Switzer on Saturday

Jobs up stocks down, blame Donald

Founder and Publisher of the Switzer Report
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I know I have followers who are Donald J. Trump fans but he and his team are very hard to play investing-wise (and that’s my beat), so I can’t say that Donald is making it easy for those of us who’d love to see a rally on Wall Street.

Clearly, as I write and the US trading day is now a little over halfway, the big indexes are down. There are two standout reasons for this, both of which are Trump-related.

The first is linked to the very media-savvy Trump economic adviser, Larry Kudlow, former CNBC host and a former Bear Stearns chief economist, telling the market that there is no China trade deal. Last night as I was doing prep for this morning, I cut this out of a report from Craig James of Commsec: “US President Trump said in a tweet that he had a “long and very good conversation” with Chinese President Xi Jinping on trade with the scheduled G20 meeting between the two likely to go ahead in Argentina.”

That was put out Thursday morning. On Tuesday morning Craig told us what he’d gleaned from US market reports that “US share markets rose on Tuesday on hopes of a trade deal between the US and China.”

This raised my hopes that a Trump-China deal would materialise sooner than I thought. My best Trump guess before this week’s China trade teasers (because he always has everyone guessing, apart from the people who hate him with a passion) was that he takes his China crusade into the mid-term elections to muster the working class vote, who think beating up on China means more US jobs.

Then, after a better-than-expected result in the elections, I expected a China trade deal to excite markets and create the typical end-of-year Santa Claus rally.

Kudlow’s denial of a trade deal now makes my original guess look more on the money. However there’s certainty that part two of my guess (i.e. the trade deal will happen because Donald is Donald!

The second reason US stocks are down as I write with two hours of trade to go, is that the US job numbers (as one commentator put it) “smashed them”. This brings both good and bad news.

It’s actually that these jobs numbers confirm my argument that the US economic recovery is strong and believable, however it would get interest rate watchers more worried about higher and faster rising rates.

Let me sum up these employment stats:

  • Jobs were up 250,000, compared to forecasts of 190,000.
  • Unemployment stayed at a low 3.7%.
  • The participation rate rose 0.2% to 62.9.
  • Average hourly earnings rose 3.1% over the year. This is the best annual rise since before (what the Americans call) the Great Recession!

A US President couldn’t have received a better piece of economic news than this report, which says that under his watch, jobs and wages rose, making the US economy look like the place to be.

This wage rise number has been the missing piece in the economic recovery puzzle so this is big news but it does worry interest rate watchers and would explain part of the stocks sell off on such a good story for the American people, as the White House might put it.

Given these two drivers of the market, if you doubted how important the China trade war is to the stock market, let me point out that the Dow was up 181 points after the job numbers. However this early positivity was wiped out when Kudlow poured cold water on the possibility that a China trade deal was close.

And he was definitive saying: “We’re not on the cusp of a deal.”

Apple didn’t help either, reporting a shipments number less than expected. And Apple also revealed a change to its reporting structure that made some suspicious about the company’s previous show-and-tell efforts on the performance of the company.

And before looking at some local market issues, you should be told that the predicted slowdown in Europe showed up in the stats this week, with the euro-zone economy growing by just 0.2% in the September quarter (forecast +0.4%). This is the slowest pace in four years.

Meanwhile, China’s official manufacturing purchasing managers’ index fell by 0.6 points to 50.2 points (survey: 50.6 points) in October – the lowest level since July 2016. And the services gauge fell by 1 point to 53.9 points (survey: 54.9 points) in October. As I always point out, a level above 50 denotes expansion in activity but a bigger number over 50 does suggest faster expansion. This trade war is not a big help to China’s growth and partly explains why the Hang Seng index in Hong Kong is down over 20% year-to-date. And the Shanghai Composite has slumped 24% in that time!

This news isn’t good for our stock market either, considering that China is our best trading partner. But here’s the really crucial bit: look at this CNBC Asia headline, which shows how important the trade war is to a stock market rally: “Hong Kong surges more than 4%, Shanghai up more than 2.5% amid trade talk hopes”.

The day Donald tells us a deal is done, stocks will spike and both he and President Xi Jinping will both be happy about that, and me too!

