[table “221” not found /]
The tone of the stock market changed this week. For the past few months, my gut told me that shares wanted to resist gravity but it all seemed to change, despite some very encouraging news for coal prices.
That said, Janet Yellen’s speech and better-than-expected US bank earnings reports from JPMorgan, Wells Fargo and Citigroup, took Wall Street to the positive, which might change our attitude next week.
In case you missed it, the AFR headlined it: “Coal price doubling in three months could deliver $25b economic boost!”
The story was that our coking coal, which had been selling for $US81 a tonne in only the March quarter, will now go to $US200 a tonne.
It’s thought this spike in coal prices will add 2% to national income, help wages start going up at long last and wait for it, add $7 billion to the budget’s bottom line, if the high prices persist.
Despite this news, hot shot investment banks (Citi and UBS) laid into the likes of BHP and Rio, with sell recommendations lowering the boom on these stocks and the recent positive outlook for stocks.
And to make this newfound negativity even more perplexing, Hillary opened up a 10-point lead in one prominent poll over Donald, which should be good for stocks but probably makes the December rate rise in the US more likely. This has always been a good reason to expect a share market sell off but it seems a little early for a rate rise stocks slide.
It is what it is but I can’t say I know exactly why it is what it is. Adding to the negativity has been the follow up OPEC meeting in November but, even on this subject, Vladimir Putin has indicated he’s on board with production controls to ensure no oil price slumps.
The plot thickens with an ex-student, turned feral ex-trader, sending me a cryptic email, which looks ominous saying only: “Not long now. You can even smell the fear.”
‘The Dude’ as he calls himself nowadays has been preaching Armageddon since February. And one day he will be right but I still think he’s reading his economics and market stuff from an old book – it could be my old notes! We’re living in weird times of long, drawn out, slow recovering economic and market scenarios, where interest rates are where no one ever imagined they’d be. And that might mean that market madness and mayhem that often comes along every 10 years or so just might be on delay.
That’s my bet but one chief investment officer of a well-known investment bank, which will remain nameless, seems to be on a unity ticket with the Dude!
The bond market is the worrying curve ball that is often hard to read, which is giving negative types current courage to speak out but there’s a lot of smart people who are on my side and who are saying that stocks, aside from some volatility, can creep higher.
The Australian share market ended the week underwater, led down by mining and bank stocks as investors prepared for an interest rate hike in the US and investment banks turned negative on miners.
The S&P/ASX 200 Index finished Friday down 1.5 points and down 0.6% for the week at 5434.
The naysayers and some weakfish China data didn’t help BHP, which lost 3.6%, while Rio Tinto dropped 1.8% over the five days trading.
Importantly, no one is saying the better commodity price story is about to reverse but the anti-BHP brigade is arguing that the bounce back from around $14 to the $24.92 top we’ve seen recently was way overdone. BHP is up about 60% now since its low this year but at its biggest, the jump was closer to 70% and expressions of negativity towards its share price make a bit of sense.
Banks had a rough week too but I can’t see how the US rate rise in December won’t be a plus for bank share prices. I’d be a happy buyer of bank stocks if we see a short-term set against these damn good companies, even if they are targets for a Labor Party Royal Commission. Interestingly, everyone seemed to love ANZ until this week, with the stock down 2.6% but CBA did end up 0.3%.
Telstra defied its market enemies after dropping to $5.02, rebounding to $5.08 by week’s end. The company might have its critics but most smarties think that at around $5 it’s still a buy for yield hunters.
But that was last week here. What about Wall Street overnight?
The Dow ended in positive territory and the US banks sticking it to the earnings doubters was nice to see. If US earnings in net terms end up being better than expected, then stocks will surge, especially if Hillary Clinton becomes President, sending Donald T back to the Hollywood that deserves him.
The banks beat on the top and bottom lines, with loan growth looking promising.
And then to add to market positivity, the Fed boss, Janet Yellen, surprised many by saying that the central bank might want to see inflation hot up a little before they raise rates! I knew something like this had to have happened because the first data point I got when I bounded out of bed was the $A at 76.12 US cents, which told me something had moved the greenback down. And you can credit or debit that to Janet.
Against that, another Fed official with voting rights, Boston Fed President, Eric Rosengren, re-confirmed his desire for a rate rise, citing full employment and 2% inflation as the reasons.
The drama will play out until early December – Janet has become a real little market player, who won’t be easily read and I reckon she likes that.
And I liked this quote from Bruce Bittles, the chief investment strategist at Baird in the US: “We’ve talked about a transition from a central bank-driven market to an earnings-driven market, and that is what we are seeing.” (CNBC)
I hope he is 100% spot on as it will drive stocks higher but we need three weeks of this kind of good earnings news. Go USA!
What I liked
- Fed minutes made a rate rise in December more likely – it’s overdue and I want to see one. The market rates it a 70% chance.
- The CIMIC offer for UGL took the latter’s share price up 50% and is a good omen.
- Chinese inflation was up 1.9% year-on-year, compared with an expected 1.6%. Higher than expected inflation is good for higher growth hopes.
- US bank earnings overnight!
- Woolworths up 1.6% to $24.28 this week is good to see, as a lot of long-suffering investors hold this once great stock. CEO Brad Banducci has been a good luck charm.
- The NAB business conditions index rose from +6.8 points to +7.7 points in September (long-term average +4.8 points). The business confidence index rose from +5.6 points to +5.9 points (long-term average +5.8 points).
- The Westpac/Melbourne Institute survey of consumer sentiment rose by 1.1% in October to 102.4. The confidence index is up 4.7% on a year ago.
- Discount airfares fell by 15.6% in October after spiking 27.4% higher in September. In smoothed terms, discount fares are up 5.2% on a year ago – the fastest pace in 13 months. I hate paying more for flying but pricing power to business is a plus for the economy.
