With the media over-preoccupied with the Budget, Tony’s women issues (which is code for Fairfax/ABC issues) and the legitimate concern of how badly Joe and Tony have sold this ‘tough’ Budget, in the words of the Monty Python team, “now for something entirely different.”
Let’s look at the economic implications of the Budget and its likely impact on our investments. But let’s not get too carried away with ourselves. We need to shine the spotlight on overseas developments that make me scoff with anger when I receive emails from viewers, readers, listeners and subscribers concerned about the chances of a huge sell off in shares. More on this below.
A big stock dumping will happen one day but I can’t see it soon. Bell Potter’s Charlie Aitken thinks a correction is on the cards over July but he argues it also creates a buying opportunity. By the way, this piece by Charlie was written before the ‘better than expected’ HSBC flash PMI reading, which showed manufacturing was on the up in China.
On the driver of our market – Wall St – Morgan’s chief economist, Michael Knox, says the S&P 500 is “moderately overvalued” and this market should follow the script of seasonal weakness until “the normal seasonal rally at year end.”
That said, the S&P 500 hit 1900 overnight and was staring at another record close as I write! The persistence of low interest rates in the US combined with good economic numbers and company profits, with the likes of Hewlett Packard really surprising the market, have kept stocks rising.
What fuels my positivity?
Over the past few weeks, I have seen some big things that have reaffirmed my positivity for stocks, which is at odd with the doomsday merchants. Here they are:
- Macquarie has a target for BHP of $43, which says China is not going to 6% growth, yet.
- Paul Rickard has put an $88 target on CBA – love a bullish Rickard!
- Saul Eslake, chief economist at Bank of America Merrill Lynch, reckons the next rate rise will be in 2016. While I don’t agree, imagine what that would do to business and consumer confidence, even with all the Budget bashing going on right now.
- Germany grew at 0.8%, which was better than expected, and the Poms could match them as a growth outperformer.
- The Fed President from Philadelphia, Charles Plosser, tipped an early rise in interest rates and while he was trumped by Fed boss, Janet Yellen, who hosed down early rate rise talk, it all augurs well for the US recovery, which is likely to be at 3-4% some time this year, though some optimists can even see 5%!
- Overnight, new homes sales were up 6.4% in the US, which stopped two months of declines and manufacturing rose to a three-month high in May with the flash purchasing managers index of manufacturing rising to 56.2 compared to 55.4 in April. So both housing and manufacturing are rising, which are great economic omens!
- By the way, when US rates rise our dollar falls and that will help start the process where our market outperforms Wall St.
- Mario Draghi of the European Central Bank will do a Crocodile Dundee next month when he says “Now this is a bazooka!” as he does more to stimulate the Eurozone. This is a huge expectation, which will drive stocks up.
- This chart shows how our deficit disappears:
The green bars show how the deficit of $28.9 billion will shrink in five years but these are based on growth forecasts of only 2.5% for 2014-15 then 3% then 3.5%, which I think are too conservative, and the RBA agrees with me. Faster growth will kill the deficit even quicker.
- The Budget doesn’t bite until 2015-16 and this chart shows it:
Look at the last four bars on the right hand side and see how the second bar is higher than the first, which means for 2014-15, the Budget is less tough than the next year. That should help the recovery in 2014-15 and then the private sector should work against a tighter fiscal policy.
- The pests in the Senate will soften the Budget’s immediate hit on demand by ruling out some measures, which will be annoying for the long-term improvement of our deficit but will give us more growth, which also brings the deficit down.
- Even though consumer sentiment fell after the Budget by 6.8% to 92.9, where pessimism starts below 100, we Aussies saw the Budget as responsible for the longer term, with the confidence reading in economic conditions over the next five years up by 11%!
- I could go on but you get the picture, which in summary looks like a global and local economy getting better, with stocks rising until the signs say we’ve gone too far. But we’re not there yet.
Memorable moments
On related issues about our stocks’ destiny, my memorable moments of the week included Charlie actually writing: “In terms of tactical (i.e. short-term) equity strategy I remain cautious on Australian equities, feeling a May through July pullback to the 5100 to 5200 range is likely and potentially already underway.”
Then I laughed at Tom Elliott of Beulah Capital on my Switzer program noting “when the eternal bull Charlie Aitken goes negative you have to be careful!”
