This morning’s read on what the US stock indices are doing tells you a story about what’s going on. Before the close, the Dow was positive but the S&P 500 and the Nasdaq were negative. In fact, the Nasdaq was on course for three weeks down as tech stocks lose friends, which is a euphemism for saying that investors are rotating out of tech and stay-at-home stocks and into cyclical as well as reopening trade companies.
Locally, we saw EML Payments have a great week, up over 24%. But in the US this week, cruise line Carnival was up 18%, Expedia 9%, American Airlines 9% and Wynn 4%.
Even Crown, with all its troubles, went up 5.34% on Friday to $10.25. You can see how we’re so influenced by what’s driving US markets, sectors and companies. By the way, Crown also had to deal with Premier Dan’s latest lockdown and potential problems with its licence, not only in Sydney, but even Melbourne and Perth.
But this reopening rotation (albeit looking earlier than I expected) is logically linked to vaccinations in the US and around the world, which are driving down infection rates.
Here’s AMP’s Shane Oliver on this health subject, which really is the most vital of economic issues: “The decline in new cases largely reflects lockdowns doing their job, but the roll out of vaccines is continuing to gather pace. 46% of Israel’s population has now received one dose of the vaccine, 24% in the UK and 12% in the US. While concern about new mutations remains, indications are that vaccines will still be highly effective in preventing severe cases, hospitalisations and deaths, and so will still allow sustained reopening. Our view remains that the US will reach herd immunity around mid-year, most developed countries including Australia will reach it by the December quarter with most emerging countries in first half next year.”
The chart below shows the encouraging trends with new infections and deaths globally.
And adding to the positivity about the reopening trade and the future of cyclical stocks is the commitment of the US Treasury Secretary, Janet Yellen, who’s backing more stimulus for the US. Yellen wants a $US1.9 trillion spend this year. That spend combined with other measures could see the Yanks at 4% unemployment rather than the current 6.3%, and inflation at 2% within a year!
That is ambitious but hugely positive for cyclical stocks and the reopening trade because it implies economic and business normalcy is closer than we might have thought at the beginning of 2021.
The Fed is on the same page and so is our own Dr Phil Lowe. They aren’t worried about the rise in US bond rates of interest or yields because they view this as the market seeing that their policies will work and recovery is coming.
Showing the importance of policy, CNBC’s European division headlined the rising markets in the EU with this: “European markets higher with Yellen stimulus comments.” This shows you the power of Washington and Wall Street and in fact, those Yellen comments could be behind all US market indices turning positive before the closing bell.
To the local story and profit-taking, as well as the usual predictable lunacy of us following Wall Street, took stocks down on Friday, despite what looks like a pretty good reporting season. But it is what it is.
Despite this, the S&P/ASX 200 Index lost ground but it was only 12.9 points made negative by a 92-point fall (or 1.3%) on Friday.
Eventually a reason will be agreed upon but, as I said, reporting season doesn’t look at all shabby and Shane Oliver agrees.
“The Australian December half earnings reporting season is now about 60% complete by companies and nearly 80% complete by market capitalisation with the clear message that profits are rebounding strongly from the lockdown impacted June half last year with this driving a rapid rebound in dividends,” he tells us. “So far 57% of companies have seen profits rise which is up from just 36% six months ago, 53% have beaten expectations compared to just 32% six months ago and 53% have increased dividends compared to 55% cutting dividends six months ago.”
Dividends are rising, guidance looks good and “…resources companies have seen the biggest upgrades and are expected to see 50% earnings growth this year, which explains the record dividends from BHP and Rio.”
That’s why I think profit-taking by shorter term players/fund managers explains Friday because the economic data still looks promising.
Banks copped it on Friday after a great run. Over the week, Westpac was up 8.8% to $24.09, ANZ rose 7.2% to $26.61 and NAB put on 0.7% to $25.11.
