Who didn’t go to bed wondering how much the Dow would dive, after our S&P/ASX 200 index slumped 73.7 points (or a big 1.34%) to 5435.30 yesterday? Well, maybe normal people were pondering how their footie teams would go or if they’d have to cheer or console their kids after another day of battle on the sporting field. I suspect, however, that many of you were asking, “is this the start of that overdue correction?” before you slipped into the land of nod.
As I write, just before the closing bell on Wall Street, and as newsreaders tell me that the US air force is bombing ISIS (or ISIL) positions in the north of Iraq (pronounced by Americans as “I-rack”), the Dow is up over 180 points. Go figure that one, but I guess that’s my job, so here goes.
What just happened?
For starters, we learnt that the Middle East is a minor worry for Wall Street, with the surprise optimism for the stock market coming from the good news that Russian troops had concluded their war games, which looked more like an exercise in threat, earlier than expected.
This took the Putin pressure down and helped US traders to buy back in at lower levels, which undoubtedly will be mirrored here on Monday.
The exercise proves that geopolitical concerns can move the market short term but the underlying market fundamentals are keeping big market players positive for the longer term.
Fundamentals count and US reporting season and the US economy both support being positive on stocks. It’s going to take a serious global gatecrasher to ruin this stock market party.
Certainly the spook factor is low on Wall Street, with the VIX (or Fear index) down over 5% overnight to around a low 15.7. And the most-watched real world indicators of fear – gold and oil – are simply telling me that panic is on a firm hold.
Back to the unreal world
Away from the harsh reality being doled out north of Baghdad and in the Gaza Strip, the world’s leading economy and stock market had more reasons to remain long stocks, with non-farm productivity spiking more than expected in the June quarter. At the same time, labor costs were subdued, all saying wages won’t be a threat to low inflation. Meanwhile, the economic story was helped by a narrowing of the trade deficit, down 7% to $41.5 billion in June. The services sector hit an 8½-year high (see below), while factory orders rose by 1.1% in June, above forecasts of a 0.6% gain. And chain store sales rose by 4.6% on a year ago, up from the 3.0% annual gain recorded the previous week. Finally, the Employment Trends index rose from 119.32 to 120.31 in July. All this says that the QE3 game played by the Fed is producing results. Therefore it’s not unrealistic for me to tell you that being long stocks, until at least into 2015, makes perfect sense.
The only challenge is whether we’ll see a 10% or more correction. Given what happened overnight, we’re going to have to see something seriously scary to spook Wall Street.
An admission
Last weekend, on route to Sydney from Melbourne after a great weekend’s break, I bumped into a nice family in an airport lounge. The kids were ranged from bookish to cute and all well behaved. The Mum was ever watchful and the Dad had one eye on his team and the other buried in a pile of newspapers.
He later came over to say hello, which was a nice touch from the Leader of the Opposition. Tony was also more accessible before he had the top job.
Bill revealed that his wife asked: “What’s he (meaning me) like?” He confessed that he said: “I think he’s his own man.”
I liked the answer and Bill went up in my estimation. Now he has to sort out a whole set of policies so I can say some nice things about him!
What is Joe on?
I’ve said before that Joe Hockey is a mate but I think he’s being poorly advised at the moment. The book? The whinge about being picked on by the media? And using that dodgy unemployment figure to try and talk the Senate into passing his Budget? I know he’s a politician but talking the economy up is more important than getting that average Budget across the line.
I bet that unemployment number will be seen as unreliable because ANZ job ads, retail and housing data, as well as recent takes on the services sector and even manufacturing, all say that this economy is a whole lot better than the incorrect headline in the SMH on Friday, which read: “Jobs hit 12-year low”. It should have read “Unemployment at 12-year high”. I preferred mine on Switzer Daily, which was “Stop the presses: 109,000 jobs created!”
Yep, that’s the better story since January and it will underpin an improving economy and a stock market that will keep heading up into 2015.
