Switzer on Saturday

End of days? Or the start of opportunities?

Founder and Publisher of the Switzer Report
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The drumsticks are rolling but this is only the start, with the US earnings season set to give us a day-by-day revelation of an unfolding drama that will end up being called “The end of days” or “The start of opportunities”. Sorry about the excessive melodrama but the earnings looming snapshot, added to the better looking economic big picture in the US, will send Wall Street in one direction or the other, though there are not two but three possible outcomes we have to be ready for.

(Oh, in case you’re interested, the Portugal bank worry again was dismissed by the Yanks but it helped that the Portuguese bank and the country’s PM KO’d fears about his financial system.)

Back to the unfolding drama. So what are the three scenarios?

First, earnings over the next three weeks are better than expected, as is often the case in the US where they have a tendency to come in about 2% better than early guesses of companies. If this happens, current stock valuations (said to be high) would be justified and stocks could grind higher.

Already Alcoa, usually seen as a good bellwether stock, has reported better than expected but Wells Fargo, regarded as just about the best bank in the States, only beat revenue by the proverbial bee’s appendage and its shares headed south.

The bank’s profit was up 3% but its CEO, John Stumpf, gave the economy a thumbs up. He pointed to businesses including capital markets, corporate banking, commercial real estate, debit card and personal lines and loans had improved in the second quarter compared with the first.

“Our results … reflected strong credit quality driven by an improved economy, especially the housing market, and our continued risk discipline,” he said. (Reuters)

Second, earnings disappoint and the masters of disaster (the likes of Marc Faber and Peter Schiff) get their crash, which I think can only happen by a left-field event. That’s why the problems with Portugal’s biggest bank worried me a little, especially when I saw the German DAX stock market index dive at the same time, making me ponder the interdependent nature of European banks. A domino effect could create a doom and gloom outcome so I’m happy to see the “have no worries” comforting from Banco Espirito Santo in Portugal. We can trust bankers, can’t we?

This second and scary scenario could also be created by much better than expected earnings and economic data in the US, so the expectation of the first US interest rate rise from the Fed is brought even closer by the key market drivers (institutions, hedge funds, etc.) and stocks dive bigger than expected.

By the way, there is a belief that many US banks will not report all that well. If this is right, it could create some market negativity but not a big stock dumping. However, if they beat expectations, it would send stocks up. These will be big news next week.

Here is the roll call for reporting next week:

  • On Monday, Citigroup reports earnings.
  • Tuesday: Goldman Sachs, Intel, JP Morgan Chase and Yahoo! are the biggies.
  • Wednesday: 16 companies from the S&P 500 index report earnings, including Bank of America, eBay, US Bancorp and Yum! Brands.
  • Thursday: Google, IBM and Morgan Stanley step up for show and tell.
  • And Friday, General Electric (a key company for the US economy) reveals all.

So, to the third scenario and this is the mild mannered, overdue correction one where the combined story of earnings plus economics says ‘yes’ rates will rise in 2015, some profits should be taken but the Fed has basically created the improving economy, which has created good conditions for profits and jobs. Thus we won’t overdo the sell off. Why? Because any decent sell off creates opportunities to buy stocks you want for the next two or three years or even beyond if you’re a long term buy and hold investor.

I’m in the third scenario camp because I can’t see the curve ball from left field. You can seldom see the X-factor because, by definition, it’s generally unseeable. However, don’t think for one moment that here at the Switzer Super Report we aren’t looking for that damn fly in the ointment.

My smart comeback of the week

This goes to Bill McBride from the Calculated Risk, where he blogged a good question on Dr Marc Faber’s doomsday predictions:

“Since the market is up 40% since his 2012 prediction, shouldn’t he be expecting something like a 50%+ decline now?”

We are funny old things

The irony is that the more we fear a big sell-off (and even I have often said I expect an overdue correction), the less likely it is that we get a crash any time soon. What our concerns say (and so does the cash on the sidelines) is we are still a little in the scepticism stage of the bull market, meaning the mature stage hasn’t been completed. We’re definitely not in the euphoric stage, which ushers in a crash.

Recall Sir John Templeman’s view on bull markets: “Bull markets are born on pessimism (2009-10), grow on scepticism (2011-13), mature on optimism (2013 -2015), and die on euphoria (2016 or ?).”

