Switzer on Saturday

The case for building optimism

Founder and Publisher of the Switzer Report
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Given that Wall Street was closed on Good Friday, Thursday’s close will be critical to Monday’s market move locally. At the start of the week, Reuters reported that “of the 33 companies in the S&P 500 that have reported thus far, 81.8% have beaten Street estimates, better than the 65% average beat rate since 1994.”

And by the end of the week, Refinitiv revealed that 74% of the companies reporting so far had beaten expectations. The number crunchers say earnings for the S&P 500 as a whole are expected to decline 1.7%, the first negative quarter in three years but this would be an improve on early forecasts that projected an earnings drop of 4% plus.

It’s a big week ahead for US earnings and the drop of economic data will be watched closely to confirm or reject the view that the economic dip that worried markets in the December quarter is starting to reverse. CNBC/Moody’s Analytics survey on economic growth tips 2.4% against the 1% call that was an earlier expectation.

The US Beige Book last week showed the economy expanding at a slight-to-moderate pace in March and early April, with the all-important employment readings continuing to increase, with nine districts reporting modest or moderate growth and the other three reporting slight growth.

As you can see, many worst case scenarios that dominated market fears are proving to be too negative, with China’s latest run of economic readings coming in better than was forecasted, telling us that the stimulus program is starting to kick in. Below in “What I like”, I show just how good the data was but the standout headline was “Chinese industrial production hits 4½-year high” from CommSec.

By Friday, the economic report card and the earnings reports should give us a good handle on how the US economy is travelling and whether this recent market optimism is overdone. We’re also expecting some more feedback from the US-China trade negotiations this week that were supposed to be done and dusted on March 27!

However, the press releases are all pointing to the fact that meaningful progress is happening. When a halt is called on the horse-trading between Trump and China, the market will have another relief rally but recent gains look like they’re anticipating future good news on the trade deal.

On the local front, we’re keeping it optimistic, despite the election uncertainty that goes before a Federal poll and the threat of a Labor victory, which doesn’t look all that positive for investors and business. Paul Rickard and I have tipped a mini-boom for stocks and property if Bill Shorten becomes PM but it’s bound to fall off a cliff after January 1 when the  capital gains tax discount drops from 50% to 25% and those new negative gearing rules kick in. That’s when we’d need a big positive, offsetting stock market stimulus from Wall Street.

It could get down to Donald!

There’s also a feeling that a sell off is overdue because stocks have done so well in 2019’s year-to-date showing. The S&P/ASX 200 Index is up nearly 11% and if we add in a low 2% for dividends and franking credits, anyone who believed my “buy the dip” call in December would be up about 14%.

“Given the scale of the rebound since the December low, there is a risk of a correction in the equity market, especially as we move to a seasonally weaker period,” said Macquarie Securities analyst Matthew Brooks. (SMH)

For those wondering if bank shares have an upside, NAB’s stock price reaction to its revelation that it would pay an extra $525 million in compensation to customers actually helped the share price. Uncertainty is never good for share prices and if this damn Oz economy can kick up after the election and talk of rate cuts is dropped, then bank share prices would sneak up.

Certainly, the good jobs report during the week, which saw the trend participation rate hit an all-time high of 65.6, suggests that the economy is heading in the right direction. These better-than-expected numbers also explain why the Oz dollar finished at 71.49 US cents.

I can’t wait for the election to be done and dusted but we have four more weeks of this stuff!

What I liked

  • Employment rose for the eighth straight month, up by 25,700 in March after a revised 10,800 increase in jobs in February (previously reported as a 4,600 increase in jobs). Full-time jobs rose by 48,300 but part-time jobs fell by 22,600. Economists had tipped an increase in total jobs of around 15,000.
  • Unemployment rose from 4.9% to 5% in seasonally adjusted terms. In trend terms, the jobless rate remained steady at a 10-year low of 5%.
  • The participation rate rose from 65.6% to 65.7%.
  • Annual job growth rose from 2.3% to a 5-month high of 2.4% (decade average 1.6%).
  • According to the Commonwealth Bank Business Sales Indicator (BSI), the pace of economy-wide spending is continuing to lift. The BSI rose by 0.7% in March, after a similar lift in February. Spending growth remains above the 0.4% long-term average monthly growth pace.
  • The PEFO (the Pre-election Economic and Fiscal Outlook) report has confirmed that a small budget deficit is expected in 2018/19, with a small surplus expected in 2019/20. The budget is expected to be in deficit by $4.3 billion in the current year (2018/19). The 2019 Budget forecast a $4.2 billion deficit. A budget surplus of $7.1 billion is expected in 2019/20.
  • The Chinese economy grew by 1.4% in the March quarter, in-line with consensus expectations. But the annual growth rate was unchanged at 6.4% in the March quarter, beating market expectations for 6.3%.
  • Chinese industrial production rose at a 8.5% annual rate in March – the strongest growth rate in 4½-years – above the forecast average (+5.9%). Production had risen by 5.3% in the year to January/February.
  • Chinese real estate investment was the highest in four years.
  • The Empire State manufacturing index for the state of New York rose from +3.7 points to +10.1 points in April (forecast +6.7 points).
  • I liked that it wasn’t easy to find many “What I didn’t likes”!

