I don’t know if you heard it here first (though I suspect you did) that the big four banks and Telstra were on the way up and had a great week, rebounding from what looked like ridiculously low levels. The experts, who check out these sorts of things, tell me that this is the third best week this year. I hope this is a sign of things to come as December looms, which is historically a great month for stocks.
So how come? Well, as Bill Clinton once advised Americans – “it’s the economy stupid.” Yep, Wall Street, which was on track ahead of the close for the best week for 2015, is starting to buy the logical story that the Fed will only raise rates for the first time since 2006 because the economy is damn well good enough to take it.
When it happens, it’s the final stages of the QE program that was designed to rescue the US and the world economy from a potential Great Depression Mk II and stocks should head north. But on a more micro-level, not only should the economy do well, so should company revenues and profits, which should help share prices.
And happily, as I have been arguing for months, the Oz economy is looking like it’s in the same boat for 2016. Even the AFR, which along with other Fairfax publications has been talking the economy down, led with a story entitled: “Risk of recession is waning as Australia outpaces it peers…”
Yahoo! But note they didn’t pass up the opportunity to throw in the R-word. A better heading might have been “After being wrong all year, we’re now right. The Oz economy is getting stronger! Sorry.”
I’m not going to gloat but it’s so nice to see more and more people get on board the positivity train, which picked up speed when Malcolm T took over the throttle.
Regular readers know I was not anti-Abbott and was pro-Joe after his 2015 Budget, which has underpinned this recent improvement in jobs but the T-train has driven up confidence and I’m hoping he handles this foreign policy pressure post-Paris, which could hurt his popularity after a so-so week.
Fortunately for the Coalition, Bill Shorten is coming up short politically. I don’t say this with glee for political purposes but for economic reasons, as the economy needs strong leadership in Canberra that elevates the psyche and tells us that the Government is not under attack from without and from within.
Strong, well-supported leadership is good for the economy, just as the opposite is bad for the economy. And as I have said, it’s the economy stupid!
This from Chuck Self, the CIO of iSectors, shows how important the economy will be for stocks as the year peters out: “The market is just going to be in volatile trading on bits and pieces of news that come out until we get to November retail sales and the November employment report.”
Here we get the National Accounts in the first week of December and then we’ll wait to see if those great job and jobless numbers of October were credible. If they were, we could really see a stocks takeoff!
What I liked
- This from the RBA minutes: “The prospects for an improvement in economic conditions had firmed a little over recent months”.
- The energy sector was up 6.6% this week despite no positive price rises, so I hope this has been driven by smarties, who are on the money.
- The 4% gain for the week for the ASX 200 index.
- The positive reaction of Wall Street to Fed minutes, which increased the likelihood of a rate rise.
- The market reaction to the Paris tragedy.
- ANZ up 5.4%, CBA up 5.4%, NAB 6% and Westpac 4.4% – love it, after I recommended these a few weeks back. Telstra also put on 5.2%!
- The Fed’s minutes, which brought this: “One of the things that’s been missing in the market has been confidence in the Fed and the Fed delivered the message the market needed to hear (yesterday in the minutes),” said Mike Baele, managing director, The Private Client Reserve, U.S. Bank. (CNBC)
- This from BTIG Chief Technical Strategist Katie Stockton: “Our market internal measures support near-term upside follow-through, particularly given the positive seasonal influences that are upon us.” (CNBC)
- Rudi Filapek Vandyke of FN Arena has turned bullish on stocks after being bearish a couple of weeks ago.
- Super funds were up 3.2% for the month of October, so the return for the first 10 months is 6.1% and Warren Chant says: “While this year’s return won’t reach the heights of the past three years (12.8% in 2012, 17.2% in 2013 and 8.5% in 2014), it would still represent the sixth positive return in the past seven years and the eleventh in the past thirteen.” This is good for a bull like yours truly!
- The Philadelphia Federal Reserve index improved from minus 4.5 points to +1.9 points (forecast minus 1.0 point). The leading index rose 0.6% in October (forecast +0.5%).
- The People’s Bank of China has announced measures to prevent a short-term liquidity squeeze. The PBOC added cash to the financial system using reverse repurchase agreements and lowered the overnight and seven-day rates on its Standing Lending Facility for local financial institutions to 2.75% and 3.25% respectively.
What I didn’t like
- The performance of BHP’s chairman Jac Nasser at this week’s AGM. He could have said the dividend is safe but, if iron ore prices fall more, we might have to review our promise to have a progressive dividend. The share price was up 1.3% for the week but the company’s management really is looking more ordinary by the week.
- The VIX or fear index at 17. It’s still pretty low on historical standards but I want to see if it gets to 14 or so this week to give me confidence that we’ve got some good weeks ahead.
- US industrial output fell for the second straight month, down by 0.2% in October – I hope this turns around soon and I will be watching this indicator closely.
My final point
The goods are really outnumbering the bads – look at my likes versus my dislikes – as we roll into December, which is a great month for stocks. Sure, you can’t trust history, totally, and yes, Warren Buffett once said: “If past history was all there was to the game, the richest people would be librarians,” but, with a strong understanding of the economy, it can be a great base for either buying or selling stocks.
I don’t usually question Warren but I do have to say “past history” – is there any other kind? And why didn’t he say “the richest people would be historians?”
