Switzer on Saturday

Dumb Draghi decisions and data drama ahead but I’m loving it!

Founder and Publisher of the Switzer Report
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How did we do it? Our stock market has been up two weeks in row, which means since the February 10 low of 4706.7 we’ve come back around 10%. I guess, simply, it’s been a story of ‘uppers’, with iron ore prices up 19%, the oil price up over $US40 a barrel for Brent Crude, our economic growth up from 2.5% to 3%, business confidence is up and the dollar’s up to 75.6 US cents this morning. And just when there was a good reason to sell off on Friday, after Mario Draghi spooked European financial markets, we went up 0.3% on the S&P/ASX 200 index.

That rise and positive market performances on a number of other days over the past two weeks are telling us something. And I reckon the 19.5% surge in the South 32 share price is also saying something positive that shouldn’t be ignored.

Smarties in the commodities space think manganese prices, which South pumps out for about 27% of its earnings, are on the way up. The same crew think coal and alumina are set to defy gravity. Why? Could all the recession talk that drove hedge fund managers to dump stocks like an Australian government drops PMs, now be seen to be as dumb as I predicted? Commodity prices react to global demand and while I can’t see the world economy going backwards, I’m not in the big bounce back for the global economy camp just yet! Of course, the low commodity prices must have cut back supply of many of these resources. The Yanks look good, Japan is tottery, Europe is growing (but at a lesser rate than was expected a few months ago) and China went public with its slight drop in growth from 7% to 6.5-7%, which, in total, hardly screams that the world economy is back in town and demanding commodities.

As I say, I can’t explain this great recovery but you know I doubted the reasons for the excessive sell off. So, maybe, we are where we’re supposed to be, given the state of economics, company profits and our best guess on our future.

Maybe, as I have been predicting, we are muddling through, along a long, gradual recovery, where sometimes the stock market gets ahead of itself, as in March 2015, when we hit 5996.4. On the other hand, we got behind ourselves when we slumped to 4706.7 on February 10 this year.

It’s like we’re surrounded by crazy traders as well as inexplicable algorithm trading systems, so my job is to keep long-term investors/followers on track and maintaining the faith. So far, my ‘buy the dips’ strategy has worked. Long may it do so!

And at 5am when I started this piece, the Dow was up 183 points (or 1.08%), while the Nasdaq was up 1.58%. Thus the positivity I described above still persists and it’s no surprise that it goes with a higher oil price, which has to be hinting that the negativity of January and February was overdone or else the stock market world is MAD!

So what’s Wall Street’s story overnight? Well, continuing the theme of craziness, it looks like it was a case of “oops, maybe we were too tough on Mario Draghi and the ECB”! After the European Central Bank boss inferred interest rates would not need to go lower, the market had convulsions, which led to me changing Mario’s Super Mario tag to Stupid Mario (no offence intended)!

However, overnight, the German DAX was up 3.51%, the French CAC 40 was 3.27% higher and the FTSE put on 1.71%. What happened?

Well, first, the International Energy Agency tipped that oil prices might’ve bottomed and second, the economists told the traders, who didn’t like Mario’s unnecessary rates comment, that the effects of the actual monetary measures announced were pretty good.

This is how AMP Capital’s chief economist Shane Oliver saw it: “The ECB more than delivered, but inadvertently shot itself in the foot (hopefully temporarily). Whichever way you look at it, the ECB delivered much more than generally expected: its monthly quantitative easing program was increased from €60bn to €80bn; it will now include buying corporate debt; new cheap financing programs for banks (what the ECB calls TLTRO) will start in June with an interest rate as low as -0.4%; and the rate of interest on bank deposits at the ECB will be cut to -0.4% (from -0.3%).”

The Europeans must have been reading Shane’s mail, as the negative reaction has been temporary and I like it. I like it a lot!

What I liked

  • The rise in stock markets in Europe overnight pushed BHP up 2.23% and Rio up 2.2%, which should be good for us on Monday.
  • Oil has fallen 70% since June 2014 to a low of $US27 a barrel but this morning it sits at $US40 a barrel. Oil plays a big part in explaining why stocks are up 10% over the month.
  • China concerns are abating following the central bank there setting the yuan higher than expected. The less desperate China looks, the better it is for international confidence.
  • The gold price was $13 lower, which is a good sign that the fear factor is reducing and it coincides with the VIX or fear index dropping to 17 but it was 30 around February 10, when we saw this year’s low on the ASX 200 index.
  • Tourist arrivals from mainland China and Hong Kong rose to a record 1,305,200 in the year to January, up 23.6% over the year – the first time annual tourist numbers have surpassed 1.3 million.
  • The NAB business conditions index rose from +5.4 to +8.3 points in February. And the rolling annual average rose to a 7-year high of +8.3 points. And the business confidence index rose from +2.7 points to +3.4 points. The survey was conducted from February 22 to 26.
  • The weekly ANZ/Roy Morgan consumer confidence rating rose by 3.5 point (3.1%) to 114.8 in the week to March 6. Confidence is up 4.1% over the year and above the average of 111.9 since 2014.
  • New claims for unemployment insurance in the US fell by 18,000 to 259,000, while the forecast was 275,000. This is another anti-recession sign.

What I didn’t like

  • Mario’s interest rate comment and the market’s reaction – he was silly and so was the market’s reaction!
  • Job advertisements here fell by 1.2% in February, after lifting by 0.8% in January. It was only the second fall in job ads in seven months and in trend terms, job ads are up 27 months in a row! And that’s likable.
  • The timing of Chinese New Year resulted in the trade surplus narrowing from US$63.3 billion to US$32.6 billion in February. Well, we hope we can blame the New Year celebrations.
  • Total new loans (personal, business, housing and lease) fell by 2.9% in January, after falling by 5.2% in December. Total lending is down by 7.4% on a year ago – the biggest annual decline in 3½ years. Have APRA and the banks gone too far with their attempts to slow down housing with higher rates?

