Switzer on Saturday

President Trump is not the Messiah but the market was positive post-speech

Founder and Publisher of the Switzer Report
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With two and a half hours to trade, the Dow Jones index was up 75 points. It’s not a ringing endorsement of the 45th President of the USA and while I was looking to see if good or bad Donald Trump showed up for the inauguration speech, it looks like a slightly good but still somewhat bad version took the oath in Washington this morning.

CNBC led with the headline: “Stocks cut gains as President Trump takes protectionist tone in speech.” That says it all. Bad Donald was going to be excessively protectionist in his speech, while good Donald would rely heavily on tax cuts, infrastructure spending and less financial institution regulation.

However, if US stock markets end up in positive territory by 8am our time, it will be because the key drivers of equities agree with JPMorgan’s CEO Jamie Dimon, who says the Trump presidency is a “moment of opportunity.”

At his best, Trump can deliver better economic growth for the USA and that helps the world economy along with Australia, which benefits on better global growth as an export-oriented country.

At his worst, he creates the seeds to grow an international trade war and when he tells the American people that “you will never be ignored again” that worries me a little, though my only comfort is that this is a politician’s promise. And while you could argue he’s not a conventional politician and his success has come from being entrepreneurial and thinking/campaigning outside the square, entrepreneurs also have a history of dreaming big but not always delivering because the realities of economies and markets of customers don’t always work out as they’d expected.

All this comes as the S&P 500 has done something that CNBC says hasn’t happened for 11 years. Just when we were expecting volatility on stock markets, the S&P 500 has gone for 68 days without a 1% drop!

This is the longest run without a notable sell off since 2006 and BK Asset Management’s Boris Schlossberg did spoil it all by giving us a history lesson: “And you can remember what happened in 2007 and 2008.”

If you can’t, just think GFC crash. Obviously, volatility is likely to make a return this year and it will be Donald Trump’s policies, utterances, negotiations and tweets that could determine that turbulence.

The Russell 2000 has lately underperformed and that can be an early sign that the S&P 500 could be in for a testing time. Clearly, headlines aren’t telling us that we’re on the yellow brick road to market happiness following the Trump speech. This reinforces the fact we should expect some pricing pressure on stocks, in the short-term.

I remain positive on stocks for 2017 and Jamie Dimon’s confidence in that department helps my optimism.

And even though Trump looks all talk, companies have responded. US car companies are changing their Mexican production plans, defence and aviation contractors have been asked to sharpen the pencil on price and Obamacare looks to be on the way out. However, the new President does have to deliver big promises, such as his wall that he said will be paid by Mexico.

Promises like these, and what has to happen to make them come to fruition, makes me think: expect volatility ahead. That said, as I indicated above, I expect a rising trend for stocks because I don’t think Trump will fail. He will have failures but I can’t see him failing. Neither does the market.

Helping him has been a pretty good US economy so some of the Trump rally has been economic developments coming via the efforts of the Fed’s Janet Yellen and President Barack Obama.

Jobless claims are at their lowest levels in decades and inflation is coming back to around 2%, which is in contrast to those nincompoops who were telling us deflation was coming. Do these people ever say sorry for these big, bad calls?

Meanwhile, in our excessive preoccupation with Trump, we’ve given insufficient attention to the US reporting season, which has been pretty good and reinforces my view on stocks for the year.

What I liked

  • Looking for something optimistic on Trump, I liked this from Bloomberg’s Justin Sink: “Yet the new President is an instinctive performer, who repeatedly overcame doubters in the unlikeliest of presidential campaigns. He brings to the White House the powerful populist fury of white working-class Americans that won him the election. He is a master of modern social media and old-fashioned political distraction.”
  • The Citi U.S. Economic Surprise index has risen to its highest level since 2014. A higher reading on the index indicates more positive economic data surprises (CNBC).
  • The Chinese economy grew at a 6.8% annual pace in the December quarter, above forecasts (+6.7%). The economy grew by 1.7% in the December quarter, down from 1.8% in the September quarter and in line with the forecast estimate of 1.7%.
  • Chinese retail sales rose at a 10.9% annual rate in the year to December. The result was the strongest result in a year and above the 10.8% growth in the year to November.
  • US housing starts rose by 11.3% to a 1.226 million annual rate in December (forecast 1.2 million).
  • The Philadelphia Federal Reserve index rose from 21.5 to 23.6 in January (forecast 15.8).
  • US inflation rose by 0.3% in December, as expected.
  • US Industrial production rose by 0.8% in December (forecast +0.6%).
  • The European Central Bank left interest rates unchanged and did not alter the asset purchase program. Doing nothing is good.
  • The IMF said that the global economy is tipped to grow by 3.4% in 2017 and 3.6% in 2018. These guys have been downgrading growth for years, so an upgrade should be welcomed.
  • Local new home sales rose from 27-month lows, up by 6.1% in November.
  • Jobs rose by 13,500 in December after rising by 37,100 in November (previously reported as a rise of 39,100 jobs). Full-time jobs rose by 9,300 while part-time jobs rose by 4,200 and there were 95,000 full-time jobs created in the December quarter – the best result since the September quarter 2010. A total of 91,500 full-time jobs were added in 2016.
  • The CBA’s Business Sales indicator showed the monthly trend growth in spending has been between 0.7-0.8%, and above the 0.3% average monthly growth recorded for the first eight months of 2017.
  • The Westpac/Melbourne Institute survey of consumer sentiment rose by 0.1% in January to 97.4. The confidence index is up 0.1% on a year ago. It wasn’t great but at least it was positive.
  • The number of loans (commitments) for budding home owners (owner-occupiers) rose by 0.9% in November, after falling by 0.6% in October. It was only the second rise in lending in five months.
  • The CommSec Luxury Vehicle index hit record highs in 2016, with sales of 17 luxury marques up 12.1% on a year ago.

