Revelations, Ronald Reagan and Roger’s Top 10

It’s been a big week of revelations for me. The overdue correction, or pullback, that we’ve endured on our market has finally spread to the USA. It now looks like a Santa Claus rally, which turns up 80% of the time, might not be on the cards for 2013. I guess you could argue Santa turned up early this year, with the Dow up 20% for the year, if you add in dividends! That’s a huge gift for US investors.

That said, never underestimate the Yanks’ loving of Santa – it’s a shopping thing, and no country shops until it drops like the USA!

In fact, after three sessions to the downside, stocks were up when I got up early today to knock this piece up. Considering tapering of QE3 could easily start next week, if the experts are to be believed, then for buyers to be outnumbering sellers on Wall Street is huge.

Helping to keep it positive was the US House of Reps that signed off on a budget deal to reduce the size of automatic spending cuts. Apart from averting another government shutdown, this should help sort out a future debt ceiling drama due for February. This still has to be signed off in the Senate and by President Obama, but it’s all likely.

By the way, Morgan’s chief economist, Michael Knox, explained this week that the US budget deficit, which was a big 7% of GDP, is heading to 4% of GDP next year, which is quite a turnaround. This is due to a faster growing US economy and that’s a tick for QE3. Also the sequester (the automatic cuts) has helped the budget bottom line. However, it shows why the Fed has to taper slowly or else this fiscal forcefulness could undo the good growth that’s now showing up. It could also explain why tapering won’t start next week. Don’t give up on Santa!

Here’s the other view on tapering. Recent job creation plus other good economic data plus comments from regional Fed presidents, plus the budget deal and the level of bond yields, all suggest tapering could start next week. But I hope they wait, which will help Santa have a last shot at a late-year rally.

The local sell-off

At home, our stock market is down about 7% since October but including dividends, we’re up about 17% for the year. A big revelation on this front is that our index is down around 6% for the year, if you measure it in US dollar terms! Now my first reaction to this titbit, was (as I only care about Aussie dollars) “so what?” But the penny dropped that this explains why foreigners have been less keen on local stocks recently, which helps explain why we’ve been succumbing to gravity and why Wall Street has been defying it.

Throw in the revelations I’ve made over the past few weeks that fund managers, like Geoff Wilson and Roger Montgomery, were telling me that they just couldn’t find any value in the market, then the recent (and overdue) pullback makes sense.

Small news, big omen

Sticking to big revelations, I loved hearing from Christena Singh, who authors the Sensis Business Index. She says small to medium businesses (SMEs) are on a business confidence surge, driven by a boost in demand not just a new government. And on the perceptions of the economy front, the reading was the best since 1996!

This Index has been an economic indicator I’ve used for many years as a more accurate guide to what’s going on in the real economy.

But wait there’s more! I interviewed John Edwards on my Sky Business program and while he’s a board member of the RBA, he actually gave some strong tips, if you read between the lines.

Edwards, who was the economic adviser to Paul Keating from 1991, wrote the best book on the man – Keating: The Inside Story. He has been the chief economist at places such as HSBC and Soc Gen. He would have sway in the RBA meetings because of his economic credentials, so I was really happy to get him on the show.

In a nutshell, he thinks the economy needs more help with the mining boom petering out. He’s not impressed with housing bubble hype in newspapers and wants the dollar to fall.

My bottom line take out message was don’t expect interest rate rises soon and don’t rule out another cut, though he didn’t say that – it’s my interpretation.

One related revelation was he said the RBA board benefited from “voluminous” contributions from the likes of me, who gave the Bank a lot of curry over their slowness to cut rates. I might get a Christmas card from Glenn this year!

Roger’s top 10 holdings

As it was my last TV show on Thursday until January 20, I asked Roger Montgomery what he liked. He still thinks the recently-listed Veda is good value but also shared his top 10 holdings in his fund as we go into 2014. Here they are:

Seek
CSL
Woolworths
McMillan Shakespeare “on watch”
TPG
G8 Education Ltd
Challenger
The Reject Shop
Ainsworth Game Technology; and
Resmed.

Roger pointed out that the maximum weight he has with any one of the above stocks is 6.5%, which means if one company has some trouble “we won’t blow up the farm”. That’s a valuable revelation as I know people who’ve held only the four banks and Telstra in their SMSF and they’ve done well. But if one stock is a victim of a bad government decision or a crazy CEO, it could KO 20% of their portfolio. I like at least 20 stocks, and I’ve said this countless times before, as it protects me from what can and will happen on stock markets.