Two of my ZEETs had a good week at the office. EML surged 24.2% to $5.08 when the short sellers got the company wrong. Meanwhile, Zip Co was up 14.04%.
The big shock was Coles losing 9.6% to $16.41 after its boss, Steve Cain, tipped that the reopening and gradual return to normalcy will hurt the supermarket’s performance.
J Capital Research put out a dud and damaging report on Nearmap, but despite this, its share price spiked 21.3% to $2.62. And Treasury Wine Estates, another of my value stocks for the long term, had a nice 10.2% rise after reporting well, given its big trouble in big China, to finish at $11.18.
But let’s not get too worried about the week-by-week ups and downs, the big issues that will keep driving stocks higher will be vaccinations, stimulus stories and central bank buying of bonds, or QE as we economists call it.
What I liked
- Preliminary retail trade rose by 0.6% in January to stand 10.7% higher than a year ago. It was less than expected but buyer exhaustion is understandable.
- The IHS Markit ‘flash’ PMI for manufacturing eased from a 49-month high of 57.2 in January to 56.6 in February. The services business activity PMI fell from 55.6 to 54.1 in the month. The composite PMI eased from 55.9 to 54.4. Readings above 50 indicate an expansion in activity.
- The ABS released its December survey of Aussie households. Almost three-quarters of Aussies surveyed say that they’ll get the Covid-19 vaccine.
- Employment rose by 29,100 in January (consensus: 30,000) after increasing by 50,000 jobs in December. Full-time jobs rose by 59,000, but part-time jobs fell by 29,800.
- Unemployment fell from 6.6% to 6.4% in January (consensus: 6.5%).
- The National Skills Commission reported that skilled internet vacancies rose by 1.6% in January to be up 11.1% on the year. Vacancies are at 19-month highs. Demand for labourers stands at 8-year highs.
- The Bureau of Statistics (ABS) reported that national payroll jobs rose by 1.3% and wages increased by 0.4% between the week ending 16 January 2021 and the week ending 30 January 2021.
- National payroll jobs are now level with a year ago.
- The ABS has released annual data on business counts. Over the year to 30 June 2020, the number of actively trading businesses in the Australian economy increased by 2% (or 46,651) to 2,422,404.
- Building permits in the US surged 10.4% in January (survey: minus 1.4%).
- US retail sales surged 5.3% in January (survey: 1.1%).
- The New York Empire State manufacturing index rose from 3.5 to 12.1 in February (survey: 6).
- The European mining index rose by 1.2% to near 10-year highs.
What I didn’t like
- The weekly ANZ-Roy Morgan consumer confidence rating fell by 1.3% to 109.9 (long-run average since 1990 is 112.6). Blame the Premier’s lockdown. But confidence is still up by 68.3% since hitting record lows of 65.3 on 20 March 2020 (lowest since 1973).
- Initial claims for unemployment insurance (jobless claims) in the US rose from 848,000 to 861,000 last week (survey: 765,000).
- EU retail stocks dropped 3.1% after shares of Gucci owner Kering slid 7.2%.
Now I’m being nasty
Shares in Facebook fell 1.5% after its decision to block all news content in Australia and the negativity, happily, is gaining, with the stock down 2.9% before the close. Before Mark Zuckerberg stuck it to us and Josh Frydenberg, the company traded at $276 and is now $261. It couldn’t happen to a ‘nicer’ company and it underlines the importance of culture. The US fund manager that’s now listed on our market with the ticker codes WCMQ (that’s the ETF version) and WQG (the listed company vehicle) selects the companies they hold based on whether the business has a growing moat or competitive advantage. And secondly, it places a high value on the culture of the business. Facebook has a questionable culture. The role of culture in a company is reflected in the success of WCM, as the chart below shows.
WCMQ since listing in Australia
(Note WCMQ and WQG is managed here by Contango Asset Management (CGA), where Marty Switzer is CEO. Because they bought and manage my SWTZ fund, I have shares in CGA and I’m glad I do, given the showing of WCM.)
