Switzer on Saturday

Dog-gone double devaluation & Don’s Domino’s

Founder and Publisher of the Switzer Report
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It has been a dog-gone doubly devaluating week for China, which stole the limelight from reporting season but external or foreign events have a habit of railroading the local issues that should be a lot more important to the companies we invest in. Of course, the bottom line health of those companies eventually wins through but, in the short-term, external stuff can be distracting.

Case in point? Domino’s Pizza here in Australia, where the share price is up over 60% in a year! I’ve interviewed the CEO, Don Meij, over the last three years and he’s always talked up his company, its overseas expansion, its hi-tech innovations linked to better customer service and the fact that France is the second biggest pizza market in the world! How does that happen?

Need more proof that a company’s reporting story eventually wins through over external events? Well, just remember how the GFC hurt the CBA’s share price, which was under $30 in 2008 and now look at it. We squeal and buy it in the low $80 region, so how good does the one-in -23 offering look at a 13% discount to $71.50 for existing shareholders?

Given the China devaluation story was over-hyped and those poor guys in Beijing are just trying to put more life into an economy we’ve all heavily depended on, especially since the GFC, the CBA story is the big one for the week. Don’t forget that China was the economy that rode to capitalism’s rescue when the GFC showed how dodgy capitalism can be! China spent big time and didn’t complain when the US used quantitative easing so aggressively that our Aussie dollar went as high as $US1.10! Sure, there was a bit of a mining boom in that dollar exchange rate but there was also a lot of weak greenback. The Yanks used a huge devaluation to resuscitate their economy, so we hardly should be chiding China for a bit of currency crushing.

The devaluation was only 3% but the yuan is up 30% in five years in real trade weighted terms and 80% over the past decade. Give ’em a break!

What I liked this week

  • AMP’s Shane Oliver telling me that 51% of Aussie company results have beaten expectations and 61% have seen their profits rise from a year ago. On top of that, dividends are up, with 68% of companies raising their dividends and only 8% cutting them.
  • The Westpac consumer sentiment spiking 7.9% in August to 99.5, so optimists are nearly on par with pessimists, which happens with a reading of 100.
  • The estimate of family finances is up 15.5% on a year ago, which has to be a positive sign for the comeback consumer concept, which is needed to help our economic growth get out of the 2%-band and into the 3%-band when unemployment falls.
  • The NAB business confidence reading remained positive but fell from an 11-month high of 8.2 to 3.5, which is better than a negative reading we saw not too long ago. I think the Abbott Government needs to get the political agenda back onto talking up and helping the economy, instead of being bogged down by entitlements and same sex marriage. You can see leadership talk happening as November and “the killing season” looms – the economy doesn’t need more of this. (You should read political journalist David Speer’s blog on Friday called “Killing season closes in” on Switzer Daily)
  • Investors liked hearing that Warren Buffett’s Berkshire Hathaway was buying Precision Castparts for US$32.3 billion, showing Wazza is investing with a positive outlook on the US economic recovery.
  • US retail sales rose by 0.6% in July, beating expectations and Wall Street liked it. A September interest rate rise is back on the cards but it’s still only 50-50 if you look at the betting.

What I didn’t like

  • The read on Chinese economic data suggests the slowdown there continues so the devaluation makes perfect sense. Retail, industrial production and urban investment were all a little under expectations and/or previous readings.
  • Wage growth is at an 18-year low of 2.3%, which is a brake on the economy and consumer confidence. That said, real wages rose as inflation is under 2%! Who would have ever believed that would happen or home loan interest rates are in the 4% range? (Our Switzer Home Loans are now at 4.19% and that’s both the advertised and comparison rate! And a five-year fixed rate is 4.88%, which I would never have believed possible a few years ago or that I’d actually have my own home loan business!)
  • The commodity price story this week, which was not helped by China’s devaluation, which pushed up the greenback. This never helps commodity prices.
  • European shares recorded the biggest one-day fall in 2015 on Wednesday, after China’s second devaluation, which confirms a story I wrote a few weeks back when I said forget Greece, China is the big watch.
  • Nick Kyrgios, his antics, his not so clever sledging to Stan Wawrinka and his hair! The weak bums at the WTA fined him $10,000 but you have to hope Stan’s girlfriend, Donna Vekic, sues the arse off Nick. Only a big loss of money would shut this dope’s big mouth.

