Switzer on Saturday

That overdue pullback looks about due!

Founder and Publisher of the Switzer Report
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We’re now in testing time for the Trump rally, with the likes of US academic economist, Robert Shiller, saying “with valuations so high, it’s time to reduce holdings.” Meanwhile, AMP Capital’s Shane Oliver, who this week on my TV show signed up for the “stocks to keep going higher this year” club, of which I’m the self-appointed president, also argued the case for a pullback.

“While shares have generally continued to push higher, they remain at risk of a short term correction being technically overbought again,” he wrote on Friday. He also threw in another reason for a sell off: “with short term investor sentiment at levels often associated with corrections.”

What could trigger such a thing? Try a major President Trump misstep on economic issues, worries about Eurozone politics with the French election looming, policy tightening in China or signs of faster Fed rate hikes on the way.

His best guess was maybe a 5% slide but given his overall view, (which we share) any share slide will be another buying opportunity and my advice will be buy that dip once we’ve apparently hit the bottom.

At home, the S&P/ASX 200 index lost 1.2% over the week after a 0.8% drop on Friday, with a “mini-meltdown for metals”, as Fairfax media reported it. However, that wasn’t all. You might not have seen it because it’s hard to actually note but as Oliver calculated: “Australian shares retreated as profit results became more mixed towards the end of the profit reporting season.”

The chart below gives us the latest state of play and it shows 46% of companies beat market expectations on profit, while 28% came in on line but 26% were disappointing on what was tipped. The profit result was 59% better than a year ago.

swos-20170225-001

On the important subject of dividends (an issue close to my investing heart and my new Switzer Dividend Growth Fund or SWTZ), I liked the fact that dividends were up for 59% of companies so far!

Here are a few other notable facts about reporting season, with just over 92% of companies already doing their show-and-tell:

  • Only 50% of companies have seen their share price outperform the market on the reporting day because the Trump rally baked in a lot of positive expectations.
  • Consensus profit forecasts for the overall market for this financial year have been revised up by around 2% through the reporting season to a strong 19%.
  • The above upgrade was primarily driven by resources companies, which are on track for a rise in profit of 150% this financial year.
  • Profit growth across the rest of the market is likely to be around 5%.
  • “Outlook comments have generally been positive and as a result the proportion of companies seeing earnings upgrades has been greater than normal,” Shane Oliver observed.

On the economy here, I didn’t like the business investment numbers but you have to be careful about these kinds of stats because the disappointing aspect of the news was still related to mining companies still not prepared to increase investment. And some are still cutting, which explains the big rebound in their bottom lines. That said, equipment investment – a nice forward indicator, especially for the non-mining part of the economy – did pick up.

At least expected business investment or capital expenditure is on an upturn, as the chart below shows:

swos-20170225-002

The star loser of the week was Isentia, which lost 40.8% and yes, I will be following up with Roger Montgomery, who has had a better view on this company than the market right now. Ardent Leisure continues its slide of 24.7% over reporting week, while Worley Parsons lost 19.5%.

Blackmores gave up 12.8% but its CEO Christine Holgate says the Chinese tourists are still filling up their bags with vitamins!

Overall, when you add in the general conclusion on reporting season to the surprisingly improving views on the European, Japanese and Chinese economies, I remain comfortable about stocks over 2017. The biggest risks remain geo-political, with elections possibly to raise questions about the Eurozone’s longevity. And then there’s the persistent issue about President Donald Trump and how he might help or hurt stocks.

Ahead of the close, the Dow was down over 50 points but what fascinates me is that there is no excessive appetite for a sell off. It’s as though most market-influential players know that the market has got ahead of itself but they still have faith that Trump will get enough done to justify their optimism. If that changes, the market will drop 4% to 5% but as I argued above, it will be a buying opportunity. If he kicks his goals with no own-goals, via excessive protection that triggers a global get-even with the Yanks, then we will be off to the races in 2017 and 2018.

