Switzer on Saturday

Crisis, central banks and consumers, US-style!

Founder and Publisher of the Switzer Report
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Well, Reserve Bank Assistant Governor, Guy Debelle, did say there’d be a violent market reaction and it was taken he was alluding to a coming crisis. However he didn’t actually say in what direction! Yep, in case you haven’t heard, Wall Street has had a violent reaction to the positive, which proves the old cliché – don’t fight the Fed.

In this case, it possibly applies to the European Central Bank, which partly explains this triple-digit spike in the Dow Jones.

But it’s not all just central bank stuff that’s driven the Dow up 263 points overnight. It’s that good old boy and girl called the US consumer.

You know, we keep hearing that markets are affected by ebola, the onward advance of ISIS, the soon to be shirt-fronted pest Putin, the possible triple-dip recession in Europe, question marks over China and a struggling Japan. But the Yanks’ latest read on consumer confidence has come in at a seven-year high! The Thomson Reuters/University of Michigan October reading on consumer sentiment came in at 86.4, the highest since July 2007!

This revelation adds to my contention that the falling oil price is a gift to economies, as this is a critical cost to business and a big personal slug on households, so it would come as a hip pocket relief. Sure, it hurts oil investors but with supply on the increase, with the US now up there as a global producer, prices like iron ore had to fall (my video with Rudi Filapek Vandyke on www.switzer.com.au should be watched by oil and LNG investors).

It’s not just US consumers to the rescue of Wall Street, with company earnings adding to the positivity. Both Morgan Stanley and General Electric beat the estimates on profits and these have added to other great reports from the likes of Citigroup.

But wait there’s even more and this is HUGE!

The European Central Bank announced that an Act will operate, as of tomorrow that permits it to buy covered bonds, which is likely to have an impact akin to Quantitative Easing or QE3 (as it’s known).

How do I know this is a positive development? Well, Italian, Greek and Spanish bonds became attractive again, with prices going up and yield going down, which means fear about these economies, governments and their bonds abated.

Conclusion? Don’t fight the Fed but maybe don’t fight that less influential ECB!

What I liked this week

  • Positive rumblings out of the Russia-Ukraine talks, which suggest a peace deal is possible! This would be great for Germany and Europe.
  • Charlie Aitken giving Telstra the thumbs up again.
  • The buying of stocks, especially when I’d run with headings on my Switzer Super Report such as “Keep the faith” and “Stocks down, get ready to buy.”
  • The Wall Street comeback overnight.
  • Car sales in September were up 0.8% on a year ago – the first annual increase in over a year. We need to see the local consumer act rationally to these unbelievably low interest rates, though our rush to real estate is very rational.

What I didn’t like

  • Guy Debelle’s unhelpful comment about a “violent market” reaction.
  • The media’s misinterpretation of Debelle’s comments, as he was referring to the bond market, not the stock market. Too many in the media don’t understand the difference!
  • The media’s scare campaign once Guy came up with his unhelpful comment.
  • The volatility we saw this week and the nagging doubt that there could be another test to this newfound market positivity.

I remain very positive on stocks, especially with the ECB’s new strategy ahead, the positive US consumer and the likely run of earnings reports from the US. But volatility is back and that can rock optimism and confidence very quickly.

That said, if this happens, like this week, I’ll probably be telling you it’s a buying opportunity, unless things change dramatically.

And that’s my job – to detect dramatic developments.

Top stocks – how they fared

The week in review (click the blue text to read more):

  • I reminded you to buy in gloom and sell in boom, and that we’ll see that overdue sell off or correction in the US over the next few weeks.
  • You might want to tell your kids or grandkids that they’re better off putting money into their super rather than paying off the mortgage, says Paul Rickard.
  • James Dunn revealed EAL, EServGlobal, Ingenia, Laserbond, and Smartpay as five bargain stocks you can grab for under 50 cents!
  • Geoff Wilson tipped Aristocrat Leisure, Austal Ships and Infomedia as stock winners from the falling Aussie dollar.
  • The brokers also upgraded Lend Lease, Mirvac and NIB.
  • And collectibles now account for 10% of ‘ultra high net worth’ individuals’ portfolios, says Alistair Bailey.

What moved the market (click the blue text to read more):

The week ahead:

Australia

Monday October 20 – Speech by Reserve Bank official
Tuesday October 21 – Reserve Bank Board Minutes
Tuesday October 21 – Speech by Reserve Bank official
Wednesday October 22 – Consumer Price Index (Sept quarter)
Thursday October 23 – Speech by Reserve Bank official

Overseas

Tuesday October 21 – Chinese monthly data (September)
Tuesday October 21 – Chinese GDP (Sept quarter)
Tuesday October 21 – US Existing home sales (September)
Wednesday October 22 – US Consumer prices (September)
Thursday October 23 – US FHFA home prices (August)
Thursday October 23 – US, Europe, China “flash” manufacturing
Friday October 24 – US Leading Index (September)
Friday October 24 – US New Home Sales (September)

Next week it’s largely about the RBA, with a number of Reserve Bank officials making speeches – let’s just hope they don’t use the word ‘violent’ in any of them! We also have the minutes of the last Board meeting released on Tuesday, and there’s one important piece of data being released on Wednesday – the consumer price index for the September quarter.

It’s a little more varied overseas, with quite a few important economic indicators coming from the US. Data on Existing Home Sales for September comes out on Tuesday, followed by US consumer prices on Wednesday. The US leading index and US new home sales are both out Friday, and the US, Europe and China will each reveal their manufacturing figures on Thursday.

Calls of the week (click the blue text to read more):

Food for thought

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

– American business magnate, investor and philanthropist, Warren Buffett.

Last week’s TV roundup

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 Fortescue Metals Group, who has its position sold short by 0.87% to 9.92%.

Source: ASIC

My favourite charts:

Dwelling Starts drive growth!

Source: HIA, ABS

Total dwelling starts in Australia have lifted to a 19-year high, with 180,408 starts in the year to June.

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