I started the week thinking the big issue was a Fed decision on Friday morning but it ended up being a fizzer, compared to the Libs’ decision to invest their last year of government with Malcolm Turnbull.
Regular readers know I have plenty of time for Tony Abbott and Joe Hockey, despite the fact they played the wrong economic card with their first Budget. They followed the political script of going hard in the first year, hoping over the next two years that forgiveness or bad memory would help them but I was warning at the time that the economy was slowing so it was a dangerous game they played.
They weren’t helped by the high dollar, the petering out mining boom and the RBA’s too high interest rate policy, which you all know I was regularly whinging about.
The most recent Budget and the RBA’s better rates policy and the falling dollar have put the economy on a better platform for a recovery so this was a great vote for Malcolm to win. The economy will look stronger by late next year when they should go to the polls, provided Malcolm lasts that long! (I am joking, I think.)
Some ‘experts’ say Malcolm will go earlier to cash in on the honeymoon effect but there are a lot of hot-under-the-collar right-wing conservative voters being fired up by my mates at 2GB – Alan Jones, Ray Hadley and Andrew Bolt – so Malcolm will need a bit of time to prove to usual Liberal voters that he’s more attractive to them than Bill Shorten.
Economics-wise, I think Malcolm will get a fairer go from the ABC and Fairfax press and that will mean the persistent anti-Abbott Government stories, which had to have undermined business and consumer confidence, will be less of an issue. So the Libs’s decision should deliver an economic dividend. Well, I damn well hope so or it wasn’t worth the effort.
To the Fed’s decision and I made the mistake of thinking the US central bank might give an overdue rate rise to prove that the US economy is recovering nicely but I underestimated a couple of things.
First, how the Fed was being pressured by the IMF and the World Bank to hold fire.
Second, how worried Janet Yellen and her team were about global economic and market developments, which is Fed-speak for China! Some US experts were surprised that the Fed mandate had extended to worrying about China but the smart argument against that is that all economies nowadays are interdependent and the Fed can’t be as US-centric as it used to be.
Third, the stronger US dollar has actually been akin to an interest rate rise, just as our depreciation has been like a great interest rate cut.
Fourth, my own bias, where I wanted to see the rate rise to get the sell-off period out of the way well before we approached the last couple of months of the year, which can be great for stocks, with December famous for a Santa Claus rally.
At this stage, I’d expect the Fed to look more seriously at raising rates in December and especially so if China’s economic data improves or Beijing comes out with some good stimulus packages that convince us to believe in the recovery of the second biggest economy in the world.
Of course, if this doesn’t materialise, then we’ll have to wait until 2016 but, believe it or not, one Fed official thinks it could be a 2017 occurrence!
Oh yes, how did Wall Street do a day after the Fed’s failure to fire up the confidence to raise rates? Down just under 300 points (or 1.74%), so the questions we are left to ask are:
- Did the Fed cause this by implying, by not raising, that the US recovery is weaker than we think?
- Are we underestimating the potential problems for China and the global economy?
- Is this just the response to the expiry of options and futures contracts – the so-called quadruple witching hour?
- Or maybe this is the resurgence of all that annoying market volatility driven by smarties, hedge fund managers, short-sellers and all those enemies of long only, long-term investors?
The answer is probably all the above! The irony is that a rate rise might have been a better option because it would have at least said that the Fed believes in the strength of the US economy, even with worrying developments in global markets and the world economy.
What I liked
- The potential economic plus of the Canberra leadership change, despite my heartfelt concern for both Tony and Joe. (I really hope business and consumer confidence trends up ASAP.)
- Our S&P/ASX 200 index response to the Fed decision, though I can’t see that there’s much to move us out of this 5000-5200 or so range, especially given Wall Street’s moves overnight. The chart below shows that damn range for the index:
[1] - Analytical work by Michael Knox of Morgans that shows the S&P 500 response to tightening of monetary policy or a rate rise is zero in the first month and then the index rises! And history shows you get 25 months until rate rises send stocks negative, so you can see why I think 2016 should be good for stocks, even with a rate rise or two! Bring it on baby, bring it on!
- Eurozone industrial production and construction activity was stronger than expected in July.
- This from AMP’s Shane Oliver on what the RBA is thinking about our economy: “There was no sign in RBA Governor Steven’s Parliamentary testimony that the RBA is moving towards another interest rate cut just yet – in fact he was ‘pretty content’. The Governor seemed reasonably comfortable that the economy is rebalancing and that the $A was around fundamentally justified levels. However, he has left plenty of wiggle room to ease again if needed with ‘growth not being as fast as we would like’, an acknowledgement of global risks and APRA’s measures to slow lending to property investors doing their job.”
- This from CommSec’s Craig James: “Employment rose by 78,000 over the three months to August after a gain of 82,800 in the previous three months. It was the strongest back-to-back gain in jobs since late 2010.”
What I didn’t like
- US stock markets overnight, with the Dow back into correction territory! Could the Fed have caused more harm than good?
- Our dollar retesting the 72 US cents level and I didn’t like hearing from Dr. Paul Kasian of Equity Trustees that if China’s economic outlook improves, as I’m hoping, it could push our dollar higher! It’s a good point, though we have seen our dollar come down from the 90US cents plus region only a year ago, and 73 US cents has been our long-term average, which should be good for creating growth opportunities going forward.
