[table “123” not found /]
The good vibes and times from stock markets are set to keep on rolling, with the Peoples Bank of China announcing its sixth rate cut in 11 months. Wall Street liked it, with the Dow up over 150 points!!!!!!!! I said a few weeks back that we were going to need either pretty good US earnings or an externally generated positive event, especially from China and we’re getting that and more.
This week we saw suggestions that Japan might add more QE, Europe too could be joining in and now China is cutting rates again to give it a chance to grow at 7%. These efforts to create economic growth and keep interest rates low will help stock prices.
Meanwhile, the Yanks got some more good earnings news overnight to add to yesterday’s good results from McDonald’s and Microsoft and it comes as Argus’ strategist, Peter Canelo says the S&P 500 is 8% undervalued! Given our ‘follow the leader’ mentality, that augurs well for a festive financial finish to this year.
Yeah, and you know things aren’t bad when airlines are making money. Overnight, American Airlines nearly doubled its net profit for the third quarter, with $1.7 billion, which was primarily based on lower fuel costs. Lower oil prices have hurt energy companies but I still think there’s a net global positive from lower energy costs that has to deliver more positivity than we’ve seen so far.
This nice lead from Wall Street has to help stocks here on Monday and on the local front, despite the big four banks potentially derailing the Turnbull turnaround or ‘turn on effect’ on our economy by their interest rate rises. And just when a lot of economists are arguing that the economy needs a rate cut or two from the RBA, our stock market spiked 86.2 points higher to 5350. What I liked was how easily we took out the 5300 level that was seen as a bit of a cap on our market going higher.
What was the cause of this newfound optimism? Try supportive comments from the European Central Bank’s boss, Mario Draghi. It’s why I christened him Super Mario years ago!
Here are the words that left no doubt that he means business about getting Europe growing, employing and creating inflation, which is what a normal healthy economy is supposed to do: “It was not a wait-and-see, but it was a work-and-assess. We are ready to act if needed, we are open to a whole menu of monetary policy instruments,” Draghi said at the ECB’s governing council meeting.
This plain talking saw the German and French stock markets surge over 2% and then Wall Street saw the Dow Jones index put on 320 points to end at 17,489.
This resilient Italian, Super Mario, told us when he got the job that he’d do “whatever it takes”. Overnight, he now has put markets and economies on notice, if they have ears, that he’s prepared to do for a ‘prolonged period’ an asset purchase program that could extend well into 2017. Whatever it takes. He learnt this from the QE pioneer, the Fed’s Ben Bernanke, and it looks pretty clear that the central banks of the world are prepared to live up to the cliché/warning “don’t fight the Fed”, which is now “don’t fight the ECB and Super Mario”.
Locally, our index was helped by banks heading higher, with the Big Four rising strongly – that’s what higher interest rates will do. But the question is: what does this mean for the Reserve Bank and its Cup Day decision on rates?
AMP’s Shane Oliver is not sure how the RBA will play it on the first Tuesday in November. He speculated on my TV program that the banks’ moves on rates could force the Big Bank to cut by 25 basis points. So banks might achieve the same outcome by passing on rate cuts of only 5 basis points, instead of 25 basis points, in the case of Westpac and 10 basis points with CBA, which raised rates by 15 basis points.
There’s no history for this sort of thing and I’m sure the RBA’s Glenn Stevens didn’t want to cut rates, especially as the October minutes of the Board meeting said the September quarter was expected to grow better than expected.
To understand these rate rises by the banks, you can blame my cautious mate David Murray, the very zealous APRA, the worried Federal Government, the excessive housing boom, the GFC that led to very low interest rates and the lending practices of the banks for this strange new chapter in Australian monetary policy history.
What I liked
- Three days of rising stocks at home and the S&P 500 at 5351.6 means we’re a good chance to beat the starting point of the year, 5411, by year’s end. I’d be happy with a 5% capital gain and 5% worth of dividends plus franking credits for a 10% plus result for 2015. How about you?
- This fact: the Aussie dollar has fallen 12.3% against the US dollar in 2015 – the 25th largest fall of 120 currencies! A lower dollar is good for growth and stocks at this stage of the cycle.
