Spurting oil, the Swiss switcharoo and another Switzer!

Founder and Publisher of the Switzer Report
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I know we’re out of season but watching the daily run of play for stocks, I feel like we’re watching our team being on the wrong side of the referee early in the game but I still have an overwhelming feeling that my side can turn around this bad spell to finish on top. Even if we have to go into extra time.

That’s the way I’ve felt since November last year when the ‘spurting’ oil supply led to a huge slump in oil prices, energy stocks and then stocks generally. And this has happened despite just about everyone from the President of the Bundesbank to the IMF boss Christine Lagarde arguing that the cost and income benefits of lower oil prices will far outweigh the negatives of beaten up energy companies and related geographical areas, such as Texas, that thrive on black gold.

But still stock markets look wobbly because of oil. I believe the short-sellers, hedge fund managers and smarty pants traders are exploiting the volatility that was absent last year, which undermined many of these suckers’ profits and so they are making inedible hay – to beasts like me – while the sun is battling these temporary black clouds!

Consistent with this assessment was Wall Street overnight. With two and a half hours to go, the Dow was up over a 100 points on what market reporters say was a rising oil price! Of course you can’t always trust stocks specialist scribes but if oil prices have taken us down, the reverse, logically, is possible.

The triple-digit gain was put down to:

  • Oil was up $US1.38 to $47.63 a barrel.
  • December consumer confidence went from 93.6 to 98.2, which was hard to get a bad interpretation out of.
  • Falling inflation, weaker than expected retail numbers and rising factory production, albeit at a slower rate, have many analysts pushing back the time when the Fed raises interest rates and that has been a plus for stocks.
  • And while the US-centric media did what a lot of Yanks do – keep exclusively focused on the good old US of A – there could be and should be some positivity around what the European Central Bank might do on Thursday next week or January 22, to be precise. For two days in a row, European stocks have risen on the expectation that Mario Draghi will eventually deliver the bazooka QE program that has escaped him and Europe for too long! The FTSE was up 0.79%, the French CAC 1.3% and the German DAX put on 1.35%. This D-Day or Draghi-Day for Europe hopefully will signify the landing of a credible monetary stimulation policy that might free the Euro zone from the tyranny of the financial crisis-created recession threat.

What was the deal with the Swiss franc?

The Swiss killed off its ceiling price on the Swiss franc relative to the euro, which took its exchange rate up 30%! To maintain this artificial exchange rate, the Swiss central bank was one of the biggest buyers of the euro and it underlines that these world-renown bankers expect something big on Thursday. I damn well hope so!

What I didn’t like this week

  • The chart below of the S&P/ASX 200 index and it’s January – one of the best months for stocks! But this is a time of great uncertainty!
  • This fact: oil prices have fallen by over 50% and the reason, we’ve been told, has been the increased supply of oil. OPEC says “that’s bunkum” and that it’s market speculation, so what has been the increase in oil supply since prices have fallen 50%? Try 2%!
  • The Swiss switcheroo on the currency that over-spiked their franc and hit some of their best companies, like Nestle and Novartis, that are key holdings in some European ETFs. It saves the central bank there a lot of money interfering but a 30% rise to the franc will hurt the Swiss economy. I guess it was always going to happen when the euro falls if a QE program comes in next week, but by 30%?
  • Falling bond yields, which suggests that the international attitude to growth is weakening and so the safety of low-paying bonds looks attractive. These guys have to be proved wrong and the ECB’s action next week will have to be a big plus for future growth or these guys will be proved right!
  • The dollar at 82.25 US cents this morning but experts such as Blackrock’s Stephen Miller thinks it could go below 70 US cents because of the fall in commodity prices.

What I liked

  • US company reporting first week has not been great, with big banks not faring well but interestingly the ones that did worse had big trading desks, while a real bank for real US people like Wells Fargo met expectations. Add this to the better consumer confidence reading and it gives me hope that the US economy is on track to deliver in 2015.
  • European stock markets’ rises ahead of January 22 – gee I hope we don’t cop another Draghi disappointment.
  • Our economic data here – falling unemployment despite a rising participation rate, record high housing starts, record high building approvals, seven months in a row of rising job ads and a lot more. I’m hoping that our economy is better than expected, meaningwe won’t need a rate cut and possibly this better than expected economy will mean better than expected earnings from key companies.
  • Reading J.K. Galbraith’s great book The Age of Uncertainty again, which reminds you that when you’re an investor you’re always uncertain in the short run. It’s the long run you have to be focused on and it’s really smart if your investments can pass the quality asset test. If they don’t, you better be in them for a short-term gain!
  • The Switzer family acquired a quality asset at 7.24pm last Saturday called Sloane Switzer and she is our first grandchild by Martin out of Jess! And not even a sloppy stock market, where we lost 3% for the week, could dent my optimism about Switzer stocks!

