Switzer on Saturday

How real are these Recession fears?

Founder and Publisher of the Switzer Report
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Recession warnings in the USA were given a reality test and they failed! The latest jobs report for the Yanks showed 136,000 jobs were created, which wasn’t too far off the 145,000 predicted by economists. But even better, the unemployment rate fell to 3.5% – a 50-year low!

In many ways, it was like a Goldilocks result for stock market players, with the Dow Jones Index up 372 points (or 1.42%). The employment result says recession fears we saw over the week were overdone, which is what stock markets often do with good and bad news. However, the lack of over-the-top jobs growth keeps the hope for more interest rate cuts on the table.

As an economist, I would’ve preferred 200,000 jobs, the threat of too much growth, rising inflation and an end to rate cuts but that won’t happen without a trade deal. Gee, I hope Donald Trump is getting that advice from his economics team.

No matter what your personal support is for what Donald has done to reinvent politics, his gamble on this trade war is bringing us closer to a recession worldwide, which will KO stocks. So I, and we, have a vested interest in praying for a big result out of the trade talks starting in Washington on Thursday.

What transpires is bound to be the dominant story I’ll be sharing with you this time next week. Doubling up for hopeful investors this month will be the Fed’s interest rate decision on October 29/30, with the market betting that there’s a 79% chance of a cut.

On the reality of recession and what the overall run of data is really pointing to, the pretty reliable GDPNow indicator from the Atlanta division of the Fed says the third quarter growth number should come in at 1.8% and CNBC says Jerome Powell on Friday told us that the US economy is in a “good place”.

Of course, the news from Wall Street overnight is good for the moment but recession alerts are building. That’s why Donald needs to nuke these negative forces or he’ll get a recession blowing up in his face and a stock market collapse before the November 2020 US election. This will be a serious test of his economic credentials, his control over his testosterone and his sanity.

If he pulls off a trade deal and stocks surge higher, leading to a rebound in business confidence and business investment, leading to jobs and higher wages along with rising interest rates, well, what’s not to like about that?

A trade deal doesn’t stop him revisiting some sticky points over time that might need to be resolved but it would reverse the negativity that surfaced this week, which isn’t far below that surface even now.

“The environment feels very fragile to us,” said Rob Croce, senior portfolio manager at Mellon. “Yet the market has been operating under the assumption that the Fed has our back and that they’re omnipotent. So, you’ve seen the market shake off any political circumstances.”

That’s a good summary (markets are fragile) and I can’t believe the White House can ignore that.

Locally, it was the worst week for Australian shares since November, with the S&P/ASX 200 index losing 2.9% (or 198 points) to finish at 6517.1. And that’s despite a 24-point gain on Friday, as prospects of an interest rate cut in the US later this month offset fears about a possible recession. That was Wall Street’s story on Thursday and we accepted that scenario for Friday’s trade.

CBA shares lost 4.9% to $77.59 after regulators charged the bank’s life insurance arm, CommInsure, with 87 breaches of anti-hawking legislation on Friday, whatever that is!

NAB was clobbered 6.6% to $27.85, after saying it had earmarked $832 million to refund customers linked to the fees-for-no-service scandal. The total cost to the bank has now passed $2 billion. Westpac lost 5%, while ANZ dropped 5.3%.

The tip of Nufarm from both Michael McCarthy and Julia Lee on my Switzer TV on Monday was timely, with the stocks having a ripper week – up 45.5% to $6.49. If you watched the show and took my colleague’s tip, you made 12% for the week, which is a nice week’s work.

And for those who always laugh at Paul Rickard, who often tips CSL as his preferred stock, despite its high price, this week its stock price rose 3.2% to $236.34, after broker Morgan Stanley upgraded the company.

Only two days ago, this was a $228 stock and has put on $8 (or 3.3%), which is another nice two day’s work for one of the best companies in the world! And six months ago, it was a $196 stock. If you copped his tip, you would’ve made 20%, which makes it one of the best companies to buy the dip on.

This gain has probably paid for the holiday Paul’s on!

