Founder and Publisher of the Switzer Report
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It was another negative week for stocks but not all of the news is negative, with some positives that could embed the makings of improved earnings. Let me get to those positive pearls in a moment, including an OK jobs report in the US that took the Dow Jones Index over 22,000 overnight. But let’s just tidy up the final significant week of our local reporting season.

The S&P/ASX 200 Index dropped a measly 19 points (or 0.3%) for the week, ending at 5724.6, which wasn’t bad, considering we went as low as 5649 on Tuesday, as CBA and Telstra did nothing to help the stock market whilst Kim Jong-un sent ‘missiles’ of madness towards Wall Street!

In case you don’t want to watch CBA’s share price slip, don’t read the next few words because they’ll tell you the stock lost 2.9% over the week and over 10% since this Austrac money laundering issue went feral. At $75 or so, the likelihood of more falls are probable but if this market is crazy enough to take the share price down to anywhere near $70, there will be a stampede to buy the stock.

To Telstra, and since reporting day and the dividend cut, the stock has gone from $4.31 to $3.67. It finished at that price on Friday but it did plumb the low of $3.56 on Wednesday. At that low level, some dividend chasers and courageous capital gain speculators couldn’t help themselves. All that said, the telco did pay its last great dividend this week, which didn’t help its battle with share price gravity.

Meanwhile, Hurricane Harvey pushed up gas prices but brought with it the oddest development ever – lower oil prices!

This is how Bloomberg saw it: “In contrast with previous major hurricanes such as Katrina in 2005, Harvey has actually seen oil prices edge down, as traders have focused more on the hit to demand from damaged U.S. refineries than the blow to supply from knocked-out production.”

OPEC is miffed that a ‘good’ hurricane hasn’t spiked up prices. It meant that a blue chip oiler like Woodside actually lost a $1 from its share price at one stage this week, but eventually was down 60 cents to $28.96.

To other hurricanes, and Gerry Harvey blew 4.17% off his share price, despite a 29% boost in net profit to a record $448.9 million and a threat that he’s not worried about Amazon. However, all that can be forgotten and ignored if someone like Australia’s best retailer cuts his dividend by 5 cents to 12 cents to hang on to cash.

On the good news front, Blackmores put on 25% after reporting better than expected, proving that it might not be a $200 plus stock as the market ridiculously priced it not long ago but it’s better than $90. I’ve gone on public record saying at $98 the smarties supported Blackmores and as it finished the week at $111.20, there seems to be some truth to the story. Analysts think $125 isn’t out of the question.

On the subject of ‘what I know that you might like to know’, Macquarie did peel back the rise in earnings for next reporting season from 11% to 7%. Meanwhile, Contango Asset Management’s George Boubouras thinks we’ll beat the 6000 level by mid-2018 and head higher as the year progresses, purely based on his calculations of future earnings of the key companies that drive those numbers.

And while a lot of this headwind stuff could make you uneasy about stocks, keep the following in mind:

  • The Oz economy had some nice readings this week (see below), which is telling me that my optimism has not been misplaced.
  • The US economic growth rate hit 3% this week.
  • The jobs report overnight in the US saw employment up 156,000, rather than the tipped 180,000. Some economists saw this as a disappointment, while others say the employment growth is double the population growth, so it’s a good number. Others say it could delay the next interest rate rise, or slow down the number of rises, which would be good for sustaining the bull market. And that’s why the stock market did not head down after the Report was released.
  • The key global economic regions – the US, the Eurozone, the UK, China, Japan and South East Asia are all growing in synchronization, which hasn’t happened since the GFC.
  • President Trump delivered a speech on tax reform that outlined just broad principles, such as lowering the corporate tax rate to 15%. And Treasury Secretary Steven Mnuchin (that’s the right spelling!) said that a detailed tax reform plan would be implemented by the end of 2017.
  • And if the US economic story keeps getting better (as I suspect) and the tax bill eventually gets up (Lord knows Donald needs a win), the greenback will rise and the Oz dollar will slip, which will be good for growth, profits and share prices.

Now that’s the kind of wonderful wind I’m praying blows in before year’s end!

And it is a chance.

What I liked

  • The Caixin manufacturing PMI reading beat expectations, rising from 51.1 in July to 51.6 in August, and ahead of the consensus estimate of 51. This is a nice thumbs up for China growth.
  • Morgan’s Michael Knox gave a very positive view on commodity prices and the outlook for the Oz stock market over the next 12 months
  • The CoreLogic Home Value Index of capital city home prices rose by 0.1% in August to stand 9.7% higher over the year. The national home price index was flat in August to be up 8.9% over the year. It was the smallest monthly change in national prices in 16 months. A bit of home price cooling is a good thing.
  • The Australian Industry Group Performance of Manufacturing Index rose by 3.8 points to 59.8 in August – the highest reading in 15 years. A reading above 50.0 indicates that the sector is expanding.
  • The third estimate of investment in 2017/18 is $101.78 billion, 3.6% lower than the third estimate for 2016/17 but it’s the smallest decline (best result) for a third estimate in five years. The upgrade in investment between the second and the third estimates for 2017/18 was 17.6% – the biggest upgrade in seven years.
  • Construction work done soared by 9.3% in the June quarter, underpinned by work on a large engineering project in Western Australia. Construction work hit record highs in NSW and Victoria. Overall construction is also at record highs!
  • The weekly ANZ/Roy Morgan consumer confidence rating rose by 3.9%, lifting from a near 12-month low of 109.2 to 113.5 in the week to August 27. The confidence reading is now back above the average of 113.2 recorded since 2004 and long-term average of 112.9.
  • US consumer confidence rose from 121.1 to 122.9 (forecast 120.3), the second best level since 2000.
  • The US economy grew at a 3% annual pace in the June quarter, up from the 2.6% preliminary estimate.
  • US personal income rose by 0.4% in July (forecast +0.3%), with spending up 0.3% (forecast was +0.4%).
  • US factory activity in August hit a six-year high.
  • The 1000 people who registered for the Switzer Listed Investment Conference last Thursday in Sydney and the full house that our experts addressed. This is a personal like and we’ll definitely be doing the conference again. Watch this space!

