Switzer on Saturday

Is this stocks boom believable?

Founder and Publisher of the Switzer Report
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What a week for stocks! And given the run of economic data and US company reporting news, as former US President Ronald Reagan once said: “You ain’t seen nothin’ yet!” Yep, some really good stuff has surfaced over the week, so let’s run our eyes over it all.

Here you go on what I liked:

  • Our stock market hit an 11-month high by the end of the week.
  • That was seven days in a row of rises.
  • We broke the important psychological level of 5400 to finish at 5429.6 on the S&P/ASX 200 index.
  • The banks were back in favour.
  • Chinese economic data gave it to those China-haters out there, with GDP up 6.7% (with the consenus forecast at 6.6%) but there were doubters with lower guesses.
  • The landslide win for Japanese PM Shinzo Abe’s party in the Upper House and the assumption that a big spending program would ensue because of the strength of the victory.
  • The S&P/ASX 200 ended trade 0.3% higher (or 18 points) to 5429.6 on Friday (up 3.8% for the week), its strongest gain in three months. The All Ordinaries ended 0.3% higher to 5510.1.
  • The US stock market indexes – the Dow and S&P 500 – both beat their all-time highs.
  • The Russell 2000 index, which is a key broad, small cap index, is trading above important technical levels creating a strong bullish technical pattern. It’s all-time high is 1290 and it’s now at 1205.31. If this record is broken, the techies see it going to a huge 1400!
  • US bank earnings have beaten market expectations and banks’ share prices there were up 5% for the week.
  • US retail was up 0.6% in June, versus the economists’ collective guess of 0.2%.
  • And it’s not just the American consumer looking good but along came a 0.6% increase in industrial production for June, which is the best gain since July 2015 and the consensus forecast was a low 0.2%.
  • Finally, US bond yields have headed up this week and that’s something you have to cheer about because this bond market’s behavior has been warning all of us to be very, very careful. I have been asking a lot of my bond market experts about how often the bond market gets it wrong. Now they are biased, being current or ex-bond people but their answer was what I expected: “Not very often!” Looking at the story I’ve bullet-pointed above, this could be one of those times.

I could go on noting big positives for stocks but let me share my favourite market quote for the week.

“Investors are not being blindsided by the earnings numbers from the big banks; that’s critical to keep volatility low and keep market sentiment stabilized,” said Chad Morganlander, portfolio manager at Stifel Nicolaus. “Financials have been reporting resilient earnings, which bodes well for the overall market.” (CNBC)

As a right royal rooter for bank stocks, as most of you know, this is music to my ears. And with stats telling us that investors are sitting on a pile of cash, this run of positive data (economic and company earnings) will make it hard for cash hoarders to maintain their defensive stance.

Next week, US reporting season will be centre-stage but there’s also a huge data drop covering housing, the Chicago Fed Index, the Philly Fed Index, the leading index and the closely watched ‘Flash’ manufacturing readings for the US, Europe and Japan.

Locally, the RBA’s latest minutes will be out for reading between the lines, with the market consensus still strongly favouring another easing of interest rates. The key determinant will be the inflation reading on July 27 but if the stock market is zooming, the RBA could easily hold fire, especially if economic data here and abroad is all looking honky dory.

The next big story for us after the CPI will be earnings season in August. On that front, my team of experts is getting more cautiously positive.

Other stuff I liked

  • OPEC telling us that the oil market is heading towards balance, which suggests an oil price slump shouldn’t be expected, which would take stocks down again like it did early in 2016.
  • Though unemployment rose from 5.7% to 5.8%, full-time jobs rose by 38,500 and the participation rate rose, which explains the rising jobless rate.
  • New vehicle sales rose by 3.1% in June and, for the year to June, a record 1,174,121 new vehicles were sold.
  • The NAB business conditions index rose from +9.7 points to +12 points in June, where the long-term average is +4.8 points. The business confidence index rose from +3 points to +6.1 points, where the long-term average is +5.7 points.

What I didn’t like

  • The Westpac/Melbourne Institute survey of consumer sentiment fell by 3% in July to 99.9, after falling by 1% in June. But still the confidence index is up 8.4% on a year ago and the survey was in the post-election week, when there was a lot of negativity around who would form Government.
  • Total lending finance fell by 3.2% in May – the second consecutive fall. Lending totalled $67.5 billion in May, down 7% over the year and holding at a 17-month low. It must be remembered the regulators wanted to kill off the housing boom to avoid a bubble and it looks like they’re getting their way.
  • The tragedy in Nice. I walked along that street a couple of years ago on a Saturday night and the place exuded positivity and happiness. No one deserves to be treated with such inhumanity let alone the children, who were victims of the disgusting individual who killed at least 84 people, including 10 kids! Some 202 others were wounded. Our hearts go out to the families of these poor people who have to live with this for the rest of their lives.

