Switzer on Saturday

Expert tips 30% market rise on trade deal

Founder and Publisher of the Switzer Report
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Wall Street is being powered into record high territory and it’s all about trade deal talk and the fact that we should soon see some piece of paper with an agreement on it that the US President can do a show-and-tell with. And trade deal talk has got one local expert tipping a 30% rise in the stock market!

A signed agreement undoubtedly will give us the leg up I’ve been predicting for most of this year but some of that would already have been built into share prices.

And the Caterpillar share price tells it all, with the very China-exposed company a $US113 stock in late August before President Trump and his team started talking positively on a trade deal. It’s now a US$145 stock. That’s a 22% rebound!

Caterpillar (CAT)

Source: finance.yahoo.com

Larry Kudlow, the guy who gave our stock market and the Yanks’ market a boost, is the same guy who has been a big plus for how the President communicates with Wall Street. Larry is the National Economic Council director at the White House and was a former chief economist for Bear Stearns, long before it collapsed and triggered the GFC market crash. He also was an anchor on CNBC for over a decade and he’s not only market savvy, he’s also politically switched on.

As the impeachment news intensifies, Kudlow has been telling the market that “progress” on a trade deal was coming along nicely.

This is what came out of CNBC on Friday while our market was trading: “White House economic adviser Larry Kudlow said Thursday that Washington is “getting close” to a trade deal with Beijing, Reuters reported.”

The comments Larry has been making publicly have been timed to offset negative views on the trade negotiations, allegedly from China sources or as a consequence of a Trump tweet.

His most recent “getting close” revelation was timed to hose down reports earlier in the week that the negotiators were hitting obstacles and were at loggerheads. That said, Larry and his President need to deliver something soon because, as the Caterpillar chart shows, there are a lot of positive expectations baked into a likely trade deal. And the calibre of the deal will also be important to how the stock market responds because the presumed higher share prices will be driven by how business investment from tariff-affected companies is likely to respond to the new tariff-reduced world.

This deal has to impress the market or else stock prices will fall. Donald can’t afford that. Neither can the US and global economies, including Australia.

But it’s important to understand that this US market at record highs isn’t just trade deal related, as company reporting season has also come in better than expected, which says the analysts had gone too negative on the economic effects of the trade war.

This positive view was reinforced this week by none other than the Fed Chairman, Jerome Powell. “If you look at today’s economy, there’s nothing that’s really booming now that would want to bust,” he said to the House Budget Committee. “In other words, it’s a pretty sustainable picture.”

He even looked at the US debt and deficit and used the highly emotive term “day of reckoning”, which he doesn’t see looming any time soon!

As young people would say: “That’s cool.”

Back home and the AFR captured how our share prices (and especially those of our big, brand name companies) like a lot of market-related developments, even if the economy (as seen through this week’s jobs report) is still looking disappointing.

“Wesfarmers, CSL, Coles, Macquarie and Woolworths broke record highs in the final session. CSL shares are up 48 per cent this year to $273, and the stock has accounted for more of the S&P/ASX 200’s 20 per cent gain this year than any other company including BHP Group,” the newspaper reported.

The S&P/ASX 200 Index finished at 6793.7 (or just about 52 points off the record high of 6845.1) and was up about 1% for the week.

Echoing how important the trade deal would be for stocks, James White from Lessep Investment Management this week told the AFR that he can see the positive capital allocation effect out of the trade deal doing enough take to stocks, wait for it, 25% to 30% higher over the next two years!

I know James and he’s not given to wildly positive forecasts without some considered analysis but it even trumps my past positive postulations. Go James!

Those companies having a good week included Afterpay, up 22%, with their customer count now up to 6.1 million, which was double last year’s number. Nearmap was up 17.1% on revenue predictions, while Appen put on 12.6%, which made my last Monday’s story on our WAAAX stocks pretty timely.

Struggler of the week was G8, which lost 23% following a profit downgrade. This company is a real sleep-killer!

Also Nine Entertainment dropped 7.9% after predicted earnings fell linked to a hard ad market for free-to-air TV. Given the Switzer family’s viewing of the box lately, this isn’t a great surprise.