I thought 2016 would be the worrying year but it could be pushed out, as we could be partly in the sceptical stage and partly in the maturing one. I might have to be bullish longer than even I expected!

I told an audience last week that I know we are in the maturing stage when taxi drivers ask for tips but I know it’s the euphoric stage when they start giving them to me! Right now, they’re still talking footie and that makes me comfortable with my market calls.

Top stocks – how they fared

Numbers that moved the market:

Businesses’ are increasingly optimistic, with the monthly NAB Business sentiment survey lifting to an index level of +7.9 in June.

The Westpac/Melbourne Institute found that consumer sentiment rose in July by 1.9% to 94.9. Although it’s still a pessimist’s reading, it’s a sign of a slow recovery after all that Budget gloom.

And despite the unemployment rate lifting a tad in June, overall employment numbers increased by 15,900. During the first six months of 2014, around 89,900 new jobs have been created!

The week ahead:

Australia:
Monday July 14 – Lending finance (May)
Monday July 14 – Credit card lending (May)
Tuesday July 15 – New car sales (June)
Tuesday July 15 – Reserve Bank Board minutes
Wednesday July 16 – Building activity (March quarter)
Thursday July 17 – Detailed employment data (June)
Thursday July 17 – Speech by Reserve Bank official

Overseas:
Tuesday July 15- US Retail sales (June)
Wednesday July 15 – US Import & export prices (June)
Wednesday July 16 – China economic data (June/June quarter)
Wednesday July 16 – US Industrial production (June)
Wednesday July 16 – US Capital flows (May)
Thursday July 17 – US Housing starts (June)
Thursday July 17 – US Philadelphia Fed survey (July)
Friday July 18 – US Leading index (June)

On Monday, May data on credit and debit cards will be released – so we’ll see if consumers have become a little more liberal with their money. Lending finance figures for May will also be released on Monday by the Australian Bureau of Statistics. The  Reserve Bank will publish minutes of its last Board meeting on Tuesday, and on Wednesday, building activity for the March quarter will be released.  On Thursday, Reserve Bank official Malcolm Edey will participate in a panel at CIFR.

Key overseas data to keep an eye on includes US Retail sales for June released on Tuesday night, and on Wednesday, there will be June data regarding US import and exports, industrial production, and capital flows. China also takes the stage on Wednesday when it releases its monthly and June quarter economic growth figures. The US takes out the rest of the week with Housing starts figures and the Philly Fed survey on Thursday, and on Friday, the US leading index for June will show if the country’s rate of expansion meets expectations.

Calls of the week:

Graeme Wood and Andrew Brice made the call to cash out of their positions as online travel entrepreneurs’ at Wotif following a whopping $703 million takeover bid from US travel giant, Expedia.

Shinzo Abe’s address to parliament solidified a historic free trade agreement between Japan and Australia – he likened the relationship to “a scrum in rugby.”

This week Clive Palmer had a last minute change of heart and voted against the carbon tax repeal because he was unhappy with the ‘vague’ wording of his amendment, which aimed to pass energy savings back to consumers. Oh, and he also stormed out of an interview with Sarah Ferguson!

Food for thought

The starting point of all achievement is desire – by Napoleon Hill, author of Think and Grow Rich.

Last week’s TV roundup

Morgan’s broker Simon Bond joins Super TV to discuss whether the Wotif.com takeover is a good sign for things to come for other popular internet companies, and he also points out other stocks he is keeping an eye on.

What do you need in your portfolio this financial year, and what super changes do you need to be aware of? Paul Rickard and I give you our insights and explain the new rules and regulations governing your SMSF from July 1.

We are now in the “drop zone” for stocks as US reporting season has finally kicked off, and some pundits are worried US companies will disappoint – so should we be worried? To answer this question, Marcel Von Pyffer from Arminus Capital joins Super TV.

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, who had its short position increase by 0.34%.

My Favourite charts:

We’ve had the strongest boost to tourism inflows in fourteen years. The graph below shows how in just under four years, the number of Chinese tourists to Australia has doubled and is catching up to the number of visitors from New Zealand.

Be nice to Chinese Tourists!

The ANZ measure of job advertisements increased in June by 4.3%, which suggests businesses are in a mood to hire!

Encouraging trend for job advertisements

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