- This from the RBA: “Members noted that overall growth was expected to have strengthened in the September quarter, with indications of growth in resource exports and dwelling investment.” Suck that in, doomsday merchants!
- This heading from CommSec: “Chinese retail sales: Fastest growth in 9 months!”
- The Yanks are finally coming to their senses, with the latest Republican counting saying Ben Carson is in front of Donald Trump. And I do love this description for Trump as “the braggadocious billionaire” from CNBC’s Ben White.
- Tech giants Amazon, Microsoft and Alphabet, (which is the renamed company called Google and which is now effectively the parent of Google), all reporting better than expected.
- The US housing sector looks alive and kicking, with the weekly mortgage market index rising by 11.8%, with purchases up 16.4% and refinancing up 8.8%.
- Dr Doom, Marc Faber, after years of predicting recessions and market meltdowns, is currently optimistic on US indices driven by the likes of GE and GM. But wait, there’s more, with Faber very bullish on Asian economies such as Vietnam, Cambodia, Laos, Myanmar, that are in our economic neighbourhood.
- Last weekend, the SMH told us that housing was “tanking” but we got this from the same newspaper this week but with less fanfare: “Doomsayers are rushing in to herald the end of Australia’s housing boom [1], but the picture looks positive and the construction cycle is below its peak, Deutsche Bank says.” (Better late than never!)
What I didn’t like
- You know how everyone said Chinese growth would fall way short of 7%, well it came in at 6.9% but this only brought out the data doubters and there are plenty when it comes to China’s Statistician. He’s virtually seen as the world’s biggest liar behind Vladimir Putin!
- The housing “tanking” headline – exaggeration plus!
- The Westpac leading index suggesting sub 3% economic growth is to be expected in 2016 (at 2.75%). I’ll throw in that this has never been one of my favourite indicators based on reliability but it should ensure that the Federal Government doesn’t do anything negative to hurt confidence.
- The bank’s decisions to raise rates, which makes 3% growth in 2016 harder to achieve but at least it has helped our bank share prices. I’ve always argued that the only way to beat the banks is to be a shareholder!
- The weekly ANZ/Roy Morgan consumer confidence rating fell by 2% to 113.3 in the week to October 18 from a 15-week high and Westpac’s rate rise was seen as the big cause.
The weight and power of Oprah
In case you missed it, shares in Weight Watchers rose by 105% after it said Oprah Winfrey will buy a 10% stake in the company! Now that’s a return on investment!
Top stocks – how they fared
[table “124” not found /]The week in review
(click the blue text to read more)
- With all this scary ‘black swan’ talk intensifying during the ‘month of crashes’, I put the theory to the test [2]!
- Paul Rickard gave some anecdotal evidence [3] on why the US economy is making a slow grind higher – and says Australia will follow suit.
- James Dunn said you should consider Next DC (NXT), APDC Group (AJD), Data#3 (DTL), Invigor (IVO) – and others – to access the best new ideas in technology [4].
- Our Super Stock Selectors were big on the banks [5] and Australian retailer, Harvey Norman (HVN).
- Charlie Aitken told you why he’s bullish on the future of Australia’s economy [6] after attending a meeting with PM Malcolm Turnbull.
- This week’s Fundie, Sean Fenton of Tribeca Investment Partners, said that a weakening in the Aussie dollar is good news [7] for Treasury Wine Estates (TWE).
- Tony Featherstone explained why there’s long-term appeal in the agribusiness sector [8], and to consider Incitec Pivot (IPL), Nufarm (NUF), Rural Funds Group (RFF) and Lindsay Australia (LAU).
- The brokers [9] placed Beach Energy, Fortescue, and Insurance Australia Group in the good books. In our second broker report [10], BHP Billiton and Mantra Group copped downgrades.
- And a special report by DBA Lawyers summarised the impacts of some recent changes to the Tax Act [11] on limited recourse borrowing arrangements (LRBAs).
What moved the market
- Markets were rattled by mixed Chinese data. China’s annual growth rate of 6.9% beat expectations, but industrial production and fixed asset investment came in weaker than expected.
- The big banks fell after the Government responded to the Financial System Inquiry, but bounced back on CBA’s interest rate hike. CBA’s decision also took the Aussie dollar to 71.95 US cents.
