Great growth, go the US and Guy Grossi’s grub

Founder and Publisher of the Switzer Report
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After July delivered us a wallet widening 4.4% rise in stocks, along comes a day like Friday with the Dow’s 317 point slump rolling us into a 1.4% drop for the S&P/ASX 200 index. However, it was worth noting that the S&P500 index on Wall Street was down 2%, completing a week where one of the notable trends I referred to nearly all week was the fact that we rose by more and now have fallen by less than the Yanks.

I like this trend and I hope it continues.

Richard Morrow of Baillieu Holst, (who regularly spars with my mate from Sky, the irrepressible Janine Perrett, who’s back from a two-week break on Monday) is tipping a mini-correction in global equities over the next couple of weeks.

That said, he seems to be on a unity ticket with me after saying this to Fairfax: “Consensus expectations for the ASX200 predict earnings per share growth of between 5 to 10% seem very reasonable.”

If this happens, our stock market could easily fall by less than Wall Street and rise by more for the rest of the year.

On the big issue

I’d love to stop focusing on the big issue:  when will the Fed raise interest rates? However, it remains exactly that: the big issue. And the jobs report came in at up 209,000 jobs, which was less than expected, and unemployment went up from 6.1% to 6.2%. The market seems to think this result will delay the first rate rise so yesterday’s stocks sell off becomes less worrying but we’re only playing around with time. One day, the rate rise story will become so irrefutable that stocks will fall until sensible investors buy back in. Until then, we’ll have to go along for the ride.

In reality, the jobs report was still a good number and you should never get too excited by one month’s figures or the rise in unemployment. However, it makes the market think that the inevitable rate rise, which looked closer after the good June quarter economic growth number mid-week, now might be a little further away.

This is why Wall Street was only down 0.42% on the Dow overnight.

Probably the more important piece of economic data was the ISM Manufacturing index that went from 55.3 in June to 57.1 in July, which is the best reading since April 2011. This number says that US factory production is growing at the fastest rate in over three years!

And get this: the employment component of this index went from 52.8 to 58.2, which is a huge step up.

Remember, a strong US economy will bring a rate rise closer and that will help our stock market, via the dollar. This week UBS’s Jakov Males, CMC’s Michael McCarthy, Eley Griffiths’ Ben Griffiths, and everyone else whom I interviewed on the subject, agreed with me that a lower dollar will boost our market.

What I didn’t like this week

  • QBE’s new admission of failure  – nothing more to say except I was glad they didn’t suck me in, though I was close.
  • Argentina missing an interest payment deadline, which means it’s in default but the country’s economic minister is in denial. Could this be a black swan event that could cause a correction? Wall Street seemed to ignore it overnight. I won’t cry for Argentina.
  • Europe’s economy and markets aren’t responding positively enough. The Manufacturing PMIs were down a little and shares were off 2.9%, though a fair bit of that came over US correction concerns from Thursday.

What I did like this week

  • The Oz dollar finishing the week at 92.84 US cents. You know I want a lower dollar for our stock market to spike despite Maureen (my wife) hoping it falls after we take the TV show to Wall Street in the first week of December. Shopping in New York is always more justifiable with a stronger dollar!
  • A statistical kick in the butt for the doomsday merchants, who played down the big freeze story for that weak March economic growth minus 2.9% figure for the US. Go the US economy! That 4% growth in June really rubbed it into the face of the doubters (more on that below).
  • Other data, such as the “flash” services index for the US coming in at 61.0 in July, which beat forecasts of 59.8; the US consumer confidence index rose from 85.2 to 90.9 in July, well above forecasts for a result near 85.3; European shares rose on Tuesday in response to better-than-expected earnings from major companies.
  • The ANZ-Roy Morgan Consumer Confidence Rating rose by another 2.4% to a 7-month high of 116.2 in the week to July 27. Last week it went up 4.4% to a 13-week high to cancel out the Budget’s negativity.
  • New home sales rose by 1.2% in June to be 13.4% higher than a year ago and private sector lending rose by a larger-than-expected 0.7% in June after a 0.4% rise in May. Annual credit growth rose from 4.7% to 5.1% – the strongest growth in over five years!
  • The official (National Bureau of Statistics) purchasing managers index for Chinese manufacturing rose from 51.0 to 51.7 in July, ahead of forecasts of 51.4.
  • Charlie is back from his Clark Griswold family adventures around Europe.
  • Interviews this week with Ben Griffiths of Eley Griffiths, who says they have positioned their successful small cap fund for smaller cap resource stocks! And the companies that Jakov Males likes with a lower dollar, though QBE let him down, big time.
  • My long-term tip on NAB getting the thumbs up from the likes of Charlie and the new CEO’s arrival (more on that below).
  • And finally, finishing off the week with a speech in Melbourne on Friday and taking Maureen to Guy Grossi’s Florentino Upstairs for her birthday and actually seeing the celebrity chef working his butt off in the kitchen. I met Guy in Shanghai when we took the show to the World Expo and he’s a great Aussie icon. I know he’s Italian but there are few more ‘dyed in the wool Aussies’ in the country!

