Switzer on Saturday

The stock market thinks we’ll beat the Coronavirus. Fingers & toes crossed that it’s right!

Founder and Publisher of the Switzer Report
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Stock market optimism prevails in the US, with all major indexes more than 1.5% higher overnight, despite the news that 20.5 million jobs were lost in April! The jobless rate went from 4.4% to 14.7%, as 20.5 million jobs disappeared. Apart from the market’s reaction, the only good news was that economists actually expected an even worse result, with the consensus being that 21.5 million jobs would have been lost because of COVID-19’s impact on normal economic activity.

This share market positivity, amidst what should be gloom, can only be linked to the gradual opening up of the US economy, which clearly looks more aggressive in some states than what we’re seeing here. “You have investors that seem to be able to look through the tsunami of negative economic data and earnings and towards the potential for a gradual reopening of the economy,” said Art Hogan, chief market strategist at National Securities to CNBC overnight.

On the local front and the weekly ANZ-Roy Morgan consumer confidence rating rose by 5.3% to 89.5 points. This is the only local economic data point I currently care about because it’s a ‘right here, right now’ indicator and tells us what consumers are currently thinking .

Sentiment has lifted for five successive weeks and is up 37.1% since hitting record lows (the lowest since 1973) of 65.3 points on March 29.

Our success beating the Coronavirus and the easing of restrictions is raising the hopes of consumers and workers that normalcy will come faster than the six months that was tied to the Prime Minister’s hibernation call in early March.

The AFR agreed with my 2GB/4BC report on Friday morning, where I said most economic numbers tell us nothing about the future except those consumer confidence numbers that have gone up five weeks in a row and capture the improving mood of the nation. If the economy is to rebound, consumers and business have to be confident and the trend is promising.

Business readings now wouldn’t be useful, as too much business is still closed or running on substantially reduced revenue. However, a consumer getting more positive will eventually spur better business sentiment once the re-opening of the economy here really is ramped up.

Here’s what The Fin Review ran with on Friday afternoon: “ASX gains 3pc as plans to ease boost confidence.”

And it was a good week, with the S&P/ASX 200 Index up 26.9 points (or 0.5%) on Friday, ending the week at 5391.1 points, which means our market clawed back about 2.8% over the week. Many of the companies I put forward as eventual potential big gainers, had a good week, with Flight Centre’s shares up 8.1% to finish at $10.76 and Webjet climbed 9.3% to $2.93.

And we can thank the PM for talking about his three-step plan to re-open Australia with step one good for cafes, restaurants and shops. All we need now are the Premiers to fire the starting gun!

The other indicators I’m interested in are those out of China. As an economy that has reportedly contained the virus and is getting back to work, its Caixin China Services Purchasing Managers’ Index (PMI), holds a lot of interest. This rose by 1.4 points to 44.4 points in April (consensus: 50.1 points). A reading below 50 signifies a contraction in activity. Chinese exports rose by 3.5% over the year to April, which was better than the economists’ forecasts of -11% but imports fell by 14.2% against the forecast of -10%. I would’ve preferred to see a bigger rebound in the PMI number than this.

What I liked

  • Despite the acrimony that’s getting more intense between the US and China over the cause of the Coronavirus, Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer spoke to Chinese Vice Premier Liu He on Thursday about the phase one trade deal signed in January. Both expect to come through with their promised actions. We don’t need a trade war with economies already under enormous recessionary pressure.
  • This from the new CEO of Macquarie, the impressive Shemara Wikramanyake: “There are long-term fundamentals that will re-emerge as we move beyond the crisis.” As long-term investors, you have to hang on to that from someone so smart! How do I know she’s smart? Her title is CEO, Macquarie Group. Enough said.
  • This AFR headline: “Stronger recovery on cards: RBA.” Our economy is tipped to contract by 10% to the June quarter but a second-half bounce back is forecasted to whittle the contraction to 6% by the end of the December quarter, before a 6% surge in growth in 2021. If the stock market comes to believe this, you’d expect it to rise on this number.
  • But wait there’s more. Governor Philip Lowe said it was “possible to contemplate an upside scenario where most domestic restrictions on activity are relaxed a little sooner and the economy recovers somewhat faster than in the baseline scenario.”
  • The success of the plethora of capital raisings lately actually tells you that the optimists actually outnumber the pessimists for Australian companies and their future.
  • US retail response in states where re-opening is leading the way, is indicating that women’s and athletic clothing in particular are seeing strong sales. Nike has had a significant bounce. After dropping to US$60, it’s now just over US$90.Nike (NKE)

