Switzer on Saturday

Doubting the doubters in Abu Dhabi

Founder and Publisher of the Switzer Report
Print This Post A A A

I started this piece in a shopping mall in Abu Dhabi. I’m here to attend the Grand Prix on a fact-finding mission! Yeah, I know it’s a tough life but hell, someone has to do it.

My economic and market analysis is competing with the incongruity of an ice rink in the middle of the desert with cute little kids in black burkas whizzing around the rink!

Life’s little amazing shocks aside, it has been a disappointing week for stocks, with the S&P/ASX index down over 3%. But why are we ignoring Wall Street, which keeps breaking all-time high records. Most of us expect to play follow the leader with the NYSE but it seems to be a one- way street and it’s downhill!

So what’s going on? Why is our stock market index struggling while even European markets can beat gravity?

Two big issues are operating. First, those damn iron ore prices keep falling and second, our economic growth for next year is being downgraded by some ecomomic soothsayers.

Even CNBC has columns entitled “Is the ‘lucky country’ headed for gloomy times?” I think the answer will be ‘no’; but think pieces like this won’t help.

Goldman Sachs thinks the relatively high dollar and falling commodity prices plus slowing China and Japan plus slow wages growth plus a slowing housing sector, maybe the post-Murray Inquiry and the arrival of macro-prudential controls, plus the impact of the Budget measures will take economic growth down to 2% from 2.3%! The analysis even throws in the El Nino effect in what was a depressing work, explaining why we call economics the dismal science.

Tim Toohey, the Goldman economist is respected but he is not God and so he could be wrong. HSBC’s chief economist Paul Bloxham has future-scored 2015 at 3% plus. Clearly these two guys have vastly different economic crystal balls!

Of course, it all rests on assumptions but the recent, poor, sick market news is linked to the weaker views for the economy and therefore profits for 2015.

If Toohey is right, our market could just keep going sideways with a slight upward bias – as he even thinks our medium term prospects are good! But if Bloxham is on the money, and I think he is, then a market spike would be on the cards.

So what do we need to see happen to make the better scenario come to pass?

  1. The Japanese election goes to PM Abe so he can continue his stimulus programs with a delayed sales tax, which should help economic growth there.
  2. Chinese data needs to firm up.
  3. US economic data must remain strong making the case for an early rise to interest rates.
  4. This would take the greenback up and the Oz dollar down and help our economy and market.
  5. Europe to surprise on the higher side over the next six months, growth-wise.
  6. The next NAB business conditions reading to reinforce the big spike in October from 3 to 12.7 – was huge.
  7. The local GDP reading in December for the September quarter to be better than expected and we are a chance there too.

If these can happen and they are possibilities, then our market will play the catch up game that is way overdue. Remember, Morgan’s chief economist, Michael Knox, thinks our market’s fair value on the S&P/ASX 200 index is 5800 and we’re now at 5304.30! He too must have bought his crystal ball from a different place to Toohey.

What I liked this week

  • The G20 pledge: add 2.1% to world growth over five years. Growth is the key to stocks.
  • Australia’s stock market is still good for going long stocks because we are so far away from 6800 – our old all-time high.
  • Greece is now out of a six-year recession.
  • The Germans got a very good ZEW survey, which showed German analyst and investor sentiment rose from -3.6 to +11.5 in November – marking the first increase in almost a year.• Meanwhile the automotive sector (up 1.5%) was the best performing sector.
  • The oil and petrol price fall is a huge plus for business costs and consumer demand and I think the doomsday merchants are missing this. The terminal gate price has fallen by over 12 cents a litre in the past six weeks, which is significant.
  • The Free Trade deal with China and what the Indian PM promised – a new and improved India – which has to be great for our exports.
  • Learning that The Who are playing at the Grand Prix on Sunday night!

What I didn’t like

  • Our stock market fall –  but it’s another buying opportunity.
  • Learning that of Australia’s total exports to China of A$94.7 billion in 2013, iron ore accounted for A$52.7 billion. Wool, the top agricultural export, made  up just A$1.9 billion. It’s time we stopped riding on the iron horse; and
  • Putin stashing gold! What is that so and so up to?
  • A gold mate of mine who reckons smarties are asking him to buy gold for them. People don’t do this when they expect good times and no geopolitical issues. That said, gold punters are just that – punters – and they have had the arse out of their trousers for some time.