What I didn’t like

  • Shares in Goldman Sachs fell by 3.8% after its earnings fell short of market expectations. Shares in Citigroup fell 0.1%, despite higher earnings with cost-cutting offsetting lower revenues.
  • The national average price of unleaded petrol rose by 3.5 cents in the past week to 144.5 cents a litre – the highest level since mid-November.

What the RBA really thinks about a rate cut

This is what the RBA Board minutes told us:

“Members also discussed the scenario where inflation did not move any higher and unemployment trended up, noting that a decrease in the cash rate would likely be appropriate in these circumstances. They recognised that the effect on the economy of lower interest rates could be expected to be smaller than in the past, given the high level of household debt and the adjustment that was occurring in housing markets. Nevertheless, a lower level of interest rates could still be expected to support the economy through a depreciation of the exchange rate and by reducing required interest payments on borrowing, freeing up cash for other expenditure…”

And they concluded with this:  “…members agreed that the likelihood of a scenario where the cash rate would need to be increased in the near term was low…Taking account of the further progress expected towards the Bank’s goals, members assessed that it was appropriate to hold the cash rate steady. Looking forward, the Board will continue to monitor developments, including how the current tensions between the domestic GDP and labour market data evolve, and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time.”

Bottom line? Rates won’t be moving any time soon.

The Week in Review:

  • The best news I’ve heard for a while was that the Centre Alliance Party should hold the balance of power in the next Senate and would oppose Bill Shorten’s unfair policy on tax refunds linked to franking credits for retirees not receiving a pension.
  • Some investors see the advantages of using a managed investment, particularly if they don’t have time to follow the market. A question Paul Rickard is frequently asked by investors is: what’s the best managed investment?
  • James Dunn looked at a group of promising stocks that all come in under 50 cents.
  • Tony Featherstone highlighted four thematic ETFs on ASX.
  • Michael McCarthy, CMC Markets’ Chief Market Strategist, put forward two Hot Stocks this week: Woolworths (WOW) and Coles (COL).
  • There were only downgrades in the first Buy, Hold, Sell – What the Brokers Say for the week, while there were an equal number of upgrades and downgrades in the second edition including an upgrade for Telstra by UBS
  • In Questions of the Week, Paul Rickard answered readers queries about whether ANZ and NAB will pay their dividends before July 1, discounts for Argo and Milton, and if it is time to take profits on resource companies.

Top Stocks – how they fared:

The Week Ahead:

Australia
Wednesday April 24 – Skilled job vacancies (March)
Wednesday April 24 – Detailed job data (March)
Wednesday April 24 – Consumer price index (March quarter)
Friday April 26 – Producer prices (March quarter)
Friday April 26 – Export & import prices (March quarter)

Overseas
Monday April 22 – US Existing home sales (March)
Tuesday April 23 – US New home sales (March)
Tuesday April 23 – US Home price index (February)
Tuesday April 23 – US Richmond Federal Reserve index
Wednesday April 24 – Weekly mortgage finance
Thursday April 25 – US Durable goods orders (March)
Friday April 26 – US Economic growth (March quarter)
Friday April 26 – US Consumer sentiment (April)

Food for thought:

“Three simple rules – pay less, diversify more and be contrarian – will serve almost everyone well.” – John Kay

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:

According to economic data released by China’s National Bureau of Statistics earlier this week, the annual growth rate for the Chinese economy remained unchanged at 6.4% in the first quarter of 2019, better than an expected decline to 6.3%:

Source: Reuters, CommSec

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Recent Switzer Reports:

Monday 15 April: Good franking credit news

Thursday 18 April: Easter ETFs

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.