A disappointing finish to the week here after a bit of promise was shown but it was a lot worse on Wall Street, where the Dow dropped 350 points at one stage but ended down 279! Looking for reasons, it looks like concerns over Greece, Europe and China and the big earnings week ahead in the US all resulted in some smarties or nervous Nellies taking profit off the table.
After a huge spike in the Shanghai Composite, news that the Government was looking at regulating short selling to expand it and more news that there could be controls on over-the-counter margin trading! They do that there? Meanwhile, the Greeks are meeting with the IMF and as a default and an exit from the euro looks more possible, German bonds went lower while Italian, Spanish and Portuguese bonds spiked over 5%!
So with Chinese futures falling on the above news, add Greece and its ramifications and European stocks dived. The German Dax lost 2.58%, the French CAC dropped 1.55% and the Spanish IBEX was 2.17% lower.
That said, some are saying this could be the start of the overdue correction. I think there would have to be earnings disappointments to make that happen. On the other hand, a correction is overdue but it would only create a buying opportunity.
Locally, in case you missed it, we did get as high as 5996.4 on Monday but China didn’t help. Then there was the slide in the iron ore price and Goldman Sachs downgrading our miners – Fortescue and Rio – as its iron ore price prediction of $US45 a tonne was taken on board by the market. The current price is closer to $US50.
The stock market lacks conviction to buy or even to really sell off but there are a few challenges and the odd glimmer of positivity out there.
The jobs number for March was a ripper. I hope this is the first sign that the real job market is showing what the ANZ job ads have shown for nine of the past 10 months.
Once again, if you missed it or your favourite newspaper failed to give it enough prominence, unemployment fell in March from 6.3% to 6.1%. More importantly, the new jobs created numbered 37,700. Adding to the positivity, the February figure, which was first reported as 15,600, was revised up to a whopping 41,900, which suggests someone at the ABS needs a new calculator!
Good times continue to roll, with full-time jobs up 31,500 out of the 37,700 new places created. The news is even better when you look at the five-month numbers, where 155,000 jobs turned up, the best result in four years!
If more jobs means a better economic recovery in the second half, which I’ve been predicting, then profits should rise and share prices will follow. Of course, the 10% rise in the market this year has been based on something and you’d hope it was economic recovery leading to profits and then higher share prices.
Against this good news, consumer confidence fell 3.3% to 96.2, China’s economic data was weaker with growth at a 10-year low and Greece is causing problems for Europe with the German Dax falling 1.9%. Why the big drop? This is how Craig James of CommSec explained it: “A report in the Financial Times suggested that the IMF had denied a request from Greece to delay loan repayments. Greece later denied the report, with the Prime Minister saying he was ‘firmly optimistic’ his government could reach an agreement with foreign creditors by the end of April.”
To be honest, when I have to choose between the FT and a Greek official, I tend to use history, – the latter’s form hasn’t been reliable! At the moment, our miners are really sensitive to European positivity and negativity. Anything negative out of Europe isn’t good for BHP’s and Rio’s share prices showing the link.
I can’t see Monday being a good day at the office for stocks here, so brace yourself for more negativity.
Timely research of the week goes to Morgan’s chief economist, Michael Knox, who tested the old maxim (which doesn’t always work, so I guess you’d call it a “minim”), which goes: “Sell in May and go away, come back on St. Leger Day.” Knoxy found a not reliable seasonal stocks story, apart from the apparent peaking of stocks in April (I said it was timely) but there is evidence to say being a buyer as early as June can be rewarding!
I’m hoping by late July we will have seen another good jobs number to prove the ABS calculators are trustworthy, then the RBA cuts rates in May to help confidence get on a roll and then the Budget actually promotes growth and jobs. These are my high hopes but I’ll be even more bullish if I can pull of this trifecta, or is it a treble?
What I liked this week.
- Despite my objective advice, the PM came over and shook my hand at the ACCI lunch on Wednesday in Sydney and this was captured on Sky News TV!
- Labor’s new attack dog, Senator Sam Dastyari, approached me at the airport to talk about the ANZ admission of not looking after some of their financial planning clients. He’s not the total loose cannon I thought he was.
- The Philadelphia Fed’s business outlook index for April came in at 7.5 from a reading of 5, which was above expectations. I’m arguing that soft spots in the US economy are weather related, though there will be some higher greenback problems for companies and some industry sectors.
- This from David Kelly, chief global strategist at J.P. Morgan Funds: “I think the economic numbers were a little weaker than expected but overall that does not change the underlying story.” He tips first quarter growth under 1% but growth of 2.5% to 3% for the second quarter (CNBC). That’s the economic comeback I want to see.
- Financial companies are doing better than expected, which means the -3% earnings predictions could be too negative for Wall Street.
- ECB boss Mario Draghi saying he wasn’t ready to “contemplate” a default by Greece and dismissed fears of a bubble in bond markets. Hope he’s right!
- Crude oil extended gains to settle up at $US56.71 a barrel on Thursday, the highest level so far this year. It did hit $US57 a barrel for the first time since Christmas Eve.
- My interview with Simon Conn of Investors Mutual – some great small cap insights – see below.
- US NAHB homebuilder sentiment rose from 52 to 56 in April. A reading above 50 means more builders view market conditions as favourable.
- My cautious support for Santos on Monday, when Ron Bewley was strongly tipping the stock. This chart captures the happiness:
[1]- European shares rallied to fresh 15-year highs on Wednesday, as comments from the head of the European Central Bank reiterated the commitment to “firmly” rollout out its quantative easing program. Draghi added that the ECB can support Greece as long as it remained solvent.
