[table “139” not found /]

After a week where all we saw was markets in the red, the burning question for many has to be: is this the market Armageddon that the doomsday merchants have been predicting for years or is it another buying opportunity?

The only good news to report from this week’s stock market rout, which must have had many investors pondering whether this was the start of a bear market or stock market crash, was the US December employment report, which revealed that 292,000 jobs had showed up, while the jobless rate remained at 5%.

This brought the added plus that I woke up to “green on the screen” instead of red (which we endured all week), with US stock market indexes up. That’s the kind of business TV I want to see when I jump out of bed!

While on positive topics, let me throw in (and it’s important) the fact that the world’s biggest economy is still creating close to 300,000 jobs in a month, in an economy where the currency is rising. This confirms my suspicions that the real world story is a whole lot better than the speculative stories that are currently driving stocks lower.

Why such a bad week?

China was centre stage, with weaker manufacturing numbers and the upcoming lifting of a ban on big shareholders (with 5% or more of a company’s stocks) unloading their shares, which was made worse by two suspensions of trade when the Chinese stock market dropped 7% in a virtual heartbeat! This not only had to spook China’s investors, it unsettled the world’s stock of share players.

China’s weak economic showing extended to the services sector as well, though it’s still expanding, albeit at a slower rate than expected. All this suggested that the economy’s overall growth could also disappoint. This not only hurt demand for material stocks such as BHP and Rio, it weakened the oil price, which meant that the market stole our Santa Claus rally gift!

The troubles between oil producers Saudi Arabia and Iran didn’t help, though many were surprised that the oil price didn’t spike on these concerns. And then there’s that serial pest in North Korea, Kim Jong-un and his H-bomb, which might only be a second-rate atom bomb. Does he look like an exaggerator who’d lie about his capability?

In addition, until the very good jobs number, US data, such as the ISM manufacturing figures, hasn’t been impressive. Finally, the end of year US stock market trading wasn’t strong or enthusiastic, so all the above has resulted in Wall Street coming up with the worst start to a trading year since 2008 – the GFC year!

I guess there was some improvement over the week because, on Monday, the Yanks were telling us it was the worst opening day since the Great Depression year of 1932, though by the close on that day it was downgraded to the worst day-one start to a year for stocks since 2008.

I argued in my Investment Report for 2016 that the economic story had to trump the speculative, largely-negative story for stocks to head up. I don’t retreat from that argument.

And then there has to be an improving earnings story. Here the Yanks are tipping an 8% gain for the year. I hope that works out but it will need a more consistent and convincing economic story coming through, more like the job numbers overnight.

Oh, by the way, there’s one downside to these good job numbers and that is that it makes some experts start tipping four interest rate rises this year. One of these was the San Francisco Fed President John Williams, who said exactly that after the December employment figures. The fewer rate rises the better for stocks so this kind of speculation isn’t helpful when a stock market is already spooked to the eyeballs.

What I liked

• Obviously, the US job numbers.
• In face of confusion of what it means for stocks that China is selling off its shares big time and the lower price of oil, investment guru Mark Cuban tweeted: “So I follow the number one rule of investing. When you don’t know what to do. Do nothing.”
• The World Bank did mark down Chinese economic growth for 2016 from 7% to 6.7% but it still makes you wonder whether this week’s sell off was more about speculation rather than economic expectations.
• CNBC reported that “Capital Economics says that inflation data expected this weekend should provide a respite from fears that China’s economy and financial markets are collapsing.” Higher inflation will be seen as a plus for Chinese growth and vice versa.
• This from CommSec’s Craig James on the 12.7% fall in local dwelling approvals in November, after rising by 3.3% in October and rising 2.7% in September: “All good things come to an end eventually and Australia’s long building boom may finally be showing signs of peaking. In the year to June 2009, 135,558 new dwellings were approved. Fast forward to the year to October 2015, and 233,186 homes were approved – up 72% from the cyclical lows. The building boom showed signs of peaking a year ago before rallying to new highs but the situation bears watching again.”
• New vehicle sales hit record levels in 2015. Australians bought 1,155,408 new vehicles in 2015, up 3.8% over the previous year. Sales in December were up 2.9% in the same month of 2014.

What I didn’t like

• The US dollar rising, not falling. A lower greenback will help commodity prices rise and the share price of the likes of BHP.
• The oil price and why its low level is not seen as a boost to economic growth. Note that I said “seen” as it is but that’s not how the speculators on stock markets want to see it.
• Dennis Gartman of the The Gartman Letter, who said we were now in a bear market. Late last year he was bearish but then admitted he was wrong but now has admitted that he was wrong when he admitted he was wrong!
• Legendary investor, George Soros, looking at the China stock market sell off and comparing it to a GFC-rerun. He often makes unhelpful comments at the scariest times, which makes you wonder: why? Could he care about us and our investments?
• The World Bank lowered its global economic growth forecast for 2016 to 2.9%, from a 3.3% projection in June. (That said, last year we grew at 2.4%, so there is an expectation of an improvement.)
• The Caixin purchasing managers index for the services sector in China fell from 51.2 to a 17-month low of 50.2 in December.

