Switzer on Saturday

A huge Jobs Report justifies being long on stocks

Founder and Publisher of the Switzer Report
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Doomsday merchants were dealt another annoying blow, with the US jobs report bringing 222,000 new positions for workers when economists were only expecting 179,000! Unsurprisingly, Wall Street devoured the figures with glee, with the S&P 500 up over 0.6%, while the recently beaten up Nasdaq Composite surged closer to 1%, or 63 points.

As with most things economic and market-related, there was a reason for caution, which will keep the climbing up the wall of worry worrisome.

CNBC captured the conflicting revelations this way: “This was a hot number,” said JJ Kinahan, chief market strategist at TD Ameritrade. But “the stock market’s reaction [had] been tempered by the wage-growth numbers” immediately after the data was released.

Personally, I don’t mind a tad of tempering as it stops Wall Street from going excessively mad in chasing stocks, ahead of then being conflicted with fears of more interest rate rises than expected, which could kill the hunt for stocks.

The job numbers say demand in the US should remain robust. And hope for economic growth in the current quarter to be well over 2% (after a typically weak first quarter growth of 1.4%) is believable.

Even though you can’t rule out a short-term sell off, as market influencers can find many reasons to reject markets and companies within them, the underlying foundations of sales, profits, jobs and income growth is economic growth. And this  looks assured for 2017, following these job numbers.

Furthermore, as this is a June number, it runs ahead of reporting season and the second half of the calendar year, which houses that December quarter, which can be so welcoming for those who are long stocks!

The slow wage growth numbers brought with them a rise in the unemployment rate from 4.3% to 4.4% but this created few concerns, with the Fed still expected to give at least one more rate rise this year. If wages had ticked up more strongly, which would have suggested that inflation was heading higher, then the recent bond market speculation of a more rapid rise in rates than was expected might have been seen as spot on.

These numbers could raise some doubts about a too fast increase in rates, which I suspect has been weighing on stocks in recent weeks.

This US news should be well received by the local stock market on Monday, following a disappointing Friday and week for share players.

Following the best day of the year for stocks on Tuesday, the S&P/ASX 200 Index gave up 55 points on Friday (or 1%) meaning the week was a 0.3% loser but we did climb over 5704, meaning that we defied the support level of around 5676, which looks around the bottom for this market, unless something mad, bad and dangerous comes along, such as a bad jobs report in the US or a terrible Trump tweet or a real body-slamming event from the President!

The market was expected to have a pretty good week, with some $10 billion worth of dividends being paid over the five days (which included our SWTZ fund as we pay quarterly) but bond market fears have spooked the stock market.

The best measure of the bond market concerns (i.e. the 10-year Aussie Government Bond) hit a three-month high of 2.73% on Friday. This means we saw bond prices and stock prices fall simultaneously, which all added to volatility and a fear for stocks.

This is just another excessive market overreaction with the banks, which were loved on Tuesday and which powered a $28 billion melt-up of the market on that day, losing friends on Friday.

All big four banks were down, with the ANZ off 1.3%, while the CBA gave up 1.1%, which means I smell a buying opportunity coming up.

Interestingly, the NAB, which a number of expert market-watchers seem to like more nowadays, was actually up 0.8% for the week, despite the anti-bank stance currently.

This bond market trend (which has been excessive, as I’ve said) says to expect more volatility but I still think we’re in for a happy ending this year, stocks-wise.

What I liked

  • Retail rose by 0.6% in May to be up 3.8% over the year. Non-food retailing rose by 1% in May after rising by 0.8% in April – the strongest back-to-back gains in 2½ years. And I loved that the Amazon-driven, anti-retail stock players got it wrong! I had predicted this was on the cards, so yippee!
  • BHP up 5.6% for the week and the prospect of it agreeing with Elliott, the US hedge fund, to sell its oil assets quite exciting the market.
  • The yen falling to an eight-week low against the Greenback, as this will help the surprisingly good comeback of the Japanese economy, which is still the third biggest economy in the world and our second-most important trading partner.
  • Exports to India hit a 5-year high, totalling $14.2 billion in the year to May, up 46% on the year. (India is worth watching for investors with an appetite for both risk and alpha.)
  • This on US earnings: “Currently, earnings are expected to grow 6.2 percent, but we wouldn’t be surprised to see growth of more than 9 percent,” said Lindsey Bell, investment strategist at CFRA. (CNBC)
  • The FOMC minutes of the Fed were not telling us that rate rises in the US would be faster than expected.
  • The ISM service sector index in the US rose by 0.5 points to 57.4 in June.
  • The trade surplus widened from $90 million to $2,471 million in May. The rolling 12-month surplus improved from $4.9 billion to $9.4 billion (the biggest surplus in five years).
  • The Performance of Services index fell 1.5 points to 51.5 in May. The index remains over 50, signifying expansion of the services sector.
  • The Commonwealth Bank Manufacturing Purchasing Managers’ Index, rose by 0.3 points to 56.2 in June.
  • This from Craig James from CommSec on the RBA rates decision on Tuesday: “There is no urgency for rates to move in any direction. On the positive side of the ledger are record corporate profits; strong business conditions; a lift in infrastructure spending; firm home building; and the prospect of further job growth.”
  • New motor vehicle sales totaled a record 134,171 in June, up 4.4% on a year ago.
  • The CoreLogic Home Value Index of capital city home prices rose by 1.8% in June and was up 9.6% over the year.

