The Trump tax watch is the ongoing preoccupation of Wall Street and inevitably the rest of global stock markets are looking on but the trend I’m really excited about is the comeback of commodity prices, especially iron ore prices.
The iron ore price was up about 8% for the week and Fairfax says the gain has been 16% for the month! Apart from the nice rise of share prices for BHP – up 3.1% for the week – and Rio 1.7% – it confirms what I’ve been arguing that the good global economic story is really positive for commodities.
This could stop the Oz dollar falling to where I’d like it to be – 70 US cents or lower – but it still augurs well for our stock market. This goes double if the positive economic growth story from the RBA holds true, which should help bank stocks have a better 2018.
Obviously, what the US does with interest rate rises next year could help us get some extra economic growth out of a lower dollar.
Without a Wall Street lead, the ‘gutless’ local market gave up 4 points on Friday on the S&P/ASX 200 Index but it did add 0.4% for the week to end at 5983. This refusal to permanently kiss the 6000 level goodbye in advancing higher is primarily because we’re all awaiting news on President Trump’s tax cuts, which are said to be passed after Thanksgiving, which has just been celebrated in the States.
If these tax cuts impress, up goes Wall Street and we go with it. If they disappoint, then we could head lower from current levels. That said, at one point there will be another buying opportunity because the economic outlook here and abroad for 2018 should underwrite good stock price rises.
Both Macquarie Bank and Goldman Sachs this week have given next year the big thumbs up for the economy and stocks, and while these guys and gals aren’t infallible, they’re pretty good on the numbers that count. A Trump tax boost would be a win on a win.
The energy price story reinforces my positive economic outlook thesis and Origin Energy was up 4.9% for the week and even Woodside managed a 2.2% rise, which all adds to my positivity for the sector.
I like these trends but I’m not keen on the current bank share price moves.
Royal Commission talk is gaining support, with ANZ down 2.1% for the week but in the fullness of time, even if our politicians cave into politics and go for a Royal Commission, when a vigorous Parliamentary Inquiry would be cheaper, quicker, and more effective, I will be a buyer of banks, if they end up at silly lower levels.
A Royal Commission could take three years to complete and make recommendations and in that time I reckon CBA could breach $100!
So what happened on Wall Street after Thanksgiving?
Well, it was Black Friday, when US retailers historically get out of the red and go into the black, with the start of the holiday shopping season. This has the world’s second greatest shoppers behind the irrepressible Chinese, going mad in the malls and Macy’s ahead of Christmas.
In fact, the queues outside of shops such as Target, Best Buys, etc. has Wall Street betting on a strong retail surge. It was a shortened trading day so the market players, who ply their money moves at the NYSE, can join the shopping rush.
The likes of Macy’s, Nordstrom and Kohl’s all had a good day at the office and it looks like market smarties have woken up to the fact that Amazon won’t totally crush shoppers’ desires to show up to shop! Well, der, and it will be interesting to see how retailers’ stocks here are treated on Monday.
I’d argue the measly 31.8-point gain on the Dow Jones Industrial Average overnight eventuated because there are still doubts about the Trump tax cuts.
“The proposed fiscal stimulus faces another hurdle next week when the Senate takes up its own version of the legislation,” said Jeremy Klein, chief market strategist at New York based FBN Securities in the US.
“I maintain that the implementation of something meaningful is an intractable problem, given the concerns surrounding the Federal deficit, the [state and local tax] deduction, and the Affordable Care Act.”
This is a crucial political and economic play to pull for the embattled US President but if his package ends up being surprisingly good and is delivered before Christmas, as has been promised, then it will confirm and even ramp up current, strong forecasts about US economic growth for 2018.
Yep, and that will be good for stocks.
What I liked
- Construction work done in Oz soared by 15.7% in the September quarter, underpinned by work on large engineering projects in Western Australia. Australian construction work hit record highs. New South Wales and Victoria also continue to generate fresh record construction work highs amid a building boom.
- Engineering work rose by 33% in the September quarter.
- The weekly ANZ/Roy Morgan consumer confidence rating rose by 1.4% to 116.4 – its highest level in 16 weeks. It was the fourth gain in five weeks.
- Our Internet Vacancy Index rose by 0.5% to 82.7 in October 2017 in trend terms, after increasing by an upwardly revised 0.6% in September. The index has now risen for 12 consecutive months – the first time since March 2011. The index has increased by 8.4% over the year.
- In an age when we want inflation, building inflation rose by 1.4% in the September quarter. The annual rate of construction inflation rose from 2.4% to 3.8% – an 8 ½-year high.
- Over the year to September, the proportion of occupied seats on domestic flights in Australia hit a 5½-year high of 78.4 %.
- Goldman’s and Macquarie’s calls for stocks in 2018 – very bullish!
- Oil hit a two-year high on Friday.
- Markit’s ‘flash’ Eurozone manufacturing purchasing manager’s index rose to 60.0 (forecast: 58.2) in November, from 58.5 in October. This was the second highest reading since June 1997.
- The Chicago Fed National Activity Index rose to 0.65 in October (forecast: 0.20), up from 0.36 in September.
- The leading index in the US rose by 1.2% in October (forecast +0.6%).
What I didn’t like
- CommSec says: “In the year to October, just 53% of young Aussies between 15-19 years were in the job market – a record low.”
- In the US, orders for durable or long-lasting goods fell by 1.2% in October (forecast +0.3%).
- A few Fed members thought a rate hike should be deferred until data showed inflation was clearly on a path to the 2% rate target.
What’s the story with Fortescue?
