Switzer on Saturday

We’re at an 11-year high. Will it go higher?

Founder and Publisher of the Switzer Report
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My job in the Switzer Report is three-fold. First, I tell you what’s going on. Second, I do my best to explain what’s likely to happen to your investments. And third via my team and myself, we try to steer you into great stock or other money-making ideas.

This is against a market that’s often so challenging that some of the smartest market players warn that it’s time in the market, not timing the market that counts. And academic work has supported that. But if Donald Trump, Xi Jinping and/or Iran are going to smash Wall Street, we’d all like to know in advance. However this type of analysis is so damn difficult.

The usual killer for stocks is rising interest rates but that’s not the challenge right now – it’s falling interest rates!

With this in mind, the fact that there can be a potential Iran-USA military encounter in the wings (after Iran was accused of attacking two oil tankers) and the Dow Jones was down only 14 points with an hour of trade to go, remains perplexing. And it comes at a time when some trade war experts believe the chances of a solution to the stand-off is a long way off, yet the overall markets seems to be buying stocks on Wall Street and on the Nasdaq as though a trade deal is at hand.

The current focus is on the G20 meeting in a fortnight’s time. While we think a Trump-Xi meeting is going to be important for stocks, only five hours ago Donald has reportedly said: “It doesn’t matter if China’s Xi attends…” the Group of 20 Summit! He really makes market direction speculation very hard but, as I say, the fact that there’s no sell off now suggests that the consensus believes a deal will be had.

You must remember that this is speculation, just like my view that Donald wants and needs a deal to avoid a market crash that would certainly lead to a US and probably a global recession, which would definitely infect us.

Overnight, Wall Street sold off on weak Chinese economic data. Chinese industrial production was up only 5.5% year-over-year and this is the slowest pace of growth in 17 years. As Fox Business noted, it’s “another sign that trade tensions are hurting growth.”

The current lie of the trade deal land is “US President Donald Trump said on Tuesday that he was holding up a trade deal with China and had  no interest in moving ahead unless Beijing agrees again to four or five ‘major points’ that Trump did not specify,” Fox’s Ken Martin explained.

Demonstrating how confusing this trade war stuff is, the Yanks got the May retail sales overnight and they increased, while sales for the prior month were revised higher. The Commerce Department said on Friday that retail sales rose 0.5% last month as households bought more motor vehicles and a variety of other goods.

With all these curve balls being tossed at the US economy’s potential growth and market players as well, I guess the following helps to explain why stocks are resisting gravity.

“We continue to expect that a sharper slowdown in economic growth over the coming months will convince the Fed to cut interest rates, but the retail sales data reinforce our view that officials are likely to wait until the September FOMC meeting before pulling the trigger,” said Andrew Hunter, senior U.S. economist at Capital Economics.

Clearly, a trade deal in an easy interest rates environment helps stocks but a no trade deal will spark a sell off. I’m punting on a deal but with Donald, it’s gambling. That’s the challenge for you to deal with.

Locally, we ended at an 11-year high, with the S&P/ASX 200 Index up 110 points to 6554 (or 1.7%) over the week. Helping was the Mexican standoff solution between Donald and his southern neighbour, which underlines what a China deal could bring!

“In a shortened trading week, the ASX continued to push higher, playing catch up to gains overseas and making a fresh 11 and a half-year high on Tuesday as President Trump struck a deal with Mexico averting the tariff threat to Mexican goods,” said Saxo Capital Markets market strategist Eleanor Creagh to the SMH.

“The moves higher have also been bolstered by central bank policy, as investors put aside the outlook for earnings and economic ills in favour of the prospect of more monetary easing incoming,” she added. “For now, the party is on and the market is cheering the prospect of monetary policy supporting asset prices.”

That’s a neat assessment of what’s going on right now.

The big market news was the AGL’s takeover bid for Vocus, explaining its 14.1% rise in value, which would have pleased Bell Direct’s Julia Lee, who told us on the SWITZER TV program now on www.switzer.com.au and YouTube on Monday nights, that she’d gone long the telco.

AGL was down 6.2% but the takeover merchants usually cop that kind of treatment. Star dropped 14.9% on a profit downgrade – those sorts of reports will do that. The market darling, Afterpay, lost 10.6% after founders sold $100 million worth of shares alongside a $300 million capital raising, while the company had to deal with an AUSTRAC demand to audit its money laundering controls.

Those who have stuck solid with Challenger wouldn’t have liked the UBS 15% reduction in its target price following a profit warning. This company would have done better with a Labor election win, as their annuity business might have looked more attractive to retirees if they’d lost their beloved franking credits.

