[table “226” not found /]
Just when we needed some good, no, great economic news the Yanks ride to our rescue again, with economic growth surging up to 2.9% in the third quarter. As the news on the US economy has been mixed, uncertainty has prevailed but this number should be a game changer.
And when you add it to a pretty good earnings season for US companies, you’d have to be a 24-carat gold doomsday merchant to find something crook with the current take on the American recovery.
This came in a week when Marc Faber, Dr. Doom himself, told CNBC that commodity prices will go higher, which is good for the likes of Rio and Fortescue and he sees oil at $US70 a barrel, which has to be why so many analysts now love BHP!
Faber says Asia is set to jump on the infrastructure road train, with tourism demands meaning airports and railways are on the ‘must have’ list for many economies north of us.
“In the western world, they believe – I’m not saying it’s the right belief – but the belief among economists and the neo-Keynesian and the interventionists is that monetary policy alone cannot lift the global economy out of its slow growth mode,” he said. “So they have to go and build infrastructure and boost governments’ fiscal deficits.” (I have derided this guy for about four years for his excessively negative views and he’s been wrong. So this U-turn, while I agree with him, still kind of worries me, though it won’t change my view on 2017 being good for stocks.)
Adding to this optimistic commodity outlook story is one of the best indicators of overall global economic improvement – copper!
Copper has hit a two-week high this week as the market focuses on the likelihood of stronger demand in China. Prices were up more than 3% by Friday but they’ve already had a spike, undoubtedly for the same reasons Faber has gone positive on the commodity.
Reuters says “China accounts for nearly half of global copper demand estimated at around 22 million tonnes this year”. So this copper story has to be a plus for China’s outlook.
Faber’s view on oil is interesting, as we know how Wall Street is so incredibly influenced by the oil price, which is now around $US50 a barrel. And because of his view on better Asian economic growth, he has tipped a $US70 target for the commodity’s price.
If he’s right, then the daily ups and downs can be ignored, though the OPEC meeting on November 30, after the US election, will have a big impact on where oil prices go. This week we heard of both Iran and Iraq wanting a special dispensation from any production cuts. Haven’t they worked out that supply cuts mean higher prices and with a product like oil, unlike apples, when prices go up, so does total revenue?
Interestingly, this week, the US Energy Department said that domestic crude stocks fell 553,000 barrels last week, the seventh such decline in the last eight weeks, which has to be another good sign that the US economy is still ticking along nicely.
So with all this potentially positive news out there, how come October could prove to be a bad month for stocks, both here and in the US?
I blame the fear of Donald Trump. Even though Hillary Clinton is ahead in the polls, her lead narrowed this week and the headline story for the stock market from CNBC was: “Stocks slide after FBI says it’s probing new Clinton emails.”
I asked Michael McCarthy of CMC Markets what he thought stocks could fall by, if Trump did a Brexit and won. While I speculated 5%, he plumped for 10%! With this Trump black cloud hovering, it’s not surprising that the S&P 500 index looks like this:
But that’s despite all the good market and economic news out there that makes 2017 look pretty promising. Morgan’s chief economist holds a positive view on the US economy and thinks this will translate into a 12% gain for the S&P 500 over next year.
Sure, the expected December interest rate rise from the Fed is another challenge for stocks but it’s nothing compared to the prospect of a Trump presidential victory. And as most of my experts argue, that rate rise is baked in and the market kind of wants it as a show of strength for the US economy, which is the great hope of the team called the global economy!
What I liked
- NAB’s reporting story and the fact that its dividend remained unchanged.
- Spot iron ore prices had their best week in six months and Scott Morrison would like to hear that for the sake of his Budget bottom line.
- The inflation news of 1.3% for the year, which was a rise on the previous 1% number, which KO’s a rate rise on Cup Day, which would have added to the already excessive house price concerns.
- Manufacturing domestic input prices rose by 2.2% in the quarter, after a 0.9% gain in the June quarter – the biggest back-to-back gains in five years. This is a plus for inflation and what we need to get to – a normal economy!
- If we build them, yes they will come, with the news that new home sales (houses and apartments) rose by 2.7% in September, after a 6.1% rise in August.
- CommSec says the terms of trade (ratio of export prices to import prices) increased 2.4% last quarter. “Based on today’s data, we expect that the terms of trade rose by around 4.5% in the September quarter.” That’s the biggest jump in five years!
- US services sector on the up with the Markit “flash” services index rising from 52.3 to 54.8 in October.
- The US Markit “flash” manufacturing index rose from 51.5 to 53.2 in October (forecast 51.5), which is another positive sign for the US economy.
- The German Ifo business climate index rose from 109.5 to a 2-year high of 110.5 in October, propelling the German stock market to 2016 highs. And some of my critics think I’ve been too bullish! (This is good news from the trouble spot called the EU.)
- CommSec’s State of the States report confirmed my hopes for a Queensland economic comeback with this: “Queensland is second strongest on dwelling starts and on population growth is the fastest in 15 months. Both tourism and agricultural exports will provide momentum in coming months and higher coal prices are encouraging.”
- Of the 275 S&P 500 companies to report so far, 78% beat on earnings and 59% topped sales forecasts. Profits look to be up 4% on the June quarter and get this – up 15% from the March quarter! Tell this to anyone who argues the US economic recovery is not convincing!
What I didn’t like
- Local stocks being down 2.7% this week but we do play follow the leader with Wall Street, which is currently being ‘trumped’.
- The ANZ/Roy Morgan consumer confidence rating fell by 3.6% to 113.6 in the week to October 23. (The index is still above the average of 112.8 since 2014 but some quality leadership out of Canberra would help and no more news about Tony Abbott suggesting a leadership challenge might happen!)
