Just when we thought the Fed’s delay of tapering was taking us off to the races, a hurricane of headwinds looks to be brewing that could upset the expected profitable trip to the ‘track’.
And two of headwinds were in the shape of the hard-to-ignore Warren Buffett and the influential Carl Icahn.
Not surprisingly, Wall Street had a down day and it was on big volume, which is never a good omen.
Let me list these headwinds:
- There’s a US Congress battle over cutting spending and Obamacare is targeted by the Republicans. Experts say the US Government could run out of money, so there’ll be 11th hour hopes of a settlement, but who knows with US politicians?
- The grumpy old men of US investment fame have told CNBC they think the stock market is “fully valued”.
- James Bullard, the St. Louis Fed President, voted against the tapering but indicated it could come in October.
- US economic data is mixed but as Bullard pointed out, unemployment has been improving lately, not by job creation but by a falling participation rate.
- There’s a German election this week, where Angela Merkel is likely to win, possibly with a three-party coalition, and the outcome could impact on European economic policies, especially with respect to austerity programs.
- Bears such as Gina Martin Adams, strategist at Wells Fargo, think interest rates and valuations tell her the market should fall 16% in three months! Others, such as Marc Faber, would agree and given the US market’s 21% rise this year, these prophets of doom have supporters.
- The Yanks hit an all-time high during the week and profit-takers have to test out these new levels.
- There are question marks over who will replace Ben Bernanke, and recall that when Larry Summers pulled out of the race, the market shot up!
- Another force for negativity on Friday would have been the quadruple witching hour, where stock index options, stock index futures, stock options and single stock futures expire on the same day. It’s a third Friday of the last month of a quarter thing, and it can unsettle markets.
- There was a re-weighting of the S&P500, with Apple and Disney losing weight in the index and Google and GM getting heavier.
- On the Dow, Bank of America, HP and Alcoa are kicked out of the Dow Jones Index and Goldman Sachs, Visa and Nike go into the world’s most watched indicator.
Time to shop
As you can see, there are plenty of forces that could unsettle a market, and while I wouldn’t be surprised about a pullback in September, with big mouths like Buffett and Icahn jawboning the market in the spookiest month of all for Yanks, I’d view it as a buying opportunity.
Note the S&P500 price-earnings multiple has gone from 17 to close to 20 over the year so far, and that could be a trigger for a test of the market. This has happened because prices have taken off, but earnings are yet to respond strongly enough, and that could be an economic challenge to the market’s elevated levels.
To local issues
David Speers, the Sky News political guru, says the Labor challenge will be a close run thing but thinks the people’s choice will be Albo. I don’t know about you but this Labor–v-Labor stoush for the leadership is too much to handle, after an election campaign that’s been going since January!
What I dug up this week
I interviewed Sean Parnell, author of Clive: The Story of Clive Palmer, who explained how Clive turned his Gold Coast real estate fortunes into an iron ore tenement that the Chinese paid hundreds of millions for. Believe it or not, Palmer was virtually a legal claim jumper! One of my goals for the year is to interview Clive.
Interview of the week
This was definitely Gerry Harvey, who took great delight reliving his victory over the shorters and hedge fund managers, who believed the internet challenge was one bridge too far for this old fella from the bricks and mortar world of retail. By the way, on Monday night on Switzer TV, we show the second part of that interview, where Gerry looks at the secrets of his success. And for punters, I asked him for his best horse for the Cups Carnival but he gave me two! Royal Descent runs today, and Gerry thinks she can win the Caulfield Cup. She won the Australian Oaks by 10 lengths, which Gerry says has never happened. History also says four-year old fillies or mares (not sure when a filly becomes a mare) have a great record in the Caulfield Cup. Aussies Love Sport was the other tip and Gerry’s words were “this one might be the best three-year old in Australia”.
Switz’s tip
If the market wants to test out these all-time high levels in the USA and five-year highs here, pin your ears back and take it as a buying opportunity!