Maybe he isn’t as infallible as we all think! Ponder that over your coffee today.
Top stocks – how they fared
[1]The week in review
(click the blue text to read more)
- I gave you my strongest case [2] for buying quality blue chips. At current prices, I think good ones like the banks remain a solid play for income first and later on, capital gains.
- Paul Rickard explained how to play the ‘ugly Australian’ – BHP. He says it will remain a core stock [3] in his portfolio and plans to buy more in the high 18s after having a dabble at $20.40.
- James Dunn shared seven oil stocks [4] with attractive prospects – Beach Energy (BPT), Drillsearch (DLSP), AWE Limited (AWE), Senex Energy (SXY), Karoon Gas Australia (KAR), Horizon Oil (HZN) and FAR Limited (FAR).
- Tony Featherstone gave you three tourism and entertainment stocks [5] that are leveraged to Asian demand and attractively priced – Village Roadshow (VRI), Mantra Group (MTR) and The Star Entertainment Group (EGP).
- Our Super Stock Selectors [6] liked OzForex Group and Milton Corporation.
- The brokers [7] gave ANZ and Computershare the thumbs up and placed MMA Offshore in the not-so-good books. Our second broker report [8] upgraded Alacer Gold Corp (AQG) and Cover-more Group.
- This week’s Professional Pick [9] was McDonald’s. Monika Kotecha, chief investment officer at Insync Funds Management, thinks the stock could reach a level in the high $120s over the next 12 months.
What moved the market
- The horrific terrorist attack in Paris sent stocks lower early in the week. Another terrorism scare that cancelled a soccer match between Germany and the Netherlands added to the negativity.
- Upbeat commentary on the economy by the RBA and the Commonwealth Bank helped the local market move higher.
- US stocks rose on the back of the Fed’s minutes showing a commitment to a December rate hike. Who said a rise would create chaos?
The week ahead
Australia
- Monday November 23 – CBA Business sales (October)
- Tuesday November 24 – Weekly consumer confidence
- Tuesday November 24 – Speech by Reserve Bank Governor
- Wednesday November 25 – Construction work done (September quarter)
- Wednesday November 25 – Speech by Reserve Bank Assistant Governor
- Thursday November 26 – Business investment (September quarter)
Overseas
- Monday November 23 – US Existing home sales (October)
- Tuesday November 24 – US Economic growth (September quarter)
- Tuesday November 24 – US Home prices (September)
- Tuesday November 24 – US Consumer confidence (November)
- Wednesday November 25 – US Durable goods orders (October)
- Wednesday November 25 – US New home sales (October)
Calls of the week
- Tony Featherstone’s ‘takeover target’ call on OzForex [10] deserves a special mention. Back in July, he added the stock to his takeover target portfolio at $2.03. It is now trading at $3.42 since global payments giant, Western Union, made an $888 million takeover bid for the company this week.
- Treasurer Scott Morrison blocked the sale of the 101,411 square kilometre Kidman cattle property to foreign investors. The decision was guided by the Foreign Investment Review Board.
- David Bassanese gave his case for a flat 15% corporate and income tax rate. Read his article here [11].
- All Blacks coach Richie McCaw made the call to hang up his boots, stepping down after 148 Tests and two world titles.
Food for thought
“Headlines, in a way, are what mislead you because bad news is a headline, and gradual improvement is not.”
Bill Gates – American businessman, cofounder of Microsoft.
Last week’s TV roundup
- After a good week for the market, is Rudi Filapek-Vandyck from FN Arena getting a little more bullish? Find out here [12].
- To explain how important the oil price is [13] for stocks right now, chief market analyst at Invast, Peter Esho, joins Super TV.
- Have the key market influencers finally come to their senses on our banks? George Boubouras from Contango Asset Management tells us if the banks are still a buy [14].
- Should you be buying BHP Billiton at these levels? To discuss [15], cofounder of the Switzer Super Report, Paul Rickard, joins the show.
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, the biggest movers were Metcash and Nine Entertainment, with a 2.23 and 2.20 percentage point increase in the proportion of shares sold short respectively.
[16]
My favourite charts
Don’t fear the rate hike!
[17]Shane Oliver sent a reassuring note on 5 reasons why you shouldn’t worry about the Fed raising rates. The chart above reveals one of them, with US employment up and unemployment down. “Jobs are well up on 2008 levels, unemployment is down to 5%, confidence is up, the housing sector has recovered and business is investing again. And since inflation normally only turns up with a lag the Fed feels there is an argument to get going.”
Record passengers from Sydney to Melbourne!
[18]The number of passengers moving between Sydney and Melbourne has increased by 3.1% on a year ago and is at a 23-month high. CommSec says this is further evidence that the economy is strengthening, as it is traditionally looked at as a ‘barometer of business activity.’
Top 5 most clicked on stories
- Paul Rickard: The ugly Australian: How to play BHP [3]
- Peter Switzer: The strongest case for buying quality blue chips [2]
- Charlie Aitken: Selective opportunities at home [19]
- Charlie Aitken: Don’t shy away from risks assets [20]
- James Dunn: Oil Stocks: 7 attractive prospects [4]
Recent Switzer Super Reports
- Thursday, 19 November, 2015: Time for that reality check [21]
- Monday, 16 November, 2015: Keep a long-term perspective [22]
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.