[table “141” not found /]
It was a frustrating week for those of us who believe the current sell off is over the top. And Friday was the most annoying, with an early 84-point gain ending as a 16.6 point drop! That’s 100 points and I have to suspect that the smarties pushed stock prices up then pocketed their gains!
As the old maxim goes: “No one went broke taking profit!”
But looking at Friday, I don’t blame anyone asking: “What just happened?”
The early Friday gain came out of Wall Street’s nice lead-in, with the Dow up over 200 points and helped along by higher oil prices. I actually liked the report from JPMorgan as well, with its $23.7 billion in revenue beating expectations. For years, US company reporting has looked good for profits but revenue reads haven’t been impressive. I hope this becomes a trend that surprises the market, with earnings expected to be down about 1% in the fourth quarter.
In a nutshell, the good news on Thursday in New York was: oil prices up, JPMorgan showing banks were doing OK and the Fed even looking at lower inflation expectations and slowing up its rate rise timetable.
So, what happened?
That damn Shanghai Composite opens up and drops 3.7%. But why? That’s what we want to know.
To find the answer, we have to look at Wall Street’s performance overnight. With two hours to go, the Dow was on track for the worst day since September 1 last year. It was down about 8% for the year, which is making the RBS call of “sell everything” looking like a good one!
Before the Yanks took centre stage, European bourses were very negative, with the German DAX down 2.54% and the UK’s FTSE off 1.93%. Then for a time, when the stock market spotlight was shone on New York, the Dow had lost over 500 points!
Again, in a nutshell, US markets didn’t like the Chinese stocks sell off linked to a lower demand for loans, some weaker local economic data and the fact that oil dropped under $US30 a barrel! It was virtually the reverse of Thursday’s gain story for Wall Street.
This story can’t be good for our market next week because America is on a public holiday on Monday for Martin Luther King Jr. Day. So, we will be without a Wall Street lead until Wednesday morning, which won’t be good.
What we’re dealing with is a huge confidence problem and China’s leadership, as well as its economy, is worrying too many key players. Selling is easier than holding your breath waiting for a turnaround.
A new curve ball for oil is the lifting of economic sanctions on Iran, which means oil supplies will increase. However, this has been known about and many thought it was factored in. It looks like it wasn’t in total, however, the weak economic data from the US hasn’t helped either.
Retail sales fell 0.1% in December – the Christmas shopping month – while the Empire Manufacturing survey fell to -19.4. Industrial production was down 0.4% but consumer sentiment did come in at 93.3, against an expectation of 93.
Of course, the US economy has to slow down given the rising greenback but I still believe we’re looking at some out-of-date indicators, such as the Empire State factory index survey of manufacturing in the state of New York!
Manufacturing has to be affected by a high dollar and cheaper rival products overseas but there still seems to be no value on oil costs being so low. The US stock market is miles ahead of us and really could do with a correction but the global story looks so uninspiring, I can see why a sell off is happening.
Earnings season in the US isn’t expected to be great and the economic data above could give us a clue why. Only a week ago, however, we learnt 292,000 new jobs came along in December, so a worrying US slowdown is not a foregone conclusion.
A lot of this slide in share prices could be linked to the increased frequency of some experts using the R-word for recession but it certainly isn’t coming from any respected economist, which is comforting.
What I liked
- Our economic story continues to look better than expected.
- Unemployment at 5.8% is a 26-month low. (On a two-point decimal basis, the number was 5.76%, which was rounded up to 5.8% – mathematicians!)
- Employment fell 1,000 but experts tipped a 12,500 loss and 301,300 jobs were created in 2015. (If the ABS is wrong by a factor of 2, then I’d still be crowing at 150,000 jobs but they’re not that bad at maths.)
- The number of loans (commitments) for people buying or building homes to live in (owner-occupiers) rose by 1.8% in November to a 6½-year high. The value of investor home loans rose by 0.7% – the first increase in seven months.
- In November, a record $22 billion in home loan commitments was actually advanced to borrowers, up 30.5% over the year, which tells me there has to be a lot of building and economic growth in the pipeline.
What I didn’t like
- Wall Street overnight and the fact that the Yanks are on a public holiday on Monday. I expect two ordinary days for investors on the local market.
- The local media coverage of the good employment report – with the stock market sapping confidence, those job numbers were worthy of a bit of exposure.
- Oil and those damn price movements, which, combined with China’s poor handling of its currency depreciation, has really rattled global financial markets.
- Me thinking (as I said a couple of weeks ago) that if you can’t stand this volatility, then you should reduce your exposure to stocks. I hate writing those words but this is my job.
I still believe we’re in a market overreaction phase and until the good news starts to trump the bad news (and I use the word “trump” with a degree of irony, considering Donald could be a bigger chance to win a US election if we end up in a bear market), we will have troubled stock markets.
One final like
Since January 4 this year, Warren Buffett has been buying oil stocks in a company called Phillips 66, with a US$390 million investment into 5.1 million shares. I’ll write more about this on Monday.