Crash or buying opportunity?

As you can see from the above, the list of bad news issues outweighs the good stories and it explains why stocks are under pressure. However, I remain of the view that the bad news is not indicative that a crash is coming. I’m seeing this as another buying opportunity. The fact that our All Ords was down around 87 points on Friday but finished down only 19.4 suggests there are dip-buyers out there when we breach the 5000-level.

We simply need a better run of good economic news like the Yanks produced with their job numbers overnight. When that happens, this market negativity will quickly turn to positivity.

Correction

Thanks to those readers who pointed out that I numerically downgraded the Santa Claus rally, which I spent the year sweating on. I reported last Saturday as a 0.8% rise when it was a big 8% jump, though this week erased 6% of it!

This mistake has been put down to too much Christmas cheer and a fact checker on holidays!

That’s all under control now!

Top stocks

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What moved the market

• A shaky start to the year as weak data from China triggered declines in global markets, with the Dow recording its worst first day of the year since 2008 while the Australian share market dropped 1.6%
• On Wednesday, North Korea successfully tested a hydrogen bomb, which rattled markets worldwide. The S&P/ASX 200 index fell 61.3 points to 5,123.1 points.
• The turmoil continued with China depreciating its currency and suspending trading for the second time in a week. This drove down the S&P ASX/200 down a further 2.2% and the Australian dollar to a two-month low. The S&P 500 lost 36.86 points to 1,953 on Thursday.
• Adding to the gloom, oil prices fell to near 12-year lows and copper prices touched their lowest since 2009, weighing on energy and material shares. All 10 S&P 500 sectors were lower, though.
• Falling commodity prices and news from China saw shares in iron ore producers fall sharply. Global miner BHP Billiton’s share price fell 82 cents to $16.33 and Rio Tinto losing $2.05 to $40.70
• Despite a resurgence in Chinese markets, investors remained nervous, selling off financial and consumer stocks to take the market below the 5,000 level. On Friday, the S&P/ASX 200 index fell below 5,000 points to 4,990.9

The week ahead

Australia

• Monday January 11 – Job advertisements (December)
• Tuesday January 12 – Credit & debt card activity (November)
• Tuesday January 12 – Overseas arrivals (November)
• Tuesday January 12 – Weekly consumer sentiment
• Wednesday January 13 – Job vacancies (November)
• Thursday January 14 – Employment/unemployment (December)
• Friday January 15 – Housing finance (November)


Overseas

• Saturday January 9 – China inflation (December)
• January 9 – 15 – China money supply & lending (December)
• Wednesday January 13 – US Beige Book (summary of conditions across Fed districts)
• Wednesday January 13 – China International trade (December)
• Friday January 15 – US Producer prices (December)
• Friday January 15 – US Retail sales (December)
• Friday January 15 – US Industrial production (December)
• Friday January 15 – US Consumer sentiment (January)

Calls of the week

• China allowed the biggest fall in the yuan in five months, and trade in Shanghai stocks was halted for the second time this week after a 7% selloff in its market. The People’s Bank of China surprised markets by setting the official mid-point rate on the yuan at 6.5646 per US dollar, the lowest since March 2011.
• The World Bank has cut its forecast for 2016 growth to 2.9%, from 3.3% projection in June. The World Bank has also cut its outlook for China’s growth in 2016 to 6.7%, from 7% for the same period. In its January 2016 Global Economic Prospects, the Washington-based banker said the outlook for emerging markets was the key factor behind why it cut its growth forecasts.
• Dick Smith’s bankers, National Australia Bank and HSBC called in the receivers with the company now being formally wound-up. Dick Smith dealt with two earnings downgrades since August including $60 million in inventory write-offs.
• Qantas lowered the number of frequent-flyer points (by up to 10%) that are needed to book flights on many overseas destinations including Asia, the Americas, Europe and Africa. A flight between Melbourne and Los Angeles will now cost 90,000 points and $419.32 in carrier charges, compared to the previous costs, that represents savings of 6000 points and about $190 in charges.

Food for thought

“There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”

J.K Gailbraith.

“You get one opportunity. You balls it up and you are in strife.”

Nick Cummins aka The Honey Badger.

My favourite charts

Look at the smalls

Of my 5 stocks for 5 months which I put to subscribers in August (see original article here) I’ve been happiest with iSentia, which has had a great year. Have a look at the chart.

S&P’s One Day Lurch

Guess what! The S&P 500 start to 2016 wasn’t that bad compared with the past, according to data from Bloomberg and they have chart to prove it!

So the S&P 500 had its sixth-worst start to the year since 1932, but the move wasn’t that dramatic. Bloomberg tells us that the 1.5% drop was just shy of the average 1.1% move in either direction on previous opening days, when big moves are common. On all the other days, the S&P 500 had average daily swings of 0.77%

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.

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