Switzer on Saturday

Market good vibes continue, pity we go to the polls!

Founder and Publisher of the Switzer Report
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US stocks were again in the green as the S&P500 was on track for the best weekly gain for three months. It would have been better if Boeing’s problems hadn’t surfaced. Share markets in the States have added around 11% this year alone. Helping stocks overnight were more positive reports about the US-China trade deal, expected to be signed later this month.

As I’ve pointed out previously, just about all the negatives that drove stocks down in the December quarter, such as the trade war, Fed rate rises and recession fears have been reversed or downgraded as a huge concern. Even the likes of China, the EU and here in Australia, there’s a belief that stimulation is in train to avoid a bigger-than-possible economic slowdown.

In fact, if there was no election with all of the historical uncertainty and some of the provocative policies that are known to be on the way if Labor wins, stocks locally would be higher.

The S&P/ASX 200 Index dropped 28 points (or 0.5%) to finish at 6175.2. But let’s keep this in context – since December 24, the Index has gone from a low of 5467, which means it’s up nearly 13%! This makes me a proud old bull and if the readings coming out of the US and China (both economic and geopolitical) can be trusted, then stocks can go higher over the year, albeit with the usual downs to go with the beloved ups.

An interesting trend over the week is the gain for the gold miners and this is linked to Brexit concerns. Despite the good news overnight, there are those who worry that the Trump trade war tentacles could choke off a deal that the market can love. This is the sort of stuff that gold traders love to speculate on, though I’m happy that Percy Allan’s market timing service (which Switzer offers nowadays under the name Market Timing Australia) has had a green light on gold as well as local stocks.

That said, gold always seems to come with curve balls. This is what the AFR’s William McInnes dug up on the subject: “We view the recent downtick as a buying opportunity for those looking to make medium-to longer-term gold allocations,” said RBC Capital Markets commodity strategist Christopher Louney. “That is not to rule out any additional near-term pain as a strong dollar continues to cap gains, but we think that price risk is skewed to the upside not only in 2019, but likely in 2020 as well.” The price of gold has fallen more than 3% in the last month and is now trading at $US1,297.05 an ounce.

Interesting play of the week was Kogan.com that spiked on its marketplace play, which means, like Amazon, small and big businesses can advertise and sell their wares on its platform. Despite a surge in its share price on Thursday, the stock finished down 0.05% for the week.

Not helping our market indexes have been financial stocks, with ANZ copping the most disdain in being down 2.8% for the week. ANZ is often portrayed as the up and coming performer because it exited Asia, took its medicine quickly, shed reputation-damaging divisions and ripped into costs. It copped a downgrade by Morgan Stanley, who’s not a true believer in its potential to keep costs down while building revenue. The slowdown in the Oz economy could not be seen as a plus for a bank that has changed its focus to local business. “While ANZ’s business mix should provide more scope than its peers to adapt to an increasingly difficult operating and regulatory environment, we believe it currently faces execution challenges in Australian retail and business banking, with housing loan growth and deposit growth below system,” said analyst Richard Wiles. (afr.com)

What I liked

  • Falling stock piles of iron ore in China, which implies higher iron ore prices ahead, China’s economy is cranking up, good for our trade/economic hopes and it delivers tax revenue for the Budget, which will make election promises fundable!
  • Almost $23 billion will be paid out by listed companies to their shareholders in the next five weeks.
  • House price collapse worriers might like to know that on immigration, net permanent and long-term arrivals stood at 289,000 in the year to January, down from near 5-year highs of 291,250 in December. Lots of people put a floor on house price slides.
  • It’s not ideal but better than might have been, with UK lawmakers approving 412 to 202 a motion setting out the option to have a short delay by agreeing to a Brexit deal by March 20 or a longer delay, if no deal can be agreed in time.
  • Shares in Apple rose by 3.5% after a broker upgrade on Tuesday. The resuscitated love for US tech stocks is a sign of market optimism I can’t dislike.
  • CommSec running with this headline: “China data encourages.” In the year to February, Chinese retail sales grew by 8.2%, with production up 5.3% and investment up 6.1%.

What I didn’t like

  • The tragic Boeing disaster.
  • The Westpac/Melbourne Institute survey of consumer sentiment index that fell by 4.8% to 98.8 in March, after rising by 4.3% to 103.8 points in February. The sentiment index is back below its long-term average of 101.3. Any number under 100 means pessimists outnumber optimists.
  • The NAB business conditions index eased from +6.6 points in January to +4.4 points in February, below the long-term average of +5.8 points.
  • The NAB business confidence index fell to a 3-year low of +2 points in February, down from +3.6 points in January and below the long-term average of +6 points.
  • The value of lending to households fell by 2.4% in January, after a 3.6% decline in December.
  • The value of loans (to households) for home alterations and additions fell by 0.7% to a record-low $281 million in January.
  • New home sales in the US fell by 6.9% in January to a 607,000 annual rate (forecast 620,000).

