It's China, China, China! - Switzer Report

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The week that was, was, simply, China! China! China! A bad week for commodities, blame China! A bad week for stocks, blame China! A bad week for the dollar (though I quite liked that) blame China!

You might recall that about a month ago, while lazing on the island of Lemnos in the northern Aegean, I argued that Greece was a sideshow and the main game would be China. That was before the 30% sell off of the Shanghai Composite. Of course, I stressed that if you have a crazy market that goes up 150%, it’s not so crazy to see a huge retracement of 30%. Then I argued that it’s not clear that this market fall would have a big impact on the economy. Others pointed out that only 98 million Chinese play stocks and that’s a small group in a country of 1.357 billion people. We’re talking only 7% of the population and not all these would have been losers over the year, as the market is still up around 120%!

But then along came Ray Dalio. Ray who? You might well ask! He’s a market guru and founder of Bridgewater Associates in the US and this once China bull came out on Thursday and changed his view on the economy, its potential and the effect of the stock market sell off. And Wall Street bought it but happily not excessively, with the Dow only down 119 points and some of that fall was because of some weak company reporting news.

But it didn’t help little old us – Australia. We copped the China negativity backwash, which hurt commodity prices and BHP’s share price. The Oz dollar is now at 73 US cents, though it was as low as 72.7 US cents yesterday. And then the China syndrome took stocks down 1.8% for the week!

China has certainly put us into the red, to create a corny joke.

And matters weren’t made better when, on Friday, the old HSBC PMI reading (which is now called the China Caixin PMI), came in at 48.2 against a Reuters forecast of 49.7. This says manufacturing in China is contracting (in fact, it’s at a 15-month low) and explains why commodities are soft.

Not helping stocks is Wall Street, where the feeling is that reporting season has had some star failures, such as Apple and IBM, even if the former’s F was a pretty harsh market markdown. Many of these companies are copping headwinds from a rising dollar as they sell a lot overseas.

That said, until Friday, over 70% of S&P 500 companies actually topped revenue expectations, which was something that US companies could not do for many years after the GFC, with most achieving profits via cost-cutting. This has to be a good sign. Why then is the Dow going nowhere and our stocks fighting gravity?

Well, there’s been Greece, the overhang of the fact that the Fed is poised to raise rates eventually, US stocks have been at all-time high levels, OPEC hasn’t helped energy prices and then there has been China with softer data, a crazy stock market and the number of China doubters growing.

On Monday, I’ll take you to China to see if it really is going to let us down!

What I liked

The weak PMI number in China will encourage the authorities to throw more stimulation at the economy.
The Oz dollar is 72.83 US cents this morning, which will be good for the economy going forward. I’m glad I’m home from overseas though.
Despite current negativity, Credit Suisse has lowered its near-term target for the S&P ASX 200 index to 6000, from 6500 but it’s still a 6000-level believer. Love the Swiss!
Julian Evans-Pritchard, a China economist at Capital Economics, doesn’t believe the recent stock market turmoil was to blame for the disappointing data, citing a “weak link” between equity prices and consumption on the mainland. (CNBC)
Tame inflation here and weekly consumer confidence up over 4%. We need a run of these good confidence numbers. Even the RBA boss was surprised about our better-than-expected labour market.

What I didn’t like

Five bad days in a row for mining stocks this week, with material stocks off 4.6% and energy down 3.5%.
Iron ore prices are down 21% since mid-June and BHP at $23.27 is a real shock, though you have to think “this must be a buy for a long-term investor or Andrew Mackenzie and the BHP board need to be boiled into a haggis!”
What a rising greenback and a weaker China economic story does to commodities.
Gold at $US1,090.25, which was the lowest level since March 2010. I’m glad I don’t invest in the stuff because I don’t understand it but I’d like to see it higher, as it makes you think growth and inflation is around the corner.
The Dow has been in and out of winning and losing territory 21 times since November 2014 and is locked into a sideways pattern. At least it’s defying the overdue big fall that the likes of Geoff Wilson of WAM says he thinks has to happen, eventually.
That China PMI number.
Me having more “what I didn’t like” compared to “what I liked”!
This zinger from Donald Trump, who leads in the Republican race for the Presidential nomination. Trump bagged the Democrat’s Sen. John McCain, regarded as a war hero after spending five years in a Vietnamese POW camp: “I like people who weren’t captured.” As one wit suggested, after that comment, someone in the Republican team has to tell Trump: “You’re fired!” (By the way, Trump leads a pack of 10 possible Republican candidates in terms of popularity! Only in America!)

Positive thought for the week

It’s gotta get better next week and I’m praying that Credit Suisse’s analysts are an exceptional team. Go the Swiss but they might need some help from our buddies in, you guessed it, China!