That said, I also noted Charlie concluding with: “…unless there is a clear change in global and domestic interest rate expectations sharply upwards, then I can see this pullback as being nothing more than a classic pullback in a bull market.”
Charlie always says “Go Australia” but I sometimes think “Go Charlie!”
One last odd fact about the Budget. Can anyone explain why female consumer sentiment fell 13.6% to 87.9 while males were steady at 98.2! Does Tony really have a women’s issue or do women have an Abbott issue?
Top stocks – how they fared
Numbers that moved the market
The Roy Morgan-ANZ weekly consumer confidence index [1] fell by 3.2 % to 100.4 in the week up to May 18, a plummet of 14% over the last month. The Westpac consumer confidence index [2] also showed a decrease to 92.90 in May, from 99.73 in April – it’s fair to say that consumers are fretting a little post-Budget!
The minutes of the US FOMC [3] implied a slightly more upbeat assessment of the US economy, particularly with the discussion around “Monetary Policy Normalization”. They also revealed they aren’t too worried about inflation, forecasting it “would remain below the Committee’s longer-run objective of 2 percent over the next few years.”
The HSBC Flash China Manufacturing PMI [4] hit a five-month high in May, jumping to 49.7 from 48.1 in April.
The week ahead
Australia
May 26 – Spotlight on National Accounts (May)
May 27 – Balance of Payments
May 27 – Prelim quarterly estimates (March quarter)
May 28 – Resources & Energy Major Projects (April)
May 28 – Construction work done (March quarter)
May 29 – Business Investment (March quarter)
May 29 – New home sales
May 30 – Private sector credit (April)
Overseas
May 27 – US consumer confidence (May)
May 27 – US Home prices (March)
May 29 – US Economic growth (March quarter)
May 29 – US Pending home sales (April)
May 30 – US Personal income and spending (April)
May 30 – US Chicago purchasing managers index (May)
On Monday, the Australian Bureau of Statistics (ABS) will publish their “Spotlight on National Accounts” series. On Tuesday, there will be preliminary trade data for the March quarter, and Wednesday will reveal construction work done estimates for the March quarter. The ABS will publish data on business investment on Thursday, and on Friday, the Reserve Bank will issue private sector credit estimates for April.
Overseas, we will see the release of US consumer confidence data and home price measures on Tuesday night, and on Thursday night, data on economic growth and pending home sales. The Chicago purchasing managers index will be released on Friday, along with US personal income and spending data for the month of April.
Calls of the Week
Tony Abbott was heavily criticised after he “gave a cheeky wink” when a pensioner on talkback radio [5] declared she works on an adult sex line to make ends meet.
Treasury Secretary, Martin Parkinson, came out this week and said changes to the preservation age [6], or the age one can access their super funds at, are “inevitable.”
Paul Rickard made the call that CBA will get to $88 [7], when the market hits 6000 this year (another one of our calls).
Food for thought
If you’re not failing every now and again, it’s a sign you’re not doing anything very innovative – Woody Allen.
Last week’s TV roundup
What IT stocks have been making their mark, and how does Australia’s IT sector compare to the US? In this special Switzer Super Report update [8], Paul Rickard and I discussed some IT stocks with potential.
Which sectors are going to enjoy a stellar second half to the year and deliver the goods? David Sokulsky from UBS Wealth Management gave me some insight [9] into the Australian equity market when he visited Super TV.
And this week, Treasury Wine Estates rejected a takeover offer, but is it still in play? Tom Elliott from Beulah Capital [10], explained what stocks have ‘takeover’ written all over them.
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 Acrux Limited, where the short position increased by a further 0.47% to 9.83%.
My Favourite charts
We’ve been at 2.5 % for ten months!
Consumers freak out post-Budget
Top 5 clicked stories of the week
- Paul Rickard – Commonwealth still the top bank [7]
- Peter Switzer – Stock crash coming – NOT! [11]
- Charlie Aitken – Be ready to strike when the price is right [12]
- Rudi Filapek-Vandyk – Buy, Sell, Hold – what the brokers say [13]
- Barrie Dunstan – Is the golden era for super over? [14]
Last week’s Super Reports
- Monday 19 May, 2014: Golden age over [15]
- Thursday 22 May, 2014: Hang in there [16]
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.