Switzer on Saturday

Iraq irritation, things that keep me bullish, and what got me laughing

Founder and Publisher of the Switzer Report
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Just when I was pondering what was going to seriously rattle the stock market (apart from the excessive rise of Wall St giving way to a bit of a sell off) along comes the crew from ISIS!

Who? In case you’ve missed it, ISIS stands for the Islamic State of Iraq and Syria. Stacked with Sunni militants, they’ve taken the Iraqi town of Baiji and the city of Tikrit in the blink of an eye. A Turkish consul has been violated and an oil refining facility has been affected. Turkey has a Kurdish population and it has never been a happy relationship. And the Turk’s leader is in political trouble, so a war could be good for his waning popularity!

This time last year, we were in Turkey so I’m glad I’m penning this from the tranquility of Saint Pompon, a village in the Dordogne region of France. But stock markets might not be tranquil, with ISIS also taking the city of Kirkuk and setting its sights on Baghdad!

But the next big worldwide worrying step could be Iran’s intervention, as the Sunni-based ISIS tries to overthrow a Shia-ruled Iraq. Iran is also a Shia-run country. This has so many curve balls it has to spook stock markets.

Why? Well, apart from the uncertainty, there’s the oil issue.

The price of oil has already spiked and that will rattle stock markets, with transport companies, airlines and even retailers knocked around as higher petrol prices make consumers less free and easy with their spending.

The 23.7-point fall (or 0.44%) to 5405.10 wasn’t too bad, all things considered, but it was always Wall St’s reaction that was going to count most. So how did it do?

As Homer Simpson said “God bless America” and it’s deserved with the Yanks swallowing the Iraq challenge sending the Dow up. You can criticise Americans but you can never question their irrepressible positivity!

Away from the Middle East, and a Deutsche Bank analyst Tim Baker thinks our earnings outlook was too optimistic as that damn dollar, worsening iron ore and coal prices and the Budget soften the growth path of the economy. He’s dropping risky assets, such as mining stocks. This comes as Bank of America Merrill Lynch is also warning about our earnings forecasts. The experts there think retailers and contractor businesses will be challenged.

Of course, they could be wrong but the dollar, the Budget and commodity prices have been negatives on an economy, which was killing it up to March.

Baker is not dumping banks but is not expecting outperformance and not doing handstands for the likes of Wesfarmers and Woolies.

That said, he thinks the Oz dollar will hit US85 cents towards the end of 2015 and that will help our stock market. However, that’s one man’s, or institution’s, view on the dollar.

Another institution that sent me its dollar forecasts has the dollar at US 87 cents by September this year! And they say it will be US 85 cents by December, then 80 cents by December 2015!

If these guys are right, then the Deutsche Bank scenario will be seen to be too gloomy. So the dollar holds the key, as I think the Budget will fade away as a negative, with both business and consumer confidence sneaking up this week and these were post-Budget readings. Also, unemployment held nicely at 5.8% and while employment fell by 4,800, they were mostly part-time jobs, as full-time work rose by 22,200 in May. (I have more to say on this later!)

Things that keep me bullish

  • The UK economy grew by 0.9% in the March quarter and GDP is now 0.2% over its pre-Great Recession peak in 2008!
  • UK manufacturing rose at the fastest rate in three years and the chief economist at Markit, Chris Williamson, proclaimed: “British factories are booming!”
  • Also, the demand for passports in the UK is booming, which is a great recovery sign as recessions don’t encourage global travelling.
  • France got past its old GDP high earlier than the UK but Italy, Spain and Greece will have to wait for that milestone.
  • Total lending in Australia rose by 3.5% in April, the strongest gain in five months. Lending totalled $69.4 billion, a six-year high and up by 26.7% on a year ago.
  • China socking it to the doubters with this lot: industrial production up 8.8% (annual rate) in May, in line with forecasts and up from 8.7% in April. Retail sales rose at a 12.5% annual rate in May, above forecasts of 12.1% and above the 11.9% annual growth in April. It was the fastest annual growth in retail sales for four months. Finally, fixed asset investment rose at a 17.2% annual rate in the five months to May, above the forecast average of 17.1%.
  • New mortgage applications in the US rose by 10.3% in the latest week, with the Purchase Index up 9.3% and the Refinancing Index up 11%.

What I didn’t like

  • The World Bank cutting the global growth figure from 3.2% to 2.8%. Luckily, they forecast as well as jockeys tip!
  • This ISIS thing in Iraq, though it will create a buying opportunity for stocks, I suspect.