- The local market received a boost after oil and gas producer Santos rejected a takeover bid of $6.88 by overseas fund manager, Scepter Partners.
- And European and US markets went higher after ECB boss Mario Draghi hinted at fresh economic stimulus measures.
The week ahead
Australia
- Monday October 26 – CommSec State of the States
- Wednesday October 28 – Consumer price index (September quarter)
- Thursday October 29 – HIA new home sales (September)
- Thursday October 29 – Trade price indexes (September quarter)
- Friday October 30 – Private sector credit (September)
- Friday October 30 – Producer price index (September quarter)
Overseas
- Monday October 26 – US new home sales (September)
- Tuesday October 27 – US durable goods orders (September)
- Tuesday October 27 – US home prices (August)
- Tuesday October 27 – US consumer confidence (October)
- Wednesday October 28 – US FOMC rate decision (October)
- Thursday October 29 – US GDP (September quarter)
- Thursday October 29 – US pending home sales (September
- Friday October 30 – US Personal income/spending (September)
- Friday October 30 – US University of Michigan Sentiment
Calls of the week
(click the blue text to read more)
- Commonwealth Bank, ANZ and NAB played ‘follow the leader’, joining Westpac in lifting standard variable rates.
- In a surprise move the CEO of health insurer Medibank, George Savvides, made the call to push his departure forward 15 months to March 2016.
- NSW Premier Mike Baird hitched a ride to work in a funky DeLoreon to mark “Back To The Future Day”. In a video posted on his Twitter account, Baird steps out of the car and says “I’ve just seen the future for NSW, it’s fantastic!” Great Scott!
[12]Source: Twitter
- The Daily Mail Australia spoiled the Bachelorette finale by leaking a picture of Sam Frost and the winner Sasha Mielczarek online just hours before the show aired on television, leaving more than a few Aussie fans furious. Network Ten won an injunction to the Supreme Court of NSW to order the removal of the story.
- And German lender Deutsche Bank made a wrong call of the week after a junior foreign exchange trader mistakenly transferred $6 billion into a client’s account! Talk about a fat finger!
Food for thought
Accept the challenges so that you can feel the exhilaration of victory.
George S. Patton – US army general.
Last week’s TV roundup
- Chair of the Financial System Inquiry (FSI), David Murray, joined the show to discuss the Government’s response [13] nearly one year after the final report.
- To further dissect the Government’s response to the FSI [14], and how it will impact the economy and shares, we spoke to a panel of economic experts including Professor John Hewson, David Bassanese and George Boubouras. It was such a robust discussion that we had to make two videos [15]!
- Anton Tagliaferro of Investors Mutual told us how he’s playing the market right now [16] and where he thinks it’s headed.
- And in the latest Super Session [17], we gave you the details on Westpac’s $3.5 billion dollar capital raising.
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 also shows how this has changed compared to the week before.
This week, one of the biggest movers was Myer, with a 4.74 percentage point increase in the proportion of its shares sold short to 17.7%. Primary Health Care’s short position increased by 2.14% to 12.63%.
[18]Source: ASIC
My favourite charts
Save now, smile later!
[19]Source: RaboDirect
RaboDirect published a study into Australia’s attitudes towards money and spending – called the Financial Health Barometer – which shows a strong correlation between savings and health and happiness. A regular saver compared to a non-saver is almost twice as likely to say they feel completely happy, and that they feel in good health and in control of their life. Get saving!
What china slowdown?
[20]Source: China Customs, Business Insider
The slowdown in China probably isn’t as disastrous as most people think. This chart from Bank of America Merrill Lynch demonstrates that the value of iron ore, rather than the volume of iron ore imports, is in decline. The volume is actually trending higher, and suggests that demand is still well and truly there!
Top 5 most clicked on stories
- Peter Switzer: Experts are talking a black swan event! Tell me it ain’t so… [2]
- Charlie Aitken: Wake up corporate Australia [6]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [9]
- Staff Reporter: Super Stock Selectors – Big banks and OFX [5]
- Tony Featherstone: 3 floats worth keeping an eye on [21]
Recent Switzer Super Reports
- Thursday, 22 October, 2015: Wake up! [22]
- Monday, 15 October, 2015: Black swan [23]
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.