Switzer on Saturday

What a January after a disastrous December!

Founder and Publisher of the Switzer Report
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Those predicting recession in the USA this year didn’t get a great round of data overnight to confirm their economic forecasting brilliance! The Yanks created, wait for it, 304,000 jobs in January, the ISM manufacturing reading rose to 56.6 (where any number over 50 means expansion is happening) and consumer sentiment went up to 91.2!

There’s still a lot of life left in Donald Trump’s U-S-A!

The tricky bit for stock players is what does this mean for the Fed’s Jerome Powell, who has recently preached and promised “patience” when it comes to interest rate rises. But 304,000 jobs is huge.

And this dilemma for the Fed and rates explains why stocks haven’t surged, following this great data dropping. You see, as Charlie Aitken argued in our webinar yesterday (which is worth catching up on if you missed it, as we covered a hell of a lot of stocks), this comeback for stocks in January has been primarily driven by Powell’s patience pledge.

Charlie and I don’t agree totally on why stocks got smashed in the December quarter. He thinks it was all due to the Fed’s then promise of three rate rises or maybe more! I agree this was a big factor but the trade war threat was a non-issue, according to CA. I think they were a dramatic duo hurting stock prices.

Time will tell when the US President deems a deal is done but for the moment the focus is a stronger-than-tipped US economy and what that means for rates, growth and profits. These are the three key drivers aside from the narrative that is driven by geopolitics.

Clearly, what happens to stocks in 2019 will be Fed-, trade deal- and Brexit-influenced and how these big lick issues interact with the macro-economic forces in key economies to determine company profits then stock prices.

Getting back to this week’s key revelations and what this means for stocks, the 304,000 jobs totally swamped the consensus economists’ guess of 170,000! That’s a 100 months of job gains and it ignored the government shutdown. How does that happen?

Throw in the week’s earnings’ story and we’re not seeing a US corporate sector that is as beaten up as the December quarter sell off implied. At one stage, that sell off was so bad that it suggested the current quarter of profits that we’re seeing now would ‘rise’ by 0%! When I saw that, I reported to you that this had to be the biggest ‘buy the dip’ signal ever!

On that subject, the Citi Bear Market Indicator still only has 3.5 out of 18 red flags, which it showed in mid-2018. The research team that watches these omens for market Armageddon doesn’t get toey until they see 10 to 12 scary signals. So it could only be a black swan that could make a monkey out of these guys and gals and their bear market guide. (I wrote about this on Thursday in Switzer Daily)

This week’s earnings results were not strong on forecasts for profits but I don’t think they’re trustworthy because the economic forecasts their CEOs are using are unclear and untrustworthy, right now. Who knows what the Fed will do but one thing I’m sure is that J. Powell will be slower to think about a rate rise, with Donald Trump watching him like an American Eagle eyeing off a bunny in the bush!

Amazon reported better than expected and so did Merck, Exxon Mobil and Chevron. And shares in General Electric rose 11.7%, after quarterly sales and cash flow beat fourth-quarter forecasts, while Facebook rose by 10.8%, showing the addiction to this business trumps anything that it might have done wrong with their customers’ data!

Meantime, shares in Boeing rose 6.25% on positive full-year profit guidance and even Apple, which was a chief spooker of the market in the December quarter, with its so-called rejection of its too pricey iPhones by the Chinese, rose 6.8% after reporting solid services revenues.

This is a good assessment of reporting season in the States: “The word I’m using to describe this earnings season is reassuring,” said Kate Warne, investment strategist at Edward Jones. “The reaction to the earnings ‘is very good because it reflects that investors were more worried than the numbers reflected and companies are being rewarded’ for posting better-than-expected results.” (CNBC)

And gee I hope I can at least use the word “reassuring” but I really hope I write on numerous occasions that our results were better than expected, though I’m not as optimistic after seeing the NAB business survey during the week. The details are below but I’m hoping it was a one-off development.

