Switzer on Saturday

Donald’s ducks were lining up until last night

Founder and Publisher of the Switzer Report
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Just when I was toying with the idea of using the headline that “Donald’s ducks are lining up in a row”, along comes the man himself with a bombshell to scatter those damn creatures! Yep, stocks went down and it followed a Chinese delegation of trade officials going home early from an agricultural tour. Wall Street didn’t like the news and the concerns were doubled down, with the President saying he’s not in the market for partial trade deals.

And Donald added to the negativity by throwing in that he didn’t expect the big deal to be done before the election. With this President and his negotiation tactics, you have to think what a normal person would be thinking and then flip it!

The drivers of the Dow Jones didn’t like this morning’s news and the Index lost 160 points (or 0.59%) to 26,935.07, which won’t help our market on Monday.

So despite this ongoing nagging doubt, how come stocks keep sneaking higher? First, it’s because the majority believe a deal will be done, or something that gives more certainty for the companies affected by the trade war. That would permit not only stock market investment but actual real business investment. This is the real world problem that threatens to deliver a global recession.

Second, the Fed and other central banks, such as the European Central Bank and ours, are adding stimulus by cutting interest rates. We saw the Fed cut its official rate by 25 basis points to a range of 1.75% to 2% this week. I think the chances of another cut here on Tuesday week went up with this Chinese exit overnight and Trump’s revelation about no partial deal. “Financial conditions remain quite positive and recent economic releases have generally beaten expectations (partly because these have been lowered in recent months),” said Michael Shaoul, chairman and CEO of Marketfield Asset Management, in a note. “Little doubt that the FOMC would react to persistent weakness by cutting rates and pushing dot-projections lower.” (CNBC)

Lower rates and the belief a trade deal will happen is holding this market up. If the October trade talks fail, I’d predict a worrying sell off. By God, I wish Donald was normal!

But it’s not just lower rates helping stocks, the President has been peppering the market by Donald delaying new tariffs from October 1 to October 15 and he exempted many Chinese products from tariffs and then China said it would exempt U.S. agricultural products and other 16 types of U.S. goods from additional tariffs.

I hope this is huffing and puffing before the main trade talks in October.

In the company of our own PM Scott Morrison, the President held a news conference, informing the reporters that he has an “amazing relationship” with President Xi Jinping but right now, “we have a little spat.” This international pillow talk revelation amazes me but since November 2016, Donald has been rewriting the book on how to be a US President.

It was another good week for stocks, with the S&P/ASX 200 up 0.9% (or 61.6 points) to 6730.8. We’ve put on 5.3% since mid-August, and we’re about 2% off our record highs, which was created in July. But with the overnight Trump news, that 6875.5 level might have to wait before it gets beaten.

The SMH’s David Scutt says the market sentiment has got on board with the expectation that a rate cut comes early next month because of the rise in unemployment from 5.2% to 5.3%, despite the big spike in jobs and a record participation rate. You’d have to call any October cut an insurance rate reduction in case a trade war escalation happens. That would be the kind of thing to turn me into a recession believer and a very defensive stock player.

I hope I don’t have to make that admission any time this year!

“Over the week, money market pricing for the chances of 25 basis point rate cut on October 1 rose from 20 per cent to over 80 per cent,” the SMH revealed. “An additional rate cut by May next year – taking the cash rate to 0.5 per cent – is now also fully priced into short term money markets.”

The big company stories last week had to include the Bellamy’s takeover offer, which saw its share price surge 54.6% higher to $13.25 and the news helped another China-affected stock in Blackmores.

A great performer for eight years is Premier Investments, which is owned by Solly Lew and run by ex-DJs boss, Mark McInnes. The share price spiked 15.7% to $18.12. These guys make stuff for retail, which is hardly a growth industry nowadays.

Another surprise good performer with a good economic omen story was Brickworks. Despite a 12% net profit fall, the company said that there was “growing anecdotal evidence from companies that the domestic economy may have turned a corner.” (AFR) The company’s share price rose 6.2% for the week at $17.90.

“Rate cuts should start stimulating the local economy and some businesses have been doing it tough in a soft economy. We’re starting to see some green shoots in building and retail sectors,” said TMP Capital fund manager, Ben Clark.

