Switzer on Saturday

How long can this stocks stress last?

Founder and Publisher of the Switzer Report
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[table “110” not found /]

The Dow sold off overnight following a US jobs report that has kept market experts guessing about what the Fed could do in two weeks’ time, when it could raise rates for the first time since the GFC.

In August, they tipped 220,000 jobs would be created but only 173,000 showed up and that’s a pretty big miss. However, unemployment dropped to a lower than expected 5.1%, while the average hourly wage increased by a bigger than expected 0.3%.

It also should be thrown in that history records that the August job number often suffers the biggest revision upwards!

The summary is that the case for a rate rise this month has not been helped nor hindered by this jobs report, so rate rise anxiety will persist. And it also means we’re no wiser about whether a rate rise could result in a big stock dumping or a relief rally.

One thing is clear. We are in a downtrend or a buyers’ strike and we need a positive news-breaker to turn around sentiment.

That’s overseas but what about the local story, where we might have ended up yesterday by nearly 13 points to see the S&P/ASX 200 index at 5060.8 but we lost 4.2% for the week, which was the worst for three months!

Two things bother me. One is the current market sell off, which looks overdone. The second is how our media hates Tony Abbott so much that they feed like a great white shark when there’s a less than impressive economic reading.

Understand this: stocks go up when economies go or grow up. At the moment, there are growth question marks over China, which is important to global growth, being the biggest contributor to world demand. The US is growing well and sustains my optimism for stocks, which I think will rebound by year’s end.

Europe is looking promising considering its challenges, while I got this on Japan from ChannelNews Asia: “Japan’s economy contracted in April-June due to weak consumption and exports and analysts expect only a modest rebound in the current quarter, keeping the BOJ under pressure to further ease monetary policy.”

So Japan is not helping optimists at the moment but could surprise us.

Meanwhile, at home, our growth story in the June quarter was weaker than expected but the negativity about this old number was excessive.

Thank God I’m supported by credible economics commentators like Ross Gittins of the SMH, who this week wrote a piece on the disappointing economic growth number on Wednesday, which was headlined: “Joe Hockey is right: Economy is neither wonderful nor woeful.”

Ross made a number of honest points that a lot of journalists left out, such as:

  • “Combine the two quarters and you get average quarterly growth of 0.55%, or annualised growth of 2.2%, which is probably closer to the truth.”
  • “What set them [the ill-trained or biased journalists] off was news from the Australian Bureau of Statistics’ national accounts that real gross domestic product grew by just 0.2% in the June quarter. What they forgot to mention was that in the previous quarter it had grown by 0.9%.”

The chart below shows the “year average” growth wasn’t great but, at 2.4%, it’s not so historically disastrous.

swos-20150905-001

I maintain that future economic indicators, such as business investment plans, job ads, building approvals and others give me and other economists hope that our economy is gradually getting better and the dollar under 70 US cents will be a big help for future growth. I promise!

Adding to the general annoyance was the lacklustre reporting season that explains why stocks have given into the negativity of a weaker than expected China, a US closer to a interest rate rise and a US reporting season that showed the stronger greenback was slowing up earnings for some huge exporters such as Apple, Amazon, IBM, etc.

CommSec says “almost 82% of those reporting full-year earnings reported a profit – below average. But almost 61% improved their profit results – above average. And, encouragingly, 85% of full year companies lifted or maintained dividends.”

So, like our economy, it wasn’t all bad news but at the moment, the pessimists, the short-sellers, the hedge funds and their ilk hold the upper hand. As annoying ‘experts’ often joke when you ask them why stocks were down on any one day they say: “Sellers outnumbered buyers.”

However, it’s pretty well right, at least for the present.

What I liked

  • Dwelling approvals were up 4.2% in July and a record 223,502 new homes were approved,
    which should help our economic growth numbers going forward.
  • This from the RBA on Tuesday: “In Australia, most of the available information suggests that moderate expansion in the economy continues. While growth has been somewhat below longer-term averages for some time, it has been accompanied with somewhat stronger growth of employment and a steady rate of unemployment over the past year.”
  • The ACT’s growth rate of 5.9% for the year to June! Who said Tony Abbott hated Canberra? Victoria grew at 2.9% and NSW at 2.4% while the others struggled and brought the national number down to 2%.
  • Exports of goods and services in July rose by 2.3% (goods up by 2.7%) while imports of goods and services rose by 0.1% (goods up 2.7%). In the June quarter, exports let us down so this might augur well for the September quarter, if a trend starts along these lines.
  • The US economy with: auto sales rising from an annualized rate of 17.55 million in July to 17.81 million in August, the biggest sales result in more than a decade (July 2005); the Beige Book survey of US Federal Reserve district banks showed that economic activity continued to expand in all districts, with tight labour markets pushing up wages in some industries and districts; the Challenger job layoffs series fell from a big 105,690 to a small 41,186 in August and the ISM services index eased from 60.3 to 59.0 in August but beat the forecast number of 58.1.
  • Tourists from China and Hong Kong rose to a record 1,152,500 over the past year, up 17% over the year but the Kiwis are still more important numbers-wise!
  • Good signs for Europe, with the German manufacturing purchasing managers index lifting from 51.8 to a 16-month high of 53.3 in August (any number over 50 means expansion).