Funny business

US comedian, Jerry Seinfeld, is selling 18 of his beloved Porsches for an expected $30 million at a Florida auction. Auctioneers Gooding & Co. say the collectible Porsches going on the block are up 166% since 2013, which makes them look like a damn good asset, if you can believe those numbers!

The week ahead

The meetings of the Bank of Japan and the Fed on rates could help or hurt this beautiful market recovery and data-wise, the Yanks get a swag of recession-testing readings, while on Thursday it will be interesting to see what our latest jobs report from the ABS tells us about one of the best economies in the world!

Top stocks – how they fared

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The week in review

(click the blue text to read more)

  • I told you what could be in store for global stock markets over the coming weeks. If we sell in May, well I’ll be a buyer if it all gets stupid and quality companies that pay consistently good dividends become attractive.
  • My colleague Paul Rickard recapped the performance of our portfolios during February. Compared to the benchmark S&P/ASX 200 Accumulation Index, the income portfolio outperformed the index by 1.15% and the growth oriented portfolio under performed by 0.50%.
  • Anton Tagliaferro from Investors Mutual gave you three quality mid and small cap dividend payers to consider – Spark Infrastructure, Sky City, and Steadfast.
  • The brokers placed Regis Healthcare and NIB holdings in the good books.
  • Gary Stone shared his technical analysis of the ASX 200 and what needs to happen for it to stay above the significant support zone of 4925 and 5000.
  • Our Super Stock Selectors liked Vita Group, Altium and Macquarie Group.
  • This week, Charlie Aitken explained how you can capture the Chinese tourist dollar through a few perfectly placed local companies.
  • Tony Featherstone gave you five ways to play the healthcare sector using strategies such as the iShares Global Healthcare ETF, or buying into Regis Healthcare, Pacific Smiles, Sonic Healthcare, and Monash IVF Group.
  • In our second broker report, South32 and Webjet were in the good books but Fortescue and QBE Insurance were in the not-so-good books.
  • Worried about the proposed government changes to tax and super? Our technical guru Tony Negline said these four super strategies could help you avoid being blindsided.
  • And Fisher & Paykel Healthcare was this week’s Professional’s Pick by Jelena Stevanovic.

What moved the market

  • A rally in oil and iron ore helped markets move higher. Brent crude rose above $US40 a barrel while iron ore surged above $60 a tonne earlier in the week.
  • Markets were rattled on the back of Chinese trade data released on Tuesday, which reignited concerns over China’s economy.
  • And despite ECB boss Mario Draghi lowering the refinancing rate to 0% and cutting the central bank’s deposit rate to -0.4%, markets fell after he said too much and suggested rates would not be cut any further. Are we seeing the making of Stupid Mario?

The week ahead

Australia

  • Monday March 14 – Credit & debit card lending (January)
  • Tuesday March 15 – Weekly consumer sentiment
  • Tuesday March 15 – New car sales (February)
  • Tuesday March 15 – Reserve Bank Board minutes
  • Thursday March 17 – Employment/unemployment (February)
  • Thursday March 17 – Speech by Reserve Bank official
  • Thursday March 17 – Reserve Bank Bulletin
  • Friday March 18 – Speech by Reserve Bank official

Overseas

  • Tuesday March 15 – US Retail sales (February)
  • Tuesday March 15 – US Producer prices (February)
  • Tuesday March 15 – US Empire Manufacturing survey
  • Wednesday March 16 – US Consumer prices (February)
  • Wednesday March 16 – US Housing starts (February)
  • Wednesday March 16 – US Industrial production (February)
  • Wednesday March 16 – US FOMC Rate Decision
  • Thursday March 17 – US Philadelphia Fed Index (March)
  • Thursday March 17 – US Leading index (February)
  • Friday March 18 – US Consumer sentiment (March)

Calls of the week

  • In this week’s SSR, Charlie Aitken said he’s placed a big bet on Star Group (QAN) as it looks set to benefit from inbound Chinese growth.
  • Our resident doctor, Ross Walker, made the call to be both judge and jury on Maria Sharapova’s Meldonium doping defence. He’s sceptical on her claims because the drug is not typically used for people like her, so it’s likely to have been used as a performance enhancing drug.
  • And Fortescue made the call to try and strike a deal with Vale to give the Brazilian company a stake of up to 15%, and help both miners claw back market share in China. Eyebrows were raised when Fortescue shares lifted the day before the deal was announced on the ASX.

Food for thought

The difference between a successful person and others is not a lack of strength, not a lack of knowledge, but rather a lack of will.

– Vince Lombardi – US football coach

Last week’s TV roundup

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, Worleyparsons had a 1.40 percentage point increase in the proportion of its shares sold short to 13.73%. Myer went the other way, with a 4.00% decrease in the proportion of its shares sold short to 17.01%.

20160312-ShortPositions

My favourite charts

Aussie dollar dances around US 75 cents

20160312-AussieDollar

Source: Yahoo! 7 Finance, 11 March 2016

The Aussie dollar rallied this week, and is now floating around US 75 cents. What’s behind it? The Aussie economy is doing better than expected which is driving positive sentiment and foreign interest in our assets.

Business conditions (net balance)

20160312-businessconditions

Source: NAB

Businesses are feeling good, real good! This week’s NAB survey shows a jump in business conditions during February to +8 points from +5 in January and well above the long-term average of the survey series.

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