I switched teams this week

This week I changed my view on interest rates and here’s what I wrote on Switzer Daily: “The latest NAB business survey has made me jump ship from being a rates are “on hold’ guy to ‘let’s cut’. And don’t pussyfoot around with it, Dr. Phil.

Six months ago, apart from falling house prices, the economic data was overwhelmingly positive. But the case for cutting has got so strong in a space of a couple of weeks that I think it would be madness to wait for the March readings on an economy that’s slowing down.”

Following last week’s revelation that our economic growth was only 0.2% for the December quarter and confidence was slipping, it’s unnecessary for the RBA to wait. I hope Dr. Phil bites the bullet and cuts. Right now, the economic readings aren’t all bad, with the job market looking great, so a cut in time might save nine! However, with the cash rate at 1.5%, we only have six cuts available, provided we don’t ever have to go into negative interest rates.

Go Dr. Phil!

The Week in Review:

  • I shared how I’m playing the changing cards that we’re now being dealt from the local and global economies.
  • The Government’s decision to cap super balances and restrict super contributions means that investment (or insurance) bonds could be a realistic alternative for investors outside of super. And here’s why…
  • James Dunn wrote about 5 results that didn’t appear all that great coming out of reporting season, but more thorough analysis shows they’re better than they looked.
  • Cinemas are still a great business when the content is right and some cinema-related stocks on ASX and overseas exchanges offer value according to Tony Featherstone.
  • Here are stocks that Julia Lee views as winners and losers in the retail space plus her favourite, Lovisa, and why that’s the case.
  • Michael McCarthy noted that the Australia 200 index has had a stellar run since December 24, gaining more than 16% in less than three months. However, the price action is now pointing to weakening, and the potential for a correction could be increasing.
  • Activity among stockbroking analysts has taken a massive step back now that the February reporting season is over and dealt with. There was an equal number of upgrades and downgrades in the first Buy, Hold, Sell – What the Brokers Say of the week as well as the second edition.
  • Our Hot Stock of the week was Whitehaven Coal (WHC).
  • And in Questions of the Week, we answered readers’ queries about Medibank, Centuria’s Investment Bond, Challenger and closing an SMSF. 

Top Stocks – how they fared:

What moved the market?

  • British MPs voted against Prime Minister Theresa May’s Brexit deal for a second time and voted against a no deal Brexit from going ahead.
  • President Donald Trump said the US would know within the next three to four weeks whether a trade deal will be struck with China.

Calls of the week:

  • Paul Rickard wrote that Centuria LifeGoals is a “well-constructed, flexible investment” with competitive pricing.
  • Looking at movie stocks locally and abroad, Tony Featherstone suggested that Village Roadshow’s rally could continue this year thanks to the release of blockbuster films.

The Week Ahead:

Australia
Tuesday March 19 – Speech by Reserve Bank official
Tuesday March 19 – Reserve Bank Board minutes
Tuesday March 19 – Residential price indexes (December Quarter)
Tuesday March 19 – Weekly consumer sentiment
Wednesday March 20 – CBA Business sales index (February)
Wednesday March 20 – Speech by Reserve Bank official
Wednesday March 20 – Skilled internet job vacancies (February)
Thursday March 21 – Employment/unemployment (February)
Thursday March 21 – Population (September quarter)
Friday March 22 – CBA ‘flash’ purchasing manager indexes (Mar.)

Overseas
Monday March 18 – US NAHB housing market index (March)
Tuesday March 19 – US Factory orders (January)
March 19-20 US Federal Reserve decision
Thursday March 21 – US Philadelphia Fed Manufacturing Index (Mar.)
Thursday March 21 – US Conference Board Leading Index (February)
Thursday March 21 – US Initial weekly jobless claims
Friday March 22 – ‘Flash’ Markit purchasing managers’ indexes
Friday March 22 – US Existing home sales (February)
Friday March 22 – US Monthly Budget Statement (February)

Food for thought:

“The most difficult thing is the decision to act, the rest is merely tenacity.”– Amelia Earhart

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.

Chart of the week:

While around $6.2 billion in dividends have already been paid out by ASX 200 companies since mid-February, this chart from CommSec shows that another $23.2 billion in dividend payouts will be delivered to shareholders in the coming weeks:

Source: CommSec, IRESS

Top 5 most clicked:

Recent Switzer Reports:

Monday 11 March: Go more defensive or cash up?

Thursday 14 March: Off to the movies?

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.