Switzer on Saturday

Stock markets can’t rise forever but goods outweigh bads for 2017

Founder and Publisher of the Switzer Report
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The overdue pullback of the stock market looked like it was on the way, after Wall Street went negative ahead of Fed-talk that could confirm a rate rise is close in the USA. Our S&P/ASX 200 dropped 0.8% on Friday, after a 1.3% gain on Thursday.

For the week, we had four down days, confirming that market gravity is starting to pull the stocks down and we lost 0.2% over the week. February was a good month but history says it’s not a great one and March is another ordinary one for stocks, though last year it ushered in the comeback for stocks that lasted all year.

Seasonality means more when a market looks overpriced or underpriced, and the former certainly seems relevant.

Fed officials had a week of opening their mouths and the market conclusion was there could be a rate rise in March. Historically, the thought of a rate rise has been bad for stocks but the early ones in a rising cycle generally only have a short-term negative impact.

This explains why the market is expecting a rate rise: “The comments by New York Fed President Dudley on Tuesday continued to be digested in light of President Trump’s congressional speech and supporting share market rally. On Tuesday, Dudley made the point that the case for ‘monetary policy tightening has become a lot more compelling’ since the November election, given the rising confidence and expectations of fiscal stimulus.” ( Craig James, CommSec)

So what we’re getting close to is probably that sell off I have expected for the past few weeks and that then should present another buying opportunity.

Interestingly, the American Association of Individual Investors’ weekly survey of US stock players found that they expect stock prices to fall over the next six months, with the group’s bearish indicator rising by over 3 points to 35.6%.

That said, despite some economic growth downgrades for previous guesses on the performance of the US for the first quarter, which is generally a bad one because of extremely cold weather, the outlook for the year is promising.

If President Trump does well, delivering on the promises Wall Street has loved since November 8, then 2017 should be a good year for stocks.  Remember, however, that we have already bagged a lot of market gains, so a period of profit-taking by short-term traders makes perfect sense.

And while I’m bracing for a bit of buffeting over the next few months, which I will argue will be buying opportunities as our ASX 200 index heads towards 6000 (with some ups and downs), I have to insist the great news of the week was confirmation that the Oz economy (that I’ve backed so strongly), actually came through.

What I liked

In case you missed it, I summed up recent good economic news on www.switzer.com.au but it bears repeating:

Here goes:

  • The economy grew by 1.1% in the December quarter, after contracting 0.5% in the September quarter. Annual economic growth lifted from 1.9% to 2.4%.
  • Unemployment fell from 5.8% to 5.7% with the January reading.
  • The weekly ANZ/Roy Morgan consumer confidence rating rose by 6.1 points (4.7%) to a 6-week high of 119.1 in the week to February 26.
  • The NAB business conditions index surged from +9.9 points to +16.2 points in January – a 9-year high. The business confidence index rose from +5.7 points to a 3-year high of +9.8 points.
  • Economy-wide sales rose by 0.6% in the December quarter, after falling 0.1% in the September quarter. Annual growth of sales lifted to 2.7%, the biggest rise in five years.
  • The CoreLogic Home Value Index of capital city home prices rose by 1.4% in February and was up 11.7% over the year.
  • Private sector credit rose by 0.2% in January, after a 0.7% gain in December. Investor housing finance lifted 0.6% in January to stand 6.6% higher over the year – the fastest growth in 11 months.
  • After a rough year, new dwelling approvals rose by 1.8% in January.
  • The Performance of Manufacturing index rose by 8.1 points to 59.3 in February – the strongest result since 2002. A reading above 50 indicates that the sector is expanding. This was the fifth consecutive month of expansion!
  • Company operating profits rose by 20.1% in the December quarter to record highs. This is CommSec’s take on profits: “The earnings season has been good. Very good. Only eight companies from the ASX 200 have produced a statutory loss for the six months to December.”
  • Car sales are close to record highs.
  • Our trade surplus is $1.3 billion in January, while in December it was $3.3 billion. We usually have trade deficits!
  • The broadest measure of the trade accounts – the current account – improved in the December quarter (smaller deficit), with the deficit falling from $10.2 billion to $3.85 billion – the smallest deficit in over 15 years.
  • Our super funds have had another great year after the stock market has surged since February 2016 by, wait for it, 22.7%!

Others things I liked

  • Deloitte Access Economics’, Chris Richardson, predicting that a wave of income is heading our way. This would KO any talk about income recession here in Australia.
  • Inflation in Japan has shown up, which is a positive sign, with a 0.1% rise! I know it’s small but it adds to an improving economic picture in an important, troubled economy.
  • Former RBA boss, Glenn Stevens, did a talk this week and noted how well our economy dealt with the collapse of the mining boom. According to work done by RBA smarties, it was our best response ever to a resource price collapse and I have to say Glenn and his team had a role to play. This is a justified self-congratulation but it also says a lot about the work of some previous governments.
  • The dollar down to 75.69 US cents because rate rise talk in the USA has taken the greenback higher. This makes talk of an 80 US cent Aussie dollar this week less likely but first we have to see rates rise for the Yanks.
  • US jobless claims fell by 19,000 to 223,000 last week – the lowest level since March 1973.
  • The ISM manufacturing index in the USA rose from 56 to 57.7 in February – the highest reading since mid-2014.
  • US consumer confidence rose to a 15-year high of 114.8 in February (forecast 111.0).