Food for thought

Is this boom in stocks believable and sustainable? I have to say the run of very good stuff outlined above has even surprised me, so I guess it might have to be a black swan curve ball (to really mix my metaphors) that would be the only big, bad, boom buster out there that we have to look out for.

Is Donald Trump a big, bad, boom buster? I hope not.

Top stocks – how they fared

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The week in review

(click the blue text to read more)

  • This week, I pondered on whether or not you should go long stocks.
  • Paul Rickard revealed why he may have given up his ‘bear’ status on gold! If you want to learn about several ways to buy the metal, read this.
  • James Dunn told you what to look out for in the upcoming local reporting season.
  • Roger Montgomery went hunting for value and tipped REA Group as one opportunity for investors.
  • Charlie Aitken explained why the US reporting season will be crucial to the direction of the S&P 500.
  • The brokers put BHP Billiton in the good books but Select Harvests copped a downgrade.
  • Tony Featherstone said emerging markets could be set for a period of growth and revealed ways to gain exposure.
  • Bill Laister shared the growth story of Catapult Group – a global leader in the athlete monitoring and analytics industry. He believes the company will continue to outperform.
  • Speaking of Catapult, in our second broker report, it gained an upgrade while Medibank Private was downgraded.
  • Tony Negline crunched some numbers to illustrate how much income you may need in retirement.

What moved the market

  • The positive market vibes kept rolling from solid US jobs data out last week. We also played follow the leader after some record highs on Wall Street.
  • Expectations that Italy would take measures to safeguard its banks supported European stock prices.
  • Shinzo Abe’s landslide political victory in Japan spurred on fiscal stimulus speculation and Asia liked it.
  • Political certainty on the local front, and in the UK after new PM Theresa May was sworn in, also helped investor sentiment.

The week ahead

Australia

  • Tuesday July 19 – Reserve Bank Board minutes
  • Tuesday July 19 – Weekly consumer confidence
  • Thursday July 21 – NAB Business survey (June quarter)
  • Thursday July 21 – Detailed employment (June)

Overseas

  • Monday July 18 – NAHB Housing Market Index (July)
  • Tuesday July 19 – US Housing starts (June)
  •  Tuesday July 19 – US Building permits (June)
  • Thursday July 21 – US Chicago Fed Index (June)
  • Thursday July 21 – US Philadelphia Fed Index (April)
  • Thursday July 21 – US FHFA House Price Index (May)
  • Thursday July 21 – US Existing home sales (June)
  • Thursday July 21 – US Leading index (June)
  • Friday July 22 – “Flash” Manufacturing (June)

Calls of the week

  • Tony Featherstone said emerging markets could outperform over the next five years despite global economic uncertainty. Read his article here.
  • Britain’s new PM Theresa May made the call to appoint former London Mayor, Boris Johnson, as Foreign Secretary.
  • China rejected a finding by an international tribunal in The Hague that it did not have sovereignty in the South China Sea!
  • The Bank of England made the call to keep the UK’s main interest rate at 0.5%, despite speculation that it would cut rates.

Food for thought

Whatever you do in life, surround yourself with smart people who’ll argue with you.

– John Wooden – US basketball coach

Last week’s TV roundup

  • For a closer look at the market and broader economy, George Boubouras from Contango Asset Management joins Super TV.
  • Julia Lee from Bell Direct joins the show to discuss the market’s momentum and share some hot stock tips.
  • Are we headed for a recession in 2016? Chief economist at St George, Hans Kunnen, joins Super TV to discuss some controversial headlines on the subject.
  • With the election over and the latest employment figures released, what does this mean for the Aussie economy? Shane Oliver shares his insights.

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 one of the biggest movers was MYOB Group with its short position increasing 0.68 percentage points to 8.49%. Next was Western Areas, moving from 8.63% to 9.11% this week. Metcash went the other way, with its position reducing by 1.26% to 12.71%.

picture_rsSource: ASIC

My favourite charts

The election didn’t KO business conditions!

20160715-businessconditions

Despite all the political uncertainty, the NAB business conditions index rose from 9.7 points to 12 points in June! That’s well-above the long-term average of 4.8 points.

Wall Street scales new heights!

20160715-markets

Strong US economic data has helped US markets surge this week, with the S&P 500 (blue line) and Dow Jones (red line) hitting record highs. Solid jobs numbers and good company results were among the drivers.

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