Wall Street was down on Friday but let’s keep it all in perspective. As CNBC put it: “The three major indexes notched record highs this week as quarterly earnings from S&P 500 companies largely outperformed expectations.”
“It’s been a strong week for stocks,” said Peter Cardillo, chief market economist at First Standard Financial, noting the S&P and the Nasdaq were on track for weekly gains. “There’s a bit of hesitance right now as we head into the weekend.”
Here in Australia we know something about hesitance and I’m hoping that our earnings season can counter the negatives that have been holding back our stock market for too damn long. Commodity prices, bank bashing, Telstra-trashing, a stronger-than-expected dollar and pre-Amazon anxiety have worked against our stock market. On top of this, there has been very little positivity coming out of Canberra because of the Senate and Liberal party leadership issues.
But when it gets down to the big issues driving stock prices, it’s primarily earnings and economics. Doubts have existed about our economy (you all know there have been none from me) but the deniers were given a good bollocking via those great job numbers for June, with 62,000 full-time positions created.
What about earnings? Can they lift this market? I’ll look at this in more detail on Monday but I did like this from Fairfax Media on Friday: “August earnings season is coming up and it’s shaping up to be a decent one. Citi reckons earnings growth in financial year 2017 will come in just shy of 20 per cent. The past financial year appears to have been a stronger than usual year for Aussie market earnings growth, underpinned by the recovery in resources earnings, and modest growth in industrials earnings.”
That’s my favourite revelation for the week and I really hope the Citi team is absolutely on the money.
On the week that was, banks were bashed then saved by a sensible APRA directive on their capital provisioning. However, they still lost friends on Friday, mainly on profit-taking.
The S&P/ASX 200 index lost 0.7% to finish at 5722.8, which represented the loss for the week. Not bad considering the heavy stuff out there against the banks and Telstra.
What’s missing is a committed belief that the Oz economy and our key companies are heading in the right direction with a pile of power. However, that seems to show up mainly in the index because individual companies have been doing OK, at least for some weeks before things change. For example, despite the overall market being down this week, ANZ was up 4.3% for the week, Westpac added 3.3%, while CBA and NAB put on around 1%. The expert balance sheet analysts think the latter two banks have a little more to do to please APRA by 2020 or so.
Not helping the index were the miners, who did well in previous weeks (three, in fact) when our banks were being beaten up, which helps to explain our market indexes’ battle with gravity.
To be fair, BHP and Rio didn’t have great production updates, which hurt their share prices. However, BHP does have a target price of $32 from Shaw brokers, which, if they’re right, has about 30% upside! That said, Citi isn’t as bullish on the Big Australian and actually downgraded it this week.
Along with other stocks optimists, I hope Citi is right on earnings season and wrong on BHP. I can’t wait until reporting season to start in earnest.
What I liked
- Employment rose by 14,000 in June, after rising by 38,000 in May.
- Full-time jobs rose by 62,000, while part-time jobs fell by 48,000.
- Full-time jobs lifted by 115,400 positions in the past two months – the strongest back-to-back job gain in 29 years.
- Hours worked rose by 0.5% in June and were up by 3.3% over the year – the strongest annual growth for over six years.
- Guy Debelle, the Deputy RBA Governor, scotching early rate rise talk and the dollar fell from 80 US cents to 78. 80 US cents in a couple of hours!
- Economy-wide spending posted firm growth in June, according to the Commonwealth Bank Business Sales Indicator (BSI). In trend terms, the BSI lifted by 0.7% in June, after a similar gain in May. The annual trend growth in sales lifted from 8.5% in May to 9.0% in June.
- The Bureau of Statistics (ABS) reported that new vehicle sales rose by 1.2% in June – the fourth consecutive gain. Annual sales of SUVs and “other vehicles”, like utes, are at record highs.
- On the US reporting season: “With 20 percent of S&P 500 companies having reported, 73 percent have beaten expectations and 77 percent have beaten on sales, according to John Butters, senior equity analyst at FactSet.” (CNBC)
- The Chinese economy grew at a 6.9% annual pace in the June quarter, above forecasts (+6.8%). The economy grew by 1.7% in the June quarter, up from 1.3% in the March quarter and in line with the forecast estimate.
- Chinese retail sales rose at an 11% annual rate in the year to June – the strongest result in 18 months. The result was above the 10.6% forecast and the 10.7% growth in the year to May.
- US housing starts rose by 8.3% to a 1.215 million annual rate in June (forecast 1.155 million).
- New home loans in the US rose by 6.3% in the latest week, with purchases up 1.1% and refinancing up 13%.
- The leading index in the USA rose by 0.6% in June (forecast +0.4%).
What I didn’t like
- Interest rate rise talk for Melbourne Cup Day – that’s a hopeless long shot!
- This early talk about rates rising and seeing the dollar go over 80 US cents and that headline tipping an 85 US cents dollar.
- The RBA minutes that set off rate rise talk. That was dumb.
- JP Morgan analysts, who said residential construction activity will decline at a “steeper than previously expected” rate, according to Bloomberg reports, which didn’t help CSR’s share price.
- The weekly ANZ/Roy Morgan consumer confidence rating eased from 113 to 112.5 in the week to July 16. Confidence is down 2.1% over the year. Did silly rate talk help? I don’t think so.
- The NAHB housing market index in the US eased from 66 to 64 in June. This was the lowest reading of home builder sentiment since November but still high in historical terms. Home builders were more concerned with higher materials prices hurting profitability in spite of solid demand.
- The collapse of the US Senate healthcare bill, which isn’t good for Trump tax plans, at least in the short term, though it could make his team work harder and smarter because they need a win.
