After a very volatile week, Father Christmas finally drove his sleigh through the oil-driven stock market anxiety to give us a really good look at what we call a Santa Claus rally. Wednesday brought a 288-point spike in the Dow, followed by a whopping 421-point surge that our market just couldn’t ignore.
Our market went up 127 points to close at 5338.60, which was a lot better than the ridiculous levels we saw earlier in the week. Sure, our market is vulnerable, with a near perfect storm explaining why our market fell so hard this week. Let’s list the reasons:
- Oil prices kept falling, broaching $US60 a barrel.
- Iron prices still under pressure.
- Economic readings from China and Europe have not been encouraging.
- Our dollar looks set to fall to 75 US cents after the RBA Governor Glenn Stevens gave us his economic wish list, which encouraged foreign shareholders to dump our stocks in the short-term.
- Wall Street started to join the oil price pity party and that really got the Nervous Nellies knee knocking!
- As I explained last week, in the US as the tax year ends, stocks get sold off so investors can use the capital losses to offset capital gains. They often then buy the stocks back, which explains the spike back on Wall Street towards the end of the week.
But this week proves a few things. First is we have to expect volatility in 2015. Second, big dips remain buying opportunities and third, I believe next year will be better for stocks than this year.
Knox’s God Bless America!
I hate seeing the S&P/ASX 200 index where it is likely to finish for the year, given I stuck my neck out with my 6000-call but if you want to see my whinging explanation for this, go to http://www.switzer.com.au/the-experts/peter-switzer-expert/ho-ho-ho—its-a-santa-claus-rally/ [1] and I also throw in a reminder of my better and more valuable calls, in case you’ve forgotten them.
Anyway, let’s look to the future and I’d like to share the views of Morgan’s chief economist Michael Knox, who remains a bull on stocks. Fortunately he doesn’t link it to China but the good old US of A!
Michael, as an economist, surprisingly is never economical with the language! So let me put his main points into a nutshell.
On the US, he expects above-trend growth linked to a revival in business investment. This lines up nicely with a range of experts, who think US stocks are in for a 15% plus rise next year. That’s the view of RBC’s chief U.S. strategist, Jonathan Golub, who thinks a 12-15% rise is a believable range for stocks.
Europe doesn’t excite Knox but he believes what most commentators expect “that the New Year will see the beginning of a program of purchasing the bonds of member countries of the Euro Area. This will be a full program of quantitative easing (QE).” And that should help lift Europe to a better economic performance in 2015, compared to 2014.
China is set to slow down from 7.4% to 7.1% but he thinks food businesses and services operations will benefit from the Free Trade Agreement. He definitely doesn’t have any Apocalypse Now scenarios for our best trading partner.
On Australia, I’ll list the key points:
- The Budget problems are partly linked to the lower oil and iron ore prices.
- The oil price is currently around 50% lower than it was in the 2013/2014 Budget.
- The iron ore price is down by more than 30% and each $US10 reduction in iron ore prices results in a half a percent fall in nominal GDP and a fall in tax receipts of $US2.8 billion by 2015/2016.
- Despite the above and Treasury’s MYEFO view that has our growth in the 1-2% range, Knox thinks 2014 will be 2.9% and next year it will be 3.4%. Good on you Knoxy – hope you’re right!
- Why? “This happens because of Australia’s close connection with the rapidly recovering US economy,” he argues. “The banks that provide finance for business investment in Australia raise their capital in US wholesale markets. We think that above trend growth in the US economy in calendar 2015 will lead to a much more liquid wholesale capital market. This in turn will generate higher growth in Australian bank imports of capital from the US wholesale market into the Australian lending market. This will lead to a higher level of domestic Australian business finance and in turn a higher level of private sector investment. We think this will result in an upside surprise in Australian output growth.” (Those liking bank stocks, still, would love to read this!)
Knox on the stock market
He thinks the falling dollar chases out foreign buyers of our stocks until the currency looks like it has bottomed. And therefore he goes on:
“The result has been an extremely cheap Australian equities market. At the time of writing, the ASX200 is trading below 5200 points. Our model of the ASX200, based on earnings per share and bond yields, tells us that fair value in December 2014 is 5771 points. This means that the Australian equities market is now more than 500 points too cheap!!!!!” (They are my exclamation marks and it does make a HUGE point.)
Final point
Fair value doesn’t always work out when you want it to, for example, at the end of the year when I could have said: “I did not get 6000 but I got 5771, let’s call it 5800!” Shane Oliver at AMP would be happy because that’s what he expected. However, stock markets don’t follow theory but they do have a habit of reacting to economic fundamentals over time.
That’s why I’m sticking to stocks for 2015 and we’re now in a great buying opportunity.
Top stocks – how they fared
The week in review (click the blue text to read more):
- This week I gave you some ideas [2] for making money in 2015.
- The brokers upgraded [3] Coca-Cola and Drill Search Energy, and Atlas Iron copped a downgrade. In our second broker report [4] for the week, Treasury Wine Estates and Wesfarmers were placed in the good books.
- Roger Montgomery told us why managing money [5] is like managing your love life!
- Our best calls of 2014 [6] included CSL, Resmed, Sirtex, Ramsay, CBA, Ardent Leisure, Aristocrat Leisure, and finally, Charlie’s call on Qantas!