What I didn’t like

  • Any story with Kim Jong-un in it!
  • Sales of new homes fell by 3.7% in July, driven by a 15.7% fall in multi-unit sales.
  • US construction spending for July, which hit a nine-month low but that will change after Hurricane Harvey.

One like I don’t like!

AMP’s Shane Oliver has found an unlikeable like out of the horrendous Hurricane Harvey. “The key implication of Hurricane Harvey for global investors though is that there is now less chance of a US shutdown/debt ceiling crisis,” he speculates. “US Federal Government agencies like the Federal Emergency Management Agency will be central to the assistance and rebuild effort and Texas voted for Trump. Given this it’s inconceivable that Trump and Congress will countenance a Government shutdown and debt ceiling crisis in the immediate aftermath of a disaster.”

It’s a tragedy that a hurricane could be the cause of the US Congress avoiding something as silly as a government shutdown.

The week in review

Top stocks – how they fared

20170901-topstocks

What moved the market?

  • North Korea launched a missile that passed over northern Japan and landed in the Pacific Ocean. The S&P/ASX 200 dropped the same day, but US markets gained the following night.
  • Telstra shares traded lower on Wednesday after going ex-dividend and the company announcing that the NBN had knocked back its securitisation proposal.
  • The Australian reporting season ended this week with Ramsay Health Care and Harvey Norman the last of the larger companies to report.
  • GDP in the USA rose to an annualised rate of 3% pa in the second quarter.

Calls of the week

  • Peter Switzer said CBA is “in more trouble than Indiana Jones in the Temple of Doom” but isn’t worried about the overall quality of the bank and will be a buying opportunity, while Paul Rickard says the “smarties will get in early”. Watch more on Mad About Money.
  • Paul Rickard said Magellan’s new product, the Magellan Global Trust, sets a news benchmark for ASX-listed products. Read more here.
  • Hamish Douglass from Magellan says he has a former deputy director of the CIA on his payroll who he speaks with to understand global risks and what’s happening at the White House.

The week ahead

Australia

  • Monday September 4 – Business Indicators (June quarter)
  • Monday September 4 – Job advertisements (August)
  • Tuesday September 5 – Balance of Payments (June quarter)
  • Tuesday September 5 – Government finance (June quarter)
  • Tuesday September 5 – New car sales (August)
  • Wednesday September 6 – Economic growth (June quarter)
  • Thursday September 7 – International trade (July)
  • Thursday September 7 – Retail trade (July)
  • Friday September 8 – Housing finance (July)

Overseas

  • Tuesday September 5 – US ISM New York (August)
  • Tuesday September 5 – US Factory orders (July)
  • Tuesday September 5 – US Caixin services (August)
  • Wednesday September 6 – US International trade (July)
  • Wednesday September 6 – US ISM services (August)
  • Thursday September 7 – US Productivity (June quarter)
  • Friday September 8 – US Consumer credit (July)
  • Friday September 8 – China Trade (August)
  • Saturday September 9 – China producer & consumer prices

Food for thought

“We all need people who will give us feedback. That’s how we improve.” Bill Gates

Last week’s TV roundup

  • Is the era of heavy price discounting over in the airline industry? To discuss this and more, founder and MD Graham Turner joins Super TV
  • Super Retail Group owns stores like Super Cheap Auto, Rebel Sport and others, so to discuss the company’s recent report and more, CEO Peter Birtles joins Super TV.
  • To share his insights into reporting season and the companies he’s watching right now, Perennial Value Management’s John Murray joins Super TV.
  • HT&E CEO Ciaran Davis is eyeing a bigger slice of the outdoor advertising market. To discuss this, and the company’s recent half year results, he joins Super TV.
  • Macquarie Telecom CEO David Tudehope joins Super TV to discuss the company’s latest results and the telco industry.

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 shows how this has changed compared to the week before.

This week, one of the biggest movers was JB Hi-Fi, with its short position increasing by 0.92 percentage points to 12.22%.

20170901-shortstocks

Chart of the week

Investment expectations

screen-shot-2017-09-01-at-12-05-22

Expectations for investment in 2017/18 rose by almost 18% in the June quarter, according to CommSec. The last time there was a June quarter as positive as this was in 2010.

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