I’d call this extraordinary year of madness and mayhem for stocks a barrel of laughs if it wasn’t hurting the bottom lines with our portfolio of stocks and my favourite listed fund. But I do believe good sense will prevail and higher share prices are in prospect.
I have an image stuck in my head of Donald Trump looking like Babe Ruth (they have similar builds) standing with a big lump of wood, readying himself to hit Europeans, North Koreans, Russians, Chinese and lefty Democrat types and journalists out of the park! And helping him stand tall, despite his frequent frailties, is a strong US economy and very solid earnings of US companies.
I know these are crazy thoughts but Donald has the ability to share the craziness. And the really crazy bit is that it could lead to an eventual good outcome for stocks. That said, I hate trade war stuff so I hope this tariff talk is just another Trump tactic!
Let’s sum up this week for stock players, where our S&P/ASX 200 Index lost 0.7% to end at 5990.4, which means we’ve kissed the 6000 level goodbye. That said, I reckon the gloomy Friday outlook driven by President Trump’s tariff tantrums, which saw the USA’s allies (minus Argentina and Australia) cop import duties on their steel and aluminium products sent to America.
Why? Well, the Yanks got a great jobs number, where unemployment fell to an 18-year low of 3.8%, after 223,000 new jobs showed up. A Reuters survey of number crunchers had tipped a 188,000 result, so the actual result was huge.
It resulted in the consensus economic growth number for the US in the second quarter has been ticked up by Moody’s Analytics from 3.6% to 3.7%, which compares to the 2.2% number for the first quarter. That’s huge.
US stocks spiked on the news, erasing the fears that drove the madness and mayhem of this week, with a crazy Italian Government heading to a new election that could be a virtual referendum on the third biggest economy in the EU remaining in the European economic community!
That news sent Italian bonds sky high and hurt European banks and has had implications on banks worldwide. The contagion has even come here and we definitely don’t need any more negative news for our financial stocks, with the Royal Commission still uncovering share shocking stuff!
The CBA ended at $68.70 on Friday. It hasn’t been at these levels since July 2013 and that’s when the world economy was looking at some scary stuff, such as the Fed’s brush with the so-called taper tantrum. This is when it wanted to cut back on its bond purchases and the stock market didn’t like it!
Again it was bad for banks, with Fairfax Media summing it up this way: “Macquarie shares tumbled 3.3 per cent to $113.02 this week as uncertainty dominated the global markets. ANZ fell later in the week after it was revealed the bank could face criminal cartel charges – its shares closing at $26.81, down 3.8 per cent for the week.”
Could our banks be in more trouble?
Meanwhile, the big geopolitical story overnight was the ‘fact’ that the Trump/Kim Jong-un meeting is back on in Singapore! This has to be a plus for stocks, until we hear it’s off again, which explains why this year for stocks is so wild and wacky.
Not surprisingly, Asian markets closed nervous and largely negative on Friday, as trade tensions around tariffs undermined investor confidence. And it was totally understandable why the S&P/ASX 200 index closed down 21.5 points (or 0.36%) on Friday.
Adding to the misery for risk-averse, dividend-playing investors, Telstra shares fell for a second week in three. This time it was the credit ratings agency Standard & Poor’s, which downgraded the telco’s long-term rating from ‘A’ to ‘A-‘. The telco’s shares lost 3% this week to end at $2.79.
And for those who love the pile of negative stories our media outlets deliver each day, they’ve delighted in warning us of the fact that “Australian house prices recorded their first annual decline since October 2012, evidence that tighter lending standards are softening demand in Sydney and Melbourne.” (The Age)
House prices in May recorded their eighth straight month of weakening and are set to continue falling as a result of the Royal Commission.
What I liked
- New business investment (spending on buildings and equipment) rose by 0.4% in the March quarter to be up 3.7% over the year – just short of the best growth in five years. The second estimate of investment in 2018/19 is $87.74 billion and is 1.4% higher than the second estimate for 2017/18. Expected investment by non-mining and manufacturing firms has never been higher.
- Council approvals to build new homes fell by 5% in April, after an upwardly-revised 3.5% rise in March (previously +2.6%). Over the year, building approvals fell from a record high $126.7 billion in March to $126.2 billion in April, which was a small fall. But importantly, house approvals rose by 0.7% and were up by 11.3% over the year to April, the strongest annual growth rate in over three years.
- In April, council approvals are at record highs for Melbourne (62,160 units) and Adelaide (10,759 units) and at 6½-year highs for Hobart (1,346 units) in rolling annual terms.
- Currently, someone on the average wage needs to work for 23.2 weeks to afford a Ford Falcon – the best (lowest) result on record. Four years ago, the same worker would have needed to work almost three weeks longer to afford the same purchase.
- The Australian Industry Group Performance of Manufacturing Index fell from 58.3 points to 57.5 in May. The CBA/Markit Manufacturing Purchasing Managers’ Index fell from 55.5 points to 53.2 in May. However, both surveys have readings above 50 points, indicating that the manufacturing sector is expanding, which it has been doing for a damn long time.
- Hobart home prices are up 12.7% over the year and it’s good to see positive news for the Apple Isle.
- Private sector credit (effectively outstanding loans) rose by 0.4% in April, after a 0.5% rise in March. Credit was up 5.1% over the year.
- In the US, consumer confidence rose from 125.6 to 128.0 in May, while The Dallas Federal Reserve manufacturing index rose from +21.8 to +26.8 (forecast +23.3).
