Switzer on Saturday

Stocks up again. What drug is Wall St on?

Founder and Publisher of the Switzer Report
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The Dow was up again (adding 1.44% overnight) but there can only be one reason for the optimism that continues to drive Wall Street and that is that the market believes there’s a Coronavirus drug solution out there and it’s not too far away. Overnight, high hopes on a treatment or vaccine have seen stocks that haven’t risen quickly (since March 23) pick up momentum when it comes to higher share prices.

This should be good for our bank stocks on Monday.

On the subject of good drug news, there have been stories all week from different countries that have implied research teams are getting close to a breakthrough. Shares in Novavax rose 31.6% after being awarded a US$1.6 billion government contract to test, manufacture and commercialise a COVID-19 vaccine.

Meanwhile, The Sunday Times newspaper reported that the UK government is closing in on a £500 million supply deal with Sanofi and GlaxoSmithKline for 60 million doses of a potential virus vaccine. Then overnight Gilead Sciences said its Remdesivir “was associated with an improvement in clinical recovery and a 62 percent reduction in the risk of mortality.”

But wait, there’s more. CNBC says “BioNTech’s CEO also told The Wall Street Journal the company’s coronavirus vaccine candidate could be ready for approval by December. The company’s US-listed shares rose 5%.”

And even a local company, Recce Pharmaceutical, which presented at our microcap conference earlier this year (I interviewed the MD in May) has seen its share price spike after the CSIRO has included its products in its testings and search for a COVID-19 solution.

Recce Pharmaceuticals (RCE)

Its share price spiked 55% this week! Yep, that’s the power of drugs in a world desperately in need of a hit that will put global economic growth onto a much needed high.

For the overall local market, the S&P/ASX 200 Index fell 2.3% for the week, with China anti-Oz sentiment and Victoria’s COVID-19 crisis not helping our economic outlook, which can’t be a plus for stocks. Clearly, positive drug news has the potential to bolster our market’s performance.

The UBS economics team, who has been quite bullish on a third quarter economic recovery, has looked at the restrictions now re-enforced in the southern capital and has said they represent “…a clear risk to the third quarter recovery.”

It’s why the likes of Qantas lost 8% over the week and Flight Centre 7.1%.

In contrast, Afterpay did it again and had a huge week. And if Morgan Stanley is right, it will soon be a $101 stock!

Afterpay (APT) 5 days trade

It wasn’t a great week for banks, with CBA down 1.3% to $70.63, ANZ off 4.6% to $18.30, Westpac down 4.8% to $17.66 and NAB gave up 4.7% to $17.86.

As I suggested above, as COVID-19 vaccine news improves, it’s going to be good news for stocks that have been harmed by closures. And banks, being a part of the Government’s rescue programme, lose profits and share price growth the longer this virus infects the economy.

What I liked

  • All the treatment and vaccine news.
  • ANZ job advertisements rose by a record 42% in June to 89,252 available positions. (But ads are still down by 44.6% from a year ago.)
  • The Melbourne Institute’s headline inflation gauge rose by 0.6% in June (the biggest lift in 3½ years since January 2017), following a record 1.2% decline in May.
  • A record $10.1 billion of owner-occupier home loans were refinanced in May, up 27.5% in the month and almost double that of a year ago, which has to be good for consumer purchasing power.
  • Sales of new luxury vehicles hit record highs last month, double the level of May and up from the 11-year low set in April. Usually a more positive housing market coincides with bigger demand for luxury cars. It’s an “I feel wealthier” thing.
  • According to the Commonwealth Bank (CBA), card spending in the week to July 3 was up 12.1% on a year ago.
  • The number of hires in the US rose by a record 2.4 million to 6.5 million.
  • The ISM non-manufacturing or services index rose by a record 11.7 points to 57.1 in June (the consensus forecast was 50.2). The final IHS Markit services index lifted from 37.5 in May to 47.9 in June (the consensus forecast was 46.9).
  • Chinese consumer prices rose by 2.5% in the year to June, up from a 2.4% annual rate in May (forecast: 2.5%). Inflation is a plus for the economic outlook.
  • I know China is currently a pain in the butt for Australia but it’s good news that its stock market is actually up 11% for the year. It says a lot about how the economy is progressing. The world economy needs China’s demand, economic growth and stock market to be rising.
  • European stocks were up overnight on better-than-expected economic news out of Italy and France. Italian industrial production jumped 42.1% in May from the previous month and was miles better than the 22.8% rise tipped by economists. French industry rose 19.6% in May which beat the 15.1% forecast.

What I didn’t like

  • The weekly ANZ-Roy Morgan consumer confidence rating fell by 1% to an 8-week low of 92.1 (long-run average since 1990 is 112.8). Blame the Victorian virus outbreak for this drop.
  • The AiGroup Performance of Services index fell by 0.1 point to 31.5 in June – the 7th successive monthly contraction in activity. That’s a worry.
  • The IBD/TIPP Economic Optimism index in the US fell from 47 points to 44 points in July (forecast: 46).
  • The European Commission said the 19 nation single currency area would contract by a record 8.7% in 2020 (previous estimate -7.7%) before rising by 6.1% in 2021.

Buffett is buying!

Interestingly, Warren Buffett has started to buy this week. This could be seen as a positive sign. At his March shareholders’ meeting (held online), he revealed that Berkshire Hathaway’s cash was US$137 billion. He also revealed how he had dumped his airline stocks for a loss of around US$5 billion! At the time, he wasn’t a buyer. He is now. This week, Wazza slammed US$10 billion down for Dominion Energy’s natural gas transmission and storage assets, which means his company transmits 18% of natural gas in the US, up from 8% before this deal. That’s a big bet on natural gas.

The week in review: 

  • And in Questions of the Week, Paul Rickard answered your questions about: How to play a takeover war?; And in the morning on ABC radio I hear that the market is expected to open 60 points down…how do they know? 

On our YouTube channel this week: 

Top Stocks – how they fared:  

 

The Week Ahead: 

Australia 

Monday July 13 Tourist arrivals & departures (May)
Tuesday July 14 Household card spending
Tuesday July 14 CBA Household card spending
Tuesday July 14 NAB Business survey (June)
Tuesday July 14 Weekly payroll jobs & wages (June 27)
Tuesday July 14 Weekly consumer confidence (July 12)
Tuesday July 14 Provisional overseas travel statistics (June)
Wednesday July 15 Monthly consumer confidence (July)
Thursday July 16 Employment/unemployment (June) 

Overseas 

Monday July 13 US Monthly budget statement (June)
Tuesday July 14 China International trade (June, annual)
Tuesday July 14 US Consumer prices (June)
Tuesday July 14 US NFIB Small Business Optimism index (June)
Wednesday July 15 US Import/Export price indexes (June)
Wednesday July 15 US Industrial production (June)
Wednesday July 15 US NY Empire State manufacturing index (July)
Wednesday July 15 US Federal Reserve Beige Book
Thursday July 16 China Economic (GDP) growth (June quarter)
Thursday July 16 China Retail sales/production/investment (June)
Thursday July 16 US Retail sales (June)
Thursday July 16 US Philadelphia Fed manufacturing index (July)
Thursday July 16 US NAHB Housing market index (July)
Friday July 17 US Housing starts/building permits (June)
Friday July 17 US Consumer sentiment index (July) 

Food for thought: 

“Without contrary there is no progression” – William Blake 

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: 

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.