Wall Street has been climbing the wall of worry and that’s where a range of concerns are recognised, but the market still climbs over them to go higher. At the moment, the obstacles to going higher are stopping the ascendency of stock prices but I don’t think we have hit an insurmountable obstruction.
What we’re talking about is investor confidence that stocks is the place to be to make money versus the accumulation of threats that could turn a bull market into a bear market.
We are climbing the wall of worry and it can be worrying by definition but you have to rationalise what you’re seeing. This is how I saw it yesterday morning for Switzer Daily (www.switzer.com.au [1]).
Wall Street spat the dummy overnight and it’s about time because the US market is way overdue for a pullback or even a 10% correction. So am I worried? Nope, as it will create another buying opportunity and it makes me happy that I have held back my quarterly foray into the equity market with my super money!”
When I got up this morning, the Dow was down another 243 points, or 1.5%. So here’s the obvious question: is this the start of something big?
Now remember, the Dow hit an all-time high of 16,576.66 on December 31 and it’s now around 15,950. So that’s a 3.7% pullback, which means, at this stage, this looks like the overdue sell-off that could turn into the 10% correction many market experts say would be, wait for it, “healthy”!
The following developments explained nervousness yesterday:
- The flash Market PMI for the USA came back from 55 to 53.7 in January. Slower rates of output and new order growth were behind this not too dramatic fall.
- The weakening HSBC reading on China’s manufacturing sector via its flash PMI index unsettled markets, as it might suggest the Chinese economy will be slower than expected.
- US earnings have not shot the lights out, especially with respect to revenue.
- Tapering could start next week after the FOMC meeting. That is a point of uncertainty that could test the market.
- And, of course, a correction is really way overdue!
This morning, we’re adding the simmering concerns over emerging economies, as money leaves more risky (but once high yielding) assets in these economies for the safety of, say, US bonds. This isn’t helping the currencies of these emerging economies and it’s possible that a currency crisis could develop. That’s a new worry to add to the list but there’s sufficient good news from the all-important world economy to make me think we’re only dealing with a temporary hurdle on the wall of worry.
Yesterday, we saw US leading indicators continue to rise, the German flash PMI rose from 55 to 55.9 in January, which is the fastest pace in over two years.
After ignoring adversity for most of 2013, I think 2014 will recognise potential threats more often and we will get market phases like the current one. But good news will eventually show.
Like US company earnings, I expect our corporate show-and-tell period next month might be more disappointing than we thought six months ago. However, over the year, news about profits in many companies, like our economic growth, will improve. This will take stock prices up that wall of worry.
The Yanks tend to worry about homeland stuff primarily, and earnings is the biggest disappointment at the moment.
A stock market either provides bargains (let’s call them best buys or bad buys) and, at the moment, there is no real catalyst to buy. But in the background, unheralded good news is accumulating that over the year will turn into reasons to buy. For example, car sales are turning around in Spain. There was good post-bailout bond auction in Ireland. Germany’s manufacturing, as I showed above, is on the up. The Poms are having difficulty with cricket but their retail sales are on the rise. Eurozone housing prices have hit a two-year high. There is a slow growth recovery happening in Europe (it’s not the no growth as doomsday merchants long-argued since 2008). And the US market is up about 130% in four years on, you guessed it – slow growth. So, don’t get too panicky when the market sells off on rumours and assumptions. As I pointed out, the market drop, percentage-wise, is small, but even if it was 10%, it would be seen as overdue and not a huge worry, provided economic news continues to deliver. By the way, part of this sell-off is because the economy and companies have not delivered great results as fast as the market guessed they would.
The ‘keep-it-in-perspective’ call
This is what Larry Summers, the former US Treasury Secretary, said this week: “We completely avoided a depression!”
He is absolutely spot on and it should keep your concerns about market dips in perspective. We’re in a buying opportunity, where the biggest concern for you might be when do you get in before it turns around and heads up?
Interview of the week
No, it wasn’t on my show but on Richo + Jones on Sky News, where Gerry Harvey summed up our wage challenge saying he has to pay $48 an hour to his dish washer at his Byron Bay resort on Sunday nights. Gerry says he needs to increase room rates to cover Sunday wages but that makes him less competitive.
Blooper of the week
Gerry again! When he was talking about some survey group that came to him investigating something, he let the f-word slip, as he observed that “after 10 minutes I realised that it was an ‘f’n’ waste of time.” It was clearly unintentional but I was surprised how little outrage it caused and I am a bit miffed he has never used it on my program!
Market revelation of the week
Listed company AFIC’s MD, Ross Barker, explained his company’s approach that they buy for the long-term and love to buy when others are selling – classic contrarians. We could be in a contrarian phase right now.
By the way, many of the experts, who don’t like the banks for this year, still see them going up 6% this year. So, with dividends and grossing up (along with the likely sell-off in coming days), they could be the contrarian play.