Other big miners had a great week but FMG did not have the same positive experience. Over the week it lost ground from $4.71 to $4.65, while its rivals did miles better. The quality of its ore is a problem, as the Chinese want higher quality ore but Michael McCarthy of CMC Markets confirmed other experts’ views that FMG, especially with its lower debt and expected big dividend yield could surprise on the higher side in the future. There are a lot of analysts targeting $6 plus on this stock. I only wish that Nev Power was still CEO!
The Week in Review:
- As always, what drives stocks up can pull stocks down. I took a look at what’s been directing the stock market [1] of late, and yep, it’s all about Donald Trump’s tax cuts!
- Paul Rickard [2] discussed whether it’s better to invest in LICs or ETFs and addressed one of the most frequently asked questions by investors – which is the best managed investment?
- James Dunn [3] revealed five stocks to play online retail with in the wake of China’s Singles Day and Black Friday in the US.
- There are increasing signs that the property market is slowing, but as Roger Montgomery [4] explained, construction activity could soon see a boost. He offered two stocks with exposure to the sector.
- In this week’s Hot Stocks [5] was an insurance company, a building company and a popular energy company.
- In our first Buy, Hold, Sell: What the brokers say [6], Trade Me Group was upgraded while Dulux was in the ‘not-so-good’ books
- And in the second Buy, Hold, Sell [7], Fisher & Paykel Healthcare was downgraded following lower than forecast growth, while brokers decided Santos should be upgraded from its ‘sell’ position.
- Charlie Aitken [8] explained why he believes Kidman Resources should be in your Christmas stocking this year, and it’s all about electric vehicles.
- David Keelen of Ellerston Capital chose Redflex as his Professionals Pick. Find out why! [9]
- Tony Featherstone [10] looked at three different tourism stocks as the holiday period fast approaches.
- Plus, Paul Rickard answered all of your Questions of the Week [11]
Top Stocks – how they fared
What moved the market?
- Queensland LNP Senator Barry O’Sullivan said he was committed to bringing on a powerful inquiry into the banking sector. This kept the pressure on major bank shares.
- Amazon was widely tipped to launch its Australian operation Friday in line with the online shopping bonanza Black Friday.
- In the US, Wall Street closed and investors took the day off to celebrate their Thanksgiving public holiday
- Iron ore prices surged on the back of optimism about Chinese demand for imported steel over winter.
Calls of the week
- I called out our media [12] for giving Amazon too much free publicity!
- Former prime minister John Howard slammed a royal commission into the banks as “rank socialism.”
- Charlie Aitken tipped Kidman Resources [8].
The Week Ahead:
Australia
- Thursday November 30 – New home sales (October)
- Thursday November 30 – Building approvals (October)
- Thursday November 30 – Private capital expenditure (Sept. quarter)
- Thursday November 30 – Private sector credit (October)
- Friday December 1 – CBA-Markit purchasing managers survey
- Friday December 1 – CoreLogic home prices (November)
Overseas
- Monday November 27 – US New home sales (October)
- Tuesday November 28 – US Trade balance (October)
- Tuesday November 28 – US Consumer Confidence (November)
- Tuesday November 28 – US FHFA Housing Price Index (September)
- Tuesday November 28 – US S&P Case-Shiller Home Prices (Sept)
- Wednesday November 29 – US Economic growth (September quarter)
- Wednesday November 29 – US Pending home sales (October)
- Wednesday November 29 – US Federal Reserve Chair Yellen speech
- Wednesday November 29 – US Federal Reserve Beige Book
- Thursday November 30 – US Personal income (November)
- Thursday November 30 – China purchasing managers surveys
- Friday December 1 – US ISM manufacturing index (November)
Food for thought:
“For those of us in the financial world, Black Friday has a strong negative connotation, referring to a stock market catastrophe.” Mark Skousen
Last week’s TV Roundup
- Are our politicians indulging in mindless bank bashing? CEO of The Bankers’ Association, Anna Bligh [13], offered her views on this and a possible bank royal commission.
- Is the fear of missing out dragging investors away from fundamentals and towards momentum? Simon Conn [14] from Investors Mutual discusses on Super TV.
- There are signs that next month’s budget update will deliver a lower than expected deficit. Chris Richardson [15] of Deloitte Access Economics joined Super TV to discuss.
- As 2017 comes to an end, it’s time to start looking at different areas of growth across the state, where to invest and what to stay away from. Louis Christopher [16] from SQM Research shared his his thoughts.
- Cricket legend Ian Chappell turned global ambassador joined a panel with CEO of SportsHero [17] Tom Lapping to discuss the future plans for the company and where it’s headed.
- To help find an answer to the energy crisis, Australia’s Mineral’s Council’s Vanessa Guthrie [18], joined Super TV to share her opinion.
- Are autonomous vehicles going to be the next big thing? What is going to happen to the car industry? Brian Haratsis [19] from Macro Plan is certain that we will see driverless cars by 2020!
- In a rising rate environment both here and in the US, where do the real investments lie? Chris Bedingfield [20] from Quay Global Investors believes he has the answer.
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.
One of the biggest movers this week was Orocobre, with its short position decreasing by 1.15%.
Charts of the week
Petrol prices the highest in 27 months
Source: Commsec
And they say Public Servants do it tough!
The graph below shows public sector vs. private sector wages growth over the last nine years.
Source: ABS
Top 5 most clicked:
- Charlie Aitken: Kidman Resources (KDR): my number 1 lithium exposure [8]
- James Dunn: Five stocks to play online retail [3]
- Paul Rickard: What’s the best managed investment? [2]
- Peter Switzer: Seriously, what should stock players fear? [1]
- Rudi Filapek-Vandyck: Buy, Hold, Sell: What the brokers say [6]
Recent Switzer Super Reports
- Monday 20th November Black Friday [21]
- Thursday 23rd November Holiday Stocks [22]
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.