It was only six days ago that I argued that I was ‘right’ on my 6000 call for the stock market by year’s end but it could be a little delayed! And then by the week’s end, I advanced the argument put forward by US market watcher Dennis Gartman that maybe we’re looking at, wait for it, a market melt-up!
Recall that I think we’d need a scary, black swan event to give us a chance of seeing a 10% correction because the economic news is generally so good and interest rates are so low that dip buyers will be keen to go long stocks whenever the market dives at least 5%. (A Russian convoy of 90 trucks carrying supplies for humanitarian reasons crossed into Ukraine overnight, if they’re attacked, it could really hurt this week’s optimism.)
Technical experts think we need a correction to bring us back to fair value but those historically low interest rates are distorting the normal way markets play.
Against this, we’re close to the most troublesome months of all – September and October – and we hit them as the S&P 500 has made record highs 28 times this year, though it lost a few points overnight probably down to the convoy concerns. Some analysts argue that both Janet Yellen, the Fed boss, and Mario Draghi of the ECB said all the right things at the central banker double header at Jackson Hole, which stopped stock markets give into geopolitical worries.
But September awaits…
History shows the key US stock market indexes usually perform the poorest in September. Since 1950, the month has seen an average decline of 1.1% for the Dow, and a 0.7% decline for the S&P 500. Why? Summer brings low trading volumes but in September, when autumn (or fall as the Yanks call it) starts, investors return to work and exit positions they’d been planning on selling. I think this is a bit dodgy. I suspect the fact that mutual funds end their fiscal year in this month is more influential, as fund managers sell off dud stocks before year-end.
But there has to be a catalyst and without one, we could see the market melt-up!
How a market melt-up happens
Try a very good company reporting season – tick! Continuing good economic data – tick! A central bank that won’t raise interest rates until the economy is going gangbusters – tick! And the Russian-Ukraine heat cools down – if this had copped a tick it would’ve been market-melt up time.
Macquarie this week gave the US a thumbs up. If you don’t have exposure to overseas markets in your portfolio, maybe an ETF for the S&P 500 could be the shot. Any foreign play could also bring a currency windfall when the Oz dollar eventually falls.
And the stock or company reporting news has been great locally as well.
We had seven sessions in a row of the market on the rise and we’re at six-year highs. And while earnings aren’t shooting the lights out, they’re pretty good and there have been encouraging outlook statements.
That said, earnings have helped our market go higher – unquestionably. We’re up 2.4% since mid-August and if the Yanks keep spiking higher, we’re set to go along for the ride.
CEOs views on our economy
This week I interviewed Wesfarmer’s Richard Goyder. What a company this has proven to be! He is positive on his company’s future and his company cuts across a lot of Australia. He even was talking up coal. Meanwhile, I was impressed with Seek’s CEO Andrew Bassatt and I especially liked the fact that he agreed with me that the latest 6.4% unemployment number isn’t telling the true employment story. I suspect he likes the ANZ job ad numbers better and his own company should even be a coalface test of where our economy is going.
15 good omens
I have 15 reasons to like our economy and these will help companies’ earnings going forward.
- First, part of that 6.4% unemployment number was caused by a rise in the participation rate, which is seen as a positive economic sign.
- Second, we have created 109,000 full-time jobs since January and that has to help consumer spending going forward.
- Third, lending hit a six and half year high in June, rising 7.6%.
- Fourth, business lending – a problem since the GFC – rose 12.1%.
- Fifth, interest rates look to be on hold for a long time, with the RBA recently saying: “Inflation is well contained and with plenty of ‘spare capacity’ in the labour market, inflation is unlikely to lift significantly.”
- Sixth, inflation adjusted retail sales grew by 3.1% in 2013-14 – the best annual growth in six years.
- Seventh, dwelling approvals for the past year are up 16% and dwelling starts lifted by 8.7% in the March quarter – the strongest result going back 30 years.
- Eighth, the ANZ jobs ads – a good forward indicator – has risen for nine months in a row.
- Ninth, the manufacturing PMI has crept into expansion territory for the first time in a long time, at 50.66. Any reading above 50 means the sector is expanding.
- Tenth, the Ai Group’s Performance of Services index rose to 49.3 points in July, which means less contraction and it’s nearly expanding.
- Eleventh, consumer confidence continues to rise from the post-Budget slump.
- Twelfth, the 17% rise in the stock market.
- Thirteenth, the related 13% jump in super after five years of rises.
- Fourteenth, the prospect of a falling dollar will boost growth and stocks.
- And finally, fifteenth, the trend annual growth in tourist arrivals is the strongest in 14 years and Chinese tourists coming here hit a record high of 769,200 in June, up 11.4% in a year.
Recapping on reporting
AMP’s Shane Oliver has done the numbers on our reporting season and concludes “the bottom line is that the June half earnings results are nowhere near as bad as many feared.”
Here’s the summary:
- 53% of companies have exceeded expectations (compared to a norm of 43%), the best result in nine years!
- 71% of companies have seen their profits rise from a year ago (compared to a norm of 66%).
- 67% of companies have increased their dividends from a year ago (up from around 60% in the last two years).
- 58% of companies have seen their share price outperform the market on the day they released results, the best result in four years.
This chart above will make dividend chasers smile – something we’ve actively encouraged. I’m not giving up on the chase for yield just yet, despite the fact that looking to position yourself for stocks that will do well out of a lower dollar, eventually, makes good investment sense.
Macquarie’s Martin Lakos thinks Computershare, James Hardie and Brambles are typical stocks that fill this bill.