What I didn’t like

  • As we’d all like to see China investigated and punished for Coronavirus mistakes and cover ups, be aware that Deloitte says if China’s economy experienced a “hard landing”, which a trade war could create with GDP growth down to 3 to 5 percentage points, it could cost Australia’s national income $140 billion (7%) and 550,000 job losses. A punishing trade war could hurt our recovery.
  • The RBA’s unemployment ‘guess’. They say it will be a bad 10% by June and only 9% by year’s end. Gotta hope they’re wrong on that but I do have to admit that after 35 years of public economics commentary, unemployment can be a stubborn number to screw down after a recession.
  • Just about all economic readings, which simply have to be shocking. The AIG Performance of Services and the group’s Construction Indexes were all at record lows, as you’d expect.
  • Having the back-of-mind negative thought about what happens to stocks if the US encounters a significant second wave of infections and deaths because of the rush back to normalcy.

Warren Buffett exposed!

In a week when those sweating on another leg down for stocks pointed to Warren Buffett’s holding of cash, which is around US$137 billion and recently rose by US$6 billion after he dumped his airline holdings, I had to share this great in-house created pic from Huffington Post from 2011.

After doing so many Buffett stories this week, I recalled how one smarty linked the success headlines of actress Anne Hathaway to spikes in Berkshire-Hathaway shares. The link was related to headlines about Anne Hathaway on Google and computer-related trading and shows just how many variables we have to consider when you decide to be a stock player!

Have a great weekend!

The week in review:

On our YouTube channel this week:

Top Stocks – how they fared:

The Week Ahead:

Australia
Tuesday May 12 – Tourist arrivals & departures (March)
Tuesday May 12 – NAB business confidence/conditions (April)
Tuesday May 12 – Speech by Federal Treasurer Frydenberg
Tuesday May 12 – Credit & debit card lending (March)
Wednesday May 13 – Provisional overseas travel statistics (April)
Wednesday May 13 – Monthly consumer confidence (May)
Wednesday May 13 – Wage Price Index (March quarter)
Thursday May 14 – Employment/unemployment (April)

Overseas
Monday May 11 – US Consumer inflation expectations (April)
Tuesday May 12 – China consumer & producer prices (April)
Tuesday May 12 – US NFIB Small Business Optimism Index (April)
Tuesday May 12 – US Consumer prices (April)
Tuesday May 12 – US Monthly Budget Statement (April)
Wednesday May 13 – NZ Interest rate decision
Wednesday May 13 – US Producer prices (April)
Thursday May 14 – US Export/import prices (April)
Friday May 15 – China production, retail, investment (April)
Friday May 15 – US Retail sales (April)
Friday May 15 – US Empire State manufacturing index (May)
Friday May 15 – US Business inventories (March)
Friday May 15 – US Industrial production (April)
Friday May 15 – US JOLTS Job Openings (March)
Friday May 15 – US Consumer confidence (May)

Food for thought:

“Fear is the most contagious disease you can imagine. It makes the virus look like a piker.” – 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:

As noted this week by AMP Capital’s Shane Oliver, Australia “has provided by far the strongest fiscal stimulus of G20 countries”, with loans and debt guarantees making up a larger proportion of the response of many other countries:

Top 5 most clicked:

Recent Switzer Reports:

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.