Corrections, charts & confusion

Founder and Publisher of the Switzer Report
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I thought I needed to show you the five-year story of what has happened to our beloved, yet underperforming, S&P/ASX 200 index, to explain the topic I’m preoccupied with at the moment. We’ve had a nice run up lately (see the little kick up on the extreme right hand side of the above chart). Since 2010, we’ve made some progress but, at 5582, we’re still a long way from our all-time high of 6828.70.

This is a huge issue because it determines how you play this market and it gets down to a simple question: “Should we forget about correction concerns?”

Overnight, Goldman Sachs put stocks on neutral for the next three months. While this says Wall Street won’t do much, it’s not exactly a call to sell and run away, is it?

I know we have subscribers who are asking how much they should take off the table, ahead of an expected and overdue correction: 20%? 40%? or 50%? No one has told me that they’ve gone to cash totally but as we all know, low interest rates are no motivation to have a huge cashed up play.

Not even the fund managers are trying that kind of thing. Wise operators, like Geoff Wilson of Wilson Asset Management, have about 35% in cash. Like others, he insists he “just can’t see value in this market right now.”

Being an old hand and not ever really given to excessive bullish sentiment, Geoff knows when a market or a stock is underpriced or overpriced. He’s not the Pope, however, and he’s not infallible! (I know this is an outdated belief but it works for comedy!)

I suspect fund managers are using their grasp of history to argue that a correction has to come. One always does, but when? And these are crazy or unique historical times, with central banks letting the money supply run and interest rates are locked in at unbelievably low rates.

Who knows best? Economists or fundies?

Against the fund managers’ views, enter the economist and the econometrician. Economist Marcel Von Pfyffer, founder of Arminius Capital, can’t see the makings of a correction until Fed chairwoman, Janet Yellen, looks like she’s close to raising interest rates.

I made the point in yesterday’s blog for Switzer Daily that Janet won’t succumb to rate-rising until the US economy is going gangbusters (as Paul Keating would’ve put it).

The Yanks aren’t there yet, with earnings and economic readings better than expected on average but it’s not gangbuster’s territory. About 70% of companies are reporting better than expected but the revenue story is still not a stellar one. When profits are good and revenue from sales is looking hot, that’s when things will change. And that’s when Yellen will have to think seriously about her first interest rate rise.

Professor Ron Bewley of Woodhall Investment Research, one of this country’s best econometricians, thinks the correction is on hold until the first interest rate hike comes into sharp focus.

And Marcel makes the same point that Janet and her central bank buddies are making a correction (a 10% stock slump) really hard to create. Right now and for some time going forward, dip-buyers like yours truly will swoop on 3-5% stock slides. This is KO’ing the usual correction, which now has not showed up for a huge 32 months.

But beware the Black Swan

Of course, a left field, or black swan event, linked to Israel or Ukraine could spook the stock market into a correction but it would have to be a bloody big bird shock. In fact, Wall Street’s notable negativity overnight was linked to Ukraine and Gaza concerns, though Amazon’s disappointing earnings report saw 11% come off its share price!

However, even with a huge geopolitical scare, there would be dip-buyers willing to bet that the market slide would be short term.

Can’t wait for September

Against all this comes the view of resources analyst at moneymorning.com.au – Jason Stevenson. He starts off his piece entitled “The stock market correction that’s coming in September 2014” with “I’m wildly bullish on the stock market.”

I have to say I don’t know how he can be so confident about his correction call but at least he is not a perma-bear, so let’s hear him out.

In fact, he’s a big bull, thinking low interest rates could propel the Dow to 21,000!

He offers three reasons for a September sell off:

  • First, it’s over a 1,000 days since the Dow corrected, which is the 5th longest no correction streak since 1928. (The longest run on record without a 10% correction was 1,127 days and that was between July 1984 and August 1987.)
  • Second, US pension funds pay out retirees in September and sell stocks to do so. Since 1990, the Dow has fallen 20 times in that month, which is 83%!
  • Third, European bank stress tests are released in September and less than impressive results are expected.

This is interesting analysis but the third one is a guess and the second one ignores historically low interest rates (though it has the most merit when you note the all-time high territory for US stocks now). That said, on the first argument, if we can go 1,127 days in the 1980s when interest rates were unbelievably high, why can’t we crush that record when rates are unbelievably low?

Where do I stand?

I’m leaning towards the economists on this one! Fund managers and my technical guys are more negative. I don’t like ignoring them but, unless a black swan sails into our economic picture, I think, say a 5% slide in stocks, would bring in buyers to stop a 10% stock dumping.

If the run of economic and earnings’ readings points to a US gangbusters situation, then we’ll see a correction, as rates and the greenback rise. It won’t last long, however, as the strong US story will bring bargain hunters and those with cash on the sidelines into the stock market.

I never thought I’d say this but Dow 21,000 could be possible in this cycle! It will be in the hands of Janet Yellen and her central bank buddies around the world.

