Switzer on Saturday

Border worries & buying opportunities

Founder and Publisher of the Switzer Report
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Before the close on Wall Street, the market was trying to process where Congress was with respect to the stimulus deal and significant issues for many companies that would be affected if what New York City Mayor Bill De Blasio says could be close to a “full shutdown” of the Big Apple soon!

But against that, on Thursday, data showing a slowdown in the US labour market powered stock plays that Congress would seal a $US900 billion stimulus deal. US Senate Majority Leader Mitch McConnell said that a coronavirus relief deal “was close”.

This protracted dispute over the stimulus programme worked against the positivity that has come out of the start of vaccination this week. And the Federal Reserve saying its bond purchases would continue “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals” is another plus.

By the way, that’s the same playbook that the Governor of the RBA, Dr Phil Lowe, is telling us. In fact, he wants to see wages growth of 4% and unemployment a hell of a lot lower than the current 6.8%. Despite my view that growth will be huge in 2021, I think we could see interest rates at these low levels for a long time. But the third year of a cash rate at 0.1% looks harder to believe.

That said, if rates are low for two years, it will be good for stocks for two years.

Back to the stimulus standoff and there have been positive comments from the right people that probably explain why the market wasn’t down all that much.

“In fact, I am even more optimistic now than I was last night that a bi-partisan, bi-cameral framework for a major rescue package is very close at hand,” Senate Majority Leader Mitch McConnell said.

Interestingly, Tesla joins the S&P 500 on Monday and a rush to buy the stock before the close is expected, which could push the Index into positive territory.

The company’s stock is up 700% this year and is now a $US600 billion company and will enter the Index as the number seven stock in the group of 500. That’s a big start!

This is a big news story in its own right but the bigger one the market is focused on is seeing the stimulus package in place and knowing the US Government and its public servants aren’t shut down, which could happen next week if a deal isn’t done! Only in America.

As Winston Churchill once said: “You can always count on the Americans to do the right thing, after they have tried everything else.”

To the local story and the S&P/ASX 200 index closed at 6675.5, losing 1.2% (or 81.2 points) on Friday. Border worries will do that. However, for the week we were up 0.5%. And for the last six months we’re up 12.3%. This is a badge of honour because, despite recent outbreaks in NSW, our good record of beating the virus and our stimulus programme, have resulted in promising news out of the Mid-Year Fiscal and Economic Outlook show-and-tell of Treasurer Josh Frydenberg’s this week.

An expected, the budget deficit of $213.7 billion was reduced by $16 billion because of our better-than-expected economic growth. By the end of the financial year, I think it will be even lower, thanks to the effect of the vaccine when it comes.

To this week’s news and Afterpay flew high after getting into the ASX 20 Index, finishing the week at $111.29, after topping $120 at one stage.

Xero, the other stellar stock, was up close to 9% for the week, closing at $150.59. I hold Xero but this rise still shocks me.

Here’s a snapshot of the biggest winners and losers from Bloomberg and the AFR.

Looking at the chart, from a personal and tipping point of view, I’m happy about EML and Megaport but not so about Mesoblast and A2M. But that’s the story when you go for speculators.

Travel stocks copped the border closure clobbering, with Qantas down 3.5% on Friday to $4.92.

And Mesoblast, a perennial ‘up and down’ stock, kicked an ‘own goal’ after admitting it would stop COVID-19 treatment in trial. Mesoblast shares fell 47% to $2.41. I’m in this one for a small punt and have to decide if I dollar cost average with this sucker! I’ll tell you on Monday.

Another hit to my speculator plays was A2 Milk, which fell 22% on Friday, after the company issued a downgrade because of slower-than-expected sales from the “corporate daigou” trade. The stock closed at $10.14. This one will get me in for more but it could be a year before I smile about it.

And our big miners were up for the week on that iron ore price going to $US158 a tonne on Thursday. This is one tradeable China won’t be banning any time soon, though its tough trade tactics have worried the iron ore market and partly explains this rise in price.