What I didn’t like
- S&P cut Greece’s credit rating to CCC+ from B-, plus a negative outlook!
- China growing at 7% – the weakest number in six years. The overreaction to the number stopped us getting to 6000. The figure is better than many expect and HSBC’s chief economist, Paul Bloxham, agrees with me.
- The small rise in NAB’s business confidence reading from -0.1 to +2.5 but business conditions did go from +2.1 to +6.1, which was pretty good.
- The warning from Treasury that the Budget bottom line would be hit $25 billion
from iron ore going from $US60
to the current sub $US50 price. When Tony Abbott was elected, the price was $US160! - The ‘no rate cut’ has seen Michael Knox take his fair value guess on the S&P/ASX 200 down to around 5800 from his 6100 or so approximation.
- Consumer sentiment dropping 3.3% to 96.2, which means pessimists outnumber optimists. This is why I want a good job number in March to be followed up by a rate cut in May and a positivity-generating Budget one week later.
Another thing
I feel some headwinds ahead and we could see stocks head lower. I wrote this on the plane home from Perth on Friday night before Wall Street slumped! I was in Perth doing a speech for IGA at their conference. I’m glad my in-house accountant told me during the week that our cash balance is building up. I feel a buying opportunity coming. It might be after May but I’ll be ready.
Top stocks – how they fared
[table “68” not found /]The week in review (click the blue text to read more):
- This week, I explained how worried [2] you should be about a market crash.
- My colleague Paul Rickard told us which supermarket giant is better – Woolies or Coles [3].
- James Dunn dug through small and mid-cap stocks to come up with five good yielders for under $5 [4].
- Ron Bewley told us which sector is best [5] to invest in, but reminded us of the importance of diversification.
- The brokers upgraded [6] Alumina and Evolution Mining and downgraded Incitec Pivot. In our second broker report [7] for the week, Mirvac Group and Suncorp were upgraded while BHP was downgraded.
- Tony Negline explained how you can split your superannuation with your spouse to avoid pension changes [8].
- And our Questions of the Week [9] looked at dividend swapping and the best and safest hybrids.
What moved the market:
- Stronger oil prices, with crude oil finishing at US $56.71 a barrel on Thursday – the highest level reached this year.
- A drop in the Aussie unemployment rate to 6.1% in March.
- And worries about a slow process in bailout negotiations between Greece and international creditors after Standard and Poor’s cut Greece’s long term credit rating by one level to CCC+.
The week ahead:
Australia:
• Tuesday April 21 -RBA Board minutes
• Tuesday April 21 – Imports of goods (March)
• Tuesday April 21 – Weekly consumer confidence (April)
• Tuesday April 21 -Speech by RBA official
• Wednesday April 22 – Consumer Prices (March quarter)
Overseas:
• Monday April 20 -Chicago Fed Index (March)
• Wednesday April 22 – US Home prices (February)
• Wednesday April 22 – US Existing home sales (March)
• Thursday April 23 – US New home sales (March)
• Thursday April 23 – Markit “Flash” manufacturing (April)
• Friday April 24 – US Durable goods orders (March)
Next week, there’s not too much on the economic calendar, but that doesn’t mean what’s there isn’t important, with the official inflation rate – or consumer price index – released on Wednesday. The RBA will shed more light on its last interest rate decision with the release of the board minutes on Tuesday and on the same day, RBA Governor Glenn Stevens is set to deliver a speech to an American Australian Association luncheon.
Overseas, the US is the focus and key releases include Thursday’s flash manufacturing figures for April, along with two important markers for the housing sector – US home prices for February and existing home sales for March – both out on Wednesday.
Calls of the week (click the blue text to read more):
- A young woman jumped up on the desk of European Central Bank’s Mario Draghi during a news conference [10], showering him in confetti and calling for an “end to the ECB dictatorship.”
- In this week’s SSR, Charlie Aitken said Macquarie remains a high conviction buy [11], which could reach $100 in the not-too-distant future and help the ASX/S&P 200 hit 6200.
- And my colleague Paul Rickard said the Government’s proposed changes to the pension taper rate mightn’t necessarily be a bad thing – you can check out his full article here [12].
Food for thought
A successful man is one who can lay a firm foundation with the bricks others have thrown at him.
David Brinkley – US Journalist
Last week’s TV roundup
- To find out whether Woolies is poised to go lower and if Wesfarmers is too pricey, former CommSec CEO and Switzer Super Report expert, Paul Rickard, shares his insights [13].
- Respected market player and Perennial Value Limited managing director, John Murray, talks to us about his new listed investment company called Wealth Defender Equities [14].
- Simon Conn, senior portfolio manager at Investors Mutual, tells us if now is a good time to be playing small caps [15].
- And in our latest Super Sessions [16] update we talk about investing outside the Australian market, with a focus on the US.
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 Myer Holdings, with its short position increasing by 1.20% to 18.77%.
[17]Source: ASIC
My favourite charts:
Jolly good jobs numbers
[18]There were some exceptional employment numbers released this week, with over 155,000 jobs added in the past five months. In March, employment rose by 37,700, and February’s gains were were revised to 41,900 from 15,600.
Top 5 most clicked on stories
- James Dunn: Five top yielders under $5 [4]
- Peter Switzer: How worried should you be about a market crash? [2]
- Peter Switzer: I do this to make money so read this! [19]
- Paul Rickard: Woolies or Coles? [3]
- Tony Featherstone: 6 Aussie small caps reaping the benefits of being born global [20]
Recent Switzer Super Reports
- Thursday, 17 April, 2015: So close, but yet so far? [21]
- Monday, 13 April, 2015: Don’t be rude about the market [22]