It has been a week dominated by oil. When putting this Report together, we looked for what moved the market and despite a pretty damn good earnings season that should have moved it, the reason markets have succumbed to gravity has got down to oil.
It’s all about its price, the likelihood of an agreement between OPEC and its rivals on a production freeze and then the potential success of such a deal. At 5am this morning, the Nigerian Oil Minister was on US business TV saying the chances of a deal were quite high, so if his observations are seen as credible, then the price of oil should end higher and stocks should spike.
At that time, all US markets were higher, with the S&P 500 0.5% into the black. However, the three hours to the closing bell could determine if our stocks can be dragged out of the market mire of last week.
Believe it or not, last week might have been a better omen than we think. A former student of mine and ex-international investment banker and commodity trader, was tipping a “shocker” last week. Yep, this ex-student looks like he’s an Armageddon bear and I have to warn you, another one of my ex-charges, who was a big wheel at Macquarie’s FX desk, took me to lunch in June 2007 and simply said: “I think there is something huge and worrying out there.”
I don’t rule out warnings from smart guys (well-taught smart guys!) so I do think if OPEC can’t pull off a credible deal and oil falls below $US26 a barrel, there could be blood on Wall Street and we won’t be protected.
Yep, I can be bear-realistic but I’m remaining on the positive side of this story, though I’m aware that’s a risk. When you’re investing with high hopes on the members of OPEC – Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela – you know you’re a thrill-seeker!
Then on the other side of the negotiating table, you have the likes of Putin’s Russia. And if it wasn’t for the desperate state of many of these economies’ budgets and, therefore, their grip on political power because of a low oil price, I wouldn’t even be speculating that a deal could be possible.
The UK’s Daily Telegraph quotes sources who say the oil futures contracts, which predict future price growth, say Saudi will be in financial trouble within two years, while others argue they could go broke by 2020, if prices don’t head up!
[1]Last November, the Saudis played the same kind of oversupply card that has ended badly for the dopes running BHP-Billiton. The chart above shows what happened with oil and its price, which was already weakening, mainly on slower global demand.
US shale oil producers have cut back growth but they haven’t stopped producing. So the Saudis have miscalculated the gains from oversupply, just like the dopes at BHP!
There are good economic and political reasons for the oilers to agree but I don’t readily link good sense with most of the nations in and out of OPEC, though the UAE is an exception.
European stock markets overnight were oil-positive, with the German DAX up 1.95% and the French CAC 40 1.56% higher with higher oil prices, a better reading on US economic growth and higher commodity prices – especially metal prices! – helping the story.
Also, China’s central bank boss reminded the market that it has tools to stop China slowing down too quickly. That ‘good oil’ from China’s top money man also helped stocks.
But wait, there’s more. And it’s more annoying news from Wall Street. The Yanks got better than expected economic data so the fear of more interest rate rises this year (than was expected a day ago) has hit stock prices!
As I’ve often complained about, the idiots determining stock prices sell on good news because it means rate rises and they sell on bad news because it implies recession!
One day, good sense will prevail and this negativity will U-turn and we’ll see an overdue spike in stocks.
On that subject, our earnings season deserves to be rewarded. However, oil concerns and some dopey UK economist pedaling rubbish about dodgy mortgage brokers creating a Big Short scenario for our ‘badly exposed’ banks, didn’t help stocks. I ripped into the economist in question but will let him remain nameless here. Surprisingly, he’s flogging a book, which also will remain unnamed. Our stock market was off 73 points for the week, with the market not helped by Jac Nasser and his BHP board. They’ve not only come up with dumb plays over the past few years, during the week they over-slashed BHP’s dividend to impress the market, then saw the share price fall 6.1%.
On my Sky TV show, I canvassed the suggestion of “Sack Jac”, which looks like an idea whose time has come!
