The three-point loss for the week in reporting season says it all: it wasn’t a great week but it wasn’t really bad. In many ways, it’s like our economy – it’s OK and getting better but not as fast as we’d like.
It therefore adds more credence to an argument I’ve been advancing for years that we’re in a slow grind higher economic and market cycle and it’s very likely that the next recession and market crash is some years off.
If I thought interest rates were about to take off and growth was going to go gangbusters, I’d have to be “ready aye ready” – that’s the motto of Malcolm Turnbull’s and my surf club, North Bondi – but I have to say I’m relaxed about those two scary scenarios.
The S&P/ASX 200 Index lost a lousy 3 points for the week, to end at 5744 but it was an eventful week.
Fortescue became one of the best dividend-yield stocks on the market at around 10%, and resource stocks have delivered in spades while predictable failures – Healthscope, isentia and vocus – lived up to their low reputations.
But let’s rely on AMP Capital’s Shane Oliver for a neat summary.
Profits were actually a good story. “At a high level, profits look good: they are up with 70% of companies reporting higher profits than a year ago, which is the strongest since 2010.” Check out the chart that clearly shows this good sign.
Note how the blue bar is up to 70% of companies, compared to 59% last year. Let’s give that a tick.
And as a dividend lover and someone with a Dividend Growth fund (SWTZ), I like this from Shane: “Some 69% of companies have increased dividends from a year ago, which is a good sign regarding the quality of earnings and overall earnings per share growth for 2016-17 is coming in at around 17.5%, which is a huge improvement after two years of declines.” Check out the chart for visual confirmation:
This chart also shows only 11% of companies cut their dividend.
So what’s the problem? Try these bananas:
- Resource stocks’ profits were up about 130% but non-resource profits were up only 5-6%.
- Only 38% surprised with their profit result, which is the weakest since 2012 but it also says something about the quality of profit analysts as well!
- Companies such as Domino’s, Telstra, Suncorp, QBE, Bluescope and Healthscope really shocked the market expert guessers and, when that happens, sell offs can be expected and that’s exactly what happened.
The result was OK without being great but there was nothing to really get spooked about. The index has been anchored down by all the above results from reporting season but it’s also dealing with Trump tweets and speeches, Kim Jong-un, a too high Aussie dollar and some softer Chinese economic data.
But I reckon the really important story is that this stock market doesn’t want to sell off. It wants to go higher but with current valuations, current economic data and question marks over what President Trump can achieve, there is a weight on the index, stopping it from creeping higher.
Amongst the ruins of reporting season it was great to see the likes of Super Retail Group and Bapcor show the Amazon lovers that good retailers can be damn profitable.
Medibank was a nice surprise, though NIB’s report should have given us a clue but, of course, Medibank has been a consistent letdown merchant!
Qantas continues to fly high and I loved that Woolworths result, which shows the value of competition and a new and improved board and CEO. Brad Banducci must be in the running for CEO of the year against Nev Power of Fortescue.
What I liked
- BHP up 5.1%, Rio up 6.5% and Fortescue up an incredible 9.2%!
- Santos up 11% – the new CEO Kevin Gallagher deserves such market approval.
- This on metals from the SMH: “Industrial metals including copper and aluminium headed for the longest run of weekly gains in more than a decade on investor optimism driven by China, with demand holding up in the largest user just as policy makers press on with reforms that should curb supply. The LME Metals Index had climbed 2.4% in the four days since Monday, and should cap a seventh weekly increase. That would be the longest rally since a nine-week run in 2006…” And long may it last!
- The US Markit “flash” manufacturing index eased from 53.3 to 52.5 in August (forecast 53.3) but the services index rose from 54.7 to 56.9 (forecast 56.9). Anything over 50 means expansion.
- The Philadelphia Fed services index rose from 23.4 to 31.8 in August.
- US consumer sentiment index rose from 93.4 to 97.6 in August (forecast 94).
What I didn’t like
- The weekly ANZ/Roy Morgan consumer confidence rating eased 2.2% from 111.7 to a near 12-month low of 109.2 in the week to August 20 and I think our ‘foreigners in Parliament’ impasse is no help to confidence!
- In a week when we saw stocks go up on the better chances of a Trump tax package getting up in Congress, the President ripped into his Republican ‘buddies’ via his infamous Trump tweets!
- This US story that investors are also focused on the estimated 12-day deadline for Congress to approve an increase in the debt ceiling.
- New US home sales slumped 9.4% in July to an annual rate of 571,000 (forecast 612,000).
- Durable goods orders fell a big 6.8% in July driven by a 19% fall in transportation equipment but the number was up 6.4% in June.
Wall St trumped higher overnight
Donald has been more a negative for stocks lately but his chief economic advisor, Gary Cohn, who was rumoured to be looking at the exit door after the President’s Charlottesville comments, gave tax reform talk a real boost.
In an interview with the Financial Times, Cohn revealed that Mr. Trump will ramp up his calls for his beloved and really needed tax cuts for his Presidency on Wednesday, when he visits Missouri.
All major market indexes liked what Cohn had to say, while Fed boss, Janet Yellen, kept it positive at Jackson Hole, Wyoming, where the world’s central bankers get together each year to ensure their monetary policies are heading in the right direction, and there’s also a bit of fishing for the anglers.