Reagan’s budget beauty

With the US Congress coming up with a timely deal and the exit of Holden underlining that budget realities are telling us we can’t keep on paying out taxpayer dough to bankroll a losing business, it reminded me of one of former US president Ronald Reagan’s great lines about bad budget behaviour.

“Government is like a baby – an alimentary canal with a big appetite at one end and no sense of responsibility at the other!”

Top stocks – how they fared

Numbers that moved the market

Apart from some strong (but relatively unimportant) job numbers in Australia, the main action this week was focused around the US.

Our dollar has finally dropped back below 90 US cents. This is a good sign because it means our market is starting to look more attractive to overseas investors, but there’s still room for improvement. In an interview this week, RBA Governor Glenn Stevens said that 85 US cents could be a good price for the currency.

Strong data continues to pour out of the States, and this week’s retail sales were no exception. November sales beat forecasts to rise by 0.7%, showing US consumers are starting to feel more confident with the state of the economy.

Also this week the US Congress passed their budget deal (the US Senate is expected to pass it next week). While the deal had a negative effect on stocks on Wednesday, the strong economic data teamed with politicians getting their act together is contributing to the argument that tapering could start this week.

The week ahead

Australia
December 17 Mid-Year Economic & Fiscal Outlook
December 17 Population (June quarter)
December 17 New car sales (November)
December 17 Reserve Bank Board minutes
December 17 Speech by Reserve Bank official
December 18 Reserve Bank Governor testimony
December 19 Reserve Bank Bulletin
December 19 Financial accounts (September quarter)
December 19 Detailed employment (November)

Overseas
December 16 US Empire State survey (December)
December 16 US Industrial production (November)
December 17/18 US Federal Reserve meeting
December 17 US Consumer prices (November)
December 18 US Housing starts (November)
December 19 US Philadelphia Fed (December)
December 19 US Existing home sales (November)
December 20 US Economic growth (September quarter)

For those who aren’t already on Christmas holidays, it’s business as usual next week in the finance world. Minutes from the Reserve Bank’s latest meeting will be released on Tuesday as well as data on car sales, which is timely considering the recent announcements in the industry.

On the same day we’ll see the mid-year budget review. This review will detail the updated position of the budget as well as Treasury’s latest economic assumptions. The following day parliamentarians get to grill RBA Governor Glenn Stevens when he speaks before the House of Representatives Economics Committee. Doesn’t that seem the wrong way around to you?

But the event which will have economists across the globe holding their breaths is in the US, when the Federal Reserve has their final meeting for the year. The question on everyone’s lips: to taper or not to taper?

Calls of the week

As was well publicised this week, Holden have made the call to pull up stumps and stop manufacturing in Australia.

After almost 12 months of editing the Switzer Super Report our author, Penny Pryor, is making the call to set up an SMSF of her own!

It was a bold call from the crossword author who hid the words “Murdoch is evil” on line three of his puzzle in Murdoch’s own Sunday Telegraph last weekend.

And my favourite call this week goes to the sign language interpreter at Nelson Mandela’s memorial service, who apparently made up his signs as he went along.

Last week’s TV roundup

Paul Rickard’s portfolios (read his latest update here) are always click magnets in the Switzer Super Report. Peter caught up with Paul to discuss what stocks he used, how he selected them, how the portfolios have performed and what can be expected moving forward.

As the festive season rolls in, can Lance Lai see a Santa Claus rally? We reveal the king of charts’ findings as he joins Peter on the show.

Was it economically sensible for the Abbott Government not to dangle buckets of money in front of General Motors, or is a decision we one day might regret? For an informed economists view, Peter spoke with Saul Eslake, Australian Chief Economist at the Bank of America, Merrill Lynch.

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.

Despite retreating by 0.7%, Cochlear is still out in front as the shortest stock on the market. The biggest mover this week was Bradken Limited, who came down 3 spots on our list after closing their short positions by 1.04%.

My favourite charts

ASX (green) vs AUD (Blue)

While the ASX has copped a beating over the last couple of weeks, the Aussie dollar has also been falling which should help stocks climb back up.

The bubble talks seem to have been put on the back burner recently (thank God!), but the property market is still chugging along nicely. As the chart shows, there is around $26 billion worth of home loans in the market at the moment.