Switzer on Saturday

Central banks keep trumping Trump’s trade war

Founder and Publisher of the Switzer Report
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It’s been a week dominated by central banks and US earnings but seriously the Fed is the main game in town, followed by the Trump trade war. Then it’s an OK looking earnings season. However, if earnings end up disappointing more than expected, the real world of a poorer-than-expected company profits could take centre stage.

That said, members of the US Federal Reserve have braced the market for what the Big Bank would do. This comment from New York Federal Reserve President John Williams got a lot of market and media attention, when he said the central bank needed to “act quickly” (when the economy was slowing and rates were low). “It’s better to take preventative measures than to wait for disaster to unfold,” he cautioned.

Investors liked that one!

These words was supported by this comment from The US Federal Reserve’s Beige Book, which effectively said that the US economy continued to grow at a “modest” rate in recent weeks, with consumers continuing to spend. The survey also expressed a “generally positive” outlook overall, even in the face of disruptions caused by US trade policy. (CNBC)

And to make this support from the Fed even more understandable, the US President, Donald Trump, hosed down our fired up optimism by telling us, again, that the US and China have a “long way to go” on trade. And yep, he repeated that the US can impose an additional US$325 billion worth of tariffs on Chinese goods, “if we want.”

His trade tweeting is keeping a lid on stock market enthusiasm, while the Fed is lifting that lid significantly, which explains why the US stock market indices have recently hit all-time highs. Last time the S&P500 did that was Monday this week. In fact, the indices had a losing week and the trade war question mark is mostly to blame, along with its implied impact on company earnings.

On earnings so far, it was good to see JPMorgan and Wells Fargo beat quarterly profit estimates but they reported weaker net interest income, pointing to rising deposit costs. Goldman Sachs earnings beat expectations, driven by the company’s investment banking and trading divisions. And Citigroup reported a better-than-expected profit, while J.B. Hunt Transport shares rose by 5.6% early in the week, after the trucking company posted strong quarterly results. Transporters doing well is a positive sign for the economy but I guess the trade war should help local producers who would be truck users.

Overnight, the big report was Microsoft. Charlie Aitken will be happy as a big supporter of the stock. Its shares hit a record after posting quarterly earnings and revenue that beat expectations. Cloud revenue was up 39% year-over-year. And AMEX topped expectations as well, which is another plus for reporting so far.

FactSet research says a 3% fall in US company earnings was likely but they might prove better than expected. Next week could tell the true story, with 25% of the S&P500 companies set to report.

This is an intriguing episode in US stock market history where there’s a Trump tug-o-war, with China and the Fed in the middle making sure that the economic and market consequences aren’t disastrous. And the circumstances we live and try to make money in are as unusual as Donald himself!

Locally, our central bank is playing a key role in explaining why our stock market is up close to 20% year-to-date. Of course, there are other reasons and I’ll deal with them on Monday but the rate cuts offsetting disappointing economic growth data has to be partly to blame for our rising stock market.

Only this week the RBA Governor, Dr Phil Lowe told us: “The Australian economy is growing and the fundamentals are strong.” However, the Board minutes said: “The Board would continue to monitor developments in the labour market closely…”. They also said (and let me summarize what they virtually told us) that if the economic data isn’t strong by October, the RBA will cut rates again.

I think our economy will pick up before November but the fact that the RBA will move heaven and earth to create growth, jobs, inflation and wage rises is a huge support to stocks.

Our market actually did pretty well, rising 3.8 points for the week, with the S&P500 rising to 6700.3. Trade war worries and a slip in the price of oil took away momentum but the likes of BHP, Rio and the gold miners, along with consumer and health stocks, kept us in positive territory.

It was a good week for banks but especially for NAB, which told us who its new CEO would be – Ross McEwan. This was a good appointment of a former CBA executive, who missed out on the top job at the bank to Ian Narev. He then took the CEO’s position at the Royal Bank of Scotland and that didn’t hurt his solid reputation.

This five-day chart of NAB’s stock tells you what the market thought about the McEwan appointment.

 

Source: au.finance.yahoo.com

And UBS agrees with me. “We believe Ross McEwan’s experience in turning around RBS in this environment gives him a unique insight into the challenges ahead,” analyst Jon Mott noted. “As a result, we believe NAB’s restructuring initiatives are likely to accelerate once he commences in 2020 and are centred around the customer. We do not expect a simple continuation of NAB’s current strategy.”

The story I liked this week involved ship builder and defence contractor Austal, whose share price rose 17.3% to $4.13 after it announced that it expected 2019-20 earnings (before interest and tax) to be at least 14% higher than 2018-19. The fact we can do this sort of thing in manufacturing shows what’s possible in Australia.

Disappointment of the week was AMP, which slumped “…16.5% to $1.80 this week after the Reserve Bank of New Zealand blocked the sale of its life insurance business to Resolution Life, forcing the bank to scrap its interim dividend. Fund managers also warned the company could present a value trap, with its future strategy thrown into jeopardy.” (SMH)

What I liked

  • The Westpac Leading Index actually surprised economists with a pretty bullish reading on future growth. The often pessimistic AFR reported: “The Westpac-Melbourne Institute Leading Index, which indicates the likely pace of economic activity into the future, has shown a strong turnaround in the month to June driven by the share market gains, better-than-expected dwelling approval numbers and higher commodity prices.”
  • The jobs report was 500 new jobs in June but there were 21,100 full-time jobs replacing 20,600 lost part-time positions. That’s progress.
  • Unemployment didn’t rise, staying at 5.2%, which is better than a rise, though a fall would be better.
  • Underemployment fell from 8.8% to 8.3%, which could be a good sign that the labour market is tightening, which the RBA would want.
  • The good old Chinese shopper delivered as per usual, with retail sales in China rising at a 9.8% annual rate in the year to June. The consensus forecast was 8.5%. This was the strongest growth rate in 14 months!
  • The Philadelphia Fed Manufacturing Index lifted by 21.5 points to 21.8 points (consensus: 5 points) in July.
  • US retail sales rose by 0.4% (consensus: +0.2%) in June.
  • The New York Empire State Manufacturing Index rose by 12.9 points (consensus: 2 points) to 4.3 points in July.