But what it does between now and December, when I expect the next big surge, is anyone’s guess. Here at the Switzer Super Report, we’ll keep trying to get it right.
P.S.: I know I’m my own man because neither Labor nor the Coalition ever invite me to their media suck up parties and I have to say I’m pretty happy about that!
Top stocks – how they fared
Numbers that moved the market
Retail trade lifted a higher than expected 0.6% in June, following a 0.3% fall in May. Inflation-adjusted retail sales grew by 3.1% in the 2013/2014 year, which is the highest annual growth in six years!
The nation’s jobless rate rose to 6.4% in July but the headlines tended to miss the better news about full time jobs: nearly 110,000 full time jobs were created in the first seven months of the year, the best start to a calendar year in six years.
The US ISM index for the important services sector rose to 58.7 in July from 56.0 in June, which is the best reading since December 2005.
The week ahead:
Australia:
Monday August 11 – Lending finance (June)
Tuesday August 12 – NAB Business survey (July)
Tuesday August 12 – Credit & debit card lending (June)
Tuesday August 12 – Residential property prices (June Quarter)
Wednesday August 13 – Wage price index (June quarter)
Wednesday August 13 – Consumer confidence (August)
Thursday August 14 – Average weekly earnings (May)
Overseas:
Tuesday August 12 – US Federal Budget (July)
Wednesday August 13 – US Retail sales (July)
Wednesday August 13 – China monthly data (July)
Thursday August 14 – US Trade prices (July)
Friday August 15 – US Producer prices (July)
Friday August 15 – US Industrial production (July)
Next week, wages take the spotlight in Australia. On Wednesday, the ABS will release the Wage Price Index for the June quarter, and the biannual Average Weekly Earnings series using the May reference period will be published on Thursday. Other data to be published includes lending finance figures on Monday, and the Westpac-Melbourne Institute Consumer Confidence index which is out on Wednesday.
Overseas, US Retail Sales for July will be released on Tuesday, and US trade prices for July will come out on Thursday. Key monthly activity data for China will be published on Wednesday.
Calls of the Week:
In Thursdays Switzer Super Report, Charlie Aitken backed James Packer’s vision to take Crown Casino to Vegas, and said investors should use the share price pullback to increase their weightings in this stock.
Putin’s call of the week was to respond to Western sanctions by banning Western food imports for one year – including imports from Australia!
Glen Stevens announced the Reserve Bank Board’s decision to keep interest rates ‘on hold’ for the 13th consecutive month at 2.5%.
The Attorney General George Brandis made headlines this week when he struggled a little in a television interview to articulate what “metadata” is.
Food for thought
Age is not important unless you’re a cheese – Helen Hayes.
Last week’s TV roundup
Charlie Aitken is back from his European holiday and was bursting to tell my Super TV viewers what stocks he is tipping right now and what he is expecting from the earnings season.
In this special Super Sessions update, my colleague Paul Rickard and I discussed the strength of the market in July, its standout sectors, and what would need to happen to make this market gain momentum.
Will this overdue correction arrive, or will dip buyers stop the market falling by 10%? George Boubouras from Equity Trustees told me what he thinks, and gave some great tips on how to prepare your portfolio if a correction does happen.
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, short positions were closed in some retail stocks, with JB H-Fi (JBH) decreasing by 1.10% to 12.28% and The Reject Shop by 1.31% to 10.03%.
Source: ASIC
My Favourite charts:
Wasted opportunity? Our unemployment is now higher than the US!
Source: UK Telegraph
Retail spending has a healthy lift!
Source: ABS, CommSec
Top five clicked on stories
- Charlie Aitken: NAB moves to my No.1 bank recommendation
- Peter Switzer: How to deal with the Dirty Harry problem
- Tony Negline: My SMSF – all about income
- Ron Bewley: Yield Portfolio – the final cut
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say
Recent Switzer Super Reports
- Thursday, 7 July 2014: Shake, Rattle and Roll
- Monday, 4 August 2014: Ask yourself one question
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.