- Speaking of Charlie, he’s still optimistic about retail [7] heading into Christmas and says a key macro-theme for 2015 will be a stronger US dollar.
- James Dunn says global shares look set to outperform in 2015 – and tips many of the top US stocks [8] to do well.
- Part 3 [9] of Paul Rickard’s Investing for your kids or grandchildren revealed the benefits of long-term investment vehicles that have tax advantages.
- Ron Bewley [10] has rebalanced his portfolio and gave his expectations for the year ahead.
- iiNet is an internet service provider that’s better than the rest [11], according to our featured fundie, ST Wong.
- And finally, Tony Negline gives you his final wrap [12] of all the super changes and trends to be across before the year concludes.
What moved the market (click the blue text to read more):
- The Dow skyrocketed after the US Fed chair Janet Yellen [13] said the Board can be “patient” when it comes to raising interest rates.
- The Russian rouble [14] was hit following the decision to raise interest rates from 10.5% to 17% to support their currency.
- The federal government’s mid-year Economic and Fiscal Outlook (MYEFO) [15], announced at the top of the week by Treasurer Joe Hockey, also dampened investor sentiment. It revealed that the government is expecting growth of 2.5% this financial year and a blow out in the budget deficit to $40.4 billion from the $29.8 billion forecast in May.
What’s ahead:
Australia
December 31 – Private sector credit (November)
January 2 – CoreLogic Home Value index (December)
Overseas
December 23 – US Personal income (November)
December 23 – US Consumer sentiment (December)
December 23 – US Durable goods orders (October)
December 23 – US FHFA home prices (October)
December 23 – US New home sales (November)
January 2 – US ISM manufacturing (December)
January 2 – US Construction spending (November)
It’s no surprise that the upcoming economic calendar is looking pretty empty as everyone takes a breather and gets ready for the Christmas break. The local agenda includes private sector credit figures for the month of November out on New Year’s Eve, and then the CoreLogic Home Value index for December will kick off the economic calendar for 2015.
There’s still a few indicators in the pipeline for the US however, and one of the highlights has to be the ISM manufacturing gauge released on January 2. Economists will be hanging out for a result over 50, which indicates expansion in this sector. US Consumer Sentiment is due on Tuesday night.
Calls of the week (click the blue text to read more):
- There might be another Bush in the White House after Jeb Bush, who is the son of former US president George W Bush, made the call that he would “actively explore the possibility of running for president” in 2016 – in a Facebook post [16] of course.
- My colleague Paul Rickard said that Prime Minister Tony Abbott and his government are “bad for business” and gave his recipe [17] for the government in 2015, and that includes some people getting the boot! Switzer expert David Bassanese also gave the government a few tips [18] in how to stimulate the economy next year.
- The goods and services tax should be increased to 15%-18%, according to the Paris based Organisation for Economic Co-Operation and Development’s (OECD) biennial report on Australia [19].
- And Apple co-founder Steve Wozniak made the call to become an Aussie citizen and has officially had his permanent residency stamped [20] in his passport! He says “I want to be a distinguished part of this country and someday I may say I lived and died an Australian, and that would be a really nice thing to be able to say”.
Food for thought
“He puzzled and puzzled till his puzzler was sore. Then the Grinch thought of something he hadn’t before. Maybe Christmas, he thought… doesn’t come from a store. Maybe Christmas, perhaps… means a little bit more!”
Dr Seuss, author.
Last week’s TV roundup
In this super sessions update [21], Paul Rickard and I talk about how you can invest overseas and take advantage of some great opportunities for your portfolio.
The Australian ETF industry is getting close to fifteen billion dollars of assets under management, with investors starting to realise the benefits of adding them to a portfolio. For more on the ETF sector, Amanda Skelly of State Street Global Advisors visited Super TV [22].
Josephine Linden is an Aussie making it big in New York. She has had a distinguished career in private wealth management in some of the biggest firms on Wall Street as a former partner and managing director of Goldman Sachs, and she spoke with me [23] about her journey.
And with the US economy picking up, this means more opportunities for Australian businesses to capitalise on the two ties between the countries. For the ins and outs of this important relationship, I spoke to Richard Leather [24] of Austrade.
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 ALS Limited, with its short position increasing by 1.16% to 8.67%. UGL Limited followed, with a short position increase of 0.62% to 12.55%.
Source: ASIC
My favourite charts:
Crowing on our calls!
Source: Yahoo!7 Finance, 18 December 2014
In this week’s SSR, we had a look back at some of our calls for the year, and those who listened to me say that you should be invested in dividend paying stocks since 2009, and then dollar-sensitive stocks in mid-2014, such as CSL and Resmed, etc., have done really well! The chart above looks at the performance of CSL over the year.
And here’s a look at the stellar performing Resmed…
Source: Yahoo!7 Finance, 18 December 2014.
Top five most clicked on stories
Peter Switzer – What happens in 2015 and what I will buy soon [2]
Rudi Filapek-Vandyck – Buy, Sell, Hold – what the brokers say [3]
Charlie Aitken – Christmas ideas and looking to 2015 [7]
Geoff Wilson – My small cap picks for 2015 – finding growth [25]
Penny Pryor – Shortlisted – Energy ETFS, WAM Capital and Hunter Hall [26]
Recent Switzer Super Reports
Thursday, 18 December, 2014: Seasons greetings [27]
Monday, 15 December, 2014: 10 more sleeps [28]
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.