Earlier in January, I told you that earnings and the US economy would be the big drivers of the stock market and tapering would be another test for the resolve of stock players on Wall Street. The new concern is tapering’s effect on emerging economies, as those who made money with cheap US borrowings since the GFC are now bringing the dough back home or shifting it to more developed economies, such as Europe.
This is the overdue correction but it will need a big, bad development to really force stock prices deeper.
Why I’m a tad negative, for the time being
I lunched on Friday to the dulcet tones of the Assistant Treasurer, Arthur Sinodinos, who also is responsible for superannuation. He said nothing that would lead me to believe that they have SMSFs in their sights. In fact, Sinodinos said they will not proceed with the Labor idea of slugging super funds that make more than $100,000 in a year with an extra 15% tax.
That said, I intend to get him on my Sky News Business TV program to make doubly sure!
Back to the FOFA lunch
Yes, they actually have lunches where they talk about the future of financial advice (FOFA) and yes, it was a packed room. What some people will do to relive the 1980s and have a boozy lunch on a Friday! You’ll be glad to know that this was not my end goal. No, I was a guest of Wilson Asset Management’s Geoff Wilson. Geoff’s views are widely sought after and this is why I’m a tad negative on stocks, for the time being. “Not comfortable with the market right now, Switz,” he said. And recent volatility on Wall Street explains why Geoff isn’t resting easy. But recall a few months ago I told you that people like Geoff and Roger Montgomery both said they couldn’t see value in the market. What’s happening now – more down days versus up days – will create the value.
Better economic and earnings readings will also bring back value and that’s why they are being watched so closely. The legendary Art Cashin, of UBS at the New York Stock Exchange (who I interviewed when I took my TV show to the Big Apple a couple of years ago) says “we’re awfully close to the end of the bull market” but that looks like a premature call. After all, he is a broker, so he’s not always right.
This is more likely to be a pullback or correction and so it should be looked back upon, later this year, as another buying opportunity. And anyway, the S&P 500 is down only 2.8% from its December 31 high of 1,848.36. The size of the pullback, which is small, combined with the second round of tapering, which is the biggest negative that the market is dealing with, tells me that we’ll have to endure a few months of this volatility that will tend towards the negative.
Let’s get real
But we have to keep this in perspective. Even our S&P/ASX 200 index is only down 4.4% since the closing high on November 5. A softer economy will do that but this is not a disastrous drama of Apocalypse Dow proportions. It’s just a pullback that will become an official correction if it falls 10%, which is no certainty if we don’t see really bad news.
Right now, economic reports from the USA were OK but Europe and the UK continue to impress. US company earnings have been a bit better than expected but have not delivered the really good news that would have taken the market higher.
Tapering in January, following the same in December, surprised some quarters of the market but I do not believe the new Fed boss, Janet Yellen will taper so fast that it kills off the bull market.
The whole QE3 exercise is based on getting US consumer and business confidence up so big companies will invest in production and jobs. That’s the point. So, the Fed can’t create a desperately negative stock market. It would probably like a 5-7% pull back, which then gets rescued by a great earnings period, which would coincide with some great economic news. That goes hand in hand.
What about us?
Our portfolios will be primarily driven by Wall Street, but this month’s earnings and the ensuing takes on the Chinese economy will either drive us down more or soften the slide. I think the one after the next earnings period will turnaround our market fortunes, where the impact of the lower dollar, low interest rates, a new Federal Government and a much healthier housing market start lifting our economic growth, our earnings and our share prices.
What I liked this week…
- US fourth quarter economic growth came in at a solid 3.2% despite higher taxes, spending cuts and a Government shutdown. It was helped by the highest consumer spending in three years!
- US consumer confidence rose to 80.7, which was a lot better than the predicted 78.1.
- The Case-Shiller Home Price Index went up 13.7% in November.
- German business optimism was at the best level in two and a half years.
- The Bundesbank says Europe’s biggest economy will experience faster growth in the first quarter than was expected. It’s tipped to be double the fourth quarter growth!
- The UK is tipped to be growing at the fastest rate since 2007 and I have noted that when the Poms’ economy is strong, their cricket team is weak, so that’s another good omen!
(There was some poor economic data but you can get bad news in any newspaper this weekend!)
Stock watch
This week, I investigated a company called LogiCamms, after Bell Direct’s Julia Lee said she liked it. Morgan’s broker, Simon Bond, did some homework and said it was paying a dividend of around 7% and was rated highly. Then David Buckland (Roger Montgomery’s lieutenant) said they liked the company and its market price was below its intrinsic value. For these guys, this is a buy signal, so I put a few in our SMSF. This is a more speculative play based on the potential of natural gas over the next 10 years.
By the way, Buckland says the team like CSL and Woolworths, which no one will give me a negative on at the moment! He also reckons The Reject Shop is a buy around $10. I thought the company was ‘rejected’ because, in bad times, a business like this does well but, as the economy improves, shoppers look for more expensive products. Buckland says it actually did well in its traditional trading stock but did poorly in higher priced items. Go figure.
Quote of the week
When Sinodinos finished his speech, he amusingly said: “I love youse all.” Apart from invoking the memory of the Marrickville Mauler, Jeff Fenech, he made me think that SMSFs could be in for a bit of love from the new Government. Let’s hope so.