What I liked

  • The budget deficit for 2018/19 was $690 million or less than 0.1% of GDP. The budget deficit was a $13.8 billion improvement on the estimate made at the 2018/19 budget and a $3.5 billion improvement on the $4.16 billion deficit forecast just five months ago. The $690 million deficit for 2018/19 compares with a $10,141 million deficit in the 2017/18 year.
  • Employment rose for the 35thconsecutive month, up by 34,700 jobs in August. But full-time jobs fell by 15,500, with part-time jobs up by 50,200. Economists had tipped an increase in total jobs of around 15,000.
  • The participation rate rose from 66.1% in July to a fresh record-high 66.2% in August, in both seasonally adjusted and trend terms.
  • The US rate cut was good insurance, with the federal funds rate reduced by 25 basis points (quarter of a per cent) to between 1.75-2% – the second successive rate cut.
  • US housing starts rose by 12.3% (survey: +5%) and building permits lifted by 7.7% (survey: -1.3%) in August.
  • US industrial production rose by 0.6% (survey: 0.2%) in August. The NAHB Housing Market Index rose by 1 point to 68 points (survey: 66 points) in September.
  • Comments from US President Donald Trump that China was buying US farm products in a “big league” way, also supported sentiment. Trade-sensitive shares of Boeing rose by 1.4%

What I didn’t like

  • Unemployment rose from 5.2% in July to 5.3% in August in seasonally adjusted and trend terms – the highest level in 12 months.
  • The weekly ANZ-Roy Morgan consumer confidence rating fell by 3.5% to a 2-year low of 109.3 points. Sentiment is below the average of 114.4 points held since 2014 and the longer term average of 113.1 points since 1990. Consumers’ views on ‘future economic conditions’ fell by 7.6% to just 1.7 points – the lowest level since November 5, 2017.
  • The FOMC’s updated quarterly “dot plot” federal funds rate projections showed officials divided about the future direction of interest rates.  Seven FOMC decision makers projected another 25 basis point cut before year-end, but no further cuts in 2020 to 2022. While five FOMC policymakers see rates going back to between 2% and 2.25% by year end. (The expectation that the US needs more cuts this year is a worry though I do like the fact they see no more cuts from 2020 to 2022!)
  • Global investors digested rising geo-political risks in the Middle East with the drone attack on the Saudi oil facility.
  • This headline: “Slowest Chinese production in 17½ years.”
  • The leading index in the US was flat in August (forecast +0.1%).
  • The Philadelphia Federal Reserve manufacturing index fell from +16.8 to +12 in September.

One final dislike

Drones!

The week in review:

Top Stocks – how they fared:

The Week Ahead:

Australia
Monday September 23 – CBA ‘flash’ purchasing manager indexes (Sep.)
Tuesday September 24 – Speech by Reserve Bank Governor
Wednesday September 25 – Skilled internet job vacancies (August)
Wednesday September 25 – Engineering construction (June quarter)
Thursday September 26 – Job vacancies (August)
Thursday September 26 – Finance and wealth (June quarter)
Thursday September 26 – Detailed employment (August)

Overseas
Monday September 23 – ‘Flash’ manufacturing/services indexes (Sep.)
Tuesday September 24 – US Home prices (July)
Tuesday September 24 – US Consumer confidence (September)
Wednesday September 25 – NZ Reserve Bank interest rate decision
Wednesday September 25 – US New home sales (August)
Thursday September 26 – US Economic (GDP) growth (June qtr., annual)
Thursday September 26 – US Pending home sales (August)
Thursday September 26 – US International goods trade (August)
Friday September 27 – US Personal income/spending (August)
Friday September 27 – US Durable goods orders (August)
Friday September 27 – China Industrial profits (August)

Food for thought:

“People who invest make money for themselves; people who speculate make money for their brokers.”– Benjamin Graham

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:

While the drone attacks on oil production in Saudi Arabia a week ago saw oil prices spike, AMP Capital’s Shane Oliver noted prices remain lower than they were a year ago and in April this year:

Source: Bloomberg, AMP Capital

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Recent Switzer Reports:

Monday 16 September: Are the doomsday merchants right?

Thursday 19 September: Stocks for the picking!

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