It's the resistance to gravity I like

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The three-week rally of the S&P/ASX 200 index made it to the end of the week, with a 64-point gain or 1.2% rise over the five trading sessions.

That was the good news again for the week. The really disappointing news was the weaker than expected economic growth number out of the US. Economists were tipping a possible 2.6% number but this advance reading on the June quarter growth was only 1.2%.

And worse still, the growth number of 1.1% for the March quarter was peeled back to 0.8%.

If it weren’t for the fact that these low numbers now tell us that the Fed will remain on hold at least until after the US election on November 8, the US stock market would’ve gone down on this news. These weaker-than-expected numbers are even politically significant, as it was Hillary Clinton’s husband, Bill, who lectured us with “it’s the economy, stupid” in the 1992 presidential campaign. That could come back to haunt Mrs Clinton and Donald Trump’s team is smart enough to exploit it.

On the good side of this bad growth number is the 4.2% growth in consumer spending, which is responsible for two-thirds of US GDP but it means that investment and, undoubtedly, exports aren’t pulling their weight.

This could be a trigger for a sell off but only the thought of rates being lower for longer could stop stock prices going for a big slump.

Next week should be interesting, as Wall Street didn’t get too negative on the number.

Locally, Friday’s big performer was Bega Cheese, which put on 6.9% as I interviewed the company’s CEO, Aidan Coleman. He outlined his company’s future role in the development of the Bega Valley at the two-day Economic Summit I hosted for the Bega Valley Shire Council. And as we spoke, the market gave him and his work a big tick.

The company picked up a significant contract with Woolworths at the expense of Murray Goulburn Co-op that’s expected to rip about $108 million from MGC’s top line.

Yes I know it hasn’t been a rip roaring week for stocks but I like the positivity, even if it has been on the restrained side. However, the inflation data did hose down the heat around high expectations of another interest rate cut here on Tuesday.

That aside, I do like the real fight against gravity on the stock market in Australia as well as on Wall Street. It says something important about where the balance of investors are placing their bets on stocks and it’s resisting the kind of negativity that was easy to sell to the punters in the first two months of this year.

In fact, since April last year, the negative story was in and the positive analysts were laughed off the block. And yes, it was painful for an optimist like yours truly but that which doesn’t kill you makes you stronger, to quote the German philosopher, Friedrich Nietzsche. (That said, I would’ve liked a better US economic growth number.)

Away from the stubbornness of stock markets to hang on to gains since mid-February, my big concern was about the European banks’ stress tests.

So my Friday was made when I sighted the CNBC headline: “Europe ekes out gains as banks rally.” This good news for European banks ran ahead of the announcement of the banks’ stress tests.

So what happened? I don’t know because they didn’t get released until 10pm Central European Time, which is 5pm New York time. Who releases important market data at night? The Europeans, that’s who! And I file at 7am EST, which is 5pm New York time!

Now it could be to ensure that there’s time to digest the stress test info, so it remains a big curve ball question. And it will be a matter for me with Monday’s Switzer Super Report.

That said, in a world of whispers from insiders, I did like the fact that the German DAX was up 0.61% and all other key European market indexes were in the green. I liked this headline: “Europe ends higher as banks rally ahead of the stress tests.” I hope insiders have got this right!

What I liked

Despite the “oh no” GDP number, the S&P 500 index still finished up. Gotta love those optimistic Yanks!
US reporting season and this revelation: “Evidence is continuing to build that US profits have bottomed. Two hundred and ninety nine S&P 500 companies have now reported June quarter earnings to date and the results show an 8% plus pick-up in profits on the March quarter, with 81% beating on earnings and 59% beating on sales.” (Shane Oliver, AMP).
Private sector lending here rose by 0.2% in June to stand 6.2% higher over the year. Housing credit rose 0.5% and 6.7% for the year.
Investor home loans rose 0.4% and 5% annually, while owner-occupier home loans rose 0.5% and 7.7% for the year.
The forecasters think that the terms of trade probably rose in the June quarter by 2%, after many months of dropping.
The Consumer Price Index rose by 0.4% in the June quarter, in line with expectations but it KO’d the pessimists, who were rooting for deflation. In seasonally adjusted terms, the CPI rose by 0.6%. The annual rate of inflation fell from 1.3% to 1% – equaling the low set in June 1999. Inflation stands at a 17-year low but on an annualized basis, you can forget deflation talk.
The ANZ/Roy Morgan consumer confidence rating rose by 0.5% last week – the first rise in five weeks and it shows how the end of elections can be good for confidence.
The IFO business sentiment index in Germany fell from 108.7 to 108.3 in July but this was above forecasts centred on 107.5. Go Europe!
The Dallas Federal Reserve manufacturing index improved from minus 18.3 to minus 1.3 in July.
The Fed left its target range for the federal funds rate at between 0.25%-0.5%. The Fed said the “labor market strengthened and that economic activity has been expanding at a moderate rate”. But with inflation remaining low, the Fed has left its options open for a rate hike later in 2016.

What I didn’t like

The US economic growth number – dead-set disappointing.
Personal credit here fell 0.1% or -0.8% for the year and business credit fell 0.2% but was still up 6.6% annually. This could’ve been an election campaign issue.
The Bank of Japan cheesed off the markets by not expanding its monetary stimulus at the huge rate that was expected. This is what ANZ’s economists concluded: “Although Kuroda signaled that there could be more easing at the next meeting in September, overall this is a huge disappointment for markets.”
Shares in Lloyds Bank fell by 5.8% after warning of a weaker UK economy after the Brexit vote.
US consumer confidence fell from 98.0 to 97.3 in July but it beat the forecast of 95.9.

