There are times when stock markets cave into the bond market but sometimes you just have to have guts and think about what Warren Buffett has advised: “…be greedy when others are fearful.” This bond concern is short term. Eventually, stocks will be back in favour.
I wrote this opening paragraph last night after looking at our stock market’s silly reaction to the bond drama in the States on Thursday. Silly? Why silly?
Well, try this: AMP Capital thinks the US will grow by 6% this year. That’s why there are inflation concerns showing up in the bond market. But that 6% growth, which is lower than others’ best guesses on growth, will power profits and then share prices.
By the way, at 5am when I got up to write this for you, the Dow was down 220 points. But get this: the Nasdaq (the home of the currently rejected big, tech stocks) was up 178 points (or 1.36%).
Yep, there’s been a little bit of rethinking on just how worried we should be about these rising yields/interest rates in the bond market because of inflation that will not be a problem for maybe one, but more likely two or three years’ time.
Seriously, how many people and how many dollars flow out of stocks to chase 10-year Treasury bonds priced at 1.6%? C’mon!
I’ve been tipping that the RBA’s prediction of a cash rate at 0.1% for three years was baloney but central banks will try to keep rates as low as they can for as long as they can. So this bond market pressure will dissipate in time and stocks will go higher.
It could be sooner than you think but, whatever happens, I’ll be pulling out my old “it’s a buying opportunity” suggestion.
My job is to keep my head when all about me are losing theirs and blaming it on the bond market, a US President, a Chinese virus or me! That’s my job and I’m doing it! And I’m not alone. Here’s AMP Capital’s Shane Oliver’s take on the subject: “Bond yields could still go higher in the short term though as bond selling begets more bond selling, possibly taking Australian 10 year bond yields through 2%, before it settles down perhaps through a combination of central bank bond buying and the realisation that underlying inflation is not taking off.”
That said, he wisely added that “the longer this continues, the greater the risk of a more severe correction in share markets if earnings upgrades struggle to keep up with the rise in bond yields”, which is a fair call but, as implied, that’s something that might happen over time. (By the way, the personal consumption expenditures price index out overnight hosed down inflation fears and helped stocks fight gravity.)
And here’s another smart guy who’s not too worried. CNBC interviewed Brook Dane (MD and portfolio manager of Goldman Sachs asset management division) about the tech sell off. Dane said Goldman thinks there are “incredible opportunities”, especially in the second generation of tech companies.
Like me, he thinks the pullback is overdone and he likes innovators and disruptors. And for those wondering about Afterpay and Zip Co, he said he’s “watching payment processing, growth software and internet ads.”
He thinks the focus of the investment house is not just in the US but globally and also wants to hold the good growth companies to add solidity to the portfolio.
Enough of that. Let’s have a quick summary of this week’s action spoiled by bond market antics and made worse by the lemmings on Wall Street.
The S&P/ASX 200 Index lost 160.7 points (or 2.4%) lower on Friday and 1.8% lower for the week. And that means the Index made 1% for the month.
The AFR noted that Nuix was the greatest casualty of the tech stock dumping this week. This was inspired by the Nasdaq, which lost 3.5% on Thursday, with Tesla off 8% in a day. Once market darling, Nuix slumped 34.2% over the week.
Here are the winners and losers:
It was a huge week for the big miners, with BHP hitting $50.45 this week but it peeled back to $49.13 because of bond market fears.
But among the fear and loathing, copper (a great litmus test for global economic growth) gave us reasons to be positive. “Copper rose 1.2% on Thursday night to $US9,456 a tonne, creeping closer to its February 2011 record high above $US10,000,” wrote the AFR’s Vesna Poljak. “Iron ore traded in the spot market rose 0.9% to $US174 a tonne according to Fastmarkets MB.”
These price rises are not only good for our market index and miners, they scream a global boom is in train, as vaccine success rates in Europe, the US and especially Israel, where half the population has received at least one dose of vaccine and infection rates are diving nicely.
Finally, to the wrap up of reporting season, here’s the summary:
- 56% of companies said profits were up, compared to 36% six months ago.
- 51% beat expectations, compared to 32% six months ago.