Tip: Let your kid play basketball

This week, Michael Jordan’s battle with a grocery store that used his name without permission in an ad in 2009 has shown us what he has earned being the greatest NBA player of all time.

Nike has paid him $US480 million, Sirius radio $US25 million, Gatorade $US18 million, Upper Deck $US14 million, etc. And CNBC says for a personal appearance the price range is $5,000 to $500,000! He even has a trademark on his famous number 23!

Jordan has to be one of the greatest slam-dunk sports stars of all time, when it comes to leveraging his brand.

Top stocks – how they fared

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The week in review

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What moved the market

  • China’s curve-ball currency devaluation shocked Wall Street.
  • Commonwealth Bank’s $5 billion capital raising, which although largely expected, still weighed on the other big banks.
  • US retail sales rose 0.6% in July from June levels to $US446.5 billion, beating expectations.
  • And earnings season hasn’t really set the world alight. Although mostly on target, companies are having a hard time impressing the market.

The week ahead

Australia

  • Tuesday August 18 – Reserve Bank Board minutes
  • Tuesday August 18 – New car sales (July)
  • Wednesday August 19 – Skilled vacancies (July)

Overseas

  • Monday August 17 – US net capital flows (June)
  • Monday August 17 – US housing market index (August)
  • Tuesday August 18 – US housing starts (July)
  • Wednesday August 19 – US FOMC minutes
  • Wednesday August 19 – US consumer prices (July)
  • Thursday August 20 – US leading index (July)
  • Thursday August 20 – US Philadelphia Fed index (August)

Calls of the week

(click the blue text to read more)

  • RBA deputy governor Philip Lowe expressed concern about household balance sheets at an economic function in Perth. “I think it is difficult to escape the conclusion that household balance sheets are, on average, a little more risky than they once were,” he said.
  • Billionaire James Packer made the call to step down as chairman of Crown Resorts to spend more time in the US to focus on the casino’s global expansion plan.
  • Our dumb call of the week goes to Aussie tennis player Nick Kyrgios, who took his antics to a whole new level after sledging Swiss opponent Stan Wawrinka about his girlfriend on court.
  • SSR expert Charlie Aitken said you should bite the bullet and buy in gloom! Check out what companies he’s backing.
  • And my colleague Paul Rickard gave CBA a 6/10 – a bare pass! – for their full-year earnings announcement. Read his full article here.

Food for thought

Failure is success if we learn from it

– Malcolm Forbes, publisher of Forbes magazine.

Last week’s TV roundup

  • What’s going on with our banks? To explain if we should be worried – or if it’s just another buying opportunity – Switzer Super Report co-founder Paul Rickard joins the show.
  • David Bassanese from BetaShares talks about the important economic indicators. Is he bullish on the Aussie economy? Find out here.
  • Domino’s Pizza announced a 40% increase in full-year profit. We spoke to the company CEO, Don Meij, to find out what kind of innovation is needed to produce these results.
  • Carsales.com delivered on expectations with profits up – but the share price took a hit. To talk about the company’s full-year results, Carsales.com CEO Greg Roebuck visits Super TV.
  • Funds specialising in ethical investing have performed well in recent years. Simon O’Connor of the Responsible Investment Association Australasia explains the growing interest in these investments.

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 a 1.59 percentage point increase in the proportion of its shares sold short to 20.50%. The next biggest mover was Slater & Gordon, with a 1.13 percentage point increase to 13.31%.

20150814 - Large Short positions

My favourite charts

Yuan a talk about the dollar?

20150814 -yuan

The chart above shows the sharp devaluation of the yuan in comparison to the US dollar during the past week (blue line). The red line shows how the Aussie dollar is faring.

Debt savvy?

20150814 - lending

It appears we’re becoming savvier with our lending commitments, with total new loans (personal, business, housing and lease) rising by just 0.8% in June after easing by 4.3% in May.

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Paul Rickard: 3 reasons why you need to buy Asia
Tony Featherstone: 6 travel stocks to buy as tourist numbers soar

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