Top Stocks – how they fared

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The week in review

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I told you whether or not you should continue to be optimistic about stocks!
Paul Rickard road tested the new listed investment company from Contango Asset Management, which offers impressive diversification and a 6.5% yield!
Our Super Stock Selectors said there’s value in Greencross, Surfstitch and bank hybrids.
James Dunn explained why there is room for M&A activity among some of the larger building materials stocks.
Charlie Aitken said the two sectors that look like good value (and have bottomed) are China H shares and Aussie banks.
Ron Bewley said that moving forward, yield stocks will continue to yield, but their future may not be as good as the historical long run.
The brokers upgraded Seek and Eclipx Group, and in our second broker report for the week, iSentia copped a downgrade.
Our Fundie, David Aylward of Tribeca Investment Partners, told us why he sees value in Amalgamated Holdings.

What moved the market

The NASDAQ took a hit after less than impressive reports from tech heavyweights Apple, Microsoft and Yahoo. Caterpillar disappointed on Thursday.
The Reserve Bank governor, Glenn Stevens, said a further interest rate cut remains “on the table”, but evidence of further economic weakness will not automatically trigger a cut. “…It is not quite good enough simply to say that evidence of continuing softness should necessarily result in further cuts in rates, without considering the longer-term risks involved,” he said at the annual Anika Foundation Luncheon in Sydney on Wednesday.
There were weaker than expected inflation figures, with the Aussie consumer price index (CPI) rising by 0.7% in the June quarter, and 1.5% in the year to June.
And resources stocks took a slide, with BHP Billiton flagging write-downs of US$650 million dollars, mainly due to its copper business. But that doesn’t mean BHP shareholders should necessarily jump ship – Paul Rickard explains why in our Questions of the Week.

The week ahead

Australia
Tuesday July 28 – Weekly consumer confidence index
Thursday July 30 – Import & export prices (June quarter)
Thursday July 30 – Building approvals (June)
Friday July 31 – Producer price indexes (June quarter)
Friday July 31 – Private sector credit (June)

Overseas
Monday July 27 – US durable goods (June)
Tuesday July 28 – US Case Shiller home prices (May)
Tuesday July 28 – US consumer confidence (July)
Tuesday July 28 – US Richmond Fed Manufacturing index
Wednesday July 29 – US pending home sales (June)
Wednesday July 29 – US Federal Reserve meeting
Thursday July 30 – US economic growth (June quarter)

Calls of the week

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You would be living under a rock if you haven’t heard about the Mick Fanning shark attack by now, but it still deserves a mention! Apparently Bronwyn Bishop made the call to give him a hand…

Source: Twitter.com

Online hackers – who go by the name of “The Impact Team” – made the call to steal large amounts of data from online infidelity website, AshleyMadison.com, and leak the information online! That’s cause for concern for the alleged 37 million not-so-anonymous users!
Don’t go calling Republican candidate Donald Trump a “jackass” – because he’ll reveal your mobile number to the masses, like he did to rival presidential candidate, Lindsey Graham. Lindsey Graham hit back by making this hilarious YouTube video of him destroying his mobile device.
And increases to the GST and Medicare levy remain on the table, according to a statement released this week after the Prime Minister, state and territory leaders met at Sydney’s Victoria Barracks.

Food for thought

Optimism is the faith that leads to achievement. Nothing can be done without hope and confidence.

– Helen Keller, American author and political activist.

Last week’s TV roundup

In the first of our Switzer Super Report Q&As, Julia Lee from Bell Direct spoke to us about reporting season, the market outlook and why she likes paper and packaging company, Orora.
To explain why the banks aren’t scared of the new APRA regulations, Switzer Super Report co-founder and director, Paul Rickard, visits Super TV.
The man who specialises in takeover targets – Tom Elliott from Beulah Capital – tells us which companies could get caught in the cross hairs next.
And in this week’s Super Sessions, we talk about LICs and explain how ASX-quoted funds work.

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 Primary Health Care with a 1.43 percentage point increase in the proportion of its shares sold short to 11.06%. The next biggest mover was Slater and Gordon with a change of 1.21 percentage points to 10.25%.

Business spending continues to benefit from government stimulus measures in June, according to new figures from the Commonwealth Bank Business Sales Indicator (BSI). Spending at Business Services enterprises rose by 2.0% in June, which is the strongest increase in over three years, while nation-wide spending (or the overall BSI) rose by 0.7% in trend terms in June. In the year to June, annual growth also rose by 7.6%, which is above the decade-average trend of 5.3%.

Recent Switzer Super Reports

Monday 20 July 2015: What’s the time?
Thursday 23 July 2015: Happy Days

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.

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