I still can see a stock sell off but without a pesty black swan, which by definition is hard to see, then it will be up to Janet, the economy and earnings.

And that’s why I’m watching them like a Labrador eyeing off a sausage at a barbecue.

(One thing does spook me. I’ve written this in Perth this morning, home of the black swan!)

Top stocks – how they fared

Numbers that moved the market:

The Aussie Consumer Price Index – our main measure of inflation – rose by a tame 0.5% during the June quarter, but the annual rate of inflation rose by 3.0%. However, the RBA likes to go off an underlying CPI measure which excludes volatile items – this came in at an annual rate of 2.8%.

This week consumer confidence hit a 13-week high, according to the ANZ-Roy Morgan Consumer Confidence Rating. In the week ending July 20, confidence levels rose 4.4% to 113.5

The HSBC/Markit Flash China Manufacturing Purchasing Managers’ Index (or PMI) expanded at its fastest pace in 18 months – lifting from 50.7 in June to 52.0 in July.

Facebook reported great financial results for the June quarter – revenue of US$2.91 billion – that’s a 61% increase since last quarter!

The week ahead:

Australia:
Tuesday July 29 – New home sales (June)
Thursday July 31 – Private sector credit (June)
Thursday July 31 – Import & export prices (June quarter)
Thursday July 31 – Building approvals (June)
Friday August 1 – RP Data/Rismark home prices (July)
Friday August 1 – Performance of Manufacturing (July)
Friday August 1 – Producer price indexes (June quarter)

Overseas:
Monday July 28 – US Pending home sales (June)
Tuesday July 29 – US Consumer confidence (July)
Tuesday July 29 – US Case Shiller home prices (May)
Wednesday July 30 – US Economic growth (June quarter)
Wednesday July 30 – US Federal Reserve meeting
Wednesday July 30 – US ADP employment (July)
Thursday July 31 – US Challenger job layoffs (July)
Friday August 1 – US Non-farm payrolls (July)
Friday August 1 – US ISM manufacturing (July)
Friday August 1- US Personal income (June)
Friday August 1- China Purchasing managers index (July)

The spotlight in Australia next week is on housing, with new home sales data for June due out on Tuesday from the Australia Housing Industry Association, building approvals for June from the ABS on Thursday, and on Friday, RP Data/Riskmark releases their Home Values index. The ABS also publishes private sector credit figures for June on Thursday, and on Friday, the Performance of Manufacturing index (PMI) for July will be released by the Australian Industry Group.

And the US is rolling out a wave of data next week with pending home sales for June on Monday, and consumer confidence for July issued on Tuesday. A key piece of economic data – US economic growth – is out on Wednesday, so we’ll see if their economy has bounced back from the harsh winter weather. The Fed also meets on Wednesday to discuss bond purchases. On Friday night, another big report in the monthly US non-farm payrolls data will be released.

Calls of the week:

Foreign Minister Julie Bishop made a powerful speech at the United Nations Security Council, which demanded the cooperation of Russia for a thorough and independent investigation into the MH17 plane crash.

PUP senator Jacqui Lambie delivered a TMI moment (too much information) this week during a radio interview, when she made some very distasteful comments about what she finds ‘’desirable’’ in a man. If you’re game enough, you can listen here.

Now moving on to something a little more classy… this week the Queen made headlines when she “photobombed’’ a photo of two Australian Commonwealth Games hockey players – with a huge smile! Apparently the photo was retweeted almost 7,800 times within nine hours of being captured.

And this week, Joe Hockey displayed what some observers are describing as “self-indulgent” behaviour with the timing of the launch of his authorised autobiography; Hockey: Not Your Average Joe. He said there would be ‘’no apologies made’’ for the content, which references how he believed his first Budget was “too soft.”

Food for thought

Don’t judge each day by the harvest you reap but by the seeds that you plant. – Robert Louis Stevenson

Last week’s TV roundup

It’s a new financial year, so is it time for you to change your investment approach? In this special Super Sessions update, Paul Rickard and Peter Switzer say it could be the right time to re-evaluate your investment objectives and your risk profile.

What stocks will continue to shine throughout earnings season, and will there be an earnings recovery? Martin Lakos from Macquarie Private Wealth joins Peter Switzer to give his expert opinion.

Wouldn’t it be nice to back a fund that delivers returns to its shareholders and also supports children’s charities? Geoff Wilson from Wilson Asset Management tells Peter Switzer about The Future Generation Investment Fund.

Do you want some real diversity in your portfolio? Find out how US micro-cap specialist THB, and Australian company Brookvine, are working together to help investors get exposed to quality international companies.

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 Mineral Resources (MIN) who had its short position increase by 2.86% to 10.51%.


Source: ASIC

My Favourite charts:

The above chart demonstrates the post budget blip in consumer confidence and that we are now starting to see some improvement!

The Northern Territory leads the way in terms of economic growth during the March quarter – 36% higher than the average quarterly growth over the last 10 years.

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Recent Switzer Super Reports