The correction of a few weeks ago is now well behind us, as the S&P 500 in the US looks to hit an all-time high this morning. Its best ever close was 1,850.84. So what’s going on? And to add drama to the story, the Yanks are doing this with a run of very ordinary economic data!
You might recall last week I referred to a typical American made up word of ‘Frozenomics’, which means that many economists are blaming the historically very cold, icy weather on the run of plainly bad factory, housing and jobs data.
At the moment, the market is buying this story, as the weather has been shocking on the East Coast and inland. However, there hasn’t been an ice show in California but home sales are still down.
The makings of the next big sell-off could start when earnings season is over, and it nearly is. And if the economic data does not rebound when Spring has sprung, there will be a realisation that the weather was over-blamed. If this happens, question marks will hang over the all-important US economic recovery, which would put another correction on the cards.
A couple of days ago, the WSJ pointed out that “the average stock has risen 0.84% on the day of a company’s report (or the day after, if the company reported after the closing bell), the biggest average gain since the middle of 2009, according to Bespoke Investment Group, a New York research firm.”
Meanwhile, Thomson Reuters reported that fourth-quarter profit growth was 9.6%, while revenue growth came in at only 1.1%. Be clear on this: when the US corporate sector can report rising revenue and earnings, there will be another leg up to this bull market. Of course, if it does not show up this year (maybe in the next earnings season), then there could be a big negative market reaction.
That’s when alarmist observations, such as “jobless recovery” and “revenue-less recovery”, will hurt positive market sentiment.
At home, our S&P/ASX 200 index is approaching a six-year high at 5,438.70, after rising five days out of five! It was a great week for optimists (I think you know where I stand), with the index up 82.4 points (or 1.5%) for the week. And we finished strongly on Friday, up around 0.5%.
Earnings season here has more market experts raising their market expectations, with the SMH reporting that Citi thinks we should see 5,800 by the end of the financial year! My once thought excessively bullish call of 6,000 for 2014 is now looking very achievable, though you know I always make the point that getting the direction of stock prices right for the year is the main goal. It’s just nice if I get the quantum right or, better still, it over achieves. Getting more for you and me, of course, is the unstated point of the Switzer Super Report [1].
Explaining the nice rise in stocks has been the better than expected earnings season. And what I like is what this means for business confidence, something I’ve been banging on about for months, which in part explains why I’ve been more bullish on the Aussie economy. In turn, it explains why I’ve been very positive on stocks for this year.
You see, earnings season has brought not only higher share prices but also higher dividends (and even special dividends) and these only come out of better balance sheets. More importantly, these extra giveaways generally don’t come from companies unless confidence is rising, suggesting that boards and management think they can pay for them.
Charlie’s back!
After a hiatus, Bell Potter’s Charlie Aitken is back with his usual irrepressible positivity. He likes BHP and Rio and says the banks are still OK investments, but don’t expect returns like we saw over 2012 and 2013. Crown remains a good gamble but the big wins are behind us, he says. And he now likes Fairfax, which surprised me, but he did pick up what I noted and that was their digital properties were showing some promise. The share price went up over 20% on Thursday but it’s still only a 90-cent stock.
Tom’s takeover targets
Takeover target specialist, Tom Elliott, was also on my Switzer program this week (on the Sky News Business channel). You might recall he was an early caller on Warrnambool Cheese & Butter. Now he likes Mortgage Choice and thinks the CBA could buy more of the company. And he likes Woodside (where the Shell holding, which is set to be sold, could bring in some bidders), Australand (as the housing boom booms further), TabCorp (as something between it and Tattersalls seems possible) and a company called Spark.
For those who like beaten up beauties
Pengana’s Rhett Kessler says Resmed and Seven West Media are two out-of-favour stocks he likes going forward. And his picks of the banks, from an investment point of view, are ANZ and NAB.
What I liked this week apart from great earnings
- The RBA minutes, which says rates are on hold for some time.
- The wage data, which says inflation won’t be an issue so, once again, rates should be on hold.
- The cricket in South Africa, until last night!
Top stocks – how they fared
Numbers that moved the market
It was a pretty quiet week in terms of economic data – especially on the home front. But earnings season kept the markets moving, with plenty of earnings results worth mentioning. In particular, BHP’s 31% [2] (or $7.8 billion) jump in half-yearly underlying profit kept the Australian stock market propped up despite some losses on Wall Street.
Moving overseas, we saw some disappointing manufacturing figures coming out of China during the week, with HSBC’s “flash” PMI data [3] forecasting a drop to 48.3 points in February. This is below the critical 50 point line between expansion and contraction – and is even softer than last month’s figure of 49.6points. As a result the Aussie dollar fell by almost fall a US cent on Thursday. But I’ll add that you should take this figure with a grain of salt, keeping in mind that manufacturers buy like mad in January in preparation for their Lunar New Year holiday – so we expected a slight PMI contraction anyway.
And in the US housing starts [4] plummeted by 16% in January, with building permits down 5.4%. This is a huge drop, but also a severe case of “frozenomics” – that is, a result of atrocious winter weather – so the market didn’t take too much notice.