Top stocks – how they fared
Numbers that moved the market
Investors around the globe held their breaths in anticipation of the US Federal Reserve [1] meeting on Wednesday, which ultimately resulted in a decision to continue with QE tapering by reducing asset purchases by $10b ($A11.43b). In response, the Aussie dollar dropped from 88.02 US cents to 87.41c on Thursday. Meanwhile, the ASX200 closed 1.16% lower and the Dow Jones slumped 1.19%.
Another big number to come out of the US was consumer confidence [2] figures, released on Tuesday. The index rose to 80.5pts, up from 77.5 last month, which was enough to lift the Dow Jones after five consecutive days of losses, despite unfavourable durable goods figures released earlier that day.
Across the globe, Chinese PMI [3]fell to 49.5pts in January, the first contraction in six months. Aussie markets closed 0.78% lower on Thursday in response. And even closer to home, Australian business conditions [4] were up 7 points to +4 in December – a near three-year high. The results from the NAB business survey, released on Tuesday, further lessened chances of an RBA rate cut
The week ahead
Australia
February 2 – RP Data/Rismark Home Value index (January)
February 3 – TD Securities inflation gauge (January)
February 3 – Building approvals (December)
February 3 – ANZ Job advertisements (January)
February 4 – Reserve Bank Board meeting
February 6 – International trade (December)
February 6 – Retail trade (December)
February 7 – Statement on Monetary Policy
Overseas
February 1 – China PMI manufacturing (January)
February 3 – US ISM manufacturing (January)
February 3 – China PMI services (January)
February 3 – US Construction spending (December)
February 5 – US ADP employment (January)
February 5 – US ISM services (January)
February 6 – US International trade (December)
February 7 – US Non-farm payrolls (January)
There’s a fair bit of interesting economic data coming out in Australia this week, with the highlight being Tuesday’s Reserve Bank Board meeting. Most economists predict the cash rate will remain unchanged at 2.5%, however there is scope for a shift in monetary policy stance from easing to neutral, after higher than expected inflation rates last quarter. This will be followed by the RBA’s quarterly statement on Friday, which includes inflation and economic growth forecasts for the March quarter.
Overseas the hot topic of the week is China’s PMI for manufacturing, released on Saturday by the National Bureau of Statistics. This report is more comprehensive than PMI data from HSBC, so we expect it will provide a good insight into economic conditions. The services sector equivalent will be released on Monday.
And in the US, economists will be keenly awaiting non-farm payroll data on Friday, after disappointing figures in December. An increase of 175,000 new jobs is predicted.
Calls of the week
My first call of the week comes from within Switzer, and goes to Tony Featherstone [5] for his list of four mid-cap yield stocks. Tony’s calling for income investors to take a risk investing outside the ASX100 in 2014. He speculates that the popular incomes earners, like Telstra and the big banks reached their pinnacle last year – so why not take a walk on the (slightly) wilder side.
And congratulations to veteran batsman Brad Hodge [6], a.k.a. the comeback kid, who’s been called up to the Aussie Twenty20 squad for the final two matches against England. It’ll be the first time in six years Hodge has been selected to play for the Australian team and at the ripe old age of 39-years-old. Good on you Hodgey!
And finally a call – or non-call – of the week for US venture capitalist Tom Perkins [7], who compared the “demonisation” of America’s richest one per cent to the persecution of the Jews during the Holocaust. But hey, who can blame him – life’s tough for a rich, white male in America… right?
Last week’s TV roundup
The Aussie market closed 1.3% lower on Wednesday, as Uncle Sam continued to influence investor sentiment. So should we be worried… or is this simply a buying opportunity? I had a chat with head of investment research at Perpetual, Matt Sherwood [8], about the factors affecting global markets currently – and how this weighs up for Australian investors.
With a string of new SMSF legislations and penalties introduced by the ATO recently, it is important trustees know where they stand – and what they can do to ensure they don’t end up in hot water. To talk us through the ins and outs of the new rules, I sat down with AMP SMSF’s Peter Burgess [9].
The Australian market closed lower again on Thursday, so is this the overdue correction we’ve been waiting for? And if so, what stocks should we be keeping an eye on? To discuss what’s happening in markets domestically and overseas, I spoke with Simon Bond [10] from Morgan’s stockbrokers.
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.
The biggest mover this week was JB Hi-Fi, with their short position increasing by 1.77%. Paladin stayed flat, while Cochlear retained its position at the top of the table with a short position of 15.54%.
My favourite charts
Here’s an interesting chart I picked out of several included in Bank of America Merrill Lynch’s China Chartbook, which was released this week. This graph shows the growth of imports from the ASEAN increased to 6.8% in November 2013, up 1% from 12 months ago. Meanwhile, import growth from the EU fell from 13.0% to 7.4% over the same period.
Source: CEIC, China Customs and BofA Merrill Lynch Global Research.
Top five clicked on stories of the week
Peter Switzer: Don’t panic. It’s just a buying opportunity [11]
James Dunn: Commodity price outlook and shares to buy [12]
Tony Featherstone: Four mid-cap options for yield investors [5]
Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [13]
Charlie Aitken: UK becomes tailwind for NAB [14]
Last week’s Switzer Super Reports
Tuesday, 28 January 2014: Shaken, not stirred [15]
Thursday, 30 January 2014: Timing is everything [16]