The Dow has done what it did for most of the week, adding a few more points, when it put on over 700 points. The reason for it began Monday US time, and as usual nowadays, started with a tweet. This is how news services reported it: “US President Donald Trump tweeted that China had called and wanted to restart trade talks. Reuters reported that Chinese Vice Premier Liu He, who has been leading the talks with Washington, said on Monday that China was willing to resolve the trade dispute through “calm” negotiations and opposed any increase in trade tensions.”

Unsurprisingly, US shares rebounded on hopes for a potential US-China trade truce and shares of tariff-affected companies lifted as a consequence, with the likes of Apple rising 1.9%, which fed into the rises of the major market indexes.

Of course, we’ve seen this before. A Trump tweet and up we go and then another Trump tweet and down we go, again! But what I’ve seen this week is a little more China input and more interest in talking about a solution than simply returning fire in a tit-for-tat fashion.

They know that the trade war is not good for both economies and the world economy, which contains a whole lot of customers that China exports to. China is the largest exporter in the world and was the biggest exporter to the EU, responsible for 20% of what the EU imports. It’s also the second largest importer of EU goods.

Clearly, the trade war and its impact on business investment, trade and confidence is behind the bond market predicting recession and I can’t believe that Donald Trump and his advisers aren’t recognising that we are in tricky and threatening waters.

By Thursday, President Trump said trade talks were scheduled “at a different level” and we learnt that China’s Commerce Ministry was willing to resolve the dispute “with a calm attitude”. And share markets rose on Thursday in response.

Recall on the Friday before the Dow slumped 623 points (or 2.4%) after President Trump hit China’s remaining $300 billion worth of un-tariffed goods with a 10% tariff, then China returned serve and raised tariffs on $US75 billion worth of US goods on the same day.

This launched a tirade of Trump tweets but this one grabbed the headlines: “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing…your companies HOME and making your products in the USA.”

We have seen a better week for believing a trade deal is possible but only a few days ago Citi’s economics team put a “no deal” scenario before the November 2020 election at 60%!

And the global trade trickiness went up a notch after Prime Minister Boris Johnson (or BoJo) announced plans to suspend Parliament, which took the pound down but stocks actually went up – a lower currency can do that. Remember, a Brexit, which looks set to be a hard one, is pencilled in for October 31 and this could rattle the UK and EU economies. So a US-China trade deal before that drama unfolds looks sensible.

On the local front we saw that 92% of companies that reported full-year results came up with a profit, above the average of 88% over the past decade, but only 52.2 % of companies were able to actually increase them from the previous year. “Aggregate statutory profits are up – a gain of 17 per cent but if BHP and Wesfarmers are excluded, profits rose by 1.2 per cent – a better reflection of the year,” noted Craig James from CommSec.

For dividend chasers, 88.4% of full-year reporting companies elected to pay a dividend. This number was above the average of 86% over the previous 19 reporting seasons covered.

Despite a nice finish on Friday, August was a negative month for stocks and we can blame trade tensions.

The S&P/ASX 200 Index closed on the last trading day for the month at 6604.2, giving up a tick over 208 points (or 3.1%). And it’s not surprising when you add the trade war tweets to the bond market’s prediction of a recession. In fact, the loss says an upcoming Armageddon currently lacks credibility! The AFR’s William McInnes has done the numbers and “BHP Group fell 11.2% to $36.20 during the month, Rio Tinto lost 8.3% to $87.59 and South32 dropped 16.2 per cent to $2.63.”

Other losers, which could be bounceback stocks if a trade deal is had, were A2 Milk (down 20.8%), Bellamy’s Australia (which lost 25.5%) and Blackmores (off 19% to $71.94 over the month).

From the winning department, Wisetech, which could be our next CSL being a world-class company, put on 16% over the month but its PE over 200 will spook most of us! My colleague, Paul Rickard, is becoming a big fan but admits he hasn’t bought the stock yet. And that’s the kind of thing that make this usually unemotional guy nearly teary!

By the way, McInnes reports UBS upgraded Appen to a “buy”. “We believe we are at a global inflection point for the Artificial Intelligence industry and therefore fast approaching a wave of mass adoption,” said analyst Josh Kannourakis. “As AI adoption and use cases expand exponentially, we expect the volume of training data required will also increase exponentially. Growing adoption of deep learning is also highly favourable for training data requirements moving forward.”

UBS has pushed Appen from a target of $26.20 to $30.

And Morgan Stanley is expecting the major banks to be more resilient in the second half of the year, with margins on the rise. A few weeks back I was arguing the case for the big four so I’m glad MS now agrees with me.