What I didn’t like
- Chinese September trade export data reported a 10% fall in growth year-on-year, much lower than the consensus estimates of a 3.3% decline.
- US economic data overnight, with retail sales up 0.6% in September, which were bang on the pessimistic forecast. Consumer sentiment came in at 87.9 rather than the forecast of 92. If the US consumer was shopping and not dropping, then the December rate rise odds would be 80%.
- Total lending finance fell by 1.2% in August – the fourth fall in five months. Lending totaled $66.7 billion in August, down 3.4% over the year.
- Building starts slumped, falling by 9.5% in the June quarter, after lifting 8% in the March quarter. However, building work done rose by 1.2% in the quarter to be up 6.6% on the year.
Chinese All Reds beat the All Blacks!
Tourists from China and Hong Kong rose to a record 1,419,900 over the year to August, up 21.3% over the year. Tourists from New Zealand totaled 1,322,900 visitors over the past year, but were up just 2.3%.
And where are we going?
In outbound tourism, Indonesia is closing the gap, with New Zealand as the top destination for Australians. Those damn Kiwis win.
Top stocks – how they fared
[table “220” not found /]The week in review
- I explored a really hard question from our Switzer Super Report [1] webinar: Is it time to sell before the slump and then buy back in later [2]?
- Paul Rickard recapped the performance of our income and growth portfolios in September – they both finished higher [3]!
- James Dunn revealed four speculative growth stocks [4] to keep on your watch list, because all big name stocks have to start somewhere!
- The brokers upgraded ALS [5] this week, while Estia Health copped a downgrade.
- What were the hot stock tips on our Super Stock Selectors list? Find out here [6].
- Tony Featherstone shared two potential Aussie winners from higher US interest rates [7] – QBE Insurance (QBE) and Computershare (CPU).
- Charlie Aitken explained why he’s optimistic about the future for Aristocrat Leisure [8] (ALL).
- To make sure you avoid income traps, Anton Tagliaferro [9] shared the questions you must ask first when investing for yield alone.
- Manny Pohl said Baby Bunting’s [10] simple business model and strong management team makes it one to watch.
- And in our second broker report [11], Magellan Financial Group and Vocus Communications were in the good books, while NAB and BHP were in the not-so-good books.
What moved the market?
- Weaker-than-expected trade numbers from China, with exports down 10% in the year to September.
- Growing doubts over Russian President Vladimir Putin’s commitment to control oil supplies, and OPEC’s September report, which showed production at eight-year highs.
- The US FOMC minutes, which pointed to a rate hike “relatively soon.”
Calls of the week
- Backflip Baird made the call to overturn the ban on the greyhound racing industry, just three months after announcing the plans. The NSW premier will give the industry another chance, saying: “I got it wrong. Cabinet got it wrong. The Government got it wrong”.
- Michael McCarthy thinks a Santa Claus rally is possible, and said the S&P/ASX200 could reach 5,900 by the end of the year. Read his analysis here [12].
- Samsung halted all production of its fire-breathing Galaxy Note 7 mobiles, after even the re-issued devices started to smoke!
- And the top-ranking elected Republican, Paul Ryan, said he would never again campaign with, or defend, Donald Trump after a recording revealed the ‘high-achiever’s’ true character.
The week ahead
Australia
- Tuesday October 18 – Reserve Bank Board Minutes (September)
- Tuesday October 18 – Weekly consumer sentiment
- Tuesday October 18 – Motor vehicle sales (September)
- Tuesday October 18 – Speech by Reserve Bank official
- Thursday October 20 – Employment report (September)
Overseas
- Monday October 17 – US Empire manufacturing (October)
- Monday October 17 – US Industrial production (September)
- Tuesday October 18 – US Consumer prices (September)
- Tuesday October 18 – US NAHB Housing market index
- Wednesday October 19 – Chinese Economic data (September)
- Wednesday October 19 – US Housing starts (September)
- Wednesday October 19 – US Building permits (September)
- Wednesday October 19 – US Federal Reserve Beige Book
- Friday October 14 – US Philadelphia Fed survey (October)
- Friday October 14 – US Existing home sales (September)
- Friday October 14 – US Leading index
Food for thought
Successful people ask better questions, and as a result, they get better answers.
– Tony Robbins, motivational speaker
Last week’s TV roundup
- Over the past month or so, the top 20 stocks have fallen back into favour. To discuss these companies and more, Charlie Aitken of Aitken Investment Management joins Super TV [13].
- Paul Rickard joins the show to talk about how the market fared during September [14].
- There are a number of curveballs that could help or hurt the stock market in the near term. To discuss, Anton Tagliaferro from Investors Mutual joins the show. [15]
- And James Dunn talks about four speculative growth stocks. [16]
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 was the biggest mover, with a 7.48 percentage point increase in the amount of shares sold short to 15%.
Source: ASIC
Charts of the week
Hey big spender?
The average credit card balance shows Aussies have around $3000 owing on their credit card – the last time it was that low was in late 2007!
Santa is on his way!
Michael McCarthy presented this chart in his Daily blog [12] to show how the ASX200 has broken the line in the sand and is pointing to higher levels. As long as we hold above the critical level of 5400, he says it’s “onward and upward”.
Top five most clicked stories
- Peter Switzer: Is it time to sell before the slump to buy in later? [2]
- James Dunn: Four speculative growth stocks [4]
- Paul Rickard: Portfolios move higher in September [3]
- Tony Featherstone: Two winners from US rate hikes [7]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [5]
Recent Switzer Super Reports
- Thursday 13 October 2016: Bond market blues [17]
- Monday 10 October 2016: Sell or wait? [18]
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.