The week ahead
Australia
February 25 Balance of Payments (Dec quarter)
February 26 Construction work done (Dec quarter)
February 26 Housing Industry Association outlook
February 27 Private business spending (Dec quarter)
February 28 Private sector credit (January)
Overseas
February 24 China house prices (January)
February 25 US Home prices (December)
February 25 US Consumer confidence (February)
February 26 US New home sales (January)
February 27 US Durable goods orders (January)
February 28 US Consumer sentiment (February)
February 28 US Economic growth (Dec quarter)
February 28 US Pending home sales (January)
The main event in Australian data reporting this week is business investment, which is released on Thursday by the Australian Bureau of Statistics. The report covers business spending on longer-term assets presently and over the next 18 months. Economists are predicting a 3% rise in spending – coming down slightly from the 3.6% rise seen in the September quarter.
Offshore the hot topic of the week is housing data. On Monday investors will be keeping an eye on Chinese housing prices data, with fears of a housing bubble developing if rates climb above 10% – keeping in mind that in December housing prices were up 9.9% year-on-year.
In the US, housing data is also the focus of the week with two lots of home prices data released on Tuesday, with economists predicting a double-digit rise in prices. This is followed by usual weekly data on home purchases and refinancing, and January figures on new home sales on Wednesday. Then on Friday we’ll see the preliminary December-quarter economic growth estimate released alongside pending home sales and consumer sentiment.
Calls of the week
My first call of the week is shared between BHP CEO Andrew McKenzie and Rio CEO Sam Walsh, who are finally giving shareholders what they want – returns! As quoted in Charlie Aitken’s fantastic article [5] for the Switzer Super Report on Thursday, CEOs of these mining giants are putting money into their shareholders’ pockets via buybacks and dividends. Sounds good to me!
I also liked Roger Montgomery [6]’s call that Flight Centre (FLC) is a good investment. He says the travel retailer isn’t the traditional bricks-and-mortar investment you might assume it is. The ASX-listed company is expanding globally and embracing the online era – it may just be worth a keeping an eye on.
And my final call goes to the booming event industry, which is already worth a huge $24 billion in Australia and is expected to grow to $31 billion in 2020. The industry claims it is short of workers – so someone driving a truck for Alcoa today could be driving one for a company like Staging Connection tomorrow. Watch this space, I say.
Food for thought
“Success is getting what you want, happiness is wanting what you get” – W.P Kinsella
This week’s quote comes from novelist, W.P Kinsella – the brains behind the novel which inspired the 1989 film Field of Dreams, starring Kevin Costner and featuring the famous (and often misquoted) line “If you build it, he will come”.
Last week’s TV roundup
Pengana Australian Equities Fund has consistently been one of the country’s best performing funds, so I decided it was time to get fund manager Rhett Kessler [7]on the show to share his investment strategies and stock picks for 2014. This is a must watch for any conservative investors out there!
We’ve got stock markets turning up in an economy where good and bad data are competing. So how’s an Aussie investor to make sense of all this? On Tuesday evening I welcomed one of the country’s most respected economists, Frank Gelber [8], to the show to discuss the factors that’ll influence the economy this year and beyond. We talked about the AUD, Europe and the housing bubble (or lack thereof in Frank’s opinion).
Earnings season was in full swing this week with some impressive results coming to light. To discuss these revenue results and what they say about markets and the economy, I spoke with JB Were’s Mike Kendall [9].
Then on Thursday, I spoke with Switzer Super Report regular and fearless stock picker Charlie Aitken [10] about the companies he’s backing for 2014. During our chat, he shared some of his favourite sectors and stocks – which includes a couple popular companies… and a couple picks that might surprise you!
PLUS, Paul and I recorded a fresh Switzer Super TV [11] video this week which will give you some insight into my market outlook at present. We chatted about economic data, company earnings news and sector movements – and how all these things will affect your super fund.
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.
After a quiet few weeks, there was an increase in short positions movements this week. The biggest mover being Fairfax, with a short position increase of 2.38%. The second biggest mover was Cochlear, which was down 1.28%.
My favourite charts
As I mentioned earlier, China’s not so “flash” PMI data was released this week, revealing a 7-month low of 48.6 points in February. I reckon this figure’s a little off considering manufacturers bought big in January in preparation for the Lunar New Year holiday – so a contraction was expected. But regardless, the PMI data was enough to spook investors as seen by the little Aussie battler (or dollar) falling half a cent. This graph charts that huge fall – you can see the yellow line stayed pretty stable between 90 cents and 89 cents on Wednesday and Thursday and then the data is released and the dollar falls right down to 89.37 US cents!
Sinking feeling: Tell me China’s not important to our dollar
Source: CommSec
Top five clicked on stories of the week
Peter Switzer: Chasing dividends – folly or fortune? [12]
Paul Rickard: ANZ’s new hybrid security [13]
Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [14]
Penny Pryor: Shortlisted [15]
Charlie Aitken: Big miners BHP and Rio back on top [5]
Last week’s Switzer Super Reports
Thursday, 20 February 2014: The boys are back in town [16]
Monday, 17 February 2014: War is over, if you want it [17]