What I didn’t like

  • This comment on Trump’s speech from Art Hogan, chief market strategist at Wunderlich Securities: “He didn’t decide to go high. He decided to go populist and protectionist, and that’s something we’re going to have to get used to. When you put together populism and protectionism, it has a lot of economic fallout. That’s how he got here.”
  • Put options are on the rise on Wall Street and this says there are more betting on a pullback, which I have to admit I’ve been expecting. We saw a bit of this over the past week.
  • Unemployment here rose from 5.7% to 5.8% but the participation rate rose to partly explain this small shift.
  • Local dwelling starts fell by 2.8% in the September quarter, after falling by 7.2% in the June quarter. Building work done fell by 5.5% in the quarter, to be up 1.4% on the year.
  • The Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 6 cents to 134.3 cents a litre in the week to January 15 – marking the biggest rise in almost two years but only the second rise in a month.

One non-Trump point

I don’t like things like petrol prices rising, higher inflation and the thought of interest rates going higher over 2017 but I do like what it implies. These developments are what you expect of a normal, non GFC-infected economy and it’s time we lived with one of those. Let’s hope Donald doesn’t ruin these nice trends that we’re seeing.

Top stocks – how they fared

topstocks

The week in review

  • I explained why I’m a ‘conservatively risky’ investor. If you think it sounds like a contradiction in terms, read on!
  • Following market outperformances in 2013, 2014 and 2016, we made some changes to our model income portfolio for 2017. Find out more.
  • A number of ETFs were introduced in 2016, with some offering different ways of looking at existing asset classes. James Dunn revealed five to watch.
  • Barrie Dunstan explained why it might be time to ignore the noise from politics and concentrate on what’s important, like ensuring your funds are ready for the July 1 super changes.
  • Our Super Stock Selectors liked Western Areas and Bluescope Steel this week, but not Whitehaven Coal.
  • While the “Trump trade” has been capturing headlines, all things China have been quietly rallying. Charlie Aitken revealed the opportunities on the horizon for Treasury Wine Estates.
  • A miner and a telco have been added to the Switzer Super Report model growth portfolio for 2017.
  • Tony Featherstone said the sell-off in small, mid-cap companies creates opportunities for patient value investors. Here are four small caps that stand out at the current price.
  • This week, Manny Pohl’s stock pick was Domino’s Pizza. Find out why.
  • And Regis Resources and Woodside Petroleum were among the broker upgrades this week, while Western Areas was downgraded.

What moved the market?

  • Investors were focused on the transition into ‘The Donald’s’ presidency.
  • UK Prime Minister Theresa May’s speech, which outlined a clean break from the EU.
  • US Federal Reserve chair Janet Yellen’s positive economic outlook for the US. She says the US economy warrants a gradual hike in interest rates.
  • And the US consumer price index (CPI), which rose by 0.3% in December.

Calls of the week

  • NSW Premier Mike Baird called it quits. Read David Speers’ article on Baird’s impressive legacy.
  • Bega Cheese bought Australia’s iconic food brand, Vegemite, in a $460 million deal for most of Mondelez International’s Australia and New Zealand grocery and cheese business.
  • And in case you missed it, in this week’s Switzer Super Report Tony Featherstone tipped five oversold small caps to consider.

The week ahead

Australia

  • Monday January 23 – State of the States (January)
  • Monday January 23 – Lending finance (November)
  • Tuesday January 24 – Weekly consumer sentiment
  • Wednesday January 25 – Consumer price index (December quarter)
  • Friday January 27 – Producer price index (December quarter)
  • Friday January 27 – Import price index (December quarter)

Overseas

  • Tuesday January 24 – US Existing home sales (December)
  • Tuesday January 24 – US Richmond Fed index (January)
  • Wednesday January 25 – FHFA Home prices index (November)
  • Thursday January 26 – US Wholesale inventories (December)
  • Thursday January 26 – US New home sales (December)
  • Thursday January 26 – US Leading index (December)
  • Friday January 27 – US Economic growth (December quarter)
  • Friday January 27 – US Durable goods orders (December)
  • Friday January 27 – University of Michigan Confidence (January)

Food for thought

A genuine leader is not a searcher for consensus but a molder of consensus.

Martin Luther King, Jr.

Last week’s TV roundup

  • To discuss some of the macroeconomic risks out there and how they could impact investing, Tribeca’s Sean Fenton joins the show.
  • BlackRock’s Charlie Lanchester joins Super TV to discuss the major themes impacting the Australian market in 2017.
  • And to discuss how Donald Trump’s presidency could impact global markets, and how you should be investing right now, Morgans’ Simon Bond joins the show.

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.

This week, one of the biggest movers was Vocus Communications, with a 0.84 percentage point increase in the proportion of its shares sold short, to 10.92%. Bellamy’s went the other way, with its short position decreasing by 1.92 percentage points to 7.22%.

shortstocks

Source: ASIC

Chart of the week

full-time
Source: ABS, CommSec

Full-time employment rose by 95,000 during the December quarter. That’s the best quarterly gain in six years!

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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.