What I didn’t like

  • This number that showed 45% of Sydney home owners fork out 45% of their household income on covering their mortgages. It certainly will put some restraint on the RBA to raise rates. However, when it does decide to push ‘em higher, its monetary policy will work a whole lot faster!
  • The moves in the bond market. While I agree with the trend of bond prices down and yields up, the expected pace of these changes and its impact on stocks is getting close to crazy.
  • US factory orders fell 0.8% in May after falling by 0.2% in April. US durable goods orders fell by 0.8% in May. Orders for non-defence capital goods excluding aircraft (a proxy for business spending plans) rose 0.2% in May.
  • The slide in oil prices later in the week.

Let me gloat

As someone who has stuck with stocks over the past financial year (in fact, since March 2009), seeing the news that our ASX 200 Index was up 14.1% for the year makes me a very happy optimist.

Go optimism, until it becomes wise not to be!

Week in review

Top stocks – how they fared

20170630-topstocks_2

What moved the market

  • Purchasing Managers’ Indices were released around the world. The indices rose in China, the Eurozone and the US. UK manufacturing activity grew in June, but slowed to a three-month low.
  • Minutes from the 13-14 June FOMC meeting showed the US Federal Reserve may start unwinding its US$4.5 million balance sheet in September.
  • Retail trade rose 0.6% in May, with non-food retailing up 1% after a 0.8% rise in April.

Calls of the week

  • Former PM Tony Abbott called the Budget “second best” in audio leaked from a speech to a Liberal branch meeting.
  • TPG Capital dropped its $2.76 billion bid for Fairfax.
  • Paul Rickard made the call that the Reserve Bank has not gone soft on the idea of interest rate increases.
  • The Daily Telegraph’s headline on Bernard Tomic: “Bored on the Fourth of July”.

The week ahead

Australia

  • Tuesday July 11 – Housing Finance (May)
  • Tuesday July 11 – NAB Business Survey (June)
  • Wednesday July 12 – Credit & debit card data (May)
  • Wednesday July 12 – Westpac consumer confidence
  • Thursday July 13 – Lending finance (May)
  • Friday July 14 – Tourist arrivals (May)

Overseas

  • Monday July 10 – China inflation (June)
  • Monday July 10 – US Consumer Credit (May)
  • Tuesday July 11 – US Wholesale inventories (May)
  • Wednesday July 12 – Federal Reserve Chair Testimony
  • Wednesday July 12 – US Federal Reserve Beige Book
  • Thursday July 13 – US Producer prices (June)
  • Thursday July 13 – US Federal Budget (June)
  • Thursday July 13 – China Trade data (June)
  • Friday July 14 – US Consumer Price (June)
  • Friday July 14 – US Retail sales (June)
  • Friday July 14 – US Industrial production (June)
  • Friday July 14 – US Consumer sentiment (July)

Food for thought

“A passionate belief in your business and personal objectives can make all the difference between success and failure. If you aren’t proud of what you’re doing, why should anybody else be?” – Richard Branson

Last week’s TV roundup

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.

This week, one of the biggest movers was Galaxy Resources, with its short position increasing by 1.65 percentage points to 10.86%. Western Areas followed, moving 1.15 percentage points to 15.16%.

20170707-shortstockslarge

Source: ASIC

Charts of the week

EPS growth positive for first time since 2010

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Source: Citi Research, Factset

For the first time since 2010, earnings per share growth for all major regions is positive. Citi Research said that “all major markets will report strong earnings growth in 2017”.

Global PMI heading in right direction

switzer_2_550

A number of countries released their Purchasing Managers Index (PMI) this week. The chart above shows that PMIs are heading in the right direction. The dip is during the 2008 GFC.

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