- The Philadelphia Federal Reserve business index fell from 27.6 to 19.5 (forecast 24.0). The capex index rose but orders, prices paid and employment sub-indexes all eased.
Another optimist
Note these words from another well-credentialed optimist, CommSec’s Craig James, after the job figures, which showed the biggest back-to-back rise of full-time jobs in 29 years: “Clearly, Aussies should fret less and celebrate more. Our record-breaking economic expansion is showing no signs of ending. The jobless rate is near 4-year lows. Business is hiring. And the available jobs are full-time, rather than part-time. More people are looking for jobs and more are finding work. What’s not to like?”
Love your work, Craig!
The week in review
- Will August be great for stocks? This week, I discussed how the stock market [1] could react as reporting season rolls into town.
- Just how likely is it that Telstra will cut their dividend? Paul Rickard [2] revealed the arguments for cutting the dividend, plus what the brokers are saying.
- Cleantech stocks have rallied this year after underperforming previously, so how should you play this sector? Tony Featherstone [3] explains.
- With debt servicing obligations rising for Australian households, Charlie Aitken told us why he has changed his view on Star Entertainment Group (SGR) [4].
- Tourism is still big business in Australia, so what does it mean for companies in the travel industry? James Dunn [5]shared five travel stocks to watch.
- Reporting season kicks off again soon, so what can we expect this year? Matthew Haupt [6] shared six predictions and companies to watch.
- In this week’s Professional’s Pick, Pengana’s Ed Prendergast [7]explained why he likes Lifestyle Communities (LIC).
- The brokers placed Northern Star Resources in the good and not-so-good books this week, while Navitas [8] was downgraded.
- In our second broker report, three of the big four banks were upgraded but JB Hi-Fi [9] was out of favour.
- And Marjon Muizer [10] explained why getting your SMSF’s valuation right is crucial when preparing the fund’s financial accounts.
Top stocks – how they fared
What moved the market?
- The banks supported the market after new capital requirements by the banking regulator, APRA, were not as scary as some thought.
- Telstra came under pressure, with speculation that the dividend will be cut.
- The latest employment numbers – which showed another rise in full-time employment – helped take the Aussie dollar to 80 US cents. It also soared after the RBA released upbeat commentary on the Aussie economy and increased market expectations of rate rises.
Calls of the week
- Bellamy’s offered investors a refund for the capital raised for a canning facility, after it failed to get a key Chinese licence.
- PM Malcolm Turnbull announced a huge shakeup of Australia’s national security architecture with his new Home Affairs Ministry. Read David Speers’ article [11] about why Turnbull should start making arguments for it.
- In its latest minutes, the RBA estimated that Australia’s “neutral cash rate” may need to rise to 3.5%, or 200 basis points above its current level of 1.5%.
- Speaking of interest rates, Goldman Sach’s chief economist Andrew Boak told the AFR there’s a possibility the RBA could hike rates on Melbourne Cup Day in November, despite the surging Aussie dollar. A long shot?
- After two greens senators resigned in the space of less than one week over citizenship issues, satirical news site, The Betoota Advocate, published an article explaining how Malcolm Turnbull quietly called Theresa May to check if Tony Abbott [12] was still a British passport holder.
The week ahead
Australia
- Monday July 24 – State of the States (July)
- Tuesday July 25 – Weekly consumer sentiment
- Wednesday July 26 – Consumer price index (June quarter)
- Wednesday July 26 – Speech by Reserve Bank Governor
- Thursday July 27 – Trade price indices (June quarter)
- Friday July 28 – Producer price index (June quarter)
Overseas
- Monday July 24 – “Flash” manufacturing gauges
- Monday July 24 – US Existing home sales (June)
- Tuesday July 25 – US CaseShiller home prices (May)
- Tuesday July 25 – US Consumer confidence (July)
- Tuesday July 25 – Richmond Fed Manufacturing index (July)
- Wednesday July 26 – US New home sales (June)
- Wednesday July 26 – US Federal Reserve rate decision
- Thursday July 27 – US Durable goods orders (June)
- Friday July 28 – US Economic growth (June quarter)
Food for thought
“There is no greater thing you can do with your life and your work than follow your passions – in a way that serves the world and you.” – Richard Branson
Last week’s TV roundup
- To share his views on the market and the stocks he likes right now, Charlie Aitken [13] of Aitken Investment Management joins Super TV.
- What do the charts have to say about the S&P/ASX 200, the S&P500, Telstra and more? Share Wealth Systems’ Gary Stone [14]joins Super TV.
- Ahead of reporting season, there can be buying opportunities if companies come out with better-than-expected results. To tell us about the stocks he likes right now, ST Wong [15] from Prime Value joins the show.
- Will Telstra cut its dividend? Paul Rickard [16]shares his analysis on Super TV.
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.
This week, Harvey Norman was the biggest mover, with its short position increasing 1.73 percentage points to 10.48%.
Source: ASIC
Chart of the week
Source: CommSec, ABS
Employment increased by 14,000 during June, with all the job gains in full-time positions. As you can see in the chart above, over the past two months, full-time jobs have jumped by 115,400. According to CommSec, that’s the best back-to-back gain in full-time jobs in 29 years!
Top 5 most clicked stories
- Paul Rickard: Will Telstra cut its dividend? [2]
- Peter Switzer: Will August be great for stocks? Act now! [1]
- James Dunn: Can these 5 travel stocks soar higher? [5]
- Charlie Aitken: Star Group (SGR): know when to fold them [4]
- Matthew Haupt: 6 predictions for reporting season [6]
Recent Switzer Super Reports
- Thursday 20 July 2017: Companies to watch [17]
- Monday 17 July 2017: Earnings season [18]
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.