Factset data has shown more than 45% of S&P 500 have reported earnings this season, and of those companies, 68.1% have topped analyst expectations.

Other important market-driving news this week was the Fed keeping the federal funds rate between 2.25-2.50%, as expected. In doing so, the central bank told us that “the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate”.

All up, this new resolve of the Fed to be “patient”, better news out of the trade deal negotiations and a better-than-expected reporting season, along with a stronger-than-tipped US economy, explains why this January for stocks, being up 7% or so, was the best first month of the year since 1987! By the way, that was a stock market crash year but there’s the old saying that “as January goes, so goes the year” and since 1950, a strong first month has seen the S&P 500 end up a big 87% of the time!

On the local front, the confession season looked a little too negative and the Hayne Royal Commission recommendations out on Monday remain a black cloud over bank share prices, which partly explains why our market was up only 3% over January. It also hasn’t been helped by what looks like a slower-than-expected economy, which has seen company earnings, which start this week in earnest, having their collective growth downgraded from around 7% to a tick over 4%.

Star of the week was Fortescue, which put on 3.4% on Friday to end at $5.84, so that was 20% for the week.

The big star of the month had to be Afterpay and this chart shows why:

Source: finance.yahoo.com

That’s a January rise of $12 to $16.18 (or 34%). A number of my guests on my Money Talks show, like Bell Direct’s Julia Lee and Monash Investors’ Simon Shields, were strong advocates of the stock. And ZIP Co, which I put the spotlight on, has gone up 14% since my interviews for my radio podcast and the TV show.

And while that’s heartening, I really hope we see bank stocks spike next week, after the Royal Commission recommendations make proper calculation of the value of a bank stock possible.

What I liked

  • In the 12 months to December 2018, our Budget deficit stood at $1,569 million (0.1% of GDP), down from the $1,816 million deficit in the year to November. The rolling annual deficit is the lowest for over 9½ years. Over the same 12-month period to December, the fiscal balance was in surplus by $5,710 million.
  • The Consumer Price Index (the main measure of inflation in Australia) rose by 0.5% in the December quarter, above expectations. In seasonally adjusted terms, the CPI rose by 0.4%. The annual rate of headline inflation eased from 1.9% to 1.8%. The Aussie dollar rose a quarter of a cent against the greenback in response. It wasn’t a big enough rise to boost economic confidence but it was an OK rise.
  • The CoreLogic Home Value Index of national home prices fell by 1% in January to be down 5.6% over the year. Prices fell in all capital cities except Canberra. Regional prices fell by just 0.2%.The table below shows that we’re not seeing home price Armageddon across the country and even Sydney’s and Melbourne’s falls aren’t as bad as the media headlines are making them out to be.
  • The Australian Industry Group Australian Performance of Manufacturing Index rose by 2.5 points to 52.5 points in January 2019. The CBA Manufacturing Purchasing Managers’ Index (PMI) fell from 54 to 53.9 points. Any reading over 50 indicates expansion.
  • Private sector credit (effectively outstanding loans) rose by 0.2% in December, after a 0.3% rise in November. Annual credit growth fell to a near 5-year low of 4.3% in December. (Note there is growth of 4.3% and it’s a 5-year low because for five years we’ve been borrowing like mad men and women!).
  • The ADP employment report, for private sector jobs in the US, rose by 213,000 in January (forecast +178,000).
  • US new home sales rose from 562,000 to 657,000 in November (forecast 560,000).
  • The FOMC now says it can be “patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.”
  • The Chicago Federal Reserve national activity index rose from +0.21 to +0.27 in December and the Dallas Federal Reserve manufacturing index rose from -5.1 points to +1 points in January.
  • Luxury goods retailers rose following a positive earnings report from LVMH. Shares in LVMH rose by 6.9%. LVMH stands for Louis Vuitton Moet Hennessy, in case you didn’t know).