What I liked

  • The Westpac/Melbourne Institute survey of consumer sentiment index rose by 4.5% (the biggest monthly gain since May 2016) to 97 points in November. Consumer sentiment is below the longer term average of 101.5 points.  A reading below 100 points denotes pessimism.
  • The NAB business confidence index rose from a 6-year low of -0.3 points in September to +1.7 points in October. The long-term average is +5.8 points. And the business conditions index rose from +1.7 points in September to +3 points in October. The long-term average is also +5.8 points.
  • The average credit/charge card balance was $3,336.78 in September, up by 3.8% on a year ago – the strongest annual growth rate in 10 months.  By value, the sum of credit and debit card purchases rose by 2% in September, the strongest gain in 4½ years. Card purchases were up 7.8% on the year.
  • The fact that bond yields rose sharply this week on more positive expectations for global growth, and oil and metal prices rose too, while gold fell as future economic and market fears subsided.
  • The NFIB Business Optimism in the US Index rose by 0.6 points to 102.4 points (forecast: 102 points) in October, continuing to hover just below cyclical highs.
  • US producer prices (final demand) rose by 0.4% in October (forecast: +0.3%) to be up 1.1% on a year ago.

What I didn’t like

  • Local employment fell for the first time in 17 months, dropping by 19,000 jobs in October, after lifting by 12,500 in September (previously estimated at +14,700). Full-time jobs fell by 10,300, with part-time jobs down by 8,700. Economists had tipped an increase in total jobs of around 15,000. The Aussie dollar fell from US68.35 cents to US 68.05 cents after the release of the data.
  • Unemployment rose from 5.2% in September in seasonally adjusted terms to 5.3% in October. The jobless rate was steady at 5.3% in trend terms.
  • The money market is pricing in a 62% chance of a February rate cut and I hope the smarties end up being wrong but our economy has to do something and fast!
  • The wage price index rose by 0.5% in the September quarter (consensus: +0.5%). Annual wage growth fell from 2.3% in the June quarter to 2.2% in the September quarter – the slowest annual growth rate since June 2018.
  • Tourist arrivals fell by 2.6% from record highs in September, with departures flat in the month. There were record tourism inflows from mainland China over the past year.
  • Chinese business investment rose by 5.2% in the 10 months to October on a year earlier (consensus: +5.4%), down from 5.4% growth in the nine months to September. It was the weakest annual growth rate since records began in 1998.
  • The Hong Kong troubles aren’t good for people or markets!

The Trump gift that keeps on giving!

Last week we learnt that President Trump’s impeachment pressure showed when he did a record 1,018 tweets last month, or nearly 33 a day! He is a real tweety bird.

We would like to invite you to the Switzer Small & Micro Cap Investor Day in Sydney on December 3rd 2019. Click here to get your complimentary tickets.

The week in review:

On our YouTube channel this week:

Top Stocks – how they fared:

The Week Ahead:

Australia
Monday November 18 – Speech by Reserve Bank Governor Lowe
Tuesday November 19 – CBA Household Spending Intentions (HSI)
Tuesday November 19 – Reserve Bank Board meeting minutes
Tuesday November 19 – Speech by Reserve Bank official
Wednesday November 20 – Skilled internet job vacancies (October)
Thursday November 21 – Detailed labour force (October)
Friday November 22 – CBA/IHS Markit ‘flash’ gauges (November)

Overseas
Monday November 18 – US NAHB Housing Market Index (November)
Tuesday November 19 – US Housing starts (October)
Tuesday November 19 – US Building permits (October)
Wednesday November 20 – US Federal Reserve (FOMC) minutes
Thursday November 21 – US Philadelphia Fed Manufacturing Index (Nov)
Thursday November 21 – US Existing home sales (October)
Thursday November 21 – US Leading Index (October)
Friday November 22 – US Kansas City Fed Manufacturing Index (Nov.)
Friday November 22 – IHS/Markit ‘flash’ purchasing managers (Nov.)
Food for thought: 

“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” – 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:

Shane Oliver from AMP Capital published a chart comparing a $100 balanced investment (with 70% Australian equities, 25% bonds and 5% cash) invested in 1928 versus a ‘switching portfolio’ that “moves 100 per cent into cash after any negative calendar year in the balanced portfolio and doesn’t move back until after the balanced portfolio has a calendar year of positive returns”. The constant investment grew to $705,497 compared to only $218,040 for the switching portfolio:

Top 5 most clicked:

Recent Switzer Reports:

Monday 11 November: Understand risk; which banks should you buy or sell?

Thursday 14 November: America blasts off!

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.