Switzer on Saturday

Currency, Corrections and Crushing Bunnies

Founder and Publisher of the Switzer Report
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You must be sick of me talking about the overdue correction but it looked like it had finally arrived, after Friday’s reaction to the Dow’s 264-point sell off. Locally, the 68.8 point dive means we’re now lower on the S&P/ASX 200 index than we were when we kicked off 2014!

I wrote the above paragraph late yesterday. At 6 am this morning the Dow was up, wait for it, 167 points! Yep, volatility is back and it looks like the Yanks haven’t given up on dip buying.

Helping US stocks was the jump in Q2 economic growth from 4.2% to 4.6%, showing my faith in the US recovery is not misplaced. Also, consumer confidence went to a 14-month high, going from 82.5 to 84.6 on the Reuters/Uni of Michigan survey.

I know it’s a distant memory but our market did get to 5672.7 on the index on September 3, which meant we had made 5.6% for the year, plus dividends and franking credits. We were up 12% or so. While this feels a bit dodgy right now, I still think we’ll make at least 10% by year’s end. However, it would only be supreme optimism that would make me say my 6000-call looks good.

It doesn’t and I blame the US economic recovery, the excessive but understandable caution of Fed boss Janet Yellen and that damn weather freeze over in the US that has put the process of our stock market comeback behind, by about six months.

How it all works out

You might recall that I’ve not only been talking about an overdue correction, I’ve been anticipating a fall in the dollar, despite the fact that I’m taking my TV show to Wall Street in early December. I’ve been arguing that a lower dollar would come and help a whole pile of companies and we’ve named them, including CSL, Computershare, Amcor, Resmed, BHP, Rio, Macquarie and even QBE (I have expressed concerns about that company’s ability to disappoint).

This dollar drop would not just improve earnings but help economic growth, job creation and overall normalisation of the economy. Of course, it will bring inflation concerns and the RBA will raise interest rates but that’s normal.

Some of you might have been surprised that stocks have fallen with the diving dollar but this is a well-worn path. As US investors, worried about our currency correction (which too has been overdue) exit $A assets such as our once very attractive yield stocks, the dollar and the stock market had to fall.

But wait, there’s more and it’s good news

Morgan’s chief economist, Michael Knox, who’s been telling us we wouldn’t dodge a correction to take our market down to fair value, reminds us that when the dollar gets to what looks like the expected bottom, the stock market then bounces.

It also re-attracts the turncoats, who are currently dumping the little Aussie bleeder, which now is 87.63 US cents. However, before they come back, it does give local investors time to pick up bargains. And yes, our beloved yield stocks will be among them.

As I write, one of the best companies in the world – CBA – is at $75.62 and it’s likely to go lower. It’s P/E is 14.73 and it’s down from a high of $83.92, so this is looking like the correction the yield-player had to have (to steal a Keatingism).

Warning

I don’t know how long this slide will play out but we’re in buying opportunity territory, though my gut feeling is that we’ll go lower, despite the nice comeback on Wall Street overnight. Our reaction on Monday should be interesting. If we have a muted rise, then I’ll remain a little hesitant to buy in at current levels. Deep down, I do think the Yanks will sell off hard when they think that first rate rise is nearing. We won’t be able to resist their lead. There is the big risk that very good US economic data could intensify the belief that Yellen will raise rates in March rather than June, which would push the greenback up and our dollar down even more, taking the stock market with it.

But this is all guesswork, though I will remind you that this is not “the Australian economy and banks have a problem” sell off. It’s a “US economy is looking good so the greenback must rise” problem. It’s the problem we’ve needed for a long time but it will have positive consequences for stocks and your wealth, after a passage of time.

What I liked this week

  • The fact that between 2004 and 2006 the Yanks raised interest rates by 25 basis points 17 times and the stock market still headed higher. This augurs well for next year when US rates will rise.
  • Every expert on my TV program was asked how long this bull market has to run. Every one (and I mean everyone) said at least two years and most intimated probably more! (I’m happy working off two years for our purposes.)
  • China’s manufacturing read coming in better than those (who are always wishing negativity on us) expected.

What I didn’t like

  • The column inches the over-hyped housing bubble is getting.
  • The exaggeration about how worried the RBA is over the house price rise. If the Big Bank was really concerned, it would move.
  • The Budget Deficit blowout to $48.5 billion – a $30 billion blowout that puts more pressure on the Government to pursue higher growth policies.
  • Talk that the Kremlin might freeze the assets of Westerners. I was hoping Putin had de-Putinized himself but apparently a mate of his saw his assets frozen by the Italians. Vlad is the DeNiro kind of guy who’d say: “If you’re going mess with me, well I’m gonna mess with you.”
  • The Roosters being rolled by the Bunnies in the NRL but the best team won for sure. Paul Rickard will be celebrating in Turkey!

