Switzer on Saturday

Surprise, surprise! President Trump didn’t hurt this rally

Founder and Publisher of the Switzer Report
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Good news greets the day, with one of the greatest current concerns right now for this stock market rally not becoming a bigger worry overnight. As we stand, there’s a strong belief that a second-wave problem won’t send the world economy into lockdown again, so Donald Trump’s hate session on China (which is seen as a diversion from what’s viewed as an ordinary showing fighting the Coronavirus) has become the big wall of worry for the market.

In the early hours of this morning (our time), Donald staged a news conference, where it was expected that he’d announce the dumping of the phase one trade deal that was so important to the strong leg up for the bull market we all enjoyed in 2019 and ahead of the arrival of the Coronavirus. But he didn’t!

Charlie Aitken, Paul Rickard and I devoted a session to this on our Switzer TV Investing program recently. Given the rallies lately, it’s still seen as a manageable risk because President Trump has to be careful that he’s not seen as the cause of a second leg down for stocks. That would be a huge threat to his re-election plans.

When the President started talking, the Dow and the S&P 500 indexes were in the red. But by the end of the get-together with the press, the markets had gone positively green. The S&P 500 actually ended up 0.48%.

Recent developments in Hong Kong sparked concerns that he’d put the pressure on China about the trade deal. And while he made reference to concerns about developments connected to Beijing’s approach to the protests on the island economy, he didn’t take the nuke option to that important trade deal. Companies with a strong Chinese focus (either as an exporter, importer or China-owned) went up. For example, Alibaba was up 2.4% on the NYSE but still down for the week.

In a note to clients, JPMorgan’s Marko Kolanoic, who’s a big believer in this COVID-19 comeback rally, explained why these news conference revelations were important for stocks: “A complete breakdown of supply chains and international trade, primarily between the two largest economies (US and China) would justify equities trading drastically lower”. (CNBC)

To the local story and for the second month in a row, we’ve headed higher. The S&P/ASX 200 Index finished on Friday at 5755.7 points, down 95 points. But the week was positive, thanks to the market’s rediscovering the value of our banks, which was my prediction at the end of my story on Monday. I hope you benefitted, with NAB up 23% at one stage over the week. There was profit-taking on Friday but the future was put on display for all to see.

It showed if the economic outlook ends up being better than expected, then bank share prices will go higher, but I wouldn’t expect another big leg up until more news actually confirms the optimism that has grown since we learnt three million, rather than six million workers were on JobKeeper.

The market had to like the fact that the RBA Governor, Dr Phil Lowe, told the COVID-19 committee that the better virus-beating news has improved the potential economic outlook and the earlier-than-expected steps to reopening the economy have also helped. We’re watching footie again! (AFL fans unfortunately have another month to wait.)

Westpac (WBC)

Source: au.finance.yahoo.com

This five-day chart shows Westpac has spiked 14.3% and is a sign of things to come, if the economic news improves week by week, as it will mean the bank’s provisions on bad debts and other profit-killers and the very negative views on future dividends will be turned on their ears. Let’s pray for that!

The bounce-back for the banks also helped my SWTZ gain 4.8%, which isn’t surprising as it is a dividend-harvesting listed product. SWTZ has rebounded 27.3% since the March 23 low and you can see why I’m liking this rally and the better outlook for banks that are key contributors to the inevitable dividend payments it promises to deliver.

For the record, the S&P/ASX 200 Index is up 26.6% over the same time.

One story that has both heartened and surprised me is Webjet (up 54.48%), which you know I had on my list of potential big gain plays over time. This rebound can only reinforce my view that the market is starting to believe the argument that the economic outlook (perhaps even for international travel) is getting better by the day.

And here’s a reason why: “The German government will vote on whether to lift its travel warning on 31 European countries by June 15. Italy’s foreign minister said the day that borders open again would be like another ‘D-Day’ for European tourism,” reported dw.com only three days ago.

If our German friends are displaying their bodies on Greek Island beaches by June, Aussies could be heading overseas a lot sooner than was expected six, four or two weeks ago. Go the Germans!

Other huge performers this month on the ASX were Southern Cross Media up 80.77%, Nearmap up 77.52%. Afterpay 68.42% and APEagers up 57.47%, which Julia Lee and I talked about on my Monday’s TV show. We agreed that with less overseas travel expected, there’ll be a lot more local driving. That rise was so soon that it even shocked me and I’ll be bringing this up with Julia this Monday.

An interesting comeback sector for the month was Real Estate, which was up 11.57%, which implies that a lot of expected troubles for landlords with their tenants might end up being less expensive for them than was initially calculated.

