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The one obvious conclusion for the past few weeks is that there aren’t many investors who are keen to sell off stocks. On the other hand, the impetus to buy is just not strong enough. We lost 0.1% on the S&P/ASX 200 on Friday to take us down a forgettable 1% for the week but the negative direction is significant because I think it reflects the disappointment over local economic data and this persistent problem with commodity prices.
Need proof of the former argument? Well, look at BHP’s price on Friday – $18.77 says it all! That’s an 8.4% slide for the week and I think this is a classic market overreaction that a long-term investor has to see this drop as a buying opportunity. That said, if you take the plunge into BHP at these prices, make sure you’re not someone who can’t cope without instant gratification!
We need to see a stronger global economy and it’s not delivering on cue, so commodity prices are hovering at the current low levels but it won’t always be like this. The BHP buyers today will win one day into the future but it is a waiting game. Share prices today are determined by short-term players and that’s the opportunity for the patient, long-term investor.
Remember what Buffett advised: “Be fearful when others are greedy and greedy when others are fearful.”
In case you haven’t been told, we have three really important weeks ahead, which will determine where the key market index will finish, which is pretty damn important if you’ve been playing the S&P/ASX 200 ETF products. Michael Heffernan agreed with me that as long as BHP stays around these levels, the index can ride higher on other stocks, such as the banks and many of the promising mid-cap companies. However, I think we need to see some better economic data this week and for the rest of December.
The local construction and business investment data this week dented my usual optimism but I’m cautiously happy to believe in the RBA’s positive view about the September quarter economic growth number, which is out on Wednesday. If they’re wrong, I will be scathing about that rate cut I thought they should have given on Cup Day.
I want them to be right. We need them to be right but I have to point out that the Turnbull effect had little impact on the September quarter, as MT only took the PM prize mid-September. It will be the December quarter that will need to deliver to keep Malcolm’s mystique and popularity alive and kicking.
Next week, the RBA decision, economic growth, home prices, building approvals and retail figures will give us a pretty reasonable snapshot of our economy and I hope it paints a positive picture to help bring Santa Claus to town for an end-of-year rally.
Meanwhile, the US has a big economic show-and-tell, with Black Friday’s retail numbers to collide with Cyber Monday’s online sales and these will be added to manufacturing and employment figures. If these suggest that the all-important American economy is on the up, Wall Street will help Santa make it to town. That then will help the rest of the world’s stock markets to share in the Christmas cheer.
Then on December 16, the Fed decision should bring the first interest rate rise since 2006 and this could make or break the much hoped for Santa Claus rally.
More and more experts think stocks will spike on a Fed rate rise, which is at odds with thoughts about this event six months ago. Guessing the market’s reaction to a rate rise remains a gamble. I’m with those who think it will bring a spike in stock prices but I can’t be certain.
What I liked
- Shane Oliver’s optimism with this: “Share markets are likely to see the normal ‘Santa Claus’ rally into year-end, particularly in the last two weeks of the year and the broad trend in shares is likely to remain up. Shares are cheap relative to bonds; monetary conditions are set to remain easy and the Federal Reserve is unlikely to do anything to threaten global growth; and this, in turn, should help see the global economic recovery continue. We continue to see the ASX200 rising to around 5500 by year-end.”
- The overall Business Sales Indicator rose by 0.6% in trend terms in October, matching gains in the preceding three months. Annual growth remained solid at 7.5%, which is the sixth straight month where annual growth has held between 7.4%-7.5%. Annual growth remains well above the decade-average trend of 5.1%.
- The US economy grew at a 2.1% annual pace in the third quarter, in line with forecasts and up from the early estimate of 1.5%.
- New home sales in the US lifted by 10.7% to an annual rate of 468,000 units, while durable goods orders there rose 1.3% in October.
- The banks stock market showing. I advised they looked good on November 16, when the CBA was at $74.78 and it’s now $80.12 – that’s a 7.1% gain!
What I didn’t like
- Slater and Gordon’s share price slump on a UK regulator decision, when the company recently told shareholders that there was no expected regulator threats! Is someone’s gig up for grabs?
- The Markit “flash” manufacturing index for the US fell from 54.1 to 52.6 in November.
- US consumer confidence fell from 97.6 to a 14-month low of 90.4 in November, while the forecast was 99.5.
- Turkish judgement when it comes to a Russian plane a little off-track!
- This from CommSec: “New business spending on buildings and equipment fell by 9.2% in the September quarter – the largest quarterly fall on record and the fifth consecutive quarterly decline.”
Admission
The recent run of economic data here and in the US hasn’t been as strong as I was hoping for but it remains mixed. I need to see some better stuff in December.
As Bill Clinton said, and I often re-quote: “It’s the economy stupid” and economics is bound to create or kill the much hoped for rally.
Top Stocks – how they fared
[1]The week in review
(click the blue text to read more)
- Paul Rickard told you everything you need to know about Macquarie’s new hybrid offering [2] and says it will appeal to yield hunters.
