Switzer on Saturday

What the…is going on with Wall Street?

Founder and Publisher of the Switzer Report
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[table “106” not found /]

Another bad week for stocks and given we’ve had two in a row and seem to be moving more down than up on what has been a sideways movement for a hell of a long time, you might be asking: “What the #!/! is going on?” Well, ask it even louder now that the Dow has dropped over 400 points!

In fact, after this week’s fall, we’re in correction territory, with the market down 13% since we hit the high of 5995 on March 23!
This has been a year when selling in May and going away would have worked nicely and if the market maxim holds true, we should come back on St. Ledger’s Day, which is around mid-September.

But hang on, September and October historically are bad months for stocks. September has special spookiness this year because some US expert commentators and analysts think the Fed will raise interest rates and this could spark a sell off.

However, minutes from the Fed out on Wednesday, and released by Bloomberg ahead of an embargo, hosed down those hot for a September rate rise. This made some market movers think that the US central bank knows something we don’t know about the US economic recovery and, combined with another fall in the price of oil to a new six-year low, explained the Dow’s 358-point dummy spit on Thursday.

This fall didn’t help our market on Friday, with reporting season here not great, though not as disastrous as this week’s massive market slide implies.

Right now, our hardly impressive reporting season, which only reflects the pretty shabby six months for the Aussie economy in the first half of 2015, is also coping with economic question marks around China, its devaluations, worldwide sinking commodity prices and then there’s the Fed rate rise issue.

Oh yes, to make things even more confusing, the Greek PM, Alexis Tsipras, thinks the Greeks need a new election. Are he and his country suffering attention deprivation disorder after being out of the news for a few weeks?

And now we have to factor in another bigger dummy spit by Wall Street overnight. This looks more serious than I like. I have to throw in that a correction is way overdue for Wall Street and the reason is that the Yanks have been playing an historically weird game with their Quantitative Easing (QE) and unbelievably low interest rates.

What made US investors more nervous on Friday, making last week the worst week since 2011 for stocks?

At one stage, the Dow had lost around 500 points and actually went into correction territory, with the drivers being weak manufacturing news out of China, oil dropping below $US40 a barrel, iffy economic news on the US economy (which I think is iffy itself), and this belief that the Fed knows something about the US economy that we’re not seeing.

I actually think they anticipated a China-related market shock and they’re not happy to add to the spookiness until they know Beijing can manage its growth, stock market and currency challenges.

Ironically, there is a currency problem going on right now in countries we don’t care about but the Fed might be watching these developments too. Even more ironic is the fact that it’s thought the Fed’s delay of a rate rise has hurt many emerging economies’ currencies!

You guys and girls know me by now. I’m thinking this all adds up to a buying opportunity, just like the one my old mate David Murray and APRA have created in forcing our banks to put more shares on the market for balance sheet safety reasons.
Charlie Aitken said it this week and so did CMC’s Michael McCarthy – banks at these prices are good value if you’re looking for an 8-10% return.

AMP’s Shane Oliver argues that pull-backs (sell offs under 10%) and corrections (sell offs between 10-20%) are “quite normal and healthy in that they help the market let off steam” ahead of the rising trend resuming.

He added: “…shares are not seeing the sort of conditions that normally precede a new cyclical bear market: shares are not unambiguously overvalued; they are not over loved by investors; uneven and below trend growth is extending the economic expansion cycle; and monetary conditions are likely to remain easy for a while yet.”

Love your work Shane!

What I liked

  • Again, this from Shane: “While there is a high risk of a further correction in share markets in the next month or so, from a broad brush perspective we are not seeing the signs normally seen at major cyclical peaks in shares and so the cyclical bull market in shares looks like it has further to go.”
  • Positivity from the RBA’s minutes where the Board reported that: “members noted that non-mining business profits had increased, business conditions were clearly above average and businesses had been hiring more labour, partly encouraged by very low wage growth.”
  • An RBA report that told me that the Big Bank said if the dollar fell to 67 US cents, they would add 0.5% to 1% to their growth forecasts, which would put us back in the 3% plus zone, which is great for job creation and confidence.
  • The weekly ANZ/Roy Morgan consumer confidence rating rose by 0.6% to a 7-week high of 113.2 in the week to August 16.
  • On Thursday in the States, we saw that the Philadelphia Federal Reserve index rose from 5.7 to 8.3 in August, above forecasts centred on a result near 7. Existing home sales rose 2.0% in July to 5.59 million (forecast 5.44 million).
  • The Markit Euro zone flash composite PMI went up to 54.1 from 53.9, which says manufacturing is expanding there.
  • The US flash PMI was 52.9, which was just under forecasts but it still says manufacturing is healthy.