- 47% increased their dividend, compared to the 55% that cut their dividend six months ago.
Shane Oliver noted that “resources companies are now expected to see 52% earnings growth this year…and…the biggest upside surprises and earnings upgrades have been for media companies, banks and retailers, attesting to the cyclical upswing in the economy.”
This is something we’ve been warning you about for a damn long time. I hope you took our tip.
What I liked
- Economic recovery believers have to like this from CNBC: “Energy has gained 6.8% this week alone, the biggest winner by far amid expectations that consumers around the world will soon be driving and flying as they were prior to the Covid-19 pandemic.”
- The Wage Price Index (WPI) rose by 0.6% in the December quarter (consensus: 0.3%) – the fastest growth in 18 months. The 1.4% wage growth exceeds the 0.9% lift in consumer prices.
- New business investment (spending on buildings and equipment) rose by 3% (the biggest quarterly lift in 8½ years) in the December quarter, after five successive declines. Economists tipped a 1% lift in the quarter.
- According to the Commonwealth Bank (CBA), credit and debit card spending in the week to February 19 lifted by 7% on a year ago (previously: 13%).
- Private sector credit (effectively outstanding loans) rose by 0.2% in January (consensus: 0.3%) to be up 1.7% over the year.
- Over the full 12 months to January, the budget deficit was $192.579 billion, or 9.8% of GDP. The underlying cash balance for the 2020-21 financial year to 31 January 2021 was a deficit of $133.9 billion against the MYEFO (mid-year) profile deficit of $148.4 billion. A lower deficit is a good sign of economic recovery.
- The Australian Bureau of Statistics (ABS) has released the Business Conditions and Sentiments survey for February. According to the survey, “The proportion of businesses facing reduced cash flow and lower demand has reduced but challenges still remain.”
- Residential building rose by 2.7% in the quarter with alterations and additions up by 3.6% to record highs.
- Despite China trade issues, the goods trade surplus was $8.754 billion — the fifth highest on record.
- The Conference Board consumer confidence index rose from 88.9 to 91.3 in February (survey: 90).
- The Conference Board leading index rose by 0.5% in January (survey: 0.4%).
- The Dallas Fed manufacturing index lifted from 7 to 17.2 in February (survey: 5).
- New claims for unemployment insurance (jobless claims) in the US fell from 841,000 to 730,000 last week (survey: 838,000)
- The US economy, as measured by GDP, grew by 4.1% in the December quarter (survey: 4.2%). Durable goods orders rose by 3.4% in January (survey: 1.1%). That’s not bad given the troubles the Yanks have had with the Coronavirus.
What I didn’t like
- The weekly ANZ-Roy Morgan consumer confidence rating fell by 0.6% to 109.2 — a third successive weekly decline (long-run average since 1990 is 112.6). I blame Premier Dan for this. But confidence is still up by 67.2% since hitting record lows of 65.3 on 29 March 2020 (lowest since 1973).
- Against the positive national trend, annual card spending fell by 7% in Victoria (previously: 12%) — the biggest contraction in spending since the week ended 23 October 2020.
- Business credit fell by 0.1% to be up 0.5 % over the year – the weakest annual growth rate in over 9 years.
- Construction work done fell by 0.9% in the December quarter (survey 1%).
- Those disruptive share speculators from Reddit won’t let GameStop shares go, with the price up over 100% on one trading day last week!
Don’t miss this!
Below are the big stories of the week from the Switzer Report. There are some great companies under the spotlight and I noticed that of the five stocks I revealed with big upsides because of the reopening trade, three went up this week, despite the big weekly fall. I think these rises were ahead of schedule but I’m not complaining.
In case you missed it, James Dunn’s piece on six companies with good-rise potential [1] features companies many of us care about such as CSL, Brambles and Sonic Healthcare.
Meanwhile, Tony Featherstone looks for stock opportunities out of the property boom [2]. By the way, in my Switzer TV: Property show [3], the founder of Century 21, Charles Tarbey said the ACT had an auction clearance rate recently over, wait for it, 90%!
