Are we looking at the pullback we had to have, as the selling prone May looms, the bomb craziness around North Korea threatens and the combined effect of Syria, Russia and Donald Trump pushes up the greenback, the yen and gold? And it comes as valuations are at elevated levels and quotable types like Bill Gross, the founder of PIMCO and now the main man at Janus, warn that we better get used to low growth economies!
Regular readers know I’ve been wondering where the sell off has been and I’m slightly conflicted, as someone who listed SWTZ (the Switzer Dividend Growth Fund) on February 24.
For the record, we are up 2.8% since we listed and have gone ex-dividend, while the S&P/ASX 200 is up 2.6% over the same time.
The depth of this sell off will be a crucial reading as the Trump effect, until recently, has made me think the pullbacks will be reasonably shallow. However, if this geopolitical spooky stuff intermixes with Trump looking inept and unable to deliver the promises he excited markets with, then we could see deeper dumpings.
I’m betting the geopolitical stuff will be managed and the overall strength of the global economy will ensure that stocks head higher over the course of the year. I’m hoping somehow Donald grows in stature in the job, despite Gross’s claim that the stock market is “priced for too much hope.”
Matters weren’t helped by the USA dropping the so-called ‘mother of all bombs’ on ISIS inhabited caves and tunnels in Afghanistan.
The Dow did drop 138.61 points (or 0.67%) post-bomb, but I was happy to see that US bank stocks reported better-than-expected strong earnings, with JPMorgan Chase and Citigroup impressing.
Amongst the madness, you have to look to see what real life sanity is delivering. This US earnings season, which will amp up over the next two weeks, has to keep telling the market that despite the craziness out there, the US economy is getting stronger and company good health says stocks can also go higher.
On the local front, the slide in iron ore prices and TPG’s big billion bet on becoming a mobile phone network player, explained index weakness over the week. Fortunately, we can bank on the banks so the S&P/ASX 200 index was up 0.5% for the week.
But the big news was iron ore, with an 8.5% slump on Wednesday night, hitting our star miners on Thursday. BHP lost 4%, Rio 4.4% and the always volatile to iron prices – Fortescue (FMG) – bashed down 6.8%.
But it wasn’t just the price thing. FMG did report lower iron ore shipments for the fiscal third-quarter, with its cash costs also rising for the first time in 13 quarters, due to the impact of wet weather.
And while this iron ore price slump has been significant and is technically a bear market, I’d like you to keep this all in perspective. This chart shows the full story:
The latest price is $73. It was around $90 but in early 2016, it was $47! So from a near 100% gain, it has dropped 30%. It explains a lower BHP share price but not any talk about Armageddon. What’s the opposite of Armageddon when the price surged? Iron investors’ heaven?
What I liked
- The NAB business conditions index rose from +9.3 points to +14.2 points in March (long-term average +5.0 points), a 9-year high. The business confidence index eased from +6.7 points to +6.1 points but it’s still above the long-term average of 5.8.
- We added 60,900 jobs in March but a rise in the participation rate, which is a good sign for the economy, kept the unemployment rate steady at 5.9%.
- 74,500 full-time jobs were created, while 13,600 part-time jobs were lost. Of course, media ‘experts’ and economists doubted the number because it was too good and they think the ABS eggheads can’t count! Why didn’t they doubt the jump in unemployment from 5.7% to 5.9% in February? Any takers?
- AMP’s Shane Oliver on the above figures: “It seems that jobs growth is picking up a bit in Australia and this is consistent with leading labour market indicators.”
- The ANZ/Roy Morgan consumer confidence rating rose by 3.3% to 114.8 in the week to April 11. Confidence is up 2.5% over the year and above the average of 113.2 since 2014. All five components of the index rose in the latest week.
- Starts rose by 0.3% in the December quarter, after a flat result in the September quarter. Work started on 231,658 new dwellings over 2016 – a record for a calendar year.
- Home investment loans fell by 5.9% in February, which could be a sign that the housing boom driven by investors is slowing down.
- Tourist arrivals rose by 0.4% in February. And departures fell by 2.3%. Arrivals are up 10.5% on the year, with departures up 4.7%.
- US consumer sentiment came in at 98, beating expectations.
- The JOLTS labour market report in the US showed a rise of 118,000 job openings on the last day of February to a total of 5.743 million – the highest levels since July 2016.
- The US Conference Board’s Employment Trends Index was up 0.3% in March to be 4.3% higher over the year. The report states “that solid job growth will continue through the spring. The surprisingly weak job growth in March is mostly noise in an otherwise healthy and tight labour market“.
- Consumer prices in China rose 0.9% in the year to March (forecast +1%). Annual growth of producer prices eased from 8-year highs, down to 7.6%.
What I didn’t like
- President Trump telling the Wall Street Journal that he thought the dollar was getting “too strong.” That’s not presidential and is jawboning and currency tampering, which he bagged the Chinese for.
- The RBA adding to housing hysteria and negative confidence effects. As interest rates aren’t set to rise and if Bill Gross is right and growth won’t go mad, then talk about big rate rises in the future might be that – talk! If the RBA is concerned, why don’t they and APRA tell the banks to lend less in Sydney and Melbourne and stop spooking consumers and business? I hope they’re not simply butt-covering themselves!