Two Final Words

First, Tanya Branwhite, Macquarie’s top investment strategist thinks the slow grind higher will continue over 2015 because of the low growth rates around the world. However, when I asked her if she thinks this bull market will last a long time, she categorically said yes.

And second, European markets were up big time, with the German Dax up a big 2.62%, the French CAC market up 2.67% and the Spanish IBEX stock index shot up a huge 3.05%! Why? First, China’s central bank cut interest rates and the European Central Bank boss, Mario Draghi kicked off his version of QE3, which turns his big talking into overdue walking and the markets liked it!

I have been looking for some positive events to spark our market and these two developments are damn good starts. Gotta love Mario and the Chinese central bank.

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 release of the Federal Open Market Committee (FOMC) meeting minutes – they’ve stuck with their long-term view on keeping interest rates low.
  • The Philly Fed Manufacturing Business Outlook Survey more than doubled expectations after jumping from 20.7 in October to 40.8 in November.
  • Lower than expected Chinese factory data – HSBC’s preliminary purchasing manager’s index shows manufacturing activity dropped in November to 50.0 from 50.4 in October, but at least 50 means the economy is not contracting!
  • Falling iron ore prices.

The week ahead:

Australia
Tuesday November 25 – Speech by Reserve Bank Deputy Governor, Philip Lowe
Wednesday November 26 – Construction work done (September quarter)
Wednesday November 26 – Resources and Energy Major Projects
Thursday November 27 – New home sales (October)
Thursday November 27 – Business investment (September quarter)

Overseas
Tuesday November 25 – US Economic growth (Sep quarter, prelim)
Tuesday November 25 – US Home prices (September)
Tuesday November 25 – US Consumer confidence (November)
Wednesday November 26 – US Durable goods orders (October)
Wednesday November 26 – US New home sales (October)
Thursday November 27 – US Thanksgiving Day

Next week is another quiet one for Australia but there are a couple of things to look forward to, including a speech by the RBA deputy governor, Philip Lowe, in his annual address to business economists. The ABS also releases their publication Construction Work Done on Wednesday.

The US has several key economic indicators released in the lead up to the Thanksgiving Day holiday. A few to note are on Tuesday’s agenda, which includes economic growth, home prices, and consumer confidence figures.

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

  • Australia finalised a a free trade agreement (FTA) with China – our largest trading partner, which is good policy for global growth. India-Australia ties might also be ramped up, with FTA plans in the pipeline.
  • Japanese PM Shinzo Abe called a snap election in December, two years ahead of schedule.
  • PUP leader Clive Palmer brought out an old party trick when he prematurely walked out on a Lateline interview after being quizzed on his legal battle with the Chinese government-owned investment group, Citic Pacific.
  • And just to add to the political circus of late, Pauline Hanson said she would be returning to lead the One Nation party – under the condition that the party is renamed “Pauline Hanson’s One Nation,” of course.

Food for thought

Life can only be understood backwards; but it must be lived forwards.

Soren Kierkegaard – Danish Philosopher

Last week’s TV roundup

  • How can you find a quality blue chip, and have they changed over the years? In Part 1, Paul Rickard and I gave you our best blue chip tips.
  • And then in Part 2, we tell you about the financial metrics that can speak volumes about a company’s value.
  • Switzer Super Report expert, Tony Negline, shared his preferred investment method of positive gearing into stocks, so you can learn to get ahead with your SMSF.
  • Another one of our experts, Ron Bewley, told us where he thinks the market is headed, and what stocks he’s banking on.
  • And it’s all about those new age stocks. NEXTDC is an IT darling, but it hit a lull this year before bouncing back up. To explain the ups and downs of the business, its CEO, Craig Scroggie, 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 BC Iron, who had its position sold short increase by 0.93% to 8.00%.

Source: ASIC

My favourite charts:

Labour Productivity looks good!

Source: RBA

In a speech this week, the Reserve Bank governor Glenn Stevens wasn’t too positive on the economy, but he did praise the response by business to a changing economic structure through lifting productivity. Stevens pointed to how labour productivity has grown faster over the past three years (observe the rising trend red line in the chart since 2012) than it did on average during most of the 2000s.

Top five most clicked on stories

Recent Switzer Super Reports