What I liked

  • The CoreLogic Home Value Index of national home prices rose by 0.9% in September, the biggest increase since March 2017. And capital city home prices rose by 1.1% – also the biggest lift in 2½ years. Regional home prices rose by 0.1% in the month.
  • The Australian Industry Group (AiGroup) Performance of Manufacturing Index rose from 53.1 points to 54.7 points in September, while the CBA/IHS Markit Manufacturing Purchasing Managers’ Index fell from 50.9 points to 50.3 points. Any reading over 50 indicates expansion.
  • The RBA cut the cash rate by 25 basis points (quarter of a per cent) to a record low of 0.75%. It is the third reduction in official rates in five months.
  • The weekly ANZ-Roy Morgan consumer confidence rating rose by 4.2% to 114.7 points. It was the biggest weekly lift in confidence in 15 months. Consumer sentiment is back above the average of 114.4 points held since 2014 and the longer term average of 113.1 points since 1990.
  • Despite building approval problems for household projects, commercial building lifted by 54%, the most in three years.
  • Private sector credit (effectively outstanding loans) rose by 0.2% in August, after lifting 0.2% growth in July.
  • Retail trade rose by 0.4% in August after an unchanged result in July (previously reported as a fall of 0.1%). It was the strongest lift in spending in six months. Sales at retail chains and other large retailers soared 0.7% in August, to be up 4.8% on the year. It was the strongest annual gain in spending for a year.
  • The trade surplus fell to $5.93 billion in August from $7.25 billion in July. Australia has recorded 20 successive monthly trade surpluses. The rolling annual surplus was a record $58.59 billion in the year to August. Exports to China have hit new highs.
  • The Australian Industry Group (AiG) Performance of Services Index (PSI) rose from 51.4 points to 51.5 points in September. The CBA/Markit Services Purchasing Managers’ Index (PMI) rose from 49.1 points to 52.4 points. A reading above 50 indicates an expansion of services sector activity.
  • The services PMI in China eased from 53.8 to 53.7 (survey 54.2). And the Caixin manufacturing PMI rose from 50.4 to 51.4 (survey 50.2). Any reading over 50 indicates expansion.
  • The ISM services index in the US fell from 56.4 to a 3-year low of 52.6 in September (forecast 55) but the reading over 50 says the sector is still expanding.
  • The ADP survey in the US showed that private sector jobs rose by 135,000 in September, which was close to the forecast of 140,000.

What I didn’t like

  • Council approvals to build new homes fell 1.1% to a 6½-year low.
  • In September, 88,181 new vehicles were sold, down by 6.9% over the year. In the 12 months to September, sales totalled 1,083,570 units, down 8.2% on a year ago and the biggest annual decline in almost a decade (November 2009).
  • The ISM manufacturing gauge in the US fell from 49.1 to a decade low of 47.8 in September (forecast 50.1). However, the Markit gauge for US manufacturing rose from 50.3 to 51.1 in September (forecast 51).
  • Data showed Euro Zone manufacturing activity contracted at its steepest rate in seven years in September.
  • The World Trade Organization (WTO) approved US moves to impose import tariffs on $7.5 billion worth of European goods, raising fears of a US-Europe trade war, which encouraged Donald Trump to tweet about tariffs for the EU.
  • The NBS manufacturing index in China rose from 49.5 to 49.8 in September (survey 49.5) but a number under 50 still means contraction for the sector.

Well, that surprises me!

First, the Reserve Bank says “the stock of banknotes on issue, relative to the size of the economy, is close to the highest it has been in 50 years.” On average, the amount of cash in the economy translates to $3,180 per person, despite the use of credit and debit cards in an age where many of us tap and go.

Second, shares of online brokerage E*Trade Financial fell 16.4% early this week, after rival Charles Schwab Corp announced it would remove commissions for online trading of stocks, ETFs and options listed on US or Canadian exchanges! Charles Schwab lost 9.8% on the news but the race to the bottom has quickened up and the announcement couldn’t be well-received by brokers right around the world.

If digital disruption continues to bring prices down, how can employees expect wage rises? Or if artificial intelligence has its way, how can they expect jobs?

The week in review:

Top Stocks – how they fared:

The Week Ahead:

Australia
Monday October 7 – Labour Day & Queen’s Birthday public holidays
Tuesday October 8 – Job advertisements (September)
Tuesday October 8 – Weekly consumer confidence (October 6)
Tuesday October 8 – NAB business survey (September)
Wednesday October 9 – Monthly consumer confidence (October)
Wednesday October 9 – Building activity (June quarter)
Thursday October 10 – Lending finance (August)

Overseas
Monday October 7 – China Caixin Services gauge (September)
Monday October 7 – US Consumer credit (August)
Tuesday October 8 – US Federal Reserve Chair Powell speaks
Tuesday October 8 – US NFIB Small Business Optimism (Sep.)
Tuesday October 8 – US Producer prices (September)
Wednesday October 9 – US Federal Reserve (FOMC) meeting minutes
Wednesday October 9 – US JOLTs Job Openings (August)
Wednesday October 9 – US Wholesale trade (September)
Thursday October 10 – US Consumer prices (September)
Thursday October 10 – US Monthly Budget Statement (September)
October 10-11 – US-China trade summit
Friday October 11 – US Import/Export prices (September)
Friday October 11 – US Consumer confidence (October)

Food for thought:

“There are old traders and there are bold traders, but there are very few old, bold traders.” – Ed Seykota

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:

CommSec’s Craig James wrote this week that even though October has a bad reputation with investors, “the month should be better known for volatility rather than negativity”. He noted that, over the past decade, the All Ordinaries had fallen three times during October:

Source: CommSec

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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.