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It’s been a Trump-free week and hasn’t the stock market lapped it up! Imagine if there was no Royal Commission big, bad behaviour headlines to rattle our market indexes!

Locally, and Friday was another positive close, with the S&P/ASX 200 Index up 0.7% to finish at 5953.6, which was a near 85-point gain or a rise of 1.5%.

But the negative news for our banks and the overall index was not all Royal Commission driven, with a UBS demolition job on Westpac clobbering any positivity towards the banks on the basis that this shocking news out of the Haynes’ inquiry was already baked into the share price.

UBS’s Jon Mott has come at the “liar loans” argument, questioning the integrity of Westpac’s lending, which, in turn, raises questions over the bank’s balance sheet and its share price.

As often happens, the knock on effect hit all the big four banks and I reckon Mr. Mott better have his numbers right or long bank stocks investors will be screaming for blood!

Fairfax says “the report by Mr Mott, who has been arguing Australia’s banks are at risk of holding “liar loans” (those with incorrect borrower information) cited data on 420 Westpac loans, which has recently been published by the Royal Commission.”

Mr Mott told investors that the data showed Westpac customers were carrying more debt than he expected, with his analysis finding the typical customer in the sample had total debt that was 5.4 times their income. In 29% of the loans, he said the bank had not completed minimum income verification, such as checking a borrower’s pay slips. (SMH)

In contrast, the AFR’s Chris Joye sent me this email on Friday afternoon, putting the kibosh on Mott’s analysis. I hope this reverses the nasty impact on banks share prices we saw on Friday, when it sinks in.

This is the Joye response: “Westpac demolished Mott’s allegations on loan quality, revealing that of the 420 loans in the sample file, just one borrower (0.2 per cent of the total) was three months or more in arrears, which is “well below [Westpac’s] portfolio average for delinquencies.

The bank further reported that the 90-day default rate on its $400 billion mortgage book was a low 0.67 per cent and a fraction of what comparable US, UK and European banks report even though Aussie home loan rates have historically been higher.

PwC found that 38 of the 420 loans failed APRA’s loan assessment standards and should not, on this test, have been originated. On Thursday, Westpac disclosed that PwC used a limited data file on each borrower, and once Westpac applied its full data file, 37 of the 38 loans were, in fact, appropriately approved. And the one loan that should not have passed its credit scoring system is currently ahead on its repayments.

Finally, Westpac highlighted that 90 of the 420 loans have already been fully repaid, which, combined with its other evidence, suggests that the bank’s loan portfolio remains of a high quality. Westpac’s chief financial officer Peter King hammered this point home, noting that “our mortgage delinquencies and losses remain low both relative to historical and industry standards”.

That’s important because Westpac has aggressively raised its interest-only loan rates, which should have propagated higher defaults.

While I am sympathetic to Mott’s negative view on bank valuations, I would contend he is right for the wrong reasons.”

To Wall Street overnight, and a 1% gain for the Nasdaq following Facebook and Amazon’s much better-than-expected reporting results didn’t last, with the Index eventually going into the red.

However, before the close, the tech Index climbed back into the green, maybe helped by a better-than-expected economic growth number for the first quarter, which came in at 2.3% rather than the 2% tipped by economists.

So the Yanks have very good corporate profit results and better-than-expected economic growth and Wall Street can’t get excited!

The US earnings reporting season is now 50% done and 80% of results to date have beaten on earnings and 71% have beaten on sales, with earnings on track to rise around 20% or more, helped by solid growth and a 5-10% boost from tax cuts. That’s a great result but why no excitement?

It’s fair to say that lots of good news puts interest rate rises and the bond market into focus and they can be enthusiasm killers.

Maybe those asking “what’s next?” to get US investors buying again might be what got them going before – tech!

Goldman Sachs raised its price target for Amazon shares to $2,000 from $1,825, representing a 32% upside from Thursday’s close. And Stifel’s Scott Devitt raised the bet higher, pumping his target up from $1800 to $2,020. (CNBC)

One other negative is the anxiety around a China trade war. The date May 21 was mentioned by one market watcher on CNBC as a key date in the US response to China’s trade retaliation plays. This guy says the wrong reaction from President Trump could take stocks down 20%! Other panelists on the Closing Bell disagreed that the market would react so negatively but they didn’t discount it as a worry factor for stock players right now.

What I liked

• The weekly ANZ/Roy Morgan consumer confidence rating rose by 2.1% to a 5-week high of 118.4. Confidence is up by 6.4% over the year and above the average of 113.6 since 2014 and the average of 112.9 since 1990.
• The Oz dollar went south over the week, which is a good development for the economy and the stock market. Since April 19, we’ve seen the currency go from nearly 78 US cents to the 75.80 US cents we see this morning. Shane Oliver thinks it could be at 70 US cents over the year, as the Yanks raise interest rates and our RBA stays on hold to, wait for it, 2020!
• A big improvement in the underlying budget on the back of increased corporate tax revenue, strong employment growth and lower spending is expected to see the deficit for this year fall to $19bn from the $29bn projected in last year’s Budget.
• The Markit “flash” manufacturing index in the US rose from 55.6 to 56.5 in April (forecast 55). The “flash” services index rose from 54.0 to 54.4 (forecast 54).
• Durable goods orders in the US rose by 2.6% in the latest week (forecast +1.6%).
• New claims for unemployment insurance in the US fell by 24,000 to 209,000 in the latest week (forecast 230,000) – the lowest levels in 48 years!
• Good profit reports from Facebook and Amazon showed the US tech companies still have some ‘fangs’ left and can justify their high share prices.
• This chart from Shane Oliver, which he says shows that shares are still cheap compared to bonds:

• The geopolitical plus of the two Korean leaders having a get together without threatening to nuke each other.
• This from the ECB President, Mario Draghi: “The underlying strength of the euro area economy continues to support our confidence that inflation will converge towards our inflation aim of below, but close to, 2 percent over the medium term.”

