Switzer on Saturday

Positivity prevails and the threats look limited

Founder and Publisher of the Switzer Report
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The stock market has welcomed Joe Biden’s first week as President, with stock market indexes trading at record high levels until Friday, when a small but understandable pullback took place. Despite terrible Coronavirus infection and death statistics, this positivity has been driven by expectations of good earnings numbers from big tech and communications companies.

That said, there’s a little more concern about the strength of the new strains of the virus. “The Covid pendulum, which normally emphasizes vaccine optimism over the harsh near-term reality, is swinging back towards the latter (for now) as epicentre stocks get hit hard in Europe,” Adam Crisafulli, founder of Vital Knowledge, said in a note on Friday. (CNBC)

Just when we were told the tech run was over (at least while the rotation into other sectors, such as financials, mining and energy is going on), Microsoft gained 8% this week, while Apple rose over 8% and Facebook put on (wait for it!) 15.5% before the close.

The thinking is that tech stocks that aren’t dependent on stimulus were favoured this week, as some questions over the size of the stimulus that could get passed surfaced.

As a consequence, those sectors above that have benefitted from the rotation out of tech, are currently losing some support as Washington debates the size of the President’s ultimate stimulus. This observation (reported by CNBC) put the spotlight on what Wall Street has to digest. “The political reality of Washington is starting to impact markets, and it’s becoming more unclear when Democrats’ ambitious stimulus goals will become law,” said Tom Essaye, founder of Sevens Report.

It was another good week for being long stocks, with a 1.3% gain for the week, with the S&P/ASX 200 up 85 points to close at 6800.4. That’s an 11-month high!

Since Joe Biden won the US election, that’s a 12% gain for the stock market. Who would’ve tipped that? It shows the power of fiscal stimulus.

Given these gains and reporting season looming, profit-taking by big fund managers could easily make for less positive experiences for stocks in coming weeks.

The big stars of the week were Zip Co, up 28.88% and Lynas, which was up 26.08%. This chart from the AFR and Bloomberg shows the winners and losers over the five trading days.

On the subject of profit-taking, the falls for Fortescue and Rio (down 3.4% and 1.5% respectively) can only be blamed on this pocketing of profit by fund managers. as the key reason for these companies’ popularity (i.e. the economic boom ahead in 2021) haven’t changed. In fact, the Biden revelations since his inauguration scream ‘get ready for growth and higher stock prices’, provided the big economies of the world (the USA and the Eurozone) can beat the Coronavirus with their vaccination programmes.

The President’s new Treasury Secretary reinforced this view, with the former Fed boss, Dr. Janet Yellen, urging US lawmakers to “act big” on the next coronavirus relief package, adding that the benefits outweigh the costs of a higher debt burden.

And just when we were told that tech stocks are on the nose, the AFR’s Luke Housego pointed out: “The S&P/ASX All Technology index jumped 4.6 per cent after Afterpay added another 6.1 per cent over the five days to $141.33 despite retreating from its record close in the last sessions.”

That record is $151.22. What’s the UBS team thinking about their $30 target for the company?

What I liked

  • In December, 50,000 jobs were created. This follows the creation of 180,400 jobs in October and 90,000 in November. “Jobs are being recreated at a solid pace as the economy re-opens in fits and starts,” St. George’s economics team explained. “We believe there is more job creation to come in 2021.”
  • Unemployment fell from 6.8% to 6.6% in December, which beat the market consensus of 6.7%.
  • The IHS Markit ‘flash’ PMI for manufacturing rose from 55.7 to a 49-month high of 57.2 in January. But the services business activity PMI fell from 57 to 55.8 in the month. The composite PMI eased from 56.6 to 56. Readings above 50 indicate an expansion in activity but it’s still a good number.
  • Recent payrolls, jobless claims and retail sales data from US data releases over the last week were strong, with robust home builder conditions, mortgage applications and housing starts, a rise in manufacturing conditions in the Philadelphia region and a decline in jobless claims.
  • In the US, building permits climbed 4.5% in December (survey: minus 1.7%) and the Philadelphia Fed manufacturing index rose from 9.1 to 26.5 in January (survey: 11.8).
  • US share markets hit all-time highs on Wednesday, as strong corporate earnings and hopes for another stimulus package boosted sentiment. Netflix shares soared 16.9% after the company reported strong subscriber growth.
  • “China’s economic expansion remains on track. GDP rose another 2.6% in the December quarter to be up 6.5% on a year ago and activity indicators generally remained strong in March.” (Shane Oliver AMP Capital)

What I didn’t like

  • Border problems locally have led to a fall in ‘preliminary’ retail trade numbers that fell in December by 4.2%, the most in 8 months. The consensus was minus 1.5% but retail was still up 9.4% on the year.
  • Debate over the size of the stimulus has unearthed some Democrats who aren’t totally on board with Biden’s $US1.9 trillion planned spend.
  • So far, 28% of Israel’s population, 7% of the UK’s population and 4% of the US population have received a vaccine dose. Seems slow in the US, doesn’t it?
  • This from Bloomberg: “Bank of America Corp. strategists warned the “extreme rally” on Wall Street that has pushed stocks to record highs, fuelled by strong U.S. policy stimulus, is forming a bubble in asset prices.” If earnings disappoint, there will be a sell off.
  • A highly transmissible coronavirus variant first identified in the U.K. may be more lethal than previous versions of the disease, British officials said. (WSJ)

Australia-v-USA

Shane Oliver gave us this over the week: “Nearly 90% of jobs and hours worked that were lost to May have now been recovered, making a very Deep V rebound. This compares to only 56% of US payroll jobs that have been recovered. And both unemployment and underemployment (here) have fallen sharply taking the labour underutilisation rate down to 15% from around 20% in April.”

How good are we? And it’s why Shane and I think stocks will do well this year and we could easily beat the Yanks on Wall Street.

By the way, our success beating the virus compared to the US and most other countries has become an economic and market competitive advantage.

The week in review:

Our videos of the week:

Top Stocks – how they fared:

The Week Ahead:

Australia
Wednesday January 27 – CommSec State of the States
Wednesday January 27 – Consumer price index (December quarter)
Wednesday January 27 – CBA weekly credit and debit card activity
Wednesday January 27 – Weekly consumer sentiment
Wednesday January 27 – NAB business survey (December)
Thursday January 28 – International trade prices (December quarter)
Thursday January 28 – Detailed labour force (December)
Friday January 29 – Private sector credit (December)
Friday January 29 – Producer prices (December quarter)

Overseas
Monday January 25 – US Dallas Fed manufacturing index (January)
Tuesday January 26 – US S&P/Case-Shiller home prices (November)
Tuesday January 26 – US FHFA house price index (November)
Tuesday January 26 – US Consumer confidence (January)
January 26-27 – US Federal Reserve Open Market Committee
Wednesday January 27 – US Durable goods orders (December)
Wednesday January 27 – China Industrial profits (December)
Thursday January 28 – US Economic (GDP) growth (December quarter)
Thursday January 28 – US New home sales (December)
Friday January 29 – US Personal income/spending
Friday January 29 – US Employment costs (December quarter)
Friday January 29 – US Pending home sales (December)
Sunday January 31 – China purchasing managers’ indexes (January)

Food for thought:

“The markets are unforgiving, and emotional trading always results in losses.” – Alexander Elder

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:

The following chart from Bespoke Investment Group shared by Bloomberg shows the number of US stocks with a market capitalisation of $500 million or more that are trading at a multiple of 10 or more times sales and have doubled in the past three months. 59 stocks currently meet all of these criteria, the highest level in the past decade but still below the peak of the dot-com bubble in February 2000:

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.