What I didn’t like

  • This in the Fairfax press: “The OECD has warned of a “rout” in Australian house prices, leading to a new economic downturn, saying both prices and household debt have reached “unprecedented highs””. A rout would have to be linked to rising unemployment, so the overdue pullback in property prices in Sydney and Melbourne doesn’t have to be as dramatic as the OECD predicts. This is because our economic outlook is actually improving.
  • The HSBC call that iron ore prices are set to fall after a huge run up, which has to affect the share prices of BHP, Rio, et al.
  • The US economy grew at a 1.9% annual rate in the December quarter, while the forecast was 2.1%.

Another likeable thing

I had a one-on-one with my mate Gerry Harvey last Wednesday at the scene of his next business venture at Fox Studio’s Entertainment Quarter in Sydney. In typical Gerry fashion, he is showing no fear, with the threat of giant business killer Amazon set to hit our shores this year. More on this on Monday.

Top stocks – how they fared

topstocks

The week in review:

  • I explained how Trump’s address to Congress – along with local economic data – could help or hurt stocks.
  • Paul Rickard revealed whether Ramsay Health Care is in the buy zone.
  • James Dunn shared five A-REITs to keep an eye on.
  • The brokers placed Flight Centre in the good books this week but Blackmores and Woolies were downgraded.
  • Our Super Stock Selectors liked Vocus this week, but Murray Goulburn was out of favour.
  • Tony Featherstone said Reliance could benefit from the unfolding recovery in US housing construction.
  • Charlie Aitken said Aristocrat Leisure remains a high-conviction investment. Find out why.
  • Graeme Colley explained how the super changes will impact segregated and unsegregated funds.
  • Andrew Smith of Perennial revealed why he likes EML Payments.
  • And in our second broker report, Super Retail was upgraded but Harvey Norman copped a downgrade.

What moved the market?

  • Donald Trump’s address to Congress – it may have been short on detail, but it did excite the market with the Dow Jones cracking 21,000!
  • Expectations for the US Fed to hike rates at its mid-March meeting.
  • Solid GDP figures, which showed the economy grew at a larger than expected 1.1% during the December quarter.

Calls of the week

  • The epic Oscars mistake, which saw La La Land incorrectly named as the winner of Best Picture instead of Moonlight. Organisers of the Academy Awards have barred the two PwC accountants behind the blunder from working at future Oscars ceremonies.
  • Former NSW Premier Mike Baird made the call to return to the National Australia Bank as chief customer officer for the lender’s corporate and institutional banking unit.
  • QBE gave its CEO John Neal a rap on the knuckles, stripping $550,000 from his bonus for not telling the board soon enough about a relationship with his executive assistant.
  • And in case you missed it, Charlie Aitken said Aristocrat Leisure is a structural growth stock, and remains a “high-conviction investment”.

The week ahead

Australia

  • Monday March 6 – Retail trade (January)
  • Monday March 6 – Job advertisements (February)
  • Tuesday March 7 – Performance of construction (February)
  • Tuesday March 7 – Weekly consumer confidence
  • Tuesday March 7 – Reserve Bank Board meeting
  • Friday March 10 – Housing finance (January)

Overseas

  • Monday March 6 – US Factory Orders (January)
  • Monday March 6 – US Durable goods orders (January)
  • Tuesday March 7 – US Trade balance (January)
  • Tuesday March 7 – US Consumer credit (January)
  • Wednesday March 8 – China Trade balance (February)
  • Wednesday March 8 – US ADP Employment report (February)
  • Wednesday March 8 – US Wholesale inventories (January)
  • Thursday March 9 – China Inflation (February)
  • Thursday March 9 – US Import price index (February)
  • Friday March 10 – US Non-farm Payrolls (February)

Food for thought

“The true sign of intelligence is not knowledge but imagination” – Albert Einstein

Last week’s TV roundup

  • Gerry Harvey from Harvey Norman joins the show for a look at the company’s half-year result, the retail environment in Australia and more.
  • To discuss the stock market and the standouts from the February reporting season, Charlie Aitken of Aitken Investment Management joins Super TV.
  • For a look at what’s behind QBE’s good results this reporting season and what’s ahead for the business, CEO John Neal joins Super TV.
  • CEO of Freelancer, Matt Barrie, discusses Freelancer’s recent results and what’s ahead for the company.
  • Roger Montgomery of Montgomery Investment Management invests in companies that look like good value, so to share his top value picks, he joins Super TV.

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 the biggest mover was WorleyParsons, with a 2.68 percentage point increase in the amount of its shares sold short, to 13.83%.

shortstocks

Source: ASIC

Chart of the week

Reporting season didn’t suck!

money

Reporting season was good! According to CommSec, just eight of 142 didn’t produce a profit for the six months to December – which means around 94% came up with the goods!

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