Switzer on Saturday

Where to for the markets – reporting season coming!

Founder and Publisher of the Switzer Report
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“The Dow Jones index has had its strongest start to the year in 15 years and investors are now re-assessing the strength of the gains.” That’s how CNBC saw Thursday’s action on Wall Street, with the Dow hitting another all-time high. And overnight we found out why investors continue to pile into stocks, despite the huge rises for stock prices over 2017, with US banks reporting better-than-expected as the fourth quarter earnings show-and-tell season hots up.

J.P.Morgan, Wells Fargo and the world’s biggest fund manager, Blackrock, all came in with better-than-expected results and this great start for this all-important sector for overall corporate profits makes it believable that earnings will be up around 11.2%.

But get this: analysts are now predicting that the current quarter’s profits will be even higher! And outlook statements have to get more positive, with a huge number of US companies expecting to see their tax rates drop from 36% to 21%. Sure, I know many big, internationally-exposed US companies have reduced their tax bills so much that the Trump tax cuts won’t have a big effect on their bottom lines directly but many businesses in the States will get a boost from the lower tax rate.

And then there’s the effects of developments, such as WalMart deciding to raise wages as a consequence of the tax cuts!

As one commentator concluded, “the stock market will enjoy a ‘Made in America’ boom this year thanks to a slew of policies spearheaded by the Trump administration, according to a Wall Street investment bank.”

Art Cashin, the longest-serving broker on the floor of the New York Stock Exchange and someone I’ve interviewed twice when I took my TV show to the Big Apple, told CNBC this week that these tax cuts will leave a lot of market players “pleasantly surprised” when they flow to most US companies. It’s what economists call the multiplier effect and it’s not an issue that US voters are ignoring, with a recent survey showing that 66% of voters describing the recent state of the economy as “excellent” or “good.” This is the highest reading since 2001, when the Quinnipiac poll was first started.

After Trump’s election in November 2016, the figure was at 39% but, interestingly, President Trump is on the outer, with only 39% of voters loving him, while 59% hate the guy, with many crediting President Obama for the good times.

The experts call Wall Street’s chase for growth companies and their less defensive stance as the reflation trade and it tends to bring big rises to stock markets, with outfits like banks in favour. So when I’m asked where markets are heading, my answer is up but expect some volatility.

Well, that’s the US but what about the limp response to all this global positivity? And we couldn’t get excited about our good retail figures, which must have made Amazon slayer Gerry Harvey put on his magic millions’ smile this week!

Our market ended down for the week! We lost 0.9% on the S&P/ASX 200 Index and it might have been worse if our miners weren’t so loved nowadays. And as someone who talked up Fortescue late last year, which duly saluted the judge, I loved this from Perpetual’s Matt Sherwood: “Miners are getting re-rated and people are starting to recalibrate portfolios to the one sector that could see significant upside.” (Fairfax)

Rio Tinto shares shot up 1.7% yesterday to a six-and-a-half year high on Friday of $80.62. Meanwhile, fossil fuels are still making appeal, with oil prices hitting their best levels since December 2014 over the week. US West Texas Intermediate crude futures are around $64.

Given how lacklustre our market is right now, I thank God we have plenty to dig up in the ground or our stock market might be going backwards! That said, I expect many of our non-mining companies to surprise on the high side this year.

At the moment, people like Matt think earnings will be up about 5% here in Australia but I suspect that figure will be pushed higher, especially if our retailers keep surprising on the high side.

Super Retail rose 3.6% to $8.70 over the week, Harvey Norman was up 1.4% to $4.38 but JB Hi-Fi shot up 8.8% to $28.36 over the week, which has been a company Paul Rickard and I have warned would surprise those who were overrating Amazon!