What I liked this week
- The S&P 500 hitting all-time highs.
- The prospect of the market melting-up.
- Former AFR lead writer, David Bassanese, (who now writes for Switzer Daily [1]), telling me on my TV show that he thinks this bull market has “at least two years to go” and David is a conservative guy.
- Oliver saying this: “Our year-end target for the S&P/ASX 200 remains 5800”, which keeps me optimistic that we could see 6000. I’d love to beat Shane in the tipping stakes!
- This name for the current rally – a Frankenstein rally – because it looks dead but comes back to life!
- Recalled this from David Brent of the BBC’s The Office (the better one!): “Life is just a series of peaks and troughs. And you don’t know whether you’re in a trough until you’re climbing out, or on a peak until you’re coming down. And that’s it you know, you never know what’s round the corner. But it’s all good. ‘If you want the rainbow, you’ve gotta put up with the rain.’ Do you know which philosopher said that? Dolly Parton. And people say she’s just a big pair of tits.”(Brent was a real charmer, wasn’t he?)
Top stocks – how they fared
Numbers that moved the market:
In his bi-annual testimony [2] to the House of Representative Economics Committee, Reserve Bank Governor, Glenn Stevens, said the economy is OK but not as good as he’d like – so it looks like the 2.50% cash rate will hold well into the New Year! Following this, Goldman Sachs – the only financial institution tipping a rate cut – finally recoiled on this call!
In contrast, US Fed officials suggested they might pull back on their stimulus objectives sooner rather than later – this suggests a faster than expected hike in interest rates [3] as long as the US economy continues on an upswing.
The US showed off some respectable economic data this week; inflation levels [4] rose by 0.1% in July and home construction [5] rose by 15.7% in June.
And China’s Flash Manufacturing PMI [6] figures disappointed this week, falling to 50.3% in August, from 51.7% in July. This took the Oz dollar under 93 US cents on Thursday.
The week ahead:
Australia:
Wednesday August 27 – Construction work done (June quarter)
Thursday August 28 – Business investment (June quarter)
Thursday August 28 – New home sales (July)
Friday August 29 – Private sector credit (July)
Overseas:
Monday August 25 – US New home sales (July)
Tuesday August 26 – US Durable goods orders (July)
Tuesday August 26 – US Home prices (June)
Tuesday August 26 – US Consumer confidence (August)
Tuesday August 26 – Richmond Fed survey (August)
Thursday August 28 – US Economic growth (June quarter)
Friday August 29 – US Personal income (July)
As earnings season starts to wind up next week, investors will start to shift their focus towards other key pieces of data that contribute to the economic growth of great ol’Aussie land. Construction work done is one of these all-important figures – along with the Business Investment Survey that reveals private capital expenditure – and both will be released for the June quarter. Other numbers of interest next week include new home sales and data on loans outstanding (aka private sector credit) for the July period.
By comparison, it’s a much busier week in the US, with numbers coming from all areas of the economic spectrum! Some highlights include the Chicago Fed National Activity Index (CFNAI) for July, along with the Consumer Confidence Index for August and preliminary economic growth (GDP) figures for the June quarter.
Calls of the Week:
From one politician’s gaffe to another, this week Clive Palmer risked offending our largest trading partner when he labelled the Chinese [7] “mongrels’’ and “bastards’’ on the ABC’s Q&A. He remains unrepentant because he said he wasn’t making a comment about China’s people, but one-state owned company he’s in a legal battle with – Citic Pacific.
Sportsbet.com came out with this cracker following Clive’s outburst… for those who don’t follow NRL, Canberra Raiders coach Ricky Stuart is under the pump and struggling to win games.
And our very own Paul Rickard made the call that it’s a “no brainer” to accept the Telstra off-market buyback if you’re in pension phase in his Switzer Super Report article [8] this week.
Food for thought
Education is not preparation for life, education is life itself – philosopher and education reformer John Dewey.
Last week’s TV roundup
Is there anything Domino’s Pizza can’t do? After full year underlying net profits hit $45.8 million – that’s an increase of 50.4% on the previous year – CEO of Domino’s Pizza, Don Meij, explained their fairy-tale performance [9]and the rate at which the company is growing. He also explained their new ‘’Pizza Mogul’’ app where you can create, name and then order your very own pizza – imagine that! Hmmm, pizza.
SEEK share prices experienced a blip this week, and full year net profits fell 35%, but week in week out the company has been celebrated by brokers everywhere as it continues to deliver the goods. To explain the events behind SEEK’s performance this week, CEO and co-founder Andrew Bassat joined Super TV. [10]
And just when you thought retail was dead, Super Retail Group’s CEO Peter Birtles [11] shared his super retail secrets with me after their great earnings report.
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 Monadelphous (MND) which had its short position decrease by 3.34% to 7.86%.
Source: ASIC
My favourite charts:
Is business on the comeback trail?
Source: CBAThe above graph shows the Commonwealth Bank Business Sales Indicator (BSI) since January 2004 – it’s a measure of spending across the economy, and in July, it grew for the 36th month straight!
Top five clicked on stories
- Paul Rickard – Telstra’s off-market buyback – accept in pension [8]
- Peter Switzer – My investment strategy is right but… [12]
- Rudi Filapek-Vandyck – Buy, Sell, Hold – what the brokers say [13]
- Paul Rickard – CBA’s jumbo issue will be gobbled [14]
- Charlie Aitken – Dialling up the contrarianism: BC Iron in focus [15]
Recent Switzer Super Reports
- Thursday, 21 August 2014: Revving up [16]
- Monday, 18 August 2014: In the long run [17]
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.