Give my regards to Broadway; Carr covets first class and Putin banned from Mexican take out

The big question on Friday was undoubtedly: “How worried should I be about this Wall Street sell off?” In reality, we should be more concerned about what Broadway did, as the Nasdaq exchange is not in Wall Street (where the Dow and the S&P500 hang out) but actually on Broadway.

It was the worst day for the hi-tech index since November 2011 and there was no trigger shock from left field. Reuters explained it well when it quoted Randy Frederick, managing director of active trading and derivatives for Charles Schwab in Austin, Texas. This is what he said: “Momentum names have been driving this market higher. A lot of these names have been trading at stratospheric valuations, and on long-term outlooks, that may or may not materialise. The question is, ‘At what point do they get too expensive?’ Right now, I think they’re looking a little expensive.”

I think he’s spot on and it could easily spread to the rest of the stock market to create an overdue correction. But it’s not worrying me. In fact, I’ll be on the lookout for a chance to buy more stocks at better prices over the next few weeks.

Saturday morning did not bring any relief from the selling, though it was not helped by below expectations profit report from JPMorgan.

Right now I want to understand how bad this could get and my feeling is that the lower the S&P500 goes, the closer we will be to value hunters coming in and snapping up oversold quality companies. Some will go for beaten up momentum stocks but they’ll be punters – stocks without earnings and dividends are for gamblers, though some punts are better than others.

As Charlie Aitken pointed out in this very report on Thursday, the Yanks have had five years in a row of “sell in May and go away” tendencies and it comes as the S&P500 is still only down 3.6% since the all-time high of 1890.90 on April 2. This market has not had a 10% correction for 18 months, so it’s overdue.

I’m not panicking. I’m waiting for some lower lows next week and watching stocks I want to hold that pay dividends, which could be dumped by short-term players, who can provide opportunities for longer term investors.

By the way, it was not all bad news in the US overnight, with the Thomson Reuters/Uni of Michigan Consumer Sentiment reading hitting a nine-month high! There was even a higher producer prices number and the Americans want a bit of inflation, with some experts more concerned about deflation rather than inflation.

Earnings over the next three weeks will determine the direction of stocks and the Bank of America report on Wednesday will be a big watch for the market.

Has Coke lost its fizz?

On the subject of dividend payers, Coca Cola Amatil copped a belting yesterday, down $1.66
(or 14.56%) to $9.74. I’ll be watching this one as a buying opportunity next week.

The fall was linked to a profit-warning from the new MD, Alison Watkins, because of
a price war with rivals in the drink space and some challenges in Indonesia. The ex-Grain Corp boss has a strategic review to cut costs and raise productivity and that should work. I think an improving economy will help, taking the line through the two months of really good job numbers. I also think there’s a bit of the old three envelope story in this with Ms Watkins. As the story goes, an exiting CEO gave his incoming replacement three numbered envelopes and advised that he open them in order – 1,2,3 – and take the advice written within each one whenever he had challenges with the company.

So, when profits were down, the new CEO opened the first envelope and the advice was: “Blame the old administration and the economy!” A year or so later, the CEO was still experiencing tough times so he opened envelope number 2. The advice was: “Tell the market you will consolidate and seek to bolster productivity”. After another year, things were still challenging, so the CEO opened the third envelope, which read: “Start preparing three envelopes!” I don’t think Alison will need her second or third envelopes.

Best news of the week

No, it wasn’t the great unemployment and employment figures but it was the IMF forecast that our economy would remain in the doldrums, struggling at 2.6% growth in 2014 and 2.7% next year! We’re already heading towards 3% growth but my point is that if the IMF had a positive forecast, then that would worry me because they’re nearly always wrong!

For China worriers

Morgan’s chief economist, Michael Knox, re-emphasised the point that construction in China is recorded in the PMI for services and this reading is in expansion mode. The sector is at a four-month high, with the latest number coming in at 51.9, up from 51 in February. Knox says construction demand is more important for steel and then iron ore demand, explaining why iron ore prices have not dived to $US80 a tonne that ‘experts’ guessed recently.

US worry warts note

For the 42nd straight month, US foreclosures fell and this time it was a 23% slide and the activity is at the lowest level since quarter two 2007!

That damn dollar

It’s just under 94US cents but there are forecasters seeing it going as high as 97US cents this year and the tip is that it won’t fall until the Americans start raising interest rates. When will that happen? My guess is 2015 and this could slow the upwards move in our stocks but it would mean that it could stretch out the time that this bull market has in bull-mode.

You know, I think this bull market has at least two years to run but it was good to hear Roger Montgomery make the same point on my TV show on Thursday and he doesn’t generally talk big picture. For those interested, he still likes JB Hi-Fi and is picking up stocks like Seek at the lower prices that this Nasdaq-inspired sell-off is creating, though he was not tempted to dive into Xero.

Making sense of market madness

I also liked this from Jerry Webman, the chief economist at Oppenheimer Funds. “The market is coming to its senses in some of the high-flying tech names; it looked like there were some pretty hefty amounts being paid for the prospect of eventual earnings. Any of us in the market more than 15 years feels the hot breath on the backs of our necks when we see such high prices being paid for tech stocks,” he said.

But wait there’s more.

“One of the interesting ironies is when you see a shift towards stocks with pretty low prices and away from momentum that tends to happen when the underlying economy is still growing.” (CNBC)

And it will be growth that protects us from a bear market showing up too early!

Carr is all class

True blue Labor man and class warrior Bob Carr, the boy from Matraville, who has always confronted class barriers, even found it extended to airlines that forced him to cope with business class! Apparently all is revealed in his new book, Diary of a Foreign Minister.

Of course, Bob is the master of PR and he has learned from the best in the media. My old colleague from my Triple M days, the highly respected and very respectable, Doug Mulray, once advised me after one of his fun-poking sessions which I tried to repel: “Switz, in this caper, it’s better to be knocked than ignored!”

On that basis, Bob’s mantra now is: Once was working class, now seeks first class!