- The ADP employment series showed that 178,000 private sector jobs were created in May (forecast +190,000) in the USA. The economy grew at a 2.2% annual rate in the March quarter (forecast +2.3%). The core personal consumption deflator rose by 2.3% (forecast 2.5%). The goods trade deficit was US$68.19 billion in April (forecast US$71.2bn deficit). OK news but not shoot the lights out stuff, though not worrying.
- The National Bureau of Statistics’ manufacturing purchasing managers’ index in China rose from 51.4 to 51.9 in May, above market forecasts for 51.3 points. The services gauge rose from 54.8 to 54.9, above consensus expectations for 54.8 points. Results above 50 points imply expanding activity.
What I didn’t like
- The CoreLogic Home Value Index of capital city home prices fell by 0.2% in May to stand 1.1% lower over the year. The national home price index fell by 0.1% in the month to be down 0.4% over the year. These falls are quite restrained but I hate the silly way our news outlets treat them. They actually say all those concerns that media outlets kept worrying us about (housing bubbles, liar loans and bank balance sheet problems) are gradually being made less of an issue. The price falls are good but the news reaction is, as usual, bad!
- The weekly ANZ/Roy Morgan consumer confidence rating fell for the first time in seven weeks, dropping 3.2% to 117.7 but is still up by 4.3% over the year and above the average of 113.8 since 2014.
- Italy’s politics and the market’s reaction!
- Bank deposits rose just 2.5% over the year to April – the slowest growth in 26 years.
Is it time for World Cup pizza?
Macquarie has upgraded Domino’s Pizza from ‘neutral’ to ‘outperform’, upgrading the company’s target price to $55. The broker said that the European growth outlook was strong with per-store economics and store count driving double-digit earnings growth. The ASX-listed company is the exclusive franchisee for France, Belgium, the Netherlands, Monaco and Germany, where the broker says the company can now drive scale benefits. While the outlook for the Australian market wasn’t as positive, Macquarie said that domestic franchising regulations were manageable, adding that strong top-line outlook could support franchisees. Macquarie says that the second half of the year will be less challenging for the company than the first half, with the World Cup a support for June (SMH).
The Week in Review:
- Telstra and the banks are a buy if you are a long-term investor [1]. It might be a contrarian view but I don’t think Telstra and the big banks are going to stay at these levels for ever.
- We’re coming to the end of financial year and Paul Rickard looked ao 7 actions to take before the end of the financial year [2].
- Charlie Aitken said, forget banks, AMP and Telstra, and told us tp consider Aristocrat Leisure and Kidman Resources [3]
- ‘Wellness’ is such a craze these days and James Dunn looked at 4 little wellness stocks to investigate [4].
- After years of losses – and hype – 3-D technology stocks are starting to appeal. Tony Featherstone looked at 3-D printing stocks poised for recovery [5].
- In the first Buy, Hold, Sell – what the brokers say [6], local plumbers’ favourite Reliance gets two upgrades after it announced a big acquisition in the UK.
- And in the second Buy, Hold, Sell – what the brokers say [7], APA Group and Domino’s Pizza both were upgraded, while AMP scored another downgrade.
- In this week’s Hot Stocks [8], food seemed to be the theme with a milk producer and supermarket getting the tick.
- And in Professional’s Pick, Pengana Australian Equities Income Fund portfolio manager, Chris Tan, explained why there’s still plenty of spark in this ‘old school’ lender. Find out what it is. [9]
- Plus, is Flight Centre flying too high? Find out what Paul Rickard thinks in this week’s Questions of the Week [10].
Top Stocks – how they fared:
What moved the market?
- The political issues in Italy and concerns whether the Euro union could split.
- US President Donald Trump has reignited fears of a trade war.
- Oil prices pulled back from three-year highs.
Calls of the week:
- I say that Telstra and the banks are a buy.
- Paul Rickard called out 7 things to do before the end of financial year.
- Barnaby’s call to take the money and tell on Channel 7 on Sunday Night
The Week Ahead:
Australia
- Monday June 4 – ANZ job advertisements (May)
- Monday June 4 – Business indicators (March quarter)
- Monday June 4 – Retail trade (April)
- Tuesday June 5 – Balance of payments (March quarter)
- Tuesday June 5 – Government finance (March quarter)
- Tuesday June 5 – Reserve Bank Board meeting
- Tuesday June 5 – New car sales (May)
- Wednesday June 6 – Economic growth (March quarter)
- Thursday June 7 – International trade (April)
Overseas
- Monday June 4 – US Factory orders (April)
- Tuesday June 5 – China services gauge (May)
- Tuesday June 5 – US ISM services (May)
- Tuesday June 5 – US JOLTS job openings (April)
- Wednesday June 6 – US International trade (April)
- Wednesday June 6 – US Productivity/labour costs (March quarter)
- Thursday June 7 – US Consumer credit (April)
- Friday June 8 – US Wholesale inventories (April)
- Friday June 8 – China International trade (May)
- Saturday June 9 – China Inflation (May)
Food for thought:
“Success is walking from failure to failure with no loss of enthusiasm.”
– Winston Churchill
The answer to last week’s riddle is a coin
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:
Roseanne may have been canned but it wasn’t the worst show!
Source: ABC
Top 5 most clicked:
- Telstra and the banks are a buy if you are a long-term investor [1] – Peter Switzer
- Forget banks, AMP and Telstra, consider Aristocrat Leisure and Kidman Resources [3]– Charlie Aitken
- 7 actions to take before the end of the financial year [2]– Paul Rickard
- Buy, Hold, Sell – what the brokers say [6]– Rudi Filapek-Vandyck
- Hot stocks – A2 Milk and Woolworths [8]– Staff Reporter
Recent Switzer Super Reports:
Monday 28th May: The long game [11]
Thursday 31st May: A better mix [12]
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.