Switzer on Saturday

Employment, Europe, Elections, Economics, Earnings

Founder and Publisher of the Switzer Report
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It has been a week of five E’s – employment, Europe, an election, earnings and economics. And they were all pretty good stories for someone who thinks stocks can go higher between now and the whole of 2015. That’s right, I see a Santa Claus rally as a certainty so I’m now speculating on next year, which I think will keep adding to our wealth, despite the likelihood of volatility.

The October jobs report came in a little weaker than expected but it was still solid news, though it made it harder for the stock market to keep breaking record highs overnight. While 231,000 was the economists’ guess, the actual number was 214,000 but the previous two months were revised up by a total of 31,000.

Non-farm payrolls have added over 200,000 jobs a month since February and you’d have to go back to 1995 to see anything better!

And the Yanks have had 49 months in a row of jobs growth and they haven’t done this since 1939!

Meanwhile, unemployment is now at 5.8%, down from 5.9% in September, which is the best reading since 2008. Analysts like the numbers with the revisions strong, sacking claims low, the hiring is broad-based, hours worked are rising and the seasonal effects point to continued good job prospects.

Consistent with this picture, the best economic news out of the States this week was the ISM manufacturing index, which rose from 56.6 to 59.0 in October. This was above forecasts for a result near 56.2. In addition, the six largest automakers in the US have reported October sales that were up 6% on a year ago, which is a nice sign.

The only worries to this great US economic picture remains Europe and China and what’s likely to happen to these economies.

This week witnessed another shot of confidence from the European Central Bank President, Mario Draghi, who said the bank’s governing council was unanimous in its commitment to using additional unconventional measures, if needed. Draghi said the ECB aims to increase the size of its balance sheet towards the levels of 2012 and effectively ruled out that there was a unity problem with European policymakers.

That good news was countered by the European Commission, which cut its forecast to 1.1% growth in 2015, down from 1.7%, though at least they think the Eurozone will beat the triple-dip recession prediction.

On China, the news was neither worrying nor positivity creating, with the “official” Chinese manufacturing purchasing managers’ index easing from 51.1 to 50.8 in October. I’m hoping these guys can overwhelm me in the not too distant future.

The often-forgotten great piece of news that could underwrite my share price confident outlook is the price of oil. In the past five years, the real price of oil, on average, has been the highest in history!

This is changing and for many Americans (and even Australians) the falling price of gasoline or petrol will improve household disposable incomes, like a wage rise with interest rates low and this will translate into more consumer spending, better economic growth, better profits and higher share prices. Yahoo!

What I liked

  • The Oz dollar starting the week at 87.47 US cents and ending the week around 85.47 US cents. It’s going to make my US trip to Wall Street for my TV show in early December a little more expensive but my SMSF’s share portfolio will more than make up for that over 2015!
  • The stock market up four weeks in a row. Michael Knox of Morgans says our market is way under fair value, so we have scope to go higher.
  • APRA revealing that under a highly stressed economic scenario – which saw house prices crash 40% and unemployment rise to 13%  – every one of the 13 banks tested remained above the minimum CET1 capital requirement of 4.5% (SMH). How good’s that? Very good!
  • The creeping good news that too many missed with the Performance of Manufacturing index up 2.9 points to 49.4. This is a sector that has been struggling for years so to nearly get to over 50, which means it’s moving into the expansion phase, is a good omen. You can probably thank a lower dollar for this.
  • Petrol prices fell 5.7 cents a litre last week, the biggest fall in five months.
  • Retail news – see below.
  • The RBA’s upgrade for our economic growth, at 2.5% in December 2014 before picking up to 2.5–3.5% by December 2015. Over the longer term, economic growth forecasts have been left unchanged with growth lifting to
    2.75-4.25% in 2016! That 4.25% has to be good for stocks in 2016, if it ends up being true.

What I didn’t like

  • The RBA showing concern for the Chinese property market – this could be a black swan.
  • Our services sector read was really disappointing but the RBA doesn’t treat this number with respect. See below for details.
  • Dwelling approvals slumped 11% in September but in true statistical terms the numbers are going sideways at historically high levels! Based on one month, they really aren’t bad.
  • The Melbourne Cup tragedies.

The future?

I wouldn’t be surprised to see another testing sell off but as I always say, it will be another buying opportunity.

Top stocks – how they fared

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

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

The week ahead:

Australia
Monday November 10 – Housing finance (September)
Tuesday November 11 – NAB business survey (October)
Tuesday November 11 – Speech from Reserve Bank official
Wednesday November 12 – Credit/debit card lending (September)
Wednesday November 12 – Lending finance (September)
Wednesday November 12 – Consumer confidence (October)
Wednesday November 12 – Wage price index (September quarter)
Thursday November 13 – Detailed labour market data (October)
Thursday November 13 – Speech by Reserve Bank official

Overseas
Monday November 10 – China inflation (October)
Wednesday November 12 – US Wholesale sales (September)
Thursday November 13 – US Federal Budget (October)
Thursday November 13 – China monthly data (October)
Friday November 13 – US Retail sales (October)
Friday November 13 – US Consumer sentiment (November)

Next week is a busy one for Australia, kicking off with housing finance figures for September. Wednesday holds the most events to watch, with the latest monthly consumer confidence reading, data on credit and debit card lending, and business lending figures for September released. However, the wage data is what most people will be paying closest attention to on Wednesday, as it can have implications for inflation and interest rates.

There’s less to look to in the US, with their usual pack of data making the rounds. This includes wholesales sales data and the monthly Fed Budget figures. Two top shelf economic indicators close the week on Friday when data for US retails sales and US consumer sentiment are released.

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

  • Morgans Chief Economist, Michael Knox, used his mathematical mastery to call Protectionist as the winner of the Melbourne Cup. He’ll surely be crowing!
  • In other Cup news, the allegedly wealthy Geoffrey Edelsten made the call to propose to his girlfriend Gabi Grecko, but apparently she lost the ring at one point – and they said it wouldn’t last!
  • And my colleague Paul Rickard says the big bank profits can last! He responded to the doubting Thomas’ of the media, who preach otherwise.

Food for thought

Yesterday is a cancelled check. Today is cash on the line. Tomorrow is a promissory note.

– Hank Stram – American football coach and athlete

Last week’s TV roundup

  • On Reserve Bank decision day (also known as Melbourne Cup day) we caught up with the treasurer of ING Direct, Michael Witts, to read between the lines of the bank’s rates decision statement. Did we miss anything, or are they singing the same old tune?
  • After a sour September, the yield sectors helped the market rebound in October. Paul Rickard told us why the yield trade is not dead.
  • The stock market has experienced a turbulent couple of months, so how is fund manager Ben Griffiths planning to play the market going forward? He visited Super TV to tell us all about it.
  • And in an increasingly global world, Roger Montgomery looked at media moves in the USA to see if they could have ramifications for media operators on our shores.

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 Mineral Resources, who had its position sold short by 0.91% to 8.87%.

Source: ASIC

My favourite charts:

Why I’m bullish for the rest of 2014!

Source: moneychimp.com

My bullish view for November to January is supported by the chart above, which shows their very positive average monthly returns from 1950 to 2013!

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