To the week that was locally, and you could have blown me down like a feather when Fairfax’s William McInnes pointed out that last week was the best since November 2016. Believe it or not, the S&P/ASX 200 index was up 3.25% (or 184 points) to close at 5849.2.

Of course, this rise was because the three-week sell off before was beyond good sense, as my reporting suggested. When I saw SWTZ at $2.32 last week, I knew the inmates had taken control of the asylum! It finished this week at $2.38 but got to $2.41 during the week. This appears to me one of the safest speculative plays because even if you hold the stock and get caught in a crash, you’ll still get a good dividend if history plays out. And after a crash, dividend-paying stocks are often the ones that get the most support because doubts hang over growth stocks. (This isn’t advice but my take on what financial education tells me.)

My old mate Michael McCarthy of CMC Markets saw the market’s move this way this week: “After a three week, nine per cent plus tumble, it was no surprise to see a bounce. However, we are not out of the woods yet.”

The “woods” are linked to the mid-term election next Tuesday and that infernal China trade deal.

I was happy to see my tip that CSL had to be in buying territory. The company had a nice week, up 8.6% this week. And financials up 3.1% also helps my credibility.

However, can you imagine where our index would be if there had been no Murray Inquiry and no Royal Commission and no Trump-China trade war? We could have had banks more precariously positioned, balance sheet-wise, but their share prices would be through the roof and the index would be at the 7000 plus mark.

I can’t dwell on these ‘reality-bite’ events but it’s worth contemplating to understand what drives stock prices and the value of our portfolios.

The big news was the announcement of the BHP buyback that helped its share price spike 7.4% for the week. (My colleague Paul Rickard will take you through the ins and outs of this offer next week.)

And it looks like the market has re-assessed AMP’s decision to sell its life insurance business, with the stock up 13% for the week, though it could’ve been helped by speculation that Macquarie might buy AMP. That said, Macquarie is now denying the story.

I agree with Macca that we’re not out of the woods but we soon will be. This will happen when the US election is over, Trump gets a China trade deal and US holiday shopping goes through the roof, with jobs and wages spiking. I can’t believe that Donald Trump wants to be known as the President who stole Christmas and mugged Santa Claus as he was bringing his annual stock market rally.

Not even Donald is so bold.

What I liked

  • Retail trade rose by 0.2% in September, after a 0.3% lift in August. Annual spending growth was steady at 3.7% in September. Over the year to September in trend terms, spending in Victoria lifted to four-year highs of 5.9%, up from 5.7% in August.
  • International visitors to Australia rose by 6% to a record high 8.4 million over the year to June. Spending by international tourists increased by 5% to $42.5 billion – a fresh record high.
  • Our trade surplus increased from a revised $2,342 million in August (previously $1,604 million) to $3,017 million (consensus: +$1,700m) in September. It was the largest surplus in 19 months and the 9thsuccessive surplus this year.
  • Australia’s annual exports to China rose from US$108.29 billion in August to US$109.42 billion in September – a new record high. Australia’s annual imports from China rose from US$69.88 billion to US$71.2 billion – also a record high and big import numbers point to stronger economic growth.
  • The CoreLogic Home Value Index of capital city home prices fell by 0.6% in October to stand 4.6% lower over the year. The national home price index fell by 0.5% in the month to be down 3.5% over the year – the weakest annual growth rate since February 2012. Yes, but look at how low these numbers are! Hardly the Armageddon headlined in media outlets.
  • The Australian Industry Group (AiGroup) Performance of Manufacturing Index fell from 59 points to 58.3 in October. The sector has been expanding (an index above 50 points denotes expansion) for the longest period since 2005. But the CBA/Markit ‘final’ manufacturing purchasing managers’ index rose from 54.3 to 54.5 in October. Both point to expansion for manufacturing.
  • Private sector credit (effectively outstanding loans) rose by 0.4% in September after a 0.5% rise in August. Credit was up 4.6% over the year, up from the 4.5% in August.
  • Loans and advances by non-bank financial intermediaries rose by 11.4% over the year to September, up from 10.3% in August and the strongest annual growth in 11 years.
  • US consumer confidence rose from 135.3 to an 18-year high of 137.9 (forecast 136). Chain store sales in the latest week were up 5.9% on a year ago, after a 5.5% annual gain in the prior week.
  • The ISM manufacturing purchasing managers’ index in the US fell by 2.1 points to 57.7 points (survey: 59 points) in October but any number over 50 means expansion is happening.
  • China’s Caixin private sector manufacturing purchasing managers’ index rose by just 0.1 point to 50.1 points (survey: 49.9 points) in October. A level above 50 denotes expansion in activity.
  • The Employment Cost Index rose by 0.8% (survey: +0.7%) in the September quarter. Wages and salaries were up by 2.9% over the year to September, the strongest gain in a decade.