One final tip
Check out some of the great stories this week, especially James Dunn’s look at some reporting stars, where he sees nice upside. And Paul Rickard puts an improving Telstra under his stock price potential microscope and gives his view on whether it’s a buy or a sell.
The week in review:
- This week, I asked my colleague who organises the companies for our small cap events to check out how they’ve performed since we ran these, and here are some amazing results [1].
- After a ‘courageous call’ on Telstra (TLS) back in October, Paul Rickard looked at whether the company is still a buy, a hold, or a sell [2].
- James Dunn looked at 5 impressive stocks with a compelling case for further share-price upside [3]: Amcor (AMC), Super Retail Group (SUL), Nick Scali (NCK), JB Hi-Fi (JBH) and Alliance Aviation (AQZ).
- Here are 3 micro-cap retailers that appeal to Tony Featherstone at their current prices [4]: Beacon Lighting Group (BLX), Cettire (CTT), and Hipages Group Holdings (HPG).
- There were 15 upgrades and 10 downgrades in the first Buy, Hold, Sell – What the Brokers Say [5] of the week, and 11 upgrades and 8 downgrades in the second edition [6].
- And in Questions of the Week [7], Paul Rickard answered your questions about BHP and Rio’s “whopper” dividends, how to find out the shares that fund managers are buying, infrastructure funds on the ASX and Vanguard’s Diversified Conservative Index ETF.
Our videos of the week:
- Boom! Doom! Zoom! | February 18, 2021 [8]
- 5 experts and their 5 best ASX stocks for 2021 [9] | Switzer TV: Investing
- Is it rational to be optimistic on house prices and where should you buy? [10] | Switzer TV: Property
- Is BHP’s super dividend sustainable? – we discuss their half year results with new CFO David Lamont [11] | Switzer TV
Top Stocks – how they fared:
The Week Ahead:
Australia
Monday February 22 – ABS household impacts of Covid-19
Tuesday February 23 – Weekly consumer sentiment index (February 21)
Tuesday February 23 – Preliminary International trade (January)
Wednesday February 24 – Wage price index (December quarter)
Wednesday February 24 – Construction work done (December quarter)
Thursday February 25 – Detailed labour force (January)
Thursday February 25 – Business investment (December quarter)
Thursday February 25 – Average weekly earnings (November)
Friday February 25 – Private sector credit (January)
Friday February 25 – Business conditions & sentiment (February)
Overseas
Monday February 22 – US Leading index (January)
Tuesday February 23 – US S&P/Case Shiller home prices (January)
Tuesday February 23 – US House price index (January)
Tuesday February 23 – US Consumer confidence (February)
Wednesday February 24 – US New home sales (January)
Thursday February 25 – US Economic growth (December quarter)
Thursday February 25 – US Durable goods orders (January)
Thursday February 25 – US Pending home sales (January)
Friday February 25 – US Personal income/spending (January)
Friday February 25 – US International goods trade (January)
Friday February 25 – US Consumer sentiment (February)
Food for thought:
“To be an investor you must be a believer in a better tomorrow.” – Benjamin Graham
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:
In the Bank of America’s latest survey of 225 global fund managers, 53% said that US stocks are currently in a late-stage bull market as shown in this chart from Statista:
Top 5 most clicked:
- Check out the performance of these 50 small caps! [1] – Peter Switzer
- Should you buy these 5 winners from reporting season? [3] – James Dunn
- Telstra – is it still a buy? [2] – Paul Rickard
- Buy, Hold, Sell – What the Brokers Say [5] – Rudi Filapek-Vandyck
- 3 micro-cap retailers that have long-term appeal [4] – Tony Featherstone
Recent Switzer Reports:
- Monday 15 February: 50 small caps to check out [12]
- Thursday 18 February: 3 micro-cap retail stocks [13]
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.