Top stocks – how they fared
Numbers that moved the market
There were two big numbers out of China this week which both saw shares react negatively. The first was China’s annual GDP growth [2] on Monday, which came out at 7.7% – in line with economist expectations and the same as last year. It was a decent enough GDP number, but it was China’s weakest figure in 13 years.
Later in the week Chinese PMI data [3] from HSBC emerged, showing a contraction in manufacturing activity for the first time in six months. The indicator fell to 49.6 in January, down from 50.5 last month.
Closer to home, Wednesday’s consumer price index (CPI) [4] rose 0.8% in December, bringing the annual rate to 2.7%. This was above economist’s expectations of a 0.5% increase for the month.The Aussie dollar rose to 88.53 US cents (up from 87.90).
The week ahead
Australia
January 28 NAB Business Confidence (December)
January 30 Trade price indexes (December)
January 30 New home sales (December)
January 31 Private sector credit (December)
Overseas
January 27 US New Home Sales (December)
January 28 US Durable goods orders (December)
January 28 S&P / CaseShiller home prices (Nov)
January 28 US Consumer confidence (January)
January 28 US Richmond Fed Index (November)
January 29 US FOMC meeting
January 30 US GDP (December Qtr)
January 30 US Pending Home Sales (December)
January 31 US Personal income (December)
It will be a fairly quiet week in terms of Aussie economic data, especially considering we’ve got a public holiday to kick off the week. NAB’s Business Confidence Survey will welcome you back on Tuesday, with results expected to show confidence is still high, following the peak-levels reached following last year’s federal election.
New home sales data for December is released on Thursday, and is expected to be positive after a 7.5% increase in November.
Overseas there will be a bit more action in the form of the Federal Reserve policymaker’s meeting on Thursday. It will be interesting to see what comes next now that the QE taper is up and running. This is followed by Friday’s US GDP figures, with economists predicting a fall from the 4.1% recorded in the September quarter to around 3.1%.
Calls of the week
There were plenty of good calls made in the Switzer Super Report this week, including Charlie Aitken’s prediction [5] that the Aussie dollar would drop to US75 cents in 2014. If Charlie’s right, then now’s the time to get exposure to the US market.
My second Call of the Week goes to Roger Montgomery. Last November Roger wrote that Sirtex Medical Limited (SRX) [6], had great prospects. His article in this Thursday’s report proved he was right on the money [7], with Sirtex gaining a whopping 25% in just two days, after announcing their second quarter growth in dosage sales earlier this month. But Roger wasn’t the first to write about it. We also ran a Fundie’s Favourite [8] by Platypus Asset Management in July.
And finally, Barry O’Farrell [9]made the call to try and stop alcohol-fuelled violence in Sydney, with a string of new laws and lock-outs announced earlier in the week. We’re pleased to see our Premier taking a stand against this kind of behaviour.
Random fact
Warren Buffett is rarely short on a good call, but this one is something special. Buffett’s company Berkshire Hathaway is teaming up with Quicken Loans to put up a $1 billion prize [10] for anyone who can correctly pick the winner of each game in a US college basketball competition. Doesn’t sound completely out of reach, right? Well with 68 teams in the competition, odds of achieving a perfect bracket are approximately 1 in 9.2 quintillion… Worry not – Quicken is also handing out $100,000 prizes to the 20 closest entrants.
Last week’s TV roundup
After two weeks away, I was back in the hotseat this week – with plenty of exciting guests to welcome me back.
I caught up with Macquarie’s Martin Lakos [11], to talk about the Aussie dollar fall and how to ensure you’re on the winning side of the depreciating dollar. We also discuss upcoming inflation figures and what to expect from the Reserve Bank over coming months.
With 13% earnings growth predicted for the current financial year, Julia Lee [12] from Bell Direct tells us how to play the earnings cycle in your favour. She shares her stock picks and sector recommendations for a prosperous 2014.
One of Australia’s most respected economists, Warwick McKibbin [13], comes on the show to discuss the economic outlook for 2014.
We welcome founder of IBIS World and fellow optimist Phil Ruthven [14] to the program to discuss the Australian industries outlook for 2014 – who will fly and who will fall? Phil also shares his economic predictions for the year.
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.
It was another quiet week on the short positions front, with Lynas Corporation (LYC) the biggest mover of the week, becoming just under half a percent shorter. Despite Cochlear’s short position closing by 0.41%, they still remain the stock with the highest short position on the market.
My favourite charts
This chart was shown in my Switzer TV interview with IBIS Founder Phil Ruthven [14] on Thursday night. It gives us a good indication of where Australian industries are headed in 2014. Hopefully it will help you decide where to buy – and what to avoid!
Source: IBIS World
Top five clicked on stories of the week
Paul Rickard: Our growth-oriented stock portfolio review [15]
James Dunn: Five small caps for 2014 [16]
Peter Switzer: Invest more as the dollar dives [17]
Charlie Aitken: An Aussie at 75 cents means you need more US in your portfolio [5]
Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [18]
Last week’s Switzer Super Reports
Thursday, 23 January 2014: Go USA! [19]
Monday, 20 January 2014: January, you’ve been hanging on me [20]