My mate Shane Oliver has summed up our reporting season, so I’ll share it with you to show my optimism isn’t misplaced:
“47% of results have bettered expectations, against a norm of 44%, with only 21% coming in worse than expected, against a norm of 25%. 66% have seen profits up on a year ago and 64% have raised their dividends, against a norm of 62%. It’s tough out there for resources stocks but no more than expected. Meanwhile, most of the big banks are seeing reasonable results and stocks exposed to the Australian economy, led by housing and the consumer, are doing well. The better than feared nature of the results to date has been reflected in 64% of stocks seeing their share price outperform the market the day results were released. Overall, profits are on track to fall around 5% this financial year but this is due to a 65% slump in resources profits. Outside of resources, profits are rising by around 5%.”
This last line is critical as it shows our non-mining companies are on the rise and the bad news story – mining – is yesterday’s news but we’re over-preoccupied with it. That’s an opportunity, provided that no external curve bomb blows up our improving economy and company scene, which should underpin better share prices.
What I liked
- US GDP was revised up, from 0.7% to 1% in the fourth quarter. Growth is key, not speculation about rate rises!
- The Chinese central bank governor, Zhou Xiaochuan, reminding the G-20 finance ministers that his bank still has firepower to stimulate his economy and he hinted that a devaluation is not his preferred tool, which markets liked.
- Historical analysis that says stock markets bottom around Super Tuesday on March 1, when the largest number of states hold their Presidential nominating contests.
- US durable goods orders surged by 4.9% in January (forecast: +2.5%), with orders for non-defense goods (and excluding aircraft) up 3.9%.
- Shares in Lloyds Bank rose by 13.5%, after the British Bank reported higher profits and a special dividend payment – a bank actually doing well – hedge fund managers would hate a bank actually showing that they’re over-hyping bank fears!
- Chris Joye of the AFR ripping into the book-flogging economist, who tried to undermine our banks in company with a hedge fund manager, who Joye says is shorting the banks!
What I didn’t like
- The negative market reaction to better than expected US growth, based on rising inflation expectations and an imminent interest rate rise. Last year, the world’s greatest concern was deflation and a lack of inflation!
- BHP could have followed Rio’s lead and kept the dividend this year and then cut going forward, or the cut could have been kinder. BHP has treated their shareholders like dirt and should pay!
- Average weekly wages rose by 1.2% in the six months to November 2015, to be 1.6% higher than a year ago, which is a little too slow to help economic growth. However, as inflation is less than 1.6%, real wages are still a little higher, though few commentators talk about this.
- The flash Markit service sector PMI fell by 3.4 points to 49.8. The contraction was against expectations for a modest gain and this is odd, considering US job numbers. It could prove dodgy.
- The first estimate of investment in 2016/17 in Australia is just $82.57 billion – the weakest result since 2007/08 – and 19.5% lower than the first estimate for 2015/16 – marking the largest fall for a first estimate reading in records going back 25 years. But, and this is a big BUT! These numbers leave out education, tourism and other services sectors, which means these numbers look like an old world indicator that might not be as useful as they should be. That said, I still don’t like them and it says the Government has to get serious about infrastructure spending.
- That dopey economist and his Big Short story and the fact that Fairfax gave him two days of credibility.
I know these are annoying market times but I do like the recent inexplicable rise in iron ore and metal prices, and so I just have a feeling that if an oil deal happens, some central bankers lift their game and data flow tends more positive, then this excessive inclination to the negative could turn on a dime.
And this could end up being the good oil. I damn well hope so.
Top Stocks – how they fared
[table “154” not found /]The week in review
(click the blue text to read more)
- I explained why the market will be tested over the next two weeks [2] – I’ve got my eye on the oil deal between OPEC and the likes of Russia that’s supposed to be finalised by March 1.
- My colleague Paul Rickard gave his take on the new CBA PERLS VIII issue [3]. On a risk-adjusted basis, he thinks a running yield of 7.45% doesn’t look too bad against CBA’s equivalent ordinary bank share yield of 8.15% (grossed up).
- James Dunn talked about the good, the bad and the ugly [4] from earnings season. Luckily, there haven’t been too many uglies!
- This week, Amcor and Pacific Brands were upgraded by the brokers [5].
- In our second broker report, AMP was upgraded and Oil Search was downgraded [6].
- Our Super Stock Selectors liked Webjet and disliked Santos [7].