Top stocks – how they fared

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

  • This week, I told you that the best way you can play oil in 2015 is to buy the index.
  • My colleague Paul Rickard gave you our brand new high-income stock portfolio for 2015.
  • Fund manager George Boubouras revealed his investment resolutions for the new year.
  • The brokers upgraded NAB, QBE and Santos.
  • Roger Montgomery said Australian company managers who “cut the fat’’ by reducing excess expenditure and also focus on strategy and innovation – like Seek, Ramsay and Challenger – are in a good position to outperform.
  • And small caps like ARB Corporation, Regional Express Holdings and Lindsay Australia could benefit from oil’s price tumble, says Tony Featherstone.

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

  • Falling oil and iron ore prices – and forecasts of further falls – continued to rock the market this week.
  • China’s trade data – which showed that exports had risen 9.9% over the year although their trade surplus had narrowed from $US54.5 billion to $US49.1 billion during the month of December.
  • Employment rose by 37,400 in December to a record high of 11,679,400, following a 44,900 rise in November. The unemployment rate also fell from 6.2% in November to 6.1% in December.
  • “Francogeddon” – the Swiss National Bank scrapped a three-year old cap on the franc, sending the currency sky-high against the Euro and pushing stocks downwards!
  • The US Fed Reserve Beige Book – which gives reports from the 12 Fed districts – suggested falling oil prices are starting to have a negative effect on jobs.
  • And the World Bank cut its global growth forecast for 2015 to 3%, down from 3.4% forecast in June.

The week ahead:

Australia
Monday January 19 – State of the States (January)
Monday January 19 – Monthly inflation gauge (December)
Monday January 19 – New car sales (December)
Tuesday January 20 – Imports of goods (December)
Wednesday January 21 – Consumer confidence (January)
Thursday January 22 – Detailed employment (December)
Thursday January 22 – New home sales (November)

Overseas
Sunday January 18 – China House prices (December)
Tuesday January 20 – China Economic growth (December quarter)
Tuesday January 20 – US NAHB housing market index (January)
Wednesday January 21 – US Housing starts (December)
Thursday January 22 – Markit “flash” manufacturing (January)
Thursday January 22 – US Home prices (November)
Friday January 23 – US Existing home sales (December)
Friday January 23 – US Leading index (December)

The States battle it out for the top spot for “economic performance” in CommSec’s State of the States survey – released Monday. Also out on Monday are the ABS figures for new car sales in December, and TD Securities and the Melbourne Institute release their monthly inflation gauge for December. The ABS is back on Tuesday to release imports of goods for December, and on Thursday, there’s more detailed employment data due along with November’s new home sales.

The biggest one to watch overseas is China’s data on economic growth – or GDP – for the December quarter. The US does have a fair bit on its agenda, but most investors will probably be paying attention to company reports as US earnings season is in full swing.

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

  • Switzer political expert Malcolm Mackerras made the call that the upcoming Queensland state election will see LNP premier Campbell Newman win the general election but lose his own seat. He tipped Lawrence Springborg to take Newman’s place as the post-election premier.
  • Charlie Aitken is back, and he wouldn’t be Charlie if he didn’t bring a high-conviction stock pick with him – he kicked off 2015 with the call “make sure you own enough Telstra’’ – and upgraded his 12-month forward price target to $7.00, from $6.40.
  • Italian artist Cristina Guggeri depicted religious and world leaders doing the “daily duty” in her digitally edited photo series – just to remind us that everybody poops of course!
  • And Golden Globes host Tina Fey delivered this call in her monologue with co-host Amy Poehler; “George Clooney married Amal Alamuddin this year. Amal is a human rights lawyer who worked on the Enron case, was an adviser to Kofi Annan regarding Syria and was selected for a three-person UN commission investigating rules of war violations in the Gaza strip. So tonight, her husband is getting a lifetime achievement award.”

Food for thought

No one’s ever achieved financial fitness with a January resolution that’s abandoned by February.

Suze Orman – American author and television host.

Last week’s TV roundup

  • Paul Rickard and I take a look back at 2014 to answer the question – was it really that bad a year? We discuss the key investment themes of last year and give a rundown of the best and worst performing sectors.
  • Did you miss out on our monthly Switzer Super Report webinar? Paul Rickard and I talk stocks, the economy, and answer your questions to help you invest well this year.
  • And here’s a Super Sessions highlight from last year on investing overseas. We tell you how to take advantage of some great opportunities for your portfolio.

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, one of the biggest movers was Monadelphous Group, with its short position increasing by 1.43% to 8.23%. Metcash followed closely, with its short position increasing by 1.21% to 11.86%.

Source: ASIC

My favourite charts:

Winning portfolio – annual average 2-year return

Since our SSR income portfolio started – over two years ago – the average annual return has been almost 16%! Here it is against the accumulation index, which had average annual returns of 12.67%.

Solid lift in employment!

Source: CBA Economics

It was good news for our unemployment rate, which decreased to 6.1% in December, the lowest rate we’ve seen since August last year. The number of people employed increased by 37,400 to 11,679,000 in December (seasonally adjusted). But this graph – illustrating cumulative employment since January 2010 – shows that not all states are growing.

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Recent Switzer Super Reports

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.