What I liked

• The third estimate of business investment spending in 2019/20 was $113.4 billion, up 10.7% on the second estimate for 2018/19 and the strongest growth in seven years.
• New business investment (spending on buildings and equipment) fell by 0.5% in the June quarter but it’s a small fall.
• The weekly ANZ-Roy Morgan consumer confidence rating rose by 1.2% to 114.1 points. Consumer sentiment is just below the average of 114.5 points held since 2014 but above the longer-term average of 113.1 points since 1990.
• In the latest survey, the estimate of family finances compared with a year ago was up from +10.3 points to +16.8 points – the highest result in weekly surveys on record (11 years).
• Private sector credit (effectively outstanding loans) rose by 0.2% in July to be up 3.1% over the year.
• The US economy grew at a 2% annual pace in the June quarter, in line with forecasts. The core personal consumption deflator (inflation measure) was up 1.7% (forecast +1.8%).
• The Richmond Federal Reserve manufacturing index improved from minus 12 points to +1 point in August. The Dallas Federal Reserve manufacturing index rose from -6.3 points to +2.7 points (survey -3 points) in August.
• US durable goods orders rose by 2.1% in July (survey +1.2%).

What I didn’t like

• Council approvals to build new homes fell by 9.7% in July to 12,944 units – the weakest level in 6½ years. Total residential building approvals fell 9.7% in July, a sharp fall after a modest decline of 1.2% in June. This was the largest fall since March and approvals are now 28.5% lower than a year ago.
• Construction work done fell by 3.8% in the June quarter – the fourth straight decline. The value of construction work done is 11.1% down on a year ago.
• Apartments drove the overall decline in buildingapprovals, dropping 18% in July, which was the largest fall since March. House approvals were only down 3%.

Trump can’t trump the consumer

Yesterday, Harvey Norman didn’t report as well as the market and Gerry Harvey would have liked. But his company is very exposed to the housing sector and we know since property prices have dropped, the sector has been in trouble. But that’s the past and so I liked it when Gerry bagged those saying we’re in a retail recession, pointing to the first two months of this financial year – July and August – when his sales were up 3.3%.

Meanwhile, in the US, July numbers show the consumer is still spending, despite trade war and recession talk. Personal consumption in the US rose 4.7% in the second quarter and saving (compared to disposable income) edged lower, from 8% to 7.7%.

Donald can’t afford to spook the precious consumer and that’s why a deal is becoming an ASAP issue.

Be sure to join myself and Paul Rickard for our webinar next Friday, where we’ll discuss how to position your portfolio with a US-China trade war at play. Click here to register and submit your question in advance.

My new book ‘Join the Rich Club’ is also now available for purchase through the Switzer Store website.

The week in review:

• This week, I told you about a few people I respect who buy LICs and when they buy them.
• Paul Rickard put forward 4 stocks that stand out from an “income” sense in that they offer attractive dividends with reasonable security.
• Despite the recent reporting season being somewhat “disappointing”, there are always exceptions, with several companies hitting it out of the park. In his article this week, James Dunn looked at 3 stars and 3 that performed weaker than expected.
• Graeme Colley used a case study to take you through the confusion that surrounds your transfer balance cap and your total super balance.
• Here are 2 education-compliance technology stocks that Tony Featherstone believes look attractive as online learning gathers steam.
• There were 30 upgrades and 25 downgrades in the first Buy Hold Sell – What the Brokers Say this week, while there were 14 downgrades and 10 upgrades in the second edition.
• We had two Hot Stocks again this week, with CMC Markets’ Chief Market Strategist Michael McCarthy highlighting A2 Milk and Burman Invest Portfolio Manager Julia Lee choosing Jumbo Interactive.
• In Questions of the Week, Paul Rickard answered queries about whether investing in ETFs is safe, the Magellan High Conviction Trust and what you should do with holdings in lithium producer Pilbara Minerals.

Top Stocks – how they fared:

The Week Ahead:

Australia
Monday September 2 – CoreLogic home prices (August)
Monday September 2 – CBA & AiGroup indexes (August)
Monday September 2 – Business indicators (June quarter)
Tuesday September 3 – Reserve Bank Board meeting
Tuesday September 3 – Balance of Payments (June quarter)
Tuesday September 3 – Retail trade (July)
Wednesday September 4 – Economic growth (June quarter)
Wednesday September 4 – New car sales (August)
Thursday September 5 – International trade (July)

Overseas
Monday September 2 – China Caixin manufacturing (August)
Tuesday September 3 – US ISM survey (August)
Tuesday September 3 – US New vehicle sales (August)
Wednesday September 4 – China Caixin services (August)
Wednesday September 4 – US Beige Book
Wednesday September 4 – US International trade (July)
Thursday September 5 – US Factory orders (July)
Thursday September 5 – US ISM services survey (August)
Thursday September 5 – US ADP employment (August)
Friday September 6 – US Non-farm payrolls (August)

Food for thought:

“Most investors want to do today what they should have done yesterday.”– Larry Summers

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:

Economic growth estimates for the June quarter will be released in the national accounts next week, with CommSec estimating growth of around 0.5% for the quarter and 1.8% over the year, continuing Australia’s record-breaking economic expansion:

Top 5 most clicked:

• When do you pick a good LIC to buy? – Peter Switzer
• 4 “income stars” from reporting season – Paul Rickard
• 3 winners & 3 losers to watch or ditch – James Dunn
• Buy, Hold, Sell – What the Brokers Say – Rudi Filapek-Vandyck
• Confusing your super caps is a common mistake – Graeme Colley

Recent Switzer Reports:

Monday 26 August: All about income: LICs to pick and income stars

Thursday 29 August: Understanding your super caps

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.