Final advice

Enjoy AFL grand final day and go the Swans!

Top stocks – how they fared

The week in review

  • This week, I explained why you should stick with the banks – capital values might fluctuate, but banks are one of the most reliable sectors in the world with many advantages, like great dividends!
  • Three of the big four banks yet to report were reviewed by James Dunn. He said that even though they aren’t “screaming buys” on growth capital, they remain a sound source of income.
  • The brokers upgraded Charter Hall and Mirvac, and downgraded Arrium and Macquarie Atlas Roads.
  • Aussie company GBST Holdings is doing well overseas and Flight Centre and Ainsworth Game Technology are worth watching. Penny Pryor recapped expert calls like these in this week’s Shortlisted.
  • If you want to find great blue chip stocks, keep an eye out for industries with good growth prospects, capital-light business models and recurring income – Tony Featherstone will share more tips next week in part two of his article.

Numbers that moved the market:

China’s Purchasing Managers Index (PMI) came in at a better than expected 50.5, up from 50.2 in August. Any number above 50 indicates expansion of the manufacturing sector.

New home sales in the US jumped 18% in August to a seasonally adjusted rate of 504,000 units – their highest level in six years!

US jobless claims rose at a lower than expected 12,000 claims to be 293,000 in the week to September 20, that compared to expectations of 296,000. But in slightly less positive news, new orders for manufactured durable goods in August fell $54.5 billion or 18.2% to $245.4 billion.

And the Aussie dollar continued to fall this week (as we’ve been predicting), arriving at an eight month low of 87.87 US cents!

The week ahead:

Australia

Tuesday September 30 – Private sector credit (August)
Wednesday October 1 – RP Data/ House Price Index (Sept)
Wednesday October 1 – Retail Trade (August)
Wednesday October 1 – Performance of Manufacturing Index (Sept)
Thursday October 2 -International trade (August)
Thursday October 2 – Building approvals (August)
Friday October 3 – HIA New Home Sales (August)
Friday October 3 – New motor vehicles sales (September)

Overseas

Monday September 29 -US Personal income (August)
Tuesday September 30 – S&P/Case-Shiller Home Prices (July)
Wednesday October 1 – US ISM manufacturing (September)
Wednesday October 1 – US Construction Spending (August)
Wednesday October 1 – US ADP employment gauge (September)
Thursday October 2 – US Trade Balance (August)
Friday October 3 – US Non-farm payrolls (September)

Leading economic figures are back! The Reserve Bank of Australia will release their Financial Aggregates publication which will include data on private sector credit or loans outstanding. We’ll see how the retail sector is fairing on Wednesday when the all-important Performance of Manufacturing Index (PMI) will also be announced. Other noteworthy data includes international trade figures and building approvals.

The US is also buzzing next week with US personal income data, the ISM manufacturing survey, and construction spending to be released – but it doesn’t stop there. The ADP national employment index and US trade balance are also on the agenda, and the potentially market-moving US Non-farm payrolls will tell us how many jobs were created in September.

Calls of the week:

The Prime Minister of the United Kingdom, David Cameron, said the Queen “purred down the line” when he told her Scotland voted “no” to independence over the phone.

The RBA brought bank lending standards into the spotlight in the Financial Stability Review and RBA Governor Glenn Stevens also said macro prudential tools could be useful in controlling the housing market.

CEO of Loftus Peak, Alex Pollak, made the call that there’s still a three-year boom ahead for IT entrepreneurial companies like eBay, Google and Apple.

And national cycling legend Cadel Evans announced he will retire in February 2015.

Food for thought

If opportunity doesn’t knock, build a door. – American comedian and actor, Milton Berle.

Last week’s TV roundup

One of the scariest business writers in town, Christopher Joye of the AFR and Smarter Money Investments, is here to give his take on the “so-called” housing bubble, among other things! Has he changed his tune? Find out here.

My colleague Paul Rickard and I summarised the main differences between Listed Investment Companies (LICs) and Exchange Traded Funds (ETFs), and when you should invest in one over the other.

Alex Dunnin from Rainmaker told us why SMSFs are so popular, how they’ve been performing, and answered questions about super fees.

And after years of retail being in the doldrums, it’s finally making a comeback. To explain what the retail sector and investors have to look forward to, Bryan Hynes from AMP Capital Shopping Centres visited 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 Arrium, who had its short position increase by 3.17% to 7.53%.

Source: ASIC

My favourite charts:

We’re getting richer!

Source: ABS, CommSec

The Reserve Bank’s Financial Accounts revealed that household wealth is at record levels – in the June quarter, wealth rose to $330,841, up $2,860.

Resources downturn will be short-lived…

Source: BREE, ABS

The Bureau of Resources and Energy Economics (BREE) predicts that resource and energy sector exports will fall by around 1.45% in 2014/15, and then spike by 13.3% in 2015/16.

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