What I didn’t like

  • The Consumer Price Index – the main measure of inflation in Australia – rose by 0.4% in the September quarter, broadly in line with expectations. The annual rate of headline inflation eased from 2.1% to 1.9%. Over the past decade, inflation has averaged 2.18% – the lowest decade-average inflation result since September quarter 1967.
  • The euro-zone economy grew by just 0.2% in the September quarter (forecast +0.4%) – the slowest pace in 4 years.
  • Investor housing finance rose by 0.1% in September, with annual growth at the slowest rate on record of 1.4%.
  • Personal credit was flat in September, but was down 1.5% over the year – the equal weakest annual growth rate in 8½ years.

Cup Tip

Though I’m more known for giving safer investment tips rather than speculative growth plays, next week I’m operating out of our Melbourne office and will be interviewing Tom Waterhouse on Monday at the Call of the Card, to see what his father Robbie, who’s regarded as a very good judge of horses, likes for the Cup.

Tom has a four out of five Cup win rate with me on my TV show and one, Green Moon, saluted the judge at over 20/1!

As we say, history is no guide to future performance but, given my track record with Melbourne Cups, I’d rather go with the pros who do the form. I guess it’s why you stick with the Switzer Report!

The Week in Review:

Top Stocks – how they fared:

 What moved the market?

  • A rise in US stocks as President Trump suggested that he was building bridges with China in a tweet, no less. “Just had a long and very good conversation with President Xi Jinping of China. We talked about many subjects, with a heavy emphasis on Trade. Those discussions are moving along nicely with meetings being scheduled at the G-20 in Argentina. Also had good discussion on North Korea!”
  • A jump in the local currency
  • ANZ’s result midweek which suggested banks aren’t basket cases just yet

Calls of the week:

  • Paul Rickard’s and my calls that banks are a buy
  • Tony Featherstone’s prediction that value is emerging in the oversupplied childcare sector
  • And Paul’s call on AMP on Monday.
  • David Peever’s decision to step down as chair of Cricket Australia. It took a while but better late then never, as they say.

The Week Ahead:

Australia
Monday November 5 — New vehicle sales (October)
Monday November 5 — CBA/AiGroup services gauges (October)
Monday November 5 — ANZ Job advertisements (October)
Tuesday November 6 — Reserve Bank Board meeting
Wednesday November 7 — Selected Living Cost Indexes (September quarter)
Friday November 9 — Statement on Monetary Policy
Friday November 9 — Housing finance (September)

Overseas
Monday November 5 — China Caixin Services purch. Managers (Oct.)
Monday November 5 — US ISM Services Index (October)
Tuesday November 6 — US Midterm elections
Tuesday November 6 — US JOLTs Job Openings (September)
Wednesday November 7– US Consumer credit (September)
November 7-8 — US Federal Reserve interest rate decision
Thursday November 8 — China International trade (October)
Friday November 9 — China Inflation (October)
Friday November 9 — US Producer prices (October)
Friday November 9 — US Consumer confidence (November)
Friday November 9 — US Wholesale inventories (September)

Food for thought:

“And the day came when the risk to remain tight in a bud was more painful than the risk it took to blossom.”

Anais Nin

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.

Chart of the week:

CommSec’s Craig James has done some interesting calculations with our CPI. It rose by 0.4 % in the September quarter, while the annual rate of headline inflation eased from 2.1 % to 1.9 %. But over the past decade, inflation has averaged 2.18 % – the lowest decade average inflation result since September quarter 1967.

 Top 5 most clicked:

Recent Switzer Reports:

Monday 29 October: Take a punt
Thursday 1 November: Accentuate the positive

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.