What I didn’t like

  • The China purchasing manager index fell from 50 to 49.7 and then the market reaction! (How come we only trust Chinese numbers when they’re bad?)
  • The Australian growth number of 0.2% instead of 0.4% and the media’s reaction, with one idiot journalist comparing our growth to Greece!
  • Retail sales falling by 0.1% in July yet JB Hi-Fi and Harvey Norman reported a great start to the new quarter! June was a big 0.6% so there could be some evening out or the ABS number crunchers might have studied in China!

So how long will this stocks stress last?

As long as we’re sweating on the Fed to raise rates and for the Chinese economy to give us something economically positive, stocks will be under pressure from the simple fact that sellers are outnumbering buyers. At home, the bad economic news pre-July has to look a thing of the past and we have to show that both low rates plus the stimulatory Budget plus a dollar now at 69.11 US cents (and heading lower) will combine to create stock buyers who are now sellers.

Remember this: the dispassionate calculations of what fair value is for our stock market is north of 5700, so as we’re at 5060 that means we are 640 points short of this mark and that’s around 12.6%. If we throw in a conservative dividend return and franking credits, there’s 15% plus out there for the positive, persistent, patient player!

If the Fed raises in the middle of the week after next and a sell off happens, then I think November could be the start of a nice finish to the year. I only hope China can come to the party and bestow positivity upon our economic and market prognostications.

Top stocks – how they fared

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The week in review

(click the blue text to read more)

What moved the market

  • Soft GDP figures, with 0.2% growth in the June quarter after a 0.9% increase in the March quarter. Over the past year, the economy grew at 2.0%.
  • Weak Chinese manufacturing data rattled markets everywhere and took the Aussie dollar below US 70 cents.
  • Retail spending fell (unexpectedly) by 0.1% in July, to be up 4.2% on a year ago.
  • Capital raisings from the likes of department store Myer and rights issues from the banks also applied downward pressure on stocks.
  • And the European Central Bank (ECB) promised to deliver more QE if it was needed, which the European markets seemed to like.

The week ahead

Australia

  • Monday September 7 – ANZ Job advertisements (August)
  • Tuesday September 8 – NAB Business survey (August)
  • Wednesday September 9 – Consumer confidence (September)
  • Wednesday September 9 – Housing finance (July)
  • Wednesday September 9 – Reserve Bank official speaks
  • Thursday September 10 – Employment/Unemployment (August)
  • Friday September 11 – Lending finance (July)

Overseas

  • Tuesday September 8 – US Consumer credit (July)
  • Tuesday September 8 – China trade balance (August)
  • Thursday September 10 – China inflation (August)
  • Thursday September 10 – US Wholesale inventories (August)
  • Thursday September 10 – US Producer prices (August)
  • Friday September 11 – US Consumer sentiment (September)
  • Sunday September 13 – China monthly data (August)

Calls of the week

(click the blue text to read more)

  • The largest contributions to economic growth came from government consumption (+0.4 percentage points) – possibly due to a spike in helicopter rides?
  • An unofficial record for the world’s heaviest sheep fleece was set after a national shearing champion removed over 40 kilograms of wool from a rescued sheep believed to have not been shorn for over five years! Holy sheep!
20150904 - sheep

Source: RSPCA ACT, ABC

  • Aldi made the call to crank up the supermarket wars after announcing it would roll out as many as 80 new stores across Australia.
  • Paul Rickard said BHP is a good play for income seekers.
  • And Charlie Aitken said it’s time to bite the bullet and buy the banks!

Food for thought

The way to get started is to quit talking and begin doing.

– Walt Disney, American entrepreneur

Last week’s TV roundup

  • I spoke with CMC Markets analyst Michael McCarthy about his view on the market mayhem and his outlook for the rest of the year and into 2016.
  • Gerry Harvey – executive chairman of Harvey Norman – joined the Switzer TV show to talk about his company’s lift in profits. And in part two, we chat about entrepreneurship and what he was like as a little tyke.
  • Should you invest in gold? We take a look at this tricky play in our latest Super Session.
  • Roger Montgomery from Montgomery Investment Management tells us whether he’s ever seen a market like this before and shares his outlook.
  • And head of self-directed wealth at NAB, Nathan Walsh, explains how you can take control of your wealth decisions.

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 Myer, which saw their short position reduce to a still very high 20.15%, while fellow retailer Dick Smith Holdings went the other way with a 0.72% percentage point increase in the proportion of its shares sold short to 11.26%.

20150904 - short stocksMy favourite charts

Opportunity during adversity

20150903 - volatility

As Charlie Aitken pointed out, the VIX index, which demonstrates the “fear factor”, can be used as an opportunity to be “conservatively constructive” and buy blue chips – like the big banks!

24 years strong

20150904 - 24 years

Despite the negative nellies out there focussing on the fact that our GDP number was softer than expected, Savanth Sebastian of CommSec pointed out that Australia has gone through 24 consecutive years of growth since our last recession in 1991! Now that’s something to focus on!

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