Top stocks and how they fared
[1]Numbers that moved the market
After lots of taper talk over the past month, the US Federal Reserve decided to leave its US$85 billion per month Quantitative Easing stimulus program in place. The Fed said that while the economy is improving, it’s not enough to take off the training wheels just yet. You can read the press release here [2] and see Bernanke’s press conference here [3].
The result of Wednesday’s announcement saw the Dow and S&P [4] both close at record highs. Our ASX200 accumulation index (which includes dividends) is also at a record high.
In the minutes of their September meeting [6], the RBA chose not to rule out further cuts to the already record-low interest rate of 2.5%. The board pointed out that the current interest rate, along with a lower Aussie dollar, are together providing “a substantial degree of stimulus to the economy”.
Beer consumption [7] has hit a 66 year low in Australia, and overall alcohol consumption has also dropped for the second year running. Wine has been closing the gap on beer and, at this rate, will be our drink of choice in just a few years. See my favourite charts below for more.
The week ahead
Australia
September 25 Financial Stability Review
September 26 Population estimates (March quarter)
September 26 Job vacancies (August)
September 26 Financial accounts (June quarter)
Overseas
September 23 US, Eurozone & China Flash Manufacturing (September)
September 24 US Home prices (July)
September 24 US Consumer confidence (September)
September 25 US Durable goods orders (August)
September 25 US New home sales (August)
September 26 US Economic growth (June quarter)
September 26 US Personal income (August)
It’s a pretty steady week as far as economic data goes this week, with just four events on the calendar in Australia. In the US, we’ll see the consumer confidence number for the month of September released. Economists aren’t optimistic here, expecting a fall from 81.5 to 80.5.
And on Thursday (Friday morning for us), the final estimate of June Quarter US economic growth will be released. The US is growing pretty much at the same rate as us and is expected to come in at an annual rate of 2.5%.
Calls of the week
When Greg Fraser was on my show [8] in July, he predicted Crown would go from $12.80 to $16. This week CWN reached $15.81.
Should you drop dividend stocks for cyclicals? Get real! I explain why it would take a lot to tear me away from dividends in my report on Monday [9].
The RBA’s Malcolm Edey summed up some current views on the property market quite well this week: “We shouldn’t be rushing to reach for the bubble terminology every time the rate of increase in house prices is higher than average, because by definition that is 50 per cent of the time.
“You’re just going to be unrealistically alarmist in making that call every time that happens … we need to keep it in perspective.”
You can listen to the conference here [10]. Skip to slide 5 for his remark.
Last week’s TV roundup
Are dividends old news or are they still a play amid this talk of a move to cyclical stocks? George Bourbouras [11], Interem CIO at Equity Trustees, and Paul Rickard from the Switzer Super Report, joined me this week to discuss this and more.
Charlie Aitken [12] tells us which stocks you should marry and which stocks should be held to just a short term fling.
Some experts are warning dividend stocks are no longer the saviour they once were. Following up on his article [13] in the Switzer Super Report last week, James Dunn [14] joined me to outline seven top yield stocks that could provide an alternative to the usual suspects.
My favourite charts
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.
Tearing its way into the top ten this week was Transfield, with a 2.74% increase in short positions. The top five remained unchanged this week, with Fairfax still number one, at 14.11% short.
[15]
Stockbroker turned city planner, Charlie Aitken, outlined in the Switzer Super Report this week [16] the infrastructure plans he’d like to see over the next decade, which would benefit both short and long term GDP: roads. He also talked about the stocks that are set to benefit.
[17]We Aussie’s love our beer right? Perhaps so, but beer consumption has dropped to 66 year lows – the same level as in 1945 – 46 when pubs didn’t serve after 6pm. As you can see in the table below, both beer and spirits are on the way down, while wine consumption is on the rise.
[18]Top five clicked on stories this week
Peter Switzer: Drop dividend stocks? Never! [9]
James Dunn: Three small-caps to keep for three years [19]
Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [20]
Peter Hogan: My SMSF [21]
Charlie Aitken: Buy a nation builder [16]
Last week’s Switzer Super Reports
Thursday, 19 September 2013: The big picture [22]
Monday, 16 September 2013: Dividends still delight [23]