What I liked

  • Trump containing his inclination to be too aggressive on China.
  • The positive economic implication of the JobKeeper cock-up.
  • What Dr Phil said at the COVID-19 committee meeting about an improving economic outlook, which will still be bad but better than once expected.
  • The ANZ/Roy Morgan consumer confidence index is now up eight months in a row.
  • According to the Australian Bureau of Statistics (ABS), “The proportion of Australians aged 18 years and over with a job remained stable between early April (63.4%) and mid-May (63.2%). The proportion of people indicating that they’d worked paid hours increased slightly over the same period, from 55.8% in early-April to 58.7% in mid-May. One in five (20%) said they were eligible to receive the fortnightly JobKeeper payment.”
  • According to the Australian Prudential Regulation Authority (APRA), resident bank deposits rose by over $53.4 billion (or 2.4%) in April, reflecting the government’s term funding stimulus measure. Household deposits were up by $21.7 billion.
  • Why we should be careful ‘hating’ China: the rolling annual goods trade surplus rose from $75.49 billion to a record $77.55 billion in April. A year ago, the surplus was just $44.6 billion.
  • New US mortgage applications rose 2.7% in the past week. Those Yanks!
  • Despite the troubles in Hong Kong, the Hang Seng Index was actually up for the week.

What I didn’t like

  • The budget deficit for April is around $32 billion higher than estimated by the MYEFO documents – but hell, what can you expect?
  • Loans to households via credit cards fell from $36.4 billion to a 12-year low of $32.5 billion in April. Credit card lending is down by 18% over the year but what can you expect?
  • Construction work done fell by 1% in the March quarter (consensus: -1.5 %) – the third fall in four quarters. The value of construction work done is down by 6.5% on a year ago. In NSW, the value of construction work fell by 8.1% in the quarter to be down by 17.3% over the year – the biggest annual decline in almost 19 years. But as I say, what can you expect?
  • The fact is that looking at predictable bad numbers doesn’t tell you much about the future, so I’ll stop reporting these “dislikes” until they actually are more predictive rather than just looking in the rear vision mirror of past economic destruction.

My best long-term play

The country’s greatest company CSL fell 10.7% over the month to $276.22. In February, this was a $341 stock, so just think about it. I am but please, this isn’t financial advice – just a timely observation.

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The week in review:

On our Youtube channel this week:

Top Stocks – how they fared:

The Week Ahead:

Australia

Monday June 1 – CBA & AiGroup manufacturing indexes (May)
Monday June 1 – CoreLogic home prices (May)
Tuesday June 2 – Business indicators (March quarter)
Tuesday June 2 – Government finance (March quarter)
Tuesday June 2 – Balance of payments (March quarter)
Tuesday June 2 – Reserve Bank Board meeting
Wednesday June 3 – Economic growth (March quarter)
Wednesday June 3 – Building approvals (April)
Wednesday June 3 – New car sales (April)
Wednesday June 3 – Reserve Bank Assistant Governor speech
Thursday June 4 – International trade (April)
Thursday June 4 – Retail trade (April)

Overseas

Monday June 1 – China Caixin manufacturing index (May)
Monday June 1 – US ISM manufacturing index (May)
Monday June 1 – US Construction spending index (May)
Wednesday June 3 – China Caixin services index (May)
Wednesday June 3 – US ADP employment (May)
Wednesday June 3 – China Factory orders (April)
Wednesday June 3 – US ISM non-manufacturing index (May)
Thursday June 4 – US Challenger job cuts (May)
Thursday June 4 – US Trade balance (April)
Friday June 5 – US Employment/unemployment (May)
Friday June 5 – US consumer credit (May)
Sunday June 7 – China International trade (May, annual)

Food for thought:

“The intelligent investor is a realist who sells to optimists and buys from pessimists.” – 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:

Australia’s economic activity for the year so far was recorded via credit card data, energy usage, SEEK job ads, traffic index, real foot index, restaurant performance, consumer confidence, Apple & Google mobility invoices and hotel bookings in this chart from AMP Capital.

Top 5 most clicked:

  1. Buy, Hold, Sell – What the Brokers Say – Rudi Filapeck-Vandyck
  2. How the economy will play into the hands of investors in bank shares – By Peter Switzer
  3. 3 LICs to buy and 2 to sell – By Paul Rickard
  4. Rev up your portfolio with these 4 stocks – By Tony Featherstone
  5. 10 stocks fighting COVID-19 – By James Dunn

Recent Switzer Reports:

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.