What I didn’t like

  • Wall Street’s sell offs on Thursday and Friday.
  • The Shanghai Composite falling 4.2% after the China flash manufacturing PMI reported at a six and a half-year low!
    Minutes of the last US Federal Reserve meeting that revealed members “concluded that, although it had seen further progress, the economic conditions warranting an increase in the target range for the federal funds rate had not yet been met.” Members continued to await further information on the economic outlook and expressed concern about lower oil prices and spillovers from slower economic growth in China. (I want the Fed to raise rates to tell us all that the US economic recovery is fair dinkum, as it will help create an end of year rally.)
  • Worries about global economic growth weighed on the Brent price of oil, but even more worrying are reports that if the price of oil goes too low, then really big company clients of US banks could be in trouble and that could put banks in trouble. Of course, there would be forced takeovers and amalgamations of struggling companies and supply would drop, pushing prices up, but there would be a short-term period of angst if we got concerned about banks’ balance sheets.
  • Reporting season worsened over the week. Last week I reported that 51% of company results had beaten expectations but that fell to 46% by Thursday afternoon. Meanwhile 61% had seen their profits rise from a year ago, which is pretty good and this number held solid, so the overall result is a bit like the economy — OK but I would have preferred something a little more uplifting.
  • John Howard tipping we would be at sub-par growth and while the evidence may support his realistic pessimism, I applaud Joe Hockey disagreeing with him. A Treasurer has to talk up the economy and to be fair, John would use RBA and Treasury guesses, sorry forecasts, and history shows they’re about as reliable as the Wallabies!

Warning!

Stocks are going lower and if you haven’t got the stomach for all this and you don’t pay capital gains tax, you might want to go to cash and then come back in when you feel comfortable. I won’t be taking this advice. I think this is an overdue correction and explainable given the crappy China, commodity and currency news around now.

The Fed hasn’t helped but I don’t blame it, given the China uncertainty right now. Janet Yellen would be happy to see the market slide a bit when the rate rise comes but she needs to believe that, all up, the smarties will say, “the Fed has done this because growth is good ahead.”

This would then bring stocks roaring back after a temporary fall.

By the way, I always expected a pre-emptive sell off ahead of the first rate rise, possibly in September, but even me, a programmed optimist, can’t call this stocks slump as a dumping ahead of a September rate rise in the States.

But I wish I could!

That will happen in the not so distant future.

Top stocks – how they fared

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The week in review

(click the blue text to read more)

What moved the market

  • Volatility on China’s stock market and concerns of a slowing Chinese economy sent Wall Street into a spin.
  • The minutes of the latest Fed meeting, which suggested the September rate rise might not happen.
  • Heavy falls in the big four banks dragged the local market lower.
  • And a decline in the oil price also rattled markets.

The week ahead

Australia

  • Tuesday August 25 – Balance of Payments (June quarter)
  • Wednesday August 26 – Construction work done (June quarter)
  • Thursday August 27 – Business investment (June quarter)

Overseas

  • Monday August 24 – China “Flash” purchasing index
  • Tuesday August 25 – US Home prices (June)
  • Tuesday August 25 – US New home sales (July)
  • Tuesday August 25 – US Consumer confidence (August)
  • Tuesday August 25 – US Richmond Fed survey (August)
  • Wednesday August 26 – US Durable goods orders (July)
  • Thursday August 27 – US Economic growth (June quarter)
  • Thursday August 27 – US Philadelphia Fed index (August)
  • Friday August 28 – US Personal income (July)

Calls of the week

(click the blue text to read more)

  • This week the Greek prime minister Alexis Tsipras resigned and called for a snap election, which is expected to be held as early as September 20.
  • The Ashley Madison scandal reared its ugly head again with the hackers posting the stolen data online – and Aussies are in the bad books! Sydney and Melbourne allegedly have the third and sixth highest number of active accounts!
  • And in business news, Aussie freight logistics company Asciano announced it would back a bid by Canadian transport and utilities company, Brookfield Infrastructure. Shareholders will vote on the takeover in November.

Food for thought

Expect problems and eat them for breakfast

  • Alfred A. Montapert, American author

Last week’s TV roundup

  • Wesfarmers CEO, Richard Goyder, talks about the company’s earnings results and the market’s positive reaction.
  • Brambles CEO, Tom Gorman, talks about its recent earnings results, and plans for the future.
  • The CEO of Seek, Andrew Bassat, joins the show to talk about the company’s jump in profits and areas of investment.
  • SSR co-founder Paul Rickard gives his take on company earnings results so far, and why he thinks Telstra is still good value.
  • In this Super Sessions update, we talk about how healthy our health care stocks really are!

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.

This week the biggest mover was Cabcharge Australia, with a 3.36 percentage point increase in the proportion of its shares sold short to 16.78%. The next biggest mover was Senex Energy, with a 1.69 percentage point increase to 9.21%.

20150821 - short stocks

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Mining money matters!

20150821 - WA

Workers like to follow the money, with the BankWest Curtin Economics Centre revealing how the inflows and outflows of migration to WA correlates pretty much bang on with the iron ore price!

Are Aussies Caraholics?

20150821 - CARS

We Aussies like our cars! According to ABS figures, car sales were down by 1.3% in July but up a decent 3.6% on a year ago. The annual total of sales for new vehicles hit a 19-month high – that’s just 0.6% shy of record highs.

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