- Roger Montgomery said there’s a long and prosperous path ahead for Aetna [3] (US: AET) shareholders.
- Resident chart guru, Gary Stone, gave us his analysis of the ASX200 [4] and told us if we’re headed for a Santa Claus rally.
- Our Super Stock Selectors had Webjet (WEB) and M2 Group in their likes lists [5].
- Tony Featherstone named three mid and small-cap insurers [6] that could make life tougher for the big players – NIB Holdings (NHF), Cover-More Group (CVO) and CBL Corporation (CBL).
- The brokers [7] upgraded Cover-More Group and James Hardie Industries (JHX). In our second broker report [8], Myer (MYR) and Technology One (TNE) received upgrades but A2 Milk (A2M) was downgraded.
- Paul Stephenson gave us an insight into his very own SMSF [9] which has achieved a 35% performance over five years.
- Tony Negline gave some pointers on how to protect yourself against fraud [10].
What moved the market
- Falls in commodity prices hit the resources sector.
- Slater and Gordon got hammered (again) on planned UK government changes to road traffic accident compensation claims.
- Wall Street traded quietly ahead of the Thanksgiving public holiday and shopping spree on Black Friday.
- European stock markets lifted on increased speculation that the ECB would continue to boost monetary stimulus measures.
The week ahead
Australia
- Monday November 30 – Business indicators (September quarter)
- Monday November 30 – Monthly inflation gauge (October)
- Monday November 30 – Private sector credit (October)
- Tuesday December 1 – Reserve Bank Board meeting
- Tuesday December 1 – CoreLogic home prices (November)
- Tuesday December 1 – Balance of Payments (September quarter)
- Tuesday December 1 – Building approvals (October)
- Wednesday December 2 – Economic growth (September quarter)
- Wednesday December 2 – Speech by Reserve Bank Governor
- Thursday December 3 – International trade (October)
- Friday December 4 – Retail trade (October)
Overseas
- Monday November 30 – US Pending home sales (October)
- Tuesday December 1 – US ISM manufacturing (November)
- Tuesday December 1 – China Purchasing indexes (November)
- Wednesday December 2 – US ADP employment (November)
- Thursday December 3 – US ISM services (November)
- Friday December 4 – US Non-farm payrolls (November)
Calls of the week
- SSR regular Charlie Aitken said his fund is building an investment position in Baby Bunting [11], using real life experiences in the nursery to sniff out a good investment opportunity.
- My mate Paul Rickard said it’s time for the BHP chairman to hit the road, Jac! Read his article here [12].
- Treasury lowered its economic growth forecast from 3% to 2.75%.
- Qantas made the call to go into the health insurance industry and will use its product Qantas Assure (in partnership with NIB) to reward members who are active with frequent flyer points. See what Tony Featherstone had to say on the topic here [6].
Food for thought
“For every promise, there is a price to pay… If the promise is clear, the price is easy…”
Jim Rohn – American entrepreneur and motivational speaker.
Last week’s TV roundup
- What stocks will Michael Heffernan of Phillip Capital be stuffing his Christmas stocking with? He joins Super TV [13] to talk about the conditions for stocks leading up to Christmas.
- ASIC commissioner Greg Tanzer reveals what the watchdog is doing to tackle property spruikers [14] who target SMSF investors.
- What does Treasurer Scott Morrison have up his sleeve to get this economy growing? He reveals all [15] on Super TV.
- Co-founder of the Switzer Super Report, Paul Rickard, joins the show to tell us if it’s too late to buy into China’s dining boom [16]. This week’s Super Session update also explored the topic [17].
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, the biggest movers were Monadelphous Group and JB Hi-Fi, with a 1.50 and 1.16 percentage point increase in the proportion of shares sold short respectively. Primary Health Care went the other way with a 1.86 percentage point decrease to 10.56%.
[18]My favourite charts
The life of a turkey and a Black Swan event are related – really!
[19]Source: Nassim Taleb, The Black Swan
It’s US Thanksgiving season and fittingly, a thanksgiving turkey can teach us a lot about a Black Swan event. Nassim Taleb’s book shows that Black Swan events are just like a turkey reared to believe it’s past days (of being fed like a king) predicts it’s future. But on the 1001th day, it’s served up on a platter! It’s a simple example of how you just can’t see that black swan event coming!
Slater and Gordon skates down a slump
[20]Source: Twitter @DavidInglesTV
Law firm Slater and Gordon has had a rough week, after the UK made changes to the legal rights for those injured in car accidents. On Thursday alone, the share price plummeted 51% – a fall like that has got to hurt!
Top 5 most clicked on stories
- Paul Rickard: Macquarie launches new hybrid [2]
- Charlie Aitken: How to play the baby boom [11]
- Peter Switzer: Buying the dips! [21]
- Charlie Aitken: Don’t shy away from risks assets [22]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [7]
Recent Switzer Super Reports
- Thursday, 26 November, 2015: Best investment ideas [23]
- Monday, 23 November, 2015: Dips and Swings [24]
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.