What I liked

  • The S&P 500 index has had its best 10-day start to a year since 2003. The S&P 500 is up 4% but in 2003, the jump was 5.9%!
  • Local November’s retail figures, where sales in the shops and online rose by 1.2% in November after increasing by 0.5% in October. That’s the strongest outcome in 4½ years.
  • Job vacancies rose by 2.7% to a record 210,300 in the three months to November. Job vacancies are up 16.1% on a year ago – the strongest annual growth rate in 7 years.
  • Approvals by local councils to build new homes rose by 11.7% in November, after falling by 0.1% in October. It was the strongest monthly outcome in 12 months. In trend terms, approvals rose for the tenth straight month, up by 0.9%.
  • The weekly ANZ/Roy Morgan consumer confidence rating rose by 4.7% to 122.0 last week – the highest level in four years and well above the long-run monthly average of 112.9.
  • According to the Federal Chamber of Automotive Industries (FCAI), new vehicle sales hit a record high of 1,189,116 units in 2017, up 0.9% on a year ago.
  • The CBA Purchasing Manager’s Index (PMI) for the services sector rose to 55.1 in December from 54.0 in November. The index is at 5-month highs.
  • The Australian Industry Group (AiG) Australian Performance of Services Index (PSI) increased to 52.0 in December from 51.7 in November. The index remains over 50, signifying expansion of the services sector.
  • Over the year to October, the proportion of occupied seats on domestic flights hit a 6-year high of 79%. Load factor on the Sydney-Melbourne route was at record highs.
  • International passenger traffic to Australian airports rose by 4.5% to 3.37 million in October, up from 3.226 million a year ago.
  • The US Consumer Price Index, excluding the volatile food and energy components, rose 0.3% last month, which is a good sign that normal inflation rates are on the way.
  • The employment trends index in the US rose from 106.4 to 107.1 in December.
  • China’s dollar-denominated trade data for 2017 was a 7.9% jump in exports and a 15.9% rise in imports, which looks good for growth.

What I didn’t like

  • The headline that the Oz dollar is heading back to 80 US cents!
  • Job advertisements declined in December, falling by 2.3% to 167,656 ads, after rising by 1.1% in November. But December isn’t a great month for new hiring. For the year, job ads are up a healthy 10.8%.
  • US core producer prices fell by 0.1% (forecast: +0.2%) in December, down from 0.3% in November.
  • The US Treasury Budget deficit increased to US$48 billion in December from US$27.3 billion in November.
  • Talk that the bond market bull run is over, which could lead to an implosion of the market, which I think is exaggerated.
  • Reports that China is considering slowing its purchases of US government debt.
  • The NFIB business optimism index in the US eased from 107.5 to 104.9 in December.

The Week in Review

Top Stocks – how they fared

What moved the market?

  • The Australian Bureau of Statistics showed retail sales were up 1.2% in November – the strongest figures in nearly five years. This was led by gains in household goods, the release of the iPhone X and sales shopping events. It was the strongest monthly outcome since February 2013.
  • The price of oil reached a three year high on Thursday to US$70 a barrel. Brent crude climbed after members of OPEC and Russia said it would continue to limit supplies while prices have also been bolstered on the back of stronger than expected worldwide economic growth.
  • Bloomberg News reported Wednesday that China may slow down or stop buying US government bonds. The report quoted anonymous sources apparently close to the matter as saying the market for US bonds has become less attractive relative to other assets. They also cited trade tensions with the US as a reason to slow Treasury purchases.
  • Wall Street extended the New Year rally this week with major indexes reaching new record highs on investor optimism ahead of quarterly earnings reports.

Calls of the week

  • I called out a news outlet delivering ominous warnings for spreading fake news!
  • International Development Minister Concetta Fierravanti-Wells called out China for constructing “useless buildings” and “roads to nowhere” in the Pacific to gain control of the region. Beijing made a call of its own by lodging a formal protest.
  • FC Barcelona has called Philippe Coutinho over to their side after Liverpool agreed to sell the Brazilian for a whopping $244 million, making it the third most expensive transfer in soccer history.

The Week Ahead

Australia

  • Tuesday January 16 – New motor vehicle sales (December)
  • Wednesday January 17 – Housing finance (November)
  • Wednesday January 17 – Building activity (Sept quarter)
  • Wednesday January 17 – Consumer confidence (January)
  • Thursday January 18 – Employment/unemployment (December)
  • Friday January 19 – Tourist arrivals/departures (November)
  • Friday January 19 – Lending finance (November)

Overseas

  • Tuesday January 16 – US Empire State index (January)
  • Wednesday January 17 – US Industrial production (December)
  • Wednesday January 17 – US NAHB housing market (January)
  • Wednesday January 17 – US Beige Book
  • Thursday January 18 – US Housing starts (December)
  • Thursday January 18 – China economic growth
  • Friday January 19 – US Consumer sentiment (January)

Food for thought

We may have all come on different ships, but we’re in the same boat now – Martin Luther King, Jr.

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

The total value of dwelling approvals rose by 14.8% to $7.7 billion in November, a record high.

Purchases made with debit cards grew by an annual rate of 15.2 per cent in November – a 4.5-year high. Meanwhile, debit cards have become younger Aussies’ preferred method of paying for goods and services over credit cards, according to CommSec.

Source: Commsec

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