What I didn’t like

  • The NAB business conditions index fell from +10.6 points to four-year lows of +2.2 points in December. The 8.4 point decline was the biggest monthly fall since October 2008 and below the long-run average of 5.8 points.
  • The NAB Business confidence index eased slightly from +3.4 points to near three-year lows of +2.8 points, below the long-run average of 6 points.
  • The Caixin/Markit purchasing managers index, which fell to a three-year low of 48.3 in January, was down from 49.7 in December.
  • The Chicago purchasing managers index fell from 63.8 to 56.7 in January (forecast 61.5).
  • Data showing a technical recession in Italy weighed on sentiment.
  • Shares in Caterpillar fell by 9.1%, with Nvidia down 13.8%. Nvidia cut its fourth quarter revenue estimate by half a billion dollars on weak demand for gaming chips in China. The energy sector fell in response to a lower oil price.
  • The 0.2% increase in euro-zone GDP for the fourth quarter of 2018 doesn’t help my flagging optimism!

Positive circuit-breaker needed

With our stock market plagued by trade deal dramas, Fed interest rate question marks, Wall Street sell offs, the Royal Commission, house price falls as well as related media hype and elections, we need a circuit-breaker to help turn around sentiment. The Royal Commission’s recommendations and how the Government and Labor respond will be critical. Let’s pray our politicians imitate statesmen and women, who know how important a confident economy is for a nation’s overall well-being!

The Week in Review:

  • Value investors are seeing more opportunities than they have for some time, with more companies trading at low valuations compared to the quality of the business. James Dunn looked at 4 potential value plays at present – from a variety of industries and market-capitalisation bands.
  • Investment bank UBS estimated the global food-delivery sales market will grow from about US$35b to US$365b by 2030. Does the market’s sour view on one meal-kit star look overcooked? Tony Featherstone examines the ASX-listed company Marley Spoon.
  • A falling dollar helps lots of local stocks. Michael Carmody is predicting no big drops for the Aussie so for anyone sweating on a 60-something dollar should read this and rethink.
  • In Buy, Hold, Sell – what the brokers say, analysts upgraded 7 companies and downgraded 11 since our last update a week ago.
  • Out hot stock from CMC Markets’ Chief Market Strategist, Michael McCarthy was Harvey Norman.
  • And in Questions of the Week, we answered readers’ queries about IOOF and a listed investment company.

Top Stocks – how they fared:  

What moved the market?

  • A dovish Fed kept interest rates on hold, which saw bond yields decline
  • Chinese officials headed to Washington DC for two days of trade talks

Calls of the week:

  • When looking at meal kit company Marley Spoon, Tony Featherstone said the micro-cap “has a valuable position in a growth market”.
  • Michael McCarthy said that Harvey Norman “could be described as a value proposition”.

The Week Ahead:

Australia
Monday February 4 – Building approvals (December)
Monday February 4 – ANZ job advertisements (January)
Tuesday February 5 – Services activity gauges (January)
Tuesday February 5 – Reserve Bank Board meeting
Tuesday February 5 – International trade (December)
Tuesday February 5 – Retail trade (December)
Tuesday February 5 – New vehicle sales (January)
Wednesday February 6 – Reserve Bank Governor speech
Friday February 8 – Statement on Monetary Policy

Overseas
Monday February 4 – US Retail sales (December)
Monday February 4 – US Factory orders (November)
Monday February 4 – US Durable goods orders (December)
Tuesday February 5 – US International trade balance (December)
Tuesday February 5 – US ISM Non-manufacturing index (January)
Wednesday February 6 – US Economic growth (advance, December quarter, year)
Wednesday February 6 – US JOLTs job openings (December)
Thursday February 7 – US Personal income/spending (December)
Thursday February 7 – US Consumer credit (December)
Thursday February 7 – US Federal Reserve Chair speech

Food for thought:

“Money is made by sitting, not trading.” – Jesse Livermore

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:

After the Fed kept interest rates in the US on hold this week, CommSec released the following chart tracking interest rates in both the US and Australia:

Source: Reserve Bank, CommSec

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