What I didn’t like

• The Consumer Price Index – the main measure of inflation in Australia – rose by 0.4% in the March quarter, below expectations for a lift of 0.5%. In seasonally adjusted terms, the CPI rose by 0.5%. The annual rate of inflation remained at 1.9%, which is not a strong sign that economic growth is heading towards gangbusters land!
• This bond market alarmist stuff. This is Shane Oliver’s wise take on rising bond yields in the US: “Bond yields are only rising because of stronger growth, while US profit growth may be close to peaking (at around 20% year-on-year in the March quarter) it’s likely to continue growing solidly…”

On the Royal Commission

If you missed my story on the irony of the Royal Commission and how I would fix up the financial sector without breaking up the banks, have a look at my Switzer Daily column from Friday.

The Week in Review:

• You need to think globally. I think there are so many opportunities overseas and it’s time you added some to your portfolio.
• Will Shorten’s franking credit stunt change the game for LICs and exchange traded managed funds? So what will the proposed changes mean for investors in LICs? Paul Rickard discussed.
• The rising Asian middle class means that more Chinese tourists are looking to go it alone. Charlie Aitken looked at one company taking advantage of that trend.
• Australia has a number of rare earths hopefuls on the ASX worth watching and James Dunn looked at 4 rare earth miners to mark.
• In the hunt for income, it’s easy to focus on the largest companies on the Australian Stock Exchange, but is this really where you can find the best yield? Shawn Burns of Contango checked out 3 income stocks outside the top 30.
• Innovation and a competitive edge are needed to take on global markets and win and Tony Featherstone selected 4 advanced manufacturers that show their mettle.
• In the first Buy, Hold, Sell – what the brokers say funds management groups were in favour last week with upgrades for Challenger and Janus Henderson.
• While in the second Buy, Hold, Sell – what the brokers say Beach Energy gets upgraded, while Westpac was hit with negative news.
• Check out this week’s Hot Stocks where steel and aluminium stocks got the tick this week, but there may be no way back for AMP,
• Plus don’t miss this week’s Questions of the Week. Paul Rickard answered reader’s queries around the best way to invest for your children and the pricing of exchange traded funds (ETFs).

Top Stocks – how they fared:

What moved the market?

• The Banking Royal Commission and revelations about shoddy financial advice.
• US reporting season, which saw big companies like Facebook, Alphabet and Amazon report big profit jumps.
•  A broker downgrade for Westpac following evidence that its home lending processes need work.
• A weaker than expected March quarter CPI of 0.4% which placed pressure on the Aussie dollar.

Calls of the week:

• I said that investors need to think globally because Bill Shorten is shrinking our wealth.
• Tony Featherstone named 4 advanced manufacturers. 
• Kim Jong-un made history when he crossed the border into South Korea for the first time on Friday, where he held hands with South Korean President Moon Jae-in.
• ‘American Dad’ Bill Cosby found guilty of sexual assault.

The Week Ahead:

Australia

• Monday April 30 – State of the States
• Monday April 30 – Private sector credit (March)
• Tuesday May 1 – Manufacturing sector surveys (April)
• Tuesday May 1 – CoreLogic home prices (April)
• Tuesday May 1 – Reserve Bank Board meeting
• Tuesday May 1 – Reserve Bank speaker
• Thursday May 3 – Services sector surveys (April)
• Thursday May 3 – Building approvals (March)
• Thursday May 3 – International trade (March)
• Friday May 4 – New motor vehicle sales (April)
• Friday May 4 – Reserve Bank Statement on Monetary Policy

Overseas

• Monday April 30 – China manufacturing & services (April)
• Monday April 30 – US Personal spending/income (March)
• Monday April 30 – US Pending home sales (March)
• Tuesday May 1 – US ISM manufacturing (April)
• Wednesday May 2 – China Caixin manufacturing survey (April)
• Wednesday May 2 – US ADP employment change (April)
• Wednesday May 2 – US Federal Reserve interest rate decision
• Thursday May 3 – US ISM services (April)
• Thursday May 3 – US Factory orders (March)
• Thursday May 3 – US Trade balance (March)
• Friday May 4 – China Caixin services survey (March)
• Friday May 4 – US Employment report (April)

Food for thought:

“It always seems impossible until it’s done.” Nelson Mandela

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.

Charts of the week:

Source: CommSec 

Top 5 most clicked:

1. Will Shorten’s franking credit stunt change the game for LICs and exchange traded managed funds? – Paul Rickard
2. With Bill Shorten shrinking your wealth, you need to think globally – Peter Switzer
3. When will Telstra be a bargain? – Paul Rickard
4. How to leverage the Chinese tourism boom – Charlie Aitken
5. Buy, Hold, Sell – what the brokers say – Rudi Filapek-Vandyck

Recent Switzer Super Reports:

Thursday 26^th April:  Leaving on a jet plane

Monday 23^rd April:  Think offshore

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.