What I didn’t like

  • The weekly ANZ-Roy Morgan consumer confidence rating fell by 1.5% to 115.8 points but consumer sentiment is still above the longer-term average of 113.1 points since 1990.
  • The Chinese economy grew by 1.6% in the June quarter, above consensus expectations for 1.5%. But the annual growth at 6.2% is the weakest pace of growth in at least 27 years.
  • Rolling annual passenger growth on the Sydney-Melbourne route is at 6½-year lows.
  • The Conference Board Leading Index in the US fell by 0.3% (consensus: +0.1%) in June.
  • US housing numbers weren’t uplifting, with housing starts falling by 0.9% (consensus: -0.7%) in June. Building permits were down by 6.1% (consensus: +0.1%) in June. Weekly MBA mortgage applications fell 1.1% to July 12.

One for my expert, Julia Lee

A few months back, Julia told us Lovisa was a good buy. This is what the SMH’s William McInnes reported on Friday: “Morgans increased its price target on Lovisa by 24.4 per cent saying it saw the jewellery store as being one of the few retailers to have a meaningful store rollout runway ahead. “We think Lovisa’s annual rollout alone will deliver 15 per cent plus growth over many years with the US being the key driver,” said analyst Josephine Little.

We haven’t changed our forecasts but continue to see upside risk to our US store rollout and group margin assumptions from 2020-21 onwards.

The broker acknowledged that while Lovisa was “far from being cheap”, the exposure to a significant global rollout programme was rare in the Australian retail sector. Morgans increased its price target on Lovisa from $10.57 to $13.15.”

Good one, Julia.

There is now less than one month until the Switzer Listed Investment Conference kicks off. A limited number of complimentary tickets are available for our valued subscribers, so click on the event you would like to attend below to get your tickets:

The week in review:

  • In times like the present, being too much of a scaredy cat can actually create more scary outcomes than many would expect.
  • If you’re an income investor and unhappy about the interest rate on term deposits, then you’ll need to go up the risk curve. Lower rates are here to stay, so the only way to increase your return is to take on more risk. Here are 5 riskier alternatives to term deposits.
  • With our market near its record high and interest rates at record lows, investors need to squeeze every ounce of return from their portfolio. One opportunity is out-of-favour Listed Investment Companies (LICs) that invest in small- and mid-cap stocks. In his article this week, Tony Featherstone weighed up 3 undervalued LICs.
  • Shares should be held for the long term but many investors find they can’t emotionally cope with regular share market crashes or they’re at or near retirement so can’t risk negative or low returns over a 10-year period. For the Report this week, Market Timing Australia’s Percy Allan put forward 4 big picture observations for you to consider.
  • If you bought Telstra (TLS) when James Dunn recommended it as a “contrarian play” a year ago, you did well – the stock has moved from $2.76 to $3.89, for a nice capital gain of 41%. But where to for TLS from here?
  • CMC Markets’ Chief Market Strategist Michael McCarthy chose Speedcast (SDA) as the Hot Stock of the week.
  • In the first Buy, Hold, Sell – What the Brokers Say of the week, FNArena counted 17 downgrades and 9 upgrades. In the second edition, there were 6 downgrades and 4 upgrades.
  • In Questions of the Week, Paul Rickard answered readers queries about pink diamonds, super limits, a stock on a winning roll and whether this time is different.

Top Stocks – how they fared:

The Week Ahead:

Australia
Monday July 22 – CBA Business Sales Index (June)
Tuesday July 23 – Weekly consumer confidence (July 21)
Tuesday July 23 – Speech by Reserve Bank official
Wednesday July 24 – CBA ‘flash’ purchasing manager indexes (July)
Wednesday July 24 – Skilled internet job vacancies (June)
Thursday July 25 – Reserve Bank Governor speech

Overseas
Monday July 22 – US Chicago Fed National Activity Index (June)
Tuesday July 23 – US FHFA House Price Index (May)
Tuesday July 23 – US Existing home sales (June)
Tuesday July 23 – US Richmond Fed Manufacturing Index (July)
Wednesday July 24 – ‘Flash’ Markit purchasing manager indexes (July)
Wednesday July 24 – US New home sales (June)
Thursday July 25 – US Durable goods orders (June)
Thursday July 25 – US Goods trade balance (June)
Thursday July 25 – US Wholesale inventories (June)
Thursday July 25 – US Kansas City Fed Manufacturing Index (July)
Friday July 26 – US Economic (GDP) growth (June quarter)
Saturday July 27 – China Industrial profits (June, annual)

Food for thought:

“The only investors who shouldn’t diversify are those who are right 100% of the time.” – John Templeton

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:

The annual growth rate for the Chinese economy fell to 6.2% in the June quarter, the weakest pace in at least 27 years as this chart from CommSec shows:

Top 5 most clicked:

Recent Switzer Reports:

Monday 15 July: 5 riskier alternatives to term deposits

Thursday 18 July: 4 big picture observations + 3 undervalued LICs

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.