The week in review:
- This week, I looked at the stocks listed 101 to 200 to see if there are big gains tipped by expert company assessors. And then I checked if 5 of these classic companies [4] – Appen (APX), Corporate Travel Management (CTD), NRW (NRW), Ooh!Media (OML) and Tassal Group (TGR) – look like they’ll be reopening beneficiaries.
- Wesfarmers (WES) has been a steady and consistent performer, up 7% in calendar 2021 and recently hitting a 52-week high. It closed on Friday at $54.01. Can it go higher, possibly to $60? Find out Paul Rickard’s view in his article this week [5].
- James Dunn looked at 6 scenarios where analysts can see clear water ahead for the share price [1]: CSL (CSL), Adairs (ADH), Booktopia (BKG), Shaver Shop (SSG), Brambles (BXB) and Sonic Healthcare (SHL).
- Tony Featherstone shared his analysis of 3 stocks worth a look as the property boom gains momentum [2]: GWA Group (GWA), Breville Group (BRG) and Joyce Corporation (JYC).
- Julia Lee, Chief Investment Officer from Burman Invest, selected Independence Group (IGO) as our “Hot” Stock of the week [6].
- In Buy, Hold, Sell – What the Brokers Say this week, there were 22 upgrades and 18 downgrades in the first edition [7], and 18 upgrades and 10 downgrades in the second edition [8].
- And in Questions of the Week [9], Paul Rickard answered your questions about ETFs becoming more popular, Woolworths (WOW) Coles (COL), mortgage broking stocks Mortgage Choice (MOC) and Australian Finance Group (AFG), and the effects of rising bond yields on the prices of bond ETFs.
Our videos of the week:
- Boom! Doom! Zoom! | February 25, 2021 [10]
- Experts love these ASX stocks: TYR, IGO, APX, AVH, WES, OML, XRO [11] | Switzer TV: Investing
- House prices continue to surge but what could kill the boom?! [3] | Switzer TV: Property
Top Stocks – how they fared:
The Week Ahead:
Australia
Monday March 1 – CoreLogic home value index (February)
Monday March 1 – Lending indicators (January)
Monday March 1 – Business indicators (December quarter)
Monday March 1 – ANZ job advertisements (February)
Tuesday March 2 – Reserve Bank Board meeting
Tuesday March 2 – Balance of payments (December quarter)
Tuesday March 2 – Building approvals (January)
Tuesday March 2 – Government finance statistics (December qtr.)
Wednesday March 3 – National accounts (December quarter)
Thursday March 4 – Retail trade (January)
Thursday March 4 – International trade (January)
Overseas
Sunday February 28 – China purchasing managers’ indexes (Feb.)
Monday March 1 – China Caixin manufacturing index (February)
Monday March 1 – US ISM manufacturing index (February)
Monday March 1 – US Construction spending (January)
Tuesday March 2 – US Vehicle sales (February)
Wednesday March 3 – China Caixin services index (February)
Wednesday March 3 – US ADP employment change (February)
Wednesday March 3 – US ISM services index (February)
Wednesday March 3 – US Federal Reserve Beige Book
Thursday March 4 – US Factory orders (January)
Friday March 5 – US Non-farm payrolls (February)
Friday March 5 – US International trade balance (January)
Food for thought:
“Value investing, the way I conceive it, is always wanting to get more value than you pay for when you buy a stock, and that approach will never go out of style.” – Charlie Munger
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:
CommSec’s Ryan Felsman shared the following chart which shows that business investment rose by 3% in the December quarter, the biggest lift since March 2012:
Top 5 most clicked:
- 5 stocks in the top 200 to benefit from reopening trade [4] – Peter Switzer
- Clear water ahead for these 6 stocks [1] – James Dunn
- 3 stocks benefitting from the property boom [2] – Tony Featherstone
- Will Wesfarmers be a $60 stock? [5] – Paul Rickard
- My “HOT” stock: IGO [6] – Maureen Jordan
Recent Switzer Reports:
- Monday 22 February: 5 stocks to benefit from reopening trade [12]
- Thursday 25 February: 3 home related stocks riding on the property boom [13]
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.