What I liked

  • The weekly ANZ-Roy Morgan consumer confidence rating rose by 1.7% to a 13-month high of 111.2 (long-run average since 1990 is 112.6). Sentiment has lifted in 14 of the past 15 weeks and is up by 70.3% since hitting record lows of 65.3 on March 29 (lowest since 1973).
  • Unemployment fell from 7% to 6.8% in November (consensus: 7%).
  • Employment rose by 90,000 in November (consensus: 40,000) after increasing by an upwardly-revised 180,400 jobs in October (previously reported as a 178,800 lift in jobs). Full-time jobs rose by 84,200 and part-time jobs rose by 5,800.
  • The participation rate lifted from 65.8% to a record high 66.1% in November.
  • The IHS Markit ‘flash’ PMI for manufacturing rose from 55.8 to a 36-month high of 56 in December. The services PMI lifted from 55.1 to 5-month highs of 57.4. The composite PMI rose from 54.9 to a 5-month high of 57. Readings above 50 indicate an expansion in activity.
  • In seasonally-adjusted terms, private new detached home sales rose by 15.2% in November to reach a decade high of 7,054 units. Sales were up 6.3% over the three months to November. In the nine months since COVID-19 restrictions came into effect in March, sales are 19.6% higher than at the same time last year.
  • Total household wealth (net worth) rose by 1.7% to a record high $11,351.1 billion in the September quarter, to be up 3.5% on a year ago.
  • The Federal Government is projecting a $197.7 billion underlying cash deficit (9.9% of GDP) for the current financial year, down from the $213.7 billion deficit (11% of GDP) previously forecast in October’s Federal Budget – an improvement of $16 billion.
  • US industrial production rose by 0.4% in November (survey: 0.3%).
  • China: Retail sales expanded at a 5% annual rate in November (consensus: 5% ). Industrial production rose at a 7% annual rate in November (consensus: 7%). Fixed-asset investment expanded by 2.6% over the 11 months to November from a year ago (consensus: 2.6%).
  • US housing starts lifted 1.2% in November (survey: 0.3%) and building permits jumped 6.2% in November as well (survey: 1%).
  • Germany and France said they were set to begin inoculating their citizens with the Pfizer-BioNtech Covid-19 vaccine in the last week of December.
  • The UK FTSE index gained 0.9% on Brexit optimism after European Commission President Ursula von der Leyen said: “There is a path to an agreement now.”

What I didn’t like

  • The potential economic implications of recent infections and border issues.
  • The Philadelphia Fed manufacturing index eased from 26.3 to 11.1 in December (survey: 20)

Time to sell your old car?

Datium Insights reported that wholesale used car prices rose by 0.5% in the past week to be up almost 30% on the year and the Coronavirus is to blame. People are scared of public transport and drive holidays are replacing trips to Bali and Europe. This is why AP Eagers and Bapcor have been doing so well.

A.P.Eagers (APE)

Bapcor (BAP)

We got that car call right!

The week in review:

Our videos of the week:

Top Stocks – how they fared:

The Weeks Ahead:

Australia
Tuesday December 22 – Preliminary retail trade (November)
Wednesday December 23 – Preliminary international trade (November)
Thursday December 31 – Private sector credit (November)

Overseas
Tuesday December 22 – US Economic growth (GDP, September quarter)
Tuesday December 22 – US Existing home sales (November)
Wednesday December 23 – US Personal income & spending (November)
Tuesday December 29 – US S&P/Case-Shiller home price index (Oct.)
Thursday December 31 – China purchasing manager indexes (Dec.)

Food for thought:

“More than anything else, what differentiates people who live up to their potential from those who don’t is a willingness to look at themselves and others objectively.” – Ray Dalio

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:

In the Mid-Year Economic and Fiscal Outlook this week, a $197.7 billion underlying cash deficit was forecasted for the current financial year, or around 9.9% of GDP. CommSec shared the following chart that looks at the previous budget position as a percent of GDP since the 2000/01 financial year, and looking forward to 2023/24:

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