What got me laughing

  • The claim that Apple negotiated its tax rate down from Ireland’s 12.5% to 2% but the company says it pays its right tax levels!
  • Ray Kelvin started clothing business Ted Baker in 1987 in a menswear shop in Glasgow and it now generates over 300 million pounds a year and has a market cap of over 850 million pounds. Why did he call it Ted Baker? He says because he feared it would go bankrupt he didn’t want to ruin his own name!
  • The UK’s Daily Telegraphsays an Italian hotel owner created a list to stop wealthy Russian tourists acting like tossers! His list said:1. Don’t order cappuccino for lunch. It’s for breakfast.

    2. Food won’t come all at once, so don’t expect it.

    3. Don’t wear stilettos with bikinis around the pool; and

    4. Don’t show off by ordering the most expensive bottle of wine on the list!

    It made me laugh but you have to wonder why Italy has a few economic challenges.

  • Meeting Chris, a subscriber to this newsletter at 2pm last Saturday in the Europcar hire shop in Bordeaux, who said to me when he saw me: “I’ve just been reading your Saturday newsletter!” And I replied: “I only just finished it in Abu Dhabi, eight hours ago!”

Top stocks – how they fared

Numbers that moved the market

NAB Business Confidence Survey for May showed business’ weren’t too worried about the ‘tough budget’.

Regardless of this, consumer confidence was still negative, rising just 0.2% to 93.2.

If you listen to mainstream news outlets this may come as a surprise, but unemployment remained steady at 5.8% in May. Full time jobs were up a solid 22,000.

The week ahead

Australia

Monday June 16 – Speech by Reserve Bank official
Tuesday June 17 – Reserve Bank Board minutes
Tuesday June 17 – New motor vehicle sales (May)
Tuesday June 17 – Agricultural commodities (June)
Thursday June 19 – Population (December quarter)
Thursday June 19 – Reserve Bank Bulletin
Thursday June 19 – Detailed labour market (May)

Overseas

Monday June 16 – US Industrial production (May)
Monday June 16 – US Capital flows (April)
Monday June 16 – US NAHB Housing Market Index (June)
Tuesday June 17 – US Consumer prices (May)
Tuesday June 17 – US Housing starts (May)
Tuesday June 17 – US Federal Reserve meeting
Wednesday June 18 – US Federal Reserve meeting
Thursday June 19 – US Leading index (June)
Thursday June 19 – US Philadelphia Fed survey (June)

The Reserve Bank Board minutes will be released on Tuesday. These minutes are from a fortnight earlier – so we’ll find out if there was any comment made on the Federal Budget. The Reserve Bank will also release its Bulletin publication on Thursday – a quarterly compilation that is all things ‘markets and the economy,’ while the Australian Bureau of Statistics will deliver detailed labour market figures for May.

There is a huge amount of U.S. data coming out next week, including the release of significant economic indicators such as May industrial production figures, data on capital flows, and consumer prices. The U.S. Federal Reserve also starts a two day meeting on Tuesday, and on Thursday night, the Philly Fed Survey as well as the U.S. Leading index will be released.

Calls of the week:

John Oliver’s hilarious piece on the World Cup is a must-watch – he details all the things wrong with the FIFA organisation, including many allegations of corruption made against them – some of which might surprise you!

Tony Abbott made Marie Bashir a Dame this week, but did anyone even hear about it? It seems Abbott’s controversial revival of the British honorific system didn’t receive too much coverage in the media this week.

And Morgan Stanley was the first to forecast that the Aussie dollar will reach parity with the U.S. this year.

Food for thought

An investment in knowledge pays the best interest – Benjamin Franklin

Last week’s TV roundup

This week on Super TV, Shane Oliver takes us through employment figures, and gives us his opinion on the state of the economy, as well as the local and global markets.

A recent ATO report has revealed there are now over 1 million SMSF members in Australia. The sector has seen huge expansion over the past 10 years to reach this milestone, but there are now signs the growth is slowing. To discuss, Marty Switzer is joined by Peter Burgess from AMP SMSF.

The housing market has seen some very impressive growth over the past 12 months, but has it run up too far? Paul Rickard and I look at the numbers, and talk about where the property market is headed next.

What are the main issues facing investors coming into the new financial year, and what should you do to make the most of the changes? Paul Rickard joins Marty Switzer to talk about end of financial year, the markets, and our model portfolios.

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 Paladin Energy (PDN), where the short position increased by 0.69%.

My favourite charts

Full time employment rose by 22,200 in May, and is up by over 100,000 this year!


NAB business confidence remained unchanged during May at +7 index points, which means the Budget didn’t spook business as much as the media let on.

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