- Charlie Aitken looked at Qantas and uncovered a business in great shape [8].
- Tony Featherstone looked at some growth themes [9] that have emerged this reporting season and found a number of businesses that are set for long-term growth.
- And Barrie Dunstan revisited the debate about tax-free contributions into super [10] and found trustees face extra challenges with falling markets.
- In our Professional’s Pick, John Kasian from Equity Trustees chose Challenger as a favourite stock in his portfolio [11].
- In Questions of the Week, we looked at Telstra’s price drop [12] and whether to sell Duet.
What moved the market
- Gyrations in the oil price drove offshore markets, and we largely followed suit.
- Some scare monger comments about Australian housing prices, plus talk of some new short positions by offshore hedge funds, hurt the share prices of our major banks.
- Overall negative sentiment tempered markets as investors preferred to remain on the sidelines.
The week ahead
Australia
- Monday February 29 – Business indicators (December quarter)
- Monday February 29 – Monthly Inflation gauge (February)
- Tuesday February 29 – Private sector credit (January)
- Tuesday March 1 – Balance of Payments (December quarter)
- Tuesday March 1 – Building approvals (January)
- Tuesday March 1 – Reserve Bank Board meeting
- Tuesday March 1 – CoreLogic Home prices (February)
- Wednesday March 2 – Economic growth (December quarter)
- Thursday March 3 – HIA new home sales (January)
- Thursday March 3 – Retail trade (January)
- Thursday March 3 – International trade (January)
Overseas
- Monday February 29 – US Pending home sales (January)
- Tuesday March 1 – US ISM Manufacturing Index (February)
- Tuesday March 1 – China Purchasing Managers (February)
- Wednesday March 2 – ADP Employment (February)
- Wednesday March 2 – US Fed Beige Book
- Thursday March 3 – US Durable goods orders (January)
- Friday March 4 – US Trade balance (January)
- Friday March 4 – US Nonfarm Payrolls (February)
Calls of the week
- BHP Billiton cut its interim dividend and abandoned its progressive dividend policy [13] after reporting a net loss of $5.67 billion for the first half of 2016. The company has not cut its dividend for 30 years!
- I made the call to sack Jac!
- Switzer Super Report expert Charlie Aitken says it’s time to buy Qantas [8] – the company is not just benefiting from low oil prices, Charlie reckons this well-managed business is positioned to grow as tourists continue to flock to Australia – he has the figures to prove it!
- Australian icon Kylie Minogue has given up singledom and accepted a marriage proposal from her fiancé Joshua Sasse – we wish you all the best Kylie, and Josh you sure are a lucky fella!
Food for thought
Live as if you were to die tomorrow; learn as if you were to live forever.
– Mahatma Ghandi
Last week’s TV roundup
- Chief executive of Wesfarmers Richard Goyder discussed the growth outlook for his business [14].
- Alison Watkins, the group managing director of Coca-Cola Amatil, discussed the company’s latest report [15] and challenging outlook.
- CEO of Brambles Tom Gorman tells us why he’s upbeat on the US economy [16] and his own company.
- CEO of NIB, Mark Fitzgibbon talked about his expansion plans for the company [17].
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. The biggest mover this week was Mineral Resources followed by Western Areas.
[18]Source: ASIC
My favourite charts
Iron ore prices have rebounded!
No one saw the 11% spike in oil prices on Monday but it looks like iron ore has powered back towards $50.
[19]No need to fear an election!
Our mate Shane Oliver has put together a chart that shows the impact of Australian elections on the share market. What is clear is that after elections, shares tend to rise more often than they fall.
[20]Top 5 most clicked on stories
- Peter Switzer: This is an important week for anyone who wants the stocks sell off to end [2]
- Paul Rickard: CBA’s hybrid priced to sell [3]
- Charlie Aitken: Time to buy Qantas? It’s more than an airline [8]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [5]
- Questions of the week: Telstra and Duet [12]
Recent Switzer Super Reports
- Thursday, 25 February 2016: Earnings matter [21]
- Monday, 22 February 2016: Mind the curve balls! [22]
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