Top stocks
[table “140” not found /]The week in review
(click the blue text to read more)
- I told you whether all this market mayhem is turning me from a bull to a bear. Here’s a hint – I’m not growling [1]!
- James Dunn gave you four stocks poised to pay special dividends [2] – Qantas Airways (QAN), Insurance Australia Group (IAG), Suncorp Group (SUN) and Platinum Asset Management (PTM).
- Paul Rickard wrapped up the performance of our income and growth portfolios during 2015. Both finished in the black [3].
- Gary Stone gave us a big picture view of the ASX, with the help of his charts [4], of course!
- Our Professional Pick was Macquarie Group (MQG) [5] by Sean Fenton. He thinks the company is linked well to global economic growth.
- Our Super Stock Selectors put Fortescue on the dislikes list [6] and Spark Infrastructure Group on the likes list.
- For defensive yield in a volatile market [7], Tony Featherstone tipped the Commonwealth Bank (CBA), Telstra Corp (TLS), Sydney Airport (SYD), Sonic Healthcare (SHL) and Westfield Corp (WDC).
- Paul Rickard reset our model income portfolio for 2016 [8] by exiting positions in Primary Health Care, South32 and Woolworths and adding IAG, Medibank and Sydney Airport.
- Christine St Anne gave us four key investment themes for 2016 [9], including the China syndrome and commodity and energy prices.
- Tony Negline responded to a recent reader query about deceased estates [10].
What moved the market
- China’s manufacturing data added to market concerns over the strength of its economy.
- Global concerns also shifted to the US after the Fed’s Beige Book showed modest growth numbers in nine of 12 economic districts surveyed.
- Falling oil prices, with crude oil testing the $US30 a barrel level, added to market volatility.
- The market also responded well (briefly) to a stabilising yuan after better than expected Chinese trade data was released.
The week ahead
Australia
- Monday January 18 – New vehicle sales (December)
- Monday January 18 – Monthly inflation gauge (December)
- Tuesday January 19 – Imports of goods (December)
- Tuesday January 19 – Lending finance (November)
- Tuesday January 19 – Weekly consumer sentiment
- Wednesday January 20 – Building activity (December quarter)
- Wednesday January 20 – Consumer confidence (January)
- Thursday January 21 – Detailed employment data (December)
Overseas
- Monday January 18 – China Home prices (December)
- Tuesday January 19 – China Economic data (December)
- Wednesday January 20 – US Consumer prices (December)
- Wednesday January 20 – US Housing starts (December)
- Thursday January 21 – US Philadelphia Fed survey (December)
- Friday January 22 – “Flash” purchasing manager index
- Friday January 22 – US Existing home sales (December)
- Friday January 22 – US Leading index (December)
Calls of the week
- The Royal Bank of Scotland cried “sell everything except high quality bonds!” this week, but you know I’m not!
- JP Morgan made the call that Blackmores will surge to $225 by the end of 2016 after the company revealed its new infant formula. It’s currently around $205.
- The Court of Arbitration for Sport overturned the AFL tribunal’s acquittal ruling, and imposed a penalty on 34 past and present Essendon players for doping.
Food for thought
“I’m not a prophet or a stone aged man, just a mortal with potential of a superman. I’m living on.”
– David Bowie, English musician.
Last week’s TV roundup
- What will happen to the property market in 2016 and where should you be buying? Louis Christopher from SQM Research joins the show [11].
- Julia Lee from Bell Direct explains how she’s playing this volatile market and shares her recent stock picks. [12]
- George Boubouras from Contango Asset Management joins the show to help make sense of this market mayhem [13].
- And Gary Stone from Share Wealth Systems tells us what we can learn from the stock charts [14].
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 Primary Health Care had the highest proportion of its ordinary shorts sold short, increasing to 10.73% from 6.68% last week.
[15]Source: ASIC
My favourite charts
Keep calm – shares are still the place to be
[16]Source: AMP Capital
In his article 7 reasons not to be too concerned, Shane Oliver shows that the gap between grossed up dividend yield on Aussie shares (nearly 7%) and term deposit rates (about 2.5%) is near its highest level since the GFC. Click here [17] to read another six reasons not to fret about short term volatility.
The new Chinese economy?
[18]While the market is worrying about china’s manufacturing sector, it’s ignoring the new Chinese economy – just look at those tourist numbers! In the year to November, tourists out of China to Australia hit over one million.
Top 5 most clicked on stories
- Tony Featherstone: 5 stocks to buy in a market sell-off [7]
- James Dunn: 4 stocks poised to pay special dividends [2]
- Paul Rickard: Our high income stock portfolio for 2016 [8]
- Paul Rickard: Portfolios outperform in tough year [3]
- Peter Switzer: Is this January performance turning me from a bull to a bear? [1]
Recent Switzer Super Reports
- Thursday, 14 January, 2015: Good value in down markets [19]
- Monday, 11 January, 2015: Growling like a bear [20]
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.