Switzer on Saturday

Big Bad Bear Week! But it’s a Good Morning!

Founder and Publisher of the Switzer Report
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After a week when our market went into the big bad bear territory, losing 4.2% for the week (over a fifth of a bear!), we saw the worst close on Friday for around two and a half years! And I hate to rub it in but we’ve lost 11.6% in 2016!

By the way, a presidential election year (or the fourth year in the cycle) has generally been the second best year for stocks. The best year is the third year before election day in the US. However, that didn’t work out in 2015, did it? That said, I have thought that maybe last year’s bad showing for stocks would give us a great chance for a rebound but for that to happen, good news has to trump bad news, with the latter around in spades at the moment.

If you need proof (and I know you don’t), just look at the Deutsche Bank and European bank concerns this week that whacked our banks! It’s like there’s a pile of people out there, who think if they raise concerns about really important things, such as the state of the banking system, that it will help their efforts to smash stocks! Could that be possible? Could there be people like that out there?

Anyway, enough complaining and finger pointing, it is what it is when it comes to stock markets. But there is good news this morning out of Wall Street! Energy and bank stocks had a good morning (or they were at 5am) when I woke up. If it lasts, it will be step one in a possible turnaround for market sentiment but I’ve learnt to temper my positivity – an 11.6% drop in one and a half months, as well as the very mentioning of pesky bears will do that!

So why the good news?

Here’s a list of reasons:

  • Deutsche Bank said it was going to buy back $5 billion worth of its bonds, so its share price spiked close to 12%.
  • European stock markets surged, with the DAX up 2.45%, the CAC up 2.52% and the FTSE 3.08% higher.
  • US banks surged, so I reckon we’re in for a good day for our unfairly beaten up banks on Monday.
  • Talk and a report, which said an OPEC oil production cut was more believable but we have heard this before.
  • US retail sales for January came in at 0.2%, which was better than the forecast of 0.1%. If the US is having a recession, as those damn short sellers have been telling us this week, the Yankee consumer hasn’t heard about it.

Look, I’ve been around long enough to know that you don’t get too excited about positive, speculative developments when you’ve got negative question marks, such as falling commodity prices, a slowing China, negative interest rates, recession talk and a bear market hanging over stocks. However, the good news is being ignored and most of it is economic. It’s why central banks, as well as most economists, are surprised by this current, excessive market negativity.

What I liked

  • CEO Jamie Dimon buying 500,000 shares of his own JPMorgan stock for $25 million— I suspect he knows his business.
  • The S&P 500 stayed above the important level of 1850.
  • Tourist arrivals into Australia rose by 2.3% to record highs in December – go the Oz dollar!
  • The Westpac/Melbourne Institute index of consumer confidence surprisingly rose by 4.2% in February to 101.1.
  • The average credit card balance rose by $34.30 (1.1%) to $3,191.60 in December. It was the biggest increase for a December month in five years and a sign that the Aussie consumer hasn’t factored in a recession here.
  • The number of loans (commitments) for people buying or building homes to live in (owner occupiers) rose by 2.6% in December to a near seven-year high. In December, a record 20,911 home loans were refinanced. Does this help you believe our economy is doing OK?
  • The NAB business confidence index lifted from +2.4 points to +2.5 points. The survey was conducted from January 27 to February 2 this year. This was a bad time for stocks but businesses still lifted confidence-wise.
  • Job advertisements rose by 1% in January, after falling by 0.1% in December. Job ads are up 10.8% on a year ago. They’ve only fallen for two of the past 10 months and are at their highest level since July 2012.
  • Wall Street’s performance overnight and the reasons behind it, which I listed above.
  • Peace talk hopes rising for Syria, which some oil experts say could actually help OPEC crack a production cut deal.

What I didn’t like

  • The NAB business conditions index easing from +6.2 to +4.8 points in January, which was an 11-month low. However, it’s still positive and there are a lot of market worries around at the moment.
  • The word of the money week – “bear”!
  • The interpretations of what the Fed’s Janet Yellen said on Capitol Hill this week. They ignored what she virtually said, that is, that the US economy isn’t heading to recession, rates should rise but economic data and what happens overseas will determine the pace of the rate rises.
  • Janet’s lack of charisma and her lack of market influence, which is typical of most central bankers, though the European Central Bank’s Mario Draghi is an exception.
  • Good news on earnings from the likes of Cochlear (up 11.3%) this week and Bluescope (up 14%) has been ignored as we worry about our banks.
  • The BS about our banks – overseas assessments of our banks are so amateur hour and they’re in the buy zone for a long-term investor.