- The conclusion that the failure of the Fed to raise interest rates means we have to expect volatility for stock markets, which we have seen a lot of recently.
- The RBA Board members noted “there were indications that the measures implemented by APRA had slowed the growth in lending for investment housing” and so APRA and my mate David Murray have taken some growth out of the economy and hurt bank shares. Not happy David, not happy!
Final footnote
I know I have pointed this out before but I have to reveal my conflict when it comes to our new PM and our expected new Treasurer, Scott Morrison. When I was very young I was Malcolm’s patrol captain at North Bondi Surf Club and even then he looked like the only guy on Bondi Beach who one day would be PM!
And when it comes to Scott, I taught him Economics on his way to a law degree at the University of New South Wales, so at least I know he was well-taught on a pretty relevant subject for a Treasurer!
I’m hoping that Ray, Alan and Andrew (the RAA team) can eventually get on board the Turnbull train for the sake of the economy, our stock market and our potential wealth!
Top stocks – how they fared
[table “114” not found /]The week in review
(click the blue text to read more)
- Paul Rickard explored Westpac’s strategy briefing [2], which holds some promise.
- Roger Montgomery dissected Myer’s ambitious new growth plan and rights issue [3].
- Our Super Stock Selectors [4] liked Telstra, Credit Corp, and Aconex, and disliked Newcrest Mining and M2 Group.
- Charlie Aitken told you how to make money with low frequency trading [5].
- This week’s Fundie, George Boubouras, explained why he likes Sydney Airport Holdings [6].
- The brokers [7] put AWE and Graincorp in their good books, while GWA and Oil Search copped downgrades. In our second broker report [8] Drillsearch, Rio and Woodside were all upgraded.
- Tony Negline explained how your SMSF can legally acquire specific types of assets [9] from related parties.
What moved the market
- The Fed left rates on hold, pushing the Aussie dollar as high as 72.76 US cents.
- A report by the US Energy Information Administration, which showed declining US crude oil inventories.
- And US consumer prices, which declined 0.1% from July.
The week ahead
Australia
- Monday September 21 – CommBank business sales index (August)
- Tuesday September 22 – Weekly consumer sentiment
- Tuesday September 22 – Home price indexes (June quarter)
- Thursday September 24 – Population data (March)
- Thursday September 24 – Finance and wealth (June quarter)
Overseas
- Monday September 21 – US Existing home sales (August)
- Tuesday September 22 – US Home prices (July)
- Tuesday September 22 – US Richmond Fed index (September)
- Wednesday September 23 – “Flash” manufacturing gauges
- Thursday September 24 – US Durable goods orders (August)
- Thursday September 24 – US New home sales (August)
- Thursday September 24 – US Federal Reserve chair speech
- Friday September 25 – US Consumer sentiment (September)
- Friday September 25 – US Economic growth (June quarter)
Calls of the week
(click the blue text to read more)
- Magic Malcolm made the call to challenge Tony for the top job with a sudden ballot, winning 54 votes to 44.
- Speaking of the new PM, an Instagram account [10] called “Texts from Malcolm” parodies him texting others during question time. Here’s one of my favourites;
[11]
- In this week’s Switzer Super Report, Tony Featherstone added Qube and Aurizon to his takeover target portfolio [12].
- And up and coming 49ers star Jarryd Hayne called “mine” instead of “yours” in his debut NFL game and dropped the ball! Rookie error!
Food for thought
Great minds discuss ideas. Average minds discuss events. Small minds discuss people.
Eleanor Roosevelt – former first lady of the United States.
Last week’s TV roundup
- Switzer Super Report co-founder Paul Rickard talks about the outlook for BHP and Woolworths [13] and a cooling in the residential property market.
- The king of charts [14], Lance Lai, joins the show to talk about market movements.
- Our other chartist, Gary Stone from Share Wealth Systems, also shares his technical analysis [15] of the Australian market.
- And chairman of Free TV Australia, Harold Mitchell, explains his outlook for media companies [16] under a Turnbull Government.
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 the biggest mover was Super Retail, with a 9.52 percentage point increase in the proportion of its shares sold short to 19.38%. Slater and Gordon went the other way, with a 5.62 percentage point decrease to 9.91%.
[17]My favourite charts
Healthy job demand
[18]Detailed employment data shows that healthcare remains the largest employer, with 1.47 million employees. This category is followed by retail at 1.21 million, and construction at 1.05 million.
Is this a trend?
[19]I think it’s clear from this chart the US Fed has been a little averse to changing the cash rate for quite some time!
Top 5 most clicked on stories
- Peter Switzer: Load up on stocks before or after the Fed’s decision? [20]
- Charlie Aitken: How to make money with low frequency investing [5]
- Charlie Aitken: Big buying opportunities in resources and banks [21]
- Paul Rickard: Can Westpac deliver? [2]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [7]
Recent Switzer Super Reports
- Thursday, 17 September, 2015: Sell the rumour and buy the fact [22]
- Monday, 14 September, 2015: Before or after? [23]
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.