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What a week! It was wild, weird and wacky but not all that worrying, given it’s May and we all know the potential for this month to break hearts, bottom lines of portfolios and bank balances. (Maybe I should have used that line on Budget night, as I do like alliteration.)
Let’s recap the big stories, so here goes:
- Westpac’s flat first half-profit started the bank worrying.
- ANZ cuts its dividend and ends up 10%, after a 5% drop!
- The Reserve Bank cut the cash interest rate to the historical low 1.75%, with only 16 out of 53 economists expecting the move on Budget day!
- The banks pass on the rate cut immediately! That’s the power of a Royal Commission threat!
- The dollar starts Tuesday at 77 US cents and ends up today at 73.68 US cents!
- The Budget comes out as a masterstroke from a small business growth aspect but as a super shocker for saving-oriented Australians.
- NAB breaks with the other banks to report better than expected. I needed that after being in the bank’s camp for the past year.
- The RBA’s monetary statement kept rate cut hopefuls cheering and the dollar did what Glenn Stevens has been working on for over a year by sinking.
- And then the Yanks created a lot less jobs than were expected and Wall Street heads up!
Sure, there were other stories for the week but these were the ones that made me think: “Gee, the markets won’t ignore these things.” And they didn’t!
Shares were up 0.75% for the week because all the news above left market players scratching their heads but the observations I got a lot this week were that we can go up more than the US market over the rest of this year.
And in case you missed this unusual 2016 milestone, we finished Friday on the S&P/ASX 200 index at 5292. We started the year at 5295.9, so we’re nearly in positive territory for the year. However, we have been as low as 4706.7, so we’ve stormed back 12.4%, which must have pleased dip buyers.
I wasn’t expecting a rate cut but I was happy if Glenn shocked me. The overall work on the dollar and the managing of market expectations has been good. The RBA boss has helped the next Government of Australia because we grow on a lower dollar and lower interest rates will spur growth and help share prices. That was a great parting gift from the Shire boy as he steps down in September, handing over his gig to a great replacement in Phil Lowe. (There was a great Pommie footie player at Manly of the same name. I wonder if our new RBA governor was named after him?!)
From great players and plays to the Budget, and this was a curious game plan for a Treasurer who knows his Government is trailing Labor and Bill Shorten in the polls. I’ve been trying to work out why my old student would construct a pretty good economic strategy of redefining small business by raising the threshold for a company tax cut and for access to the $20,000 instant write off for capital assets and then ‘cheese off’ super trustees, who probably vote for the Coalition.
The changes were crazy politics for that group. In some respects, the big hurtful changes were more Labor than even Labor. Moody’s should have liked it and Bill Shorten too but listening to callers to an older demographic radio station, such as 2GB in Sydney and 3AW in Melbourne, you have to conclude there were a lot of “not happy, Scott” voters out there.
By the way, the Treasurer used 2.5% for economic growth in the Budget, which I reckon is way too conservative. I told him so on Wednesday. I bet growth is closer to 3%, especially after Glenn’s efforts this week, which makes me more optimistic for stocks this year, despite the potential for a May sell off again this year. You know what I’ll be advising if it happens – buy the dips!
What I liked
- This from Savanth Sebastian at CommSec, after the RBA’s monetary statement: “The Reserve Bank couldn’t have been any clearer. If rates are going to move anywhere, it will be down and not up. In fact, the Reserve Bank inflation forecasts essentially suggest that there would be no pressure to raise rates well into 2018 at the absolute earliest.”
- The RBA has inflation down to a 1.5-2.5% band.
- Their growth forecast is more aligned with mine, rather than my ex-student’s. It’s “now seen at 2.5-3.5% in December 2016 – around half a per cent higher than previous forecasts. Growth of 3-4% is expected into June 2018” (CommSec)
- Retail sales rose by 0.4% in March, after a revised 0.1% lift in February. (Remember those who were telling us retail was dead?)
- Glenn Stevens all week!
- Australia’s trade deficit narrowed from $3.04 billion in February to $2.16 billion in March.
- The small business offerings in the Budget.
- Scott Morrison got it right when he started to remind us that our current 3% growth rate puts us as one of the best growing economies in the world, alongside South Korea. We need more talking up of the economy.
- You might have missed this but the NAB business confidence reading fell to 5 points in April from 6 points in March, but above February’s level. And business conditions dropped to 9 points from 12 but these are still great readings for an economy that crackpots keep telling us “is challenged.” This is how Alan Oster, the chief economist at NAB sees it: “Overall outcomes continue to point to a business environment that is highly favourable to Australian firms.”
- This is how Paul Constantinou, the founder of Quest (which has 150 apartment complexes mainly servicing corporate travellers) puts it: “It has been the best quarter in 20 years!”
- US jobs were less than expected at 160,000, instead of an expected 200,000 but economists said this wasn’t a bad miss, considering the job creation in past months and the market liked concluding that the US will only have one rate rise rather than two and the first will be September, not June, which many expected. Unemployment remained at 5%.
- The ISM services sector gauge in the US rose from 54.5 to 55.7 in April, showing continued expansion in the sector.
- New US auto sales totaled 17.42 million units in April, up from 16.7 million in March and above forecasts centred on 17.2 million units. Go you good thing – Yanks!
- The German Markit manufacturing purchasing managers index rose from 50.7 to a three-month high of 51.8 in April. We need more good European news to underpin rising stocks this year.
What I didn’t like
- The super changes (which I’ll look at in this Report on Monday) to see how worried you should be. (Paul Rickard’s coverage was spot on as usual in Switzer Daily [1].)