What I liked

  • BHP’s result and dividend increase – who saw that coming?
  • NAB, Westpac and ANZ all rose 0.6% over the week but CBA lost 2.8% but it went ex-dividend.
  • The Fair Work Commission’s decision to cut Sunday and public holiday penalty rates by 25% says a Labor-appointed body can be impartial and sensible, which means economic reform here in Australia might not be totally dead. We now have to hope the Senate can grow up and stop being a pathetic place for populists.
  • The RBA boss, Dr. Phil Lowe, told the Parliament’s Economics Committee that he was optimistic on the medium-term outlook for the Australian economy and that when it comes to mining investment, the pullback is “90 per cent” complete.
  • From the Fed, the key message from its minutes from its last meeting was that the US central bank is on track to raise interest rates again “fairly soon”, which means they rate the US economy strongly.
  • US existing home sales jumped by 3.3% to a seasonally adjusted annual rate of 5.69 million units in January – a 10-year high.
  • Eurozone business conditions PMIs (both manufacturing and services) improved further in February, pointing to acceleration in growth.
  • Japan’s manufacturing conditions PMI were positive in February, continuing a recovery since May last year and pointing to stronger growth ahead.

What I didn’t like

  • New business spending on buildings and equipment fell by 2.1% in the December quarter. Spending on buildings fell by 4.1% in the quarter but thankfully spending on equipment rose by 0%. Investment is down 15.5% over the year.
  • For the record, the average wage across Australia stands at $79,737 but they are not rising quickly enough.
  • The ANZ/Roy Morgan consumer confidence rating fell by 2.3% to a 7-week low of 113.7 in the week to February 19. Confidence is up 0.1% over the year and just above the average of 113.2 since 2014. Canberra and leadership tensions are no help!
  • The market dropping on the very day my team and I rang the bell on SWTZ!

On SWTZ

This is an exchange traded fund (ETF) or product where our fund manager will be trying to maximise dividends. He would have bought a lot of companies this week that soon will pay dividends but it will, like market-oriented ETFs, be affected by the direction of the market. That said, I’d prefer the market to rise and take the unit price higher but any sell off will make me want to buy more of SWTZ, which will be a core approach to my pretty cautious investing this year, which most of you know is my go.

Top stocks – how they fared

20170224-topstocks_2

The week in review

What moved the market?

  • Another busy week of earnings results. Woolworths, nib, Qantas and Coca-Cola were some of the winners.
  • Several majors such as CBA, RIO and Wesfarmers trading ex-dividend.
  • And minutes from the US Fed’s latest meeting, which showed the majority of members looking at raising rates sooner rather than later.

Calls of the week

  • BHP Billiton boosted its dividend to a better than expected US40c per share. Read Andrew Main’s article on BHP’s bumper profit.
  • Despite Woolworths’ quarterly sales growth impressing the market, Paul Rickard says it’s a ‘pass’. Find out why.
  • Fairfax confirmed that it’s considering spinning off its lucrative Domain business.
  • And Australia Post CEO, Ahmed Fahour, made the call to step down shortly after being criticised for his $5.6 million dollar salary. No small bicky!

The week ahead

Australia

  • Monday February 27 – Business Indicators (December quarter)
  • Tuesday February 28 – Balance of Payments (December quarter)
  • Tuesday February 28 – Weekly consumer confidence
  • Tuesday February 28 – Government finance (December quarter)
  • Tuesday February 28 – Private Sector Credit (January)
  • Wednesday March 1 – Economic growth (December quarter)
  • Wednesday March 1 – Corelogic home value index (February)
  • Wednesday March 1 – Performance of Manufacturing (March)
  • Thursday March 2 – International trade (January)
  • Thursday March 2 – Building approvals (January)
  • Friday March 3 – New vehicle sales (February)

Overseas

  • Monday February 27 – US Durable goods orders (January)
  • Monday February 27 – US Pending home sales (January)
  • Tuesday February 28 – US Economic growth (December quarter)
  • Tuesday February 28 – US Consumer confidence (February)
  • Tuesday February 28 – US Case Shiller home prices (December)
  • Wednesday March 1 – US Personal income & spending (January)
  • Wednesday March 1 – US ISM manufacturing (February)
  • Friday March 3 – US ISM services (February)
  • Friday March 3 – US Auto sales (February)

Food for thought

“There are no secrets to success. It is the result of preparation, hard work, and learning from failure” – Colin Powell

Last week’s TV roundup

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 shows how this has changed compared to the week before.

This week the biggest mover was Orocobre with a 2.4 percentage point increase in the amount of its shares sold short to 10.69%.

20170224-shortpositions

Source: ASIC

Chart of the week

Record construction work done in NSW

record-construction

Despite construction work done falling marginally in the December quarter, in NSW it rose 2.2% to a record $12.98 billion!

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