- Malcolm Turnbull’s satisfaction rating on Newspoll under 30% and below Bill Shorten’s and below what Tony Abbott polled when he was turfed out!
- US consumer confidence fell from 103.5 to 98.6 in October (forecast: 101.0). Again there is a bit of Trump in this story.
- The excessive sell off of defensive yield stocks continued this week, though it is creating a buying opportunity for those of us who collect good dividend payers. (A lot of this sell off is fund managers collecting cash to buy growth stocks, which is a nice omen for the future.)
- AMP’s news on Friday, with its share down 9.1% to $4.68. It lost 11.5% over the week after its $668 million write-down of its wealth protection business, which shocked the market!
- The Ardent Leisure tragedy.
- Wesfarmers revelation that same store food and liquor store sales in its Coles supermarkets were up only 1.8%, which compared unfavourably to the 3.3% rise in the previous quarter.
Here’s a tip
Good luck with your Melbourne Cup ‘investments’ but save up a bit for any sell off of stocks in coming weeks. CMC’s Michael McCarthy thinks these current market concerns could see us trend as low as 5200 but he agrees that it would be the time to pile in, provided Donald doesn’t win on Tuesday week. Then the sell off would be greater and picking the time to buy in would be a lot harder but I will be having a crack. Hope it doesn’t come to that but with new bad emails out for Hillary from the FBI, you have to wonder what the US dirty tricks campaigns will unearth over the next two weeks.
God bless America. It damn well needs blessing, if not economically then definitely politically!
Top stocks – how they fared
[table “225” not found /]The week in review
- I explained how spooked I am [1] about a market crash and what we can learn from history.
- My mate Paul Rickard revealed the best fixed interest funds [2] on the market.
- James Dunn discussed the unexpected rally in coking coal and what it could mean for 9 coal companies [3].
- The brokers [4] liked Tatts Group, but MG Unit Trust copped a downgrade.
- Our Super Stock Selectors shared their thoughts on Crown, Westpac and Fortescue [5].
- Want to find a great blue chip stock but don’t know where to start? Tony Featherstone outlined 7 steps to follow [6].
- Gary Stone gave his technical analysis on BHP and Blackmores [7]. Find out where they’re headed.
- Roger Collison and Steven McCarthy think Pioneer Credit [8] could double in share price over the next few years.
- And our second broker report [9] placed Santos in the good books and Healthscope in the not-so-good books.
What moved the market?
- The CPI inflation number, which came in better-than-expected and reduced market expectations of a Cup Day rate cut.
- Mixed US earnings reports – including Apple’s first-ever decline in annual sales in 15 years – and the easing oil price.
- Headwinds facing Coles owner Wesfarmers, Crown Resorts, and the healthcare sector.
- And the devastating tragedy at Ardent Leisure’s Dreamworld theme park.
Calls of the week
- Despite speculation they would cut their dividend, NAB maintained their dividend at 99 cents per share on the back of stronger-than-expected cash earnings.
- Treasurer ScoMo suggested the states could be provided with incentive payments to increase housing supply to make housing more affordable. Here’s my take on the issue [10].
- And in this week’s Switzer Super Report, Gary Stone said the technical odds are high that BHP could push towards $29 [7].
The week ahead
Australia
- Monday October 24 – State of the States (October)
- Wednesday October 26 – Consumer price index (September quarter)
- Thursday October 27 – Import & export prices (September quarter)
- Thursday October 27 – Detailed employment data (September)
- Friday October 28 – Producer price indexes (September quarter)
- Friday October 28 – New home sales (September)
Overseas
- Monday October 24 – US, Europe, Japan “Flash” manufacturing
- Tuesday October 25 – US Home prices (August)
- Tuesday October 25 – US Consumer confidence (October)
- Tuesday October 25 – US Richmond Federal Reserve index (October)
- Wednesday October 26 – US Advance trade (September)
- Wednesday October 26 – US New home sales (September)
- Thursday October 27 – US Durable goods (September)
- Thursday October 27 – US Pending home sales (September)
- Friday October 28 – US Economic growth (September quarter)
- Friday October 28 – US Employment costs (September quarter)
Food for thought
Management is doing things right; leadership is doing the right things.
Peter Drucker, US educator and author
Last week’s TV roundup
- Is a stock market crash on the horizon? To discuss, Morgans’ chief economist Michael Knox [11] joins the show.
- With the market seemingly going sideways, just what are the charts saying? Gary Stone [12] of Share Wealth Systems shares his insights.
- If those predicting a share market rally heading into 2017 are right, what kind of companies are looking like good value now? To discuss, Michael Heffernan [13] from PhillipCapital joins Super TV.
- And CMC Markets’ Michael McCarthy [14] reveals why the market has been under pressure this week.
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 Nine Entertainment, with its short position increasing 2 percentage points to 10.48%. Japara followed, with a 1.5 percentage point increase to 7.59%.
Source: ASIC
Chart of the week
Aussie shares have climbed a wall of worry!
Source: AMP Capital, ASX
There are a lot of worries out there that markets take notice of (think Trump and a Fed rate hike) but a little perspective can help! In his note this week, Shane Oliver of AMP Capital used this chart to help keep the perpetual worry list in context.
Top five most clicked stories
- Peter Switzer: Fear of a market crash is high. I’m happy about that! [1]
- Paul Rickard: The best fixed interest fund [2]
- Gary Stone: Buying the dip in Star, Link and Regis Resources [15]
- Tony Featherstone: 7 steps to finding a great stock [6]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [4]
Recent Switzer Super Reports
- Thursday 27 October: Blue chips [16]
- Monday 24 October: Stock market outlook [17]
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.