Let me rerun this…

I wrote this, this week, on www.switzer.com.au

“And in case you’re a whinger, who wants markets to always go up, remember this about our stock market. The GFC closing low was 3145.50. We’re now at 4775.7. That’s a 51% rise over seven years (from March 2009 until now). Now let’s add in say a 5% return for dividends each year. That’s 35%, giving a total of 86%. Let’s also throw in 1% for franking credits each year, giving us a gain of 7% over that seven-year period. The grand total for anyone, who had a portfolio as good as the index plus dividends, is 93% (or a 13.2% rise each year).

Apologies if you have been a whinger but sometimes we have to put stock markets into numerical perspective.

Top stocks – how they fared

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The week in review

(click the blue text to read more)

  • This week I told you why I’m loading up on stocks whenever I can!
  • Paul Rickard explained how to play BHP during these volatile times. Gary Stone also gave his technical insights into the company’s share price movements and when he’d have a dabble.
  • The brokers placed AGL in the good books and Domino’s and Perpetual in the bad books. Our second broker report upgraded JB Hi-Fi.
  • Our Super Stock Selectors liked REA Group and the Commonwealth Bank.
  • Charlie Aitken said that while there are still buying opportunities out there, it pays to remain patient and be disciplined with your selections.
  • Tony Featherstone explained how a dive in oil prices has made some large energy stocks attractive takeover targets.
  • Tony Negline gave you the benefits and pitfalls of holding life insurance policies inside and outside of your super.
  • And this week our Professional’s Pick was Gateway Lifestyle Group. Perennial Value Management’s Andrew Smith is primarily attracted to the company for its strong tailwinds from the ageing population.

What moved the market

  • Concerns about the exposure of banks to oil and energy markets (driven mainly out of Europe) triggered a global selloff in financial stocks.
  • Commonwealth Bank shares bounced back after announcing a $4.8 billion cash profit.
  • Wall Street went lower after the Fed Boss Janet Yellen acknowledged global growth concerns in her semi-annual congressional testimony. But like me, she thinks that the market is wrong betting on a recession!

The week ahead

Australia

  • Monday February 15 – New motor vehicle sales (January)
  • Tuesday February 16 – Weekly Consumer sentiment
  • Tuesday February 16 – RBA Board Minutes (February)
  • Tuesday February 16 – Lending finance (December)
  • Thursday February 18 – Employment/unemployment (January)
  • Thursday February 18 – Reserve Bank speech

Overseas

  • Monday February 15 – China Trade (January)
  • Tuesday February 16 – Empire Manufacturing Index (February)
  • Wednesday February 17 – US Housing starts (January)
  • Wednesday February 17 – US Producer prices (January)
  • Wednesday February 17 – US Industrial production (January)
  • Wednesday February 17 – US Federal Reserve minutes
  • Thursday February 18 – US Leading index (January)
  • Thursday February 18 – China Inflation (January)
  • Friday February 19 – US Consumer price index (January)

Calls of the week

  • PM Malcolm Turnbull made a GST back flip, confirming this week that a rise in the goods and services tax is no longer on the cards. Is this political U-turn the sign of a wimp, or a smartie?
  • Rio Tinto made the call to butcher their progressive dividend policy. BHP will follow the week after next.
  • And Tony Featherstone added WorleyParsons to his takeover target portfolio in the latest SSR.

Food for thought

“Be fearful when others are greedy and greedy when others are fearful.”

– Warren Buffet – US investor and businessman

Last week’s TV roundup

  • George Boubouras from Contango Asset Management discusses what this market madness is all about.
  • What are the most popular ETFs to bag in a falling market? Adam Muston from UBS Global Asset Management joins Switzer TV.
  • Roger Montgomery from Montgomery Investment Management discusses how he’s approaching the market right now.
  • And FN Arena’s Rudi Filapek-Vandyck has been hanging around a bear – but is it a long term relationship, or just a fling? He tells all on Super TV.

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 Vocus Communications with a 2.95 percentage point increase in the proportion of its shares sold short to 12.67%.

20160212-shortpositions

Source: ASIC

My favourite charts

Long term partners are cheapskates!

20160212-Finder

Based on a survey of 1,043 Australians by Finder.com.au, if you’ve been with your loved one for over 10 years, you and your partner are more likely to be tight-wads on Valentine’s Day! Those together 6-10 years are likely to receive the most expensive gifts.

Job ads at 3 and a half year highs

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Job ads lifted 1% in January, and are up 10.8% on a year ago. Current levels are the highest since July 2012 – a nice indicator of the strength of business activity.

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