Yellen didn’t give away much. However, to allay the fears of those who might be worried about the precarious nature of the world’s financial system (with all of its debt used to kill a potential Great Depression with the GFC), Janet did say this: “The financial system is safer now than it was then, though some adjustments may be needed to regulations.”
Well, that might make worriers a little less worried.
The week in review:
- A recent email I received from a supporter/follower got me thinking about the different ideas we have about investing to build wealth. So this week, I put the Switzer Dividend Growth Fund into perspective [1].
- Paul Rickard said there’s no rush with Telstra – find out why [2].
- Treasury Wine Estates [3] exceeded expectations with its recent report and Charlie Aitken thinks more to come for the winemaker.
- Tony Featherstone [4] revealed three LICs that offer a basket of diversified private companies.
- James Dunn said dividend growth has been a major theme for reporting season, but beware guidance [5]!
- Sam Berridge explained why he likes Veris (VRS) in this week’s Professional’s Pick [6].
- Melanie Dunn shared a strategy to address cash flow concerns [7] for SMSF trustees.
- Cochlear received an upgrade and downgrade from brokers this week [8].
- In our second broker report [9], Fortescue Metals Group and Sims Metal Management were upgraded while nib and QBE were downgraded.
- And our stock selectors revealed the stocks [10] they like – and dislike – in this week’s survey.
Top stocks – how they fared
What moved the market?
- Reporting season continued to play its part. Positive results helped the likes of BHP Billiton, Fortescue Metals and South32.
- US share markets surged on reports that Trump’s team and lawmakers were making progress on tax reform. But then markets got nervy again after Trump threatened to shut down government (more on that below).
- Market sentiment was also subdued by anticipation of a speech to be made by Fed Chair, Janet Yellen, at a conference in Jackson Hole, Wyoming.
Calls of the week
- Trump said he was prepared to shut down government if he didn’t secure funding for his wall along the Mexico border. “If we have to close down our Government, we’re building that wall”. House of Reps Speaker Paul Ryan later hosed down the comments by saying that he didn’t think a shutdown would be necessary.
- Paul Rickard said Woolworths’ turnaround story was impressive, but it’s still not a buy in his books. Read his article on Switzer Daily [11].
- And in case you missed it, in this week’s Switzer Super Report, Charlie Aitken said the medium-term investment case for Treasury Wine Estates [3] is very strong.
The week ahead
Australia
- Tuesday August 29 – Household expenditure survey
- Wednesday August 30 – Construction work done (June quarter)
- Wednesday August 30 – Building approvals (July)
- Thursday August 31 – HIA New home sales (July)
- Thursday August 31 – Private sector credit (July)
- Thursday August 31 – Business investment (June quarter)
- Friday September 1 – CBA/Markit Manufacturing gauge
- Friday September 1 – CoreLogic House Price index
Overseas
- Monday August 28 – US Wholesale inventories (July)
- Tuesday August 29 – US consumer confidence (August)
- Tuesday August 29 – S&P CoreLogic Home Prices (June)
- Wednesday August 30 – ADP Private employment report (August)
- Wednesday August 30 – US Economic growth (June quarter)
- Thursday August 31 – US Personal income/spending (July)
- Friday September 1 – US Nonfarm payrolls (August)
- Friday September 1 – US vehicle sales (August)
- Friday September 1 – Purchasing manager surveys
- Friday September 1 – US Consumer confidence (August)
- Friday September 1 – US Construction spending (July)
Food for thought
Time is the friend of the wonderful company, the enemy of the mediocre.
– Warren Buffett
Last week’s TV roundup
- Fortescue Metals Group [12] CEO Nev Power joins Switzer TV to discuss the strong results, and how the iron ore company overcame challenges.
- Coca-Cola Amatil is dealing with a number of headwinds, but are things improving? CFO Martyn Roberts joins Super TV [13].
- To discuss nib’s latest results announcement, diversifying the business and more, CEO Mark Fitzgibbon joins the show [14].
- Bapcor CEO Darryl Abotomey [15] joins the show to talk about the company’s results, the market’s reaction and the retail and car industry.
- Energy player Santos’ latest results announcement suggests the worst might be behind it. For a look at what lies ahead, CEO Kevin Gallagher joins the show [16].
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, Japara Healthcare was one of the biggest movers with its short position increasing by 2 percentage point to 9.68%.
Source: ASIC
Chart of the week
Growing dividends: A key theme this reporting season
Source: AMP Capital
One part of reporting season I like is the growth of dividends, where a company like Fortescue tripled its dividend and now is one of the best dividend plays in town! Just look at the last two columns and you’ll see how many companies have increased their dividends.
Top 5 most clicked stories
- Paul Rickard: No rush with Telstra [2]
- Peter Switzer: The investment lesson you’d be a mug to ignore! Read this ASAP! [17]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [8]
- Charlie Aitken: Treasury Wine Estates (TWE): an excellent set of numbers [3]
- Tony Featherstone: 3 profit season opportunities [18]
Recent Switzer Super Reports
- Thursday 24 August: Reporting season winds down [19]
- Monday 21 August: Investing to build wealth [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.