Top stocks – how they fared

Numbers that moved the market:

There was great news for the Yanks this week – their economy grew at an annual rate of 4% during the June quarter, well above forecasts of a 2.9% gain.

The US Employment Cost Index (ECI) rose 0.7% in the second quarter, higher than expected, with many believing this was the driver of the big Thursday night sell-off.

Despite Aussie building approvals coming in lower than expectations this week, new home sales lifted 1.2% in June, and are now 13.4% higher than a year ago.

The week ahead:

Australia:

Monday August 4 – Retail Trade (June)
Monday August 4 – ANZ Job Advertisements (July)
Tuesday August 5 – TD Securities Inflation gauge (July)
Tuesday August 5 – International Trade (June)
Tuesday August 5 – Reserve Bank Board Meeting
Thursday August 7 – Employment/unemployment (July)
Thursday August 7 – Tourist Arrivals (June)
Friday August 8 – Housing Finance (June)
Friday August 8 – Statement on Monetary Policy

Overseas:

Sunday August 3 – China Services sector index (July)
Tuesday August 5 – ISM Services index (July)
Tuesday August 5 – US Factory Orders (June)
Tuesday August 5 – China HSBC PMI (July)
Wednesday August 6 – US Trade Balance (June)
Friday August 8 – China Trade Balance (July)

Next week investors will be paying close attention to retail trade figures for June due out on Monday, and July employment figures to be released on Thursday. The Reserve Bank Board meets on Tuesday to discuss the latest inflation result, with all commentators expecting the RBA to leave the cash rate unchanged at 2.5%. At the end of the week, the RBA will release their quarterly Statement on Monetary Policy.

We’ll be seeing less of the US next week, with China producing a Services Sector Index for July on Sunday, the HSBC Purchasing Managers Index for July released on Tuesday, and their Trade Balance coming out on Friday. The US does have a few items on their agenda next week, with the ISM Services Index for July along with Factory Orders for June on Tuesday night, and on Friday, the US Trade Balance for July.

Calls of the week:

This week, Peter Boockvar, chief market analyst at the Lindsey Group, told CNBC:

“The Fed is not going to be able to wait a year to raise interest rates; what they should do is raise them at the end of this year, what they will do is move at the beginning of next year, as opposed to the middle or end, which is what people think”.

Just when you thought all of these political book launches were done and dusted, enter Greg Combet’s memoir – The Fight of My Life – launched by former PM Julia Gillard. The book reveals how Gillard wanted Combet to lead Labor into the last election, but he passed up the offer.

Maybe he borrowed the idea from Paul Rickard; Independent Senator Nick Xenophon said he’ll introduce legislation in the spring session of parliament that will allow first home buyers to borrow money from their superannuation in order to secure a deposit.

And just a day after Charlie Aitken made the call that NAB is his preferred bank, NAB’s CEO Andrew Thorburn reshuffled his Group Executive Leadership Team on his first day in the job!

Food for thought

Only the guy who isn’t rowing has time to rock the boat – Jean-Paul Sartre.

Last week’s TV roundup

Only one in five Australians uses a financial advisor. Should more people rely on them, and will the FOFA reforms make any difference? To evaluate how important the FOFA reforms are, Mark Rantall from the Financial Planning Association of Australia, and our very own Paul Rickard, joins Super TV.

Switzer Financial Group’s senior financial advisor, David Hardman, gives us his wish list for the financial advice industry. He tells us what he likes and doesn’t like about this important sector which helps Australians build their wealth.

In this special Super Sessions update, I talk to Paul Rickard about the leaders in the materials sector, and we discuss whether it’s time to re-evaluate your exposure.

Each quarter we check in with the country’s top chief financial officers to see how the economy is travelling. This week, Keith Skinner from Deloitte gave us the rundown.

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.

Both Iluka Resources (ILU) and Fortescue Metals (FMG) had their positions stocks sold short increase by 0.81% to 10.20% and 8.25% respectively.

Source: ASIC

My Favourite charts:

US Consumer Confidence shows a serious boost post GFC!

Source: The Conference Board/Harver Analytics

 

Australian New Home Sales bounce back after a 15 year low

Source: Housing Industry Association, CommSec

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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.