- News that BHP and Vale are to face a $44 billion lawsuit, which smashed the share price during the week.
- Shares of Commerzbank slumped by 9.6% after the German bank reported a 52% fall in first quarter profit. I worry when banks look dodgy.
- Trump’s progress towards the presidency!
My really big dislike for the week
The fallout from the Budget hasn’t been great for the Government. I want the election to give us a Government with influence over the Senate or else we won’t fix our Budget deficit and debt problems. If that doesn’t happen, then one day Moody’s will take away our AAA-rating, interest rates will rise and voters of Australia will get the butt kicking they deserve for voting in powerless parliaments. The only people who’ll like this will be misguided Greenie socialists and those retirees praying for the return of high interest rates on term deposits!
Top stocks – how they fared
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The week in review
(click the blue text to read more)
- This week I explained why it was a testy week for stocks [2], and why it could continue to be a testy May!
- Paul Rickard gave an update on our Switzer Super Report model portfolios. [3] Our income portfolio has made leaps and bounds in April, finishing up 3.27%.
- Roger Montgomery explained why Invocare [4] is a growth stock for the watch list.
- Gary Stone revealed how the ASX200 had reached a technical resistance zone [5] and gave his outlook on where it’s headed.
- The brokers [6] put Pacific Brands and Resmed in the good books while IOOF Holdings copped a downgrade. In our second broker report [7] there were limited upgrades and Perseus mining got the thumbs down.
- Gary Chau [8] of DBA lawyers explained the insurance traps people face when they exit large funds and start an SMSF.
- The Super Stock Selectors [9] liked Bellamy’s and Macquarie but Atlas Iron was on the dislikes list.
- Charlie Aitken gave his two cents [10] on the old “Sell in May and go away” adage.
- Tony Featherstone [11] said infrastructure stocks UGL and Downer EDI deserve some attention.
- Tony Negline gave you his technical update [12] on the budget measures and what that means for your super. Two words – don’t panic!
- And BWX was this week’s pick by our fundie [13], Julian Beaumont of Bennelong Australian Equity Partners.
What moved the market
- The Reserve Bank of Australia cut the cash rate to a historic low of 1.75% from 2.00%, which took the Aussie dollar under 75 US cents.
- The local market and banking sector were supported after the half-year bank results for Westpac, ANZ and NAB turned out not-too-shabby.
- Disappointing Chinese manufacturing data added to the retreat in prices for oil and iron ore.
- And BHP shares tumbled on the news of a lawsuit filed against Brazilian iron ore miner, Samarco.
The week ahead
Australia
- Monday May 9 – ANZ Job Ads (April)
- Wednesday May 11 – Consumer confidence (May)
- Wednesday May 11 – Housing finance (May)
- Thursday May 12 – Speech by Reserve Bank official
- Thursday May 12 – Credit & debit card data
- Thursday May 12 – WA State Budget
- Friday May 13 – Lending Finance
Overseas
- Sunday May 8 – China Trade (April)
- Monday May 9 – OECD Economic Outlook
- Tuesday May 10 – Chinese Inflation (April)
- Wednesday May 11 – US Monthly Budget statement (April)
- Thursday May 12 – Bank of England Meeting
- Friday May 13 – US Retail sales (April)
- Friday May 13 – US Producer Prices
- Saturday May 14 – Chinese economic data
Calls of the week
- Treasurer ScoMo made a few big calls in his first Budget delivered on Tuesday night. A lifetime non-concessional contribution cap of $500,000 and a $1.6 million cap on the amount of super transferred into the tax-free retirement phase are among the budget measures. Read Tony Negline’s article to get up to speed [12] on the super changes.
- In this week’s SSR, my mate Charlie said that we could see the old adage [10] “Sell in May and go away” come to fruition with a number of market shifts occurring.
- And ScoMo made the call to replace RBA governor Glenn Stevens, who is stepping down after 10 years of service in September, with deputy governor Philip Lowe.
Food for thought
Politicians come in three varieties: straight men, fixers, and maddies
– Paul Keating
Last week’s TV roundup
- AMP chief economist Shane Oliver and PwC’s tax guru Tom Seymour joins the show to give the budget their score card [14].
- After delivering the Federal Budget, the main man, Treasurer Scott Morrison [15], joins Super TV.
- Will this be a sell in May and go away month? To discuss this [16] and more, Switzer Super Report expert Paul Rickard and Morgans’ Simon Bond joins the show.
- And FN Arena’s Rudi Filapek-Vandyck shares how he’s playing the market [17] 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 Australian Agriculture with its short position increasing by 2.19 percentage points to 7.42%.
[18]Source: ASIC
My favourite charts
Back to surplus
[19]Source: Budget Papers, CommSec
Here is the forecast budget deficit as a percentage of GDP over the next few years. A deficit of 2.4% GDP is expected for 2015/16, decreasing to 2.2% of GDP in 2016/17.
Against all odds
[20]Is Leicester City a growth stock? This chart shows how the team went against all odds to beat out the Big 5!
Top 5 most clicked on stories
- Charlie Aitken: Sell in May? [10]
- Roger Montgomery: One growth stock for the watch list [4]
- Peter Switzer: Is this the big test week for stocks? [2]
- Tony Negline: Super changes: Don’t panic [12]
- Paul Rickard: Income portfolio makes strong gain in April [3]
Recent Switzer Super Reports
- Thursday, 5 May, 2016: Look at the big picture [21]
- Monday, 2 May, 2016: Testing May [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.