Stressed about the Stress Tests?

On Friday, I looked at a scary projection by Bloomberg’s Satyajit Das about European banks and in particular those worrying Italian ones and in this speculative piece, I explained why I don’t want to believe it.

AMP’s Shane Oliver explained the problem linked to Italian banks and here it is:

“What’s wrong with Italian banks? Put simply, after years of poor growth and low interest rates, Italy’s banks have seen their non-performing loans rise to the point that two of them need to be recapitalised or else they will have to slow lending, which will be bad for Italian growth. The trouble is that their share prices have collapsed making it hard to raise capital from the equity market and European rules on bank recapitalisation require private bond holders in banks to take losses ahead of the injection of public money. After the political furore that followed when an elderly retail investor committed suicide last November, after having to take a €100,000 loss on a bond holding in a small bank, the Italian Government cannot afford to have a wider “bail-in” of ordinary bank investors as it will damage its prospects of winning a referendum on reducing the Italian Senate’s power, which in turn could lead to the fall of the Renzi Government. So there is a stand-off between PM Matteo Renzi and the European Commission, but ultimately a compromise is likely as the rest of Europe realises that failure to do so could see the Eurosceptic Five Star Movement attain power in Italy. The European Banking Authority’s bank stress tests could help clear the way for such a compromise.”

I know a lot of us hope or pray our favourite footie team gets up or our son or daughter win in their sporting endeavours but spare a little prayer for European banks. If they’re stressed, we and our portfolio of stocks will also be stressed next week.

Go European banks!

Top stocks – how they fared

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The week in review

(click the blue text to read more)

I explained why it’s not ‘sell everything time’ because the facts, and the charts, just don’t stack up.
Paul Rickard explained how you can compare the returns of your fund with the professionals and work out if you’re doing a good job!
James Dunn revealed the highlights – and lowlights – of the US earnings reporting season.
This week, Charlie Aitken discussed whether bonds are on the way out and cyclical equities are on the way in.
Tony Featherstone shared six stocks that could benefit on the back of declining home ownership.
Tony Negline explained the difference between individual and corporate trustees and what to consider when making the swap.
Coca-Cola Amatil and Seven West Media were in the not-so-good books. The brokers placed TouchCorp in the good books, while Origin and Woolworths received downgrades.
And this week we launched our special Hunt for Yield – The Income Masterclass series. In Episode One, we discussed commercial property opportunities with the chief executive officer of Real Estate Securities at APN Property Group, Michael Doble. In Episode Two, managing director of Perennial Value Management, John Murray, spoke with us about his approach to shares.

What moved the market

The local market moved higher after the consumer price index – the main measure of inflation in Australia – increased 0.4% for the June quarter and had analysts tipping a possible rate cut on Tuesday.
Wall Street edged higher on the back of better-than-expected US earnings reports from the tech giants Facebook and Apple.
And speculation on the BoJ stimulus package helped support Asian stocks.

The week ahead

Australia

Monday August 1 – Inflation gauge (July)
Monday August 1 – Home value index (July)
Tuesday August 2 – International trade (June)
Tuesday August 2 – Building approvals (June)
Tuesday August 2 – Reserve Bank Board meeting
Thursday August 4 – Retail trade (June)
Friday August 5 – Statement on Monetary Policy

Overseas

Monday August 1 – China purchasing managers (July)
Monday August 1 – US ISM manufacturing (July)
Tuesday August 2 – US Personal income (July)
Tuesday August 2 – US Auto sales (July)
Wednesday August 3 – US ADP Employment (July)
Wednesday August 3 – US ISM services (July)
Thursday August 4 – US Challenger job layoffs (July)
Friday August 5 – US International Trade (June)
Friday August 5 – US Non-farm payrolls (July)

Calls of the week

A NSW man won a Pacific island resort in a raffle after forking out just $65 on the ticket. The former Australian owners of the Micronesian resort made the call to organise an international draw following a suggestion from their son. Better than winning a meat tray!
Donald Trump raised eyebrows after calling on Russia to hack the emails of rival Hillary Clinton to expose emails during her time as Secretary of State.
Woolworths announced a restructuring program for their company including 500 job cuts and halving the number of new stores set to open over the next few years. But Paul Rickard says this turnaround will take time to ripen! Read his analysis here.

Food for thought

Action is the foundational key to all success – Pablo Picasso

Last week’s TV roundup

CIO at Wilson Asset Management, Chris Stott, joins Super TV to discuss their record result.
Arminuis Capital’s Marcel von Pfyffer gives his analysis on Wednesday’s inflation reading.
Jon Howie from BlackRock explains how he’s navigating this low-rate environment.
And Simon Conn, senior portfolio manager at Investors Mutual, joins the show to tell us how he’s investing right now.

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 Cover-More Group with a 0.35 percentage point increase in the proportion of its shares sold short to 9.70%. Oil Search went the other way, decreasing by 1.04 percentage points to 7.86%.

Source: ASIC

My favourite charts

Mark Zuckerberg mobilises revenue!

This week Facebook shares hit record highs after its quarterly profit and revenue exceeded expectations. Mobile advertising revenue accounted for 84% of the company’s total advertising revenue.

The business conditions (red line) of small and medium sized enterprises are the highest they’ve been in six years, according to the latest SME survey by NAB. Business conditions rose by 2 points to +6 index points, above the long-run average of +4 points.

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