What I liked

  • Employment rose for the 12thstraight month, up by 42,300 in May, after a revised 43,100 increase in jobs in April (previously reported as a 28,400 increase in jobs). Full-time jobs rose by 2,400 but part-time jobs rose by 39,800. Economists had tipped an increase in total jobs of around 15,000.
  •  The participation rate rose from 65.9% to a record high of 66%.
  • The NAB business confidence index rose from 0.1 points in April to a 10-month high of +7.3 points. It was the biggest lift in business confidence in almost six years. (The NAB business conditions index fell from +3.3 points in April to +0.6 points in May but this was not surprising, given the slowing economy and the election effect.)
  • The move up for iron prices, which is good for BHP, Rio, Fortescue, the market index and the Federal Budget! The price of iron ore rose firmly on Thursday amid supply concerns as port stockpiles in China fell and reports of difficulties in procuring Australian iron ore. (SMH)
  • The NFIB business optimism index in the US rose from 103.5 to 105 in May (forecast 102.3).
  • Despite a slower Chinese economy, this happened: Exports in May were up 1.1% on a year ago (forecast -3.8%). Imports fell by 8.5% (forecast -3.8%) but the trade surplus rose from US$13.77 billion to US$41.66bn. How did that happen?

What I didn’t like

  • The Westpac/Melbourne Institute survey of consumer sentiment index fell by 0.6% to 100.7 in June, after rising by 0.6% to 101.3 in May.
  • The Morgan Stanley labour market indicator rose this week, despite a pretty good jobs number, and points to future demand weakness, which should see the RBA cut once more in August alongside another downgrade to forecasts.”
  • The major banks were weaker after the Australian Prudential Regulation Authority (APRA) released new tougher capital holding guidelines to be held against interest only and property investor loans. I think APRA has done enough damage for this economic cycle!
  • Tourist arrivals fell by 0.2% in April, with departures down 1.1%. China is the largest source of tourists to Australia. Over the past year, 1,438,500 tourists came to Australia from China, up by 1.3% on the year – the weakest annual growth rate in nine years.
  •  Oil prices rose on news of attacks against two oil tankers in the Gulf of Oman, with the US Secretary of State, Mike Pompeo, assessing that Iran was responsible for the attacks. The UK later supported those claims.
  • The IBD/TIPP economic optimism index in the US fell from 58.6 to 53.2 in June (forecast 59.2).
  • US consumer prices rose by 0.1% as expected in May, to be up 1.8% on the year, which is too low.
  • Chinese economic data was poor with new vehicle sales in May down 16.4% on a year ago after a 14.6% annual decline in April.

Deal or No Deal?

CNBC says one former leading trade advisor to President Donald Trump says he thinks the US will emerge from its lengthy negotiations with China with a deal, but “There won’t be a deal at the G-20,” Clete Willems told Kayla Tausche at CNBC’s Capital Exchange event in Washington.

Willems likes the fact that Xi called Donald “a friend” and that China’s public statements have been supportive. But he still thinks three to six months might be needed to seal a deal. And this possibly explains why central banks are talking lower interest rates.

As long as the trade talk doesn’t turn negative and central banks stick to their current script, then stocks can creep higher. But the trade talk has to stay positive.

Remember, one week of new Mexico tariffs sent Wall Street down.

To remind you how hard it is to play Donald, just look at this CommSec report mid-week: “Reuters reported US President Donald Trump as saying that he had a feeling that a trade deal with China could be reached but again threatened to increase tariffs on Chinese goods if they do not make a deal.”

This gives me both positivity and negativity in the one sentence, but that’s life with Donald!

The week in review:

Top Stocks – how they fared:

The Week Ahead:

Australia
Tuesday June 18 – ANZ-Roy Morgan consumer confidence
Tuesday June 18 – Residential price indexes (March Quarter)
Tuesday June 18 – Reserve Bank Board minutes
Wednesday June 19 – Skilled internet job vacancies (May)
Thursday June 20 – CBA Business Sales Index (May)
Thursday June 20 – Reserve Bank Governor speech
Thursday June 20 – Population (December quarter)
Thursday June 20 – Detailed employment (May)
Friday June 21 – CBA ‘flash’ purchasing manager indexes (June)

Overseas
Monday June 17 – US Empire State Manufacturing Index (June)
Monday June 17 – US NAHB Housing Market Index (June)
Tuesday June 18 – China House Price Index (May, annual)
Tuesday June 18 – US Housing starts (May)
Tuesday June 18 – US Building permits (May)
June 18-19 – US Federal Reserve interest rate decision
Thursday June 20 – US Current account balance (March quarter)
Thursday June 20 – US Philadelphia Fed Manufacturing Index (June)
Thursday June 20 – US Conference Board Leading Index (May)
Friday June 21 – ‘Flash’ Markit purchasing managers indexes (June)
Friday June 21 – US Existing home sales (May)

Food for thought: 

“Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.” – Warren Buffett

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:

A record high 55% of respondents to the latest Westpac-Melbourne Institute consumer sentiment index believe that the wisest place for savings is not in banks, shares or property. Shares were believed to be the wisest place for savings by 9.6% of those surveyed, up 2.1 percentage points from the last survey but still behind banks on 28.8% and paying off debt on 24.7%.

Source: Melbourne Institute, CommSec

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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.