- News about the April 23 French election is not the best, with the far right and far left candidates, who are both anti-EU, doing better in the polls than I like!
On Telstra
The TPG grab for spectrum has hit Telstra’s share price and it comes when every fund manager and their dog has been tipping me that the dividend will be cut sooner than many think. This TPG move could make these tips on the money but, as many of the tipsters have observed, when ANZ and BHP cut their dividend, the stock price actually headed up.
I think Telstra’s CEO, Andy Penn, has to cut the dividend but at the same time come up with a strategy that screams capital growth is coming.
If this doesn’t happen, shareholders will hang up on the huge telco, which should be able to wipe the floor with its opponents. Go Andy!
The week in review
- With US economic growth slowing a little, what indicators should we be watching and how should we play stocks in the coming months? I revealed all in my article [1].
- In light of global stock markets rising to near-record highs over the past year, Paul Rickard explored whether it’s too late to invest offshore [2].
- Barrie Dunstan [3] explained what investors can learn from Warren Buffett’s big Apple share play.
- The brokers placed AGL in the good books [4], while South32 was downgraded.
- Our super stock selectors [5] liked Premier Investments this week, but Metcash was on the dislikes list.
- Using knowledge, cash and courage to maximise returns and minimise risk, Tony Featherstone revealed three tips for picking stocks [6].
- Charlie Aitken [7] said the Wall Street correction has started, and that Chinese economic growth could be running ahead of expectations.
- Graeme Colley [8] unveiled five more urban myths about the upcoming super changes. Read on!
- In our second broker report [9], Telstra received an upgrade, while TPG was in the not-so-good books and The Reject Shop copped two downgrades.
Top stocks – how they fared
What moved the market?
- Geopolitical tensions between the US and Russia, North Korea and the Middle East.
- Comments from Donald Trump about the US dollar “getting too strong”.
- TPG’s expansion plan announcement belted Telstra shares.
- And BHP shares jumped on Elliott Advisors’ overhaul proposal.
Calls of the week
- TPG Telecom said it would spend $1.9 billion on its own mobile network.
- Activist hedge fund, Elliott Advisors, proposed that BHP restructure its business, including collapsing its dual-listed structure and spinning off its petroleum division. Read Paul Rickard’s article [10] on why BHP was too quick to dismiss the proposal.
- While highlighting the atrocities of Syria’s Bashar al-Assad regime, Donald Trump’s spokesman Sean Spicer said: “You had someone as despicable as Hitler who didn’t even sink to using chemical weapons”. He has since apologised, but the gaffe prompted calls for his resignation.
- The United Airlines CEO, Oscar Munoz, issued not one, but three apologies over the forced removal of a passenger from an overbooked flight. Understandably, shares in the company took a massive hit.
The week ahead
Australia
- Tuesday April 18 – Reserve Bank Board Minutes (April)
- Tuesday April 18 – Weekly consumer confidence
- Wednesday April 19 – Motor vehicle sales (March)
- Thursday April 20 – Detailed labour market data (March)
Overseas
- Monday April 17 – US Empire Manufacturing survey (April)
- Monday April 17 – China economic data (March)
- Monday April 17 – US NAHB Housing market index (April)
- Tuesday April 18 – US Housing starts (March)
- Tuesday April 18 – US Industrial production (March)
- Wednesday April 19 – US Federal Reserve Beige book
- Thursday April 20 – US Leading indicators index (March)
- Thursday April 20 – US Philadelphia Fed Survey (April)
- Thursday April 20 – IMF World Economic Outlook
- Friday April 21 – US Existing home sales (March)
- Friday April 21 – “Flash” Manufacturing (April)
Food for thought
Success is not the key to happiness. Happiness is the key to success. If you love what you are doing, you will be successful.
– Albert Schweitzer
Last week’s TV roundup
- Arthur Sinodinos [11], Minister for Industry, Innovation and Science, discusses the Government’s ideas to fix up Australia’s housing problems, as well as their plans to create more innovation.
- Why is the market doing so well despite all the curveballs out there? To answer this, David Bassanese, chief economist at BetaShares and Switzer Daily contributor, joins Super TV [12].
- Louis Christopher from SQM Research shares his views [13] on housing supply, interest rates, negative gearing and the outlook for property.
- Is China the fly in the ointment for the rosy outlook for the Australian economy, or is it a media beat up? To discuss, Deloitte Access Economics’ Chris Richardson joins the show [14].
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 WorleyParsons with a 3.58 percentage point increase in the amount of its shares sold short to 8.52%. Harvey Norman’s short position increased by 1.02 percentage points to 9.13%.
Source: ASIC
Chart of the week
According to CommSec, about three times as many jobs expected by economists turned up in March. 60,900 jobs were added, compared to a 2,800 rise in February. Full-time jobs rose by 74,500 and part–time jobs fell by 13,600. As shown in the chart above, it was the largest back-to-back gain in full-time jobs (113,200) in 29 years!
Top five most clicked stories
- Charlie Aitken: Ramsay Health Care: 4 reasons to be cautious [15]
- Tony Feathertstone: 3 stocks that can rally further [16]
- Peter Switzer: Crystal balling oil, iron ore and where stocks go! [1]
- Paul Rickard: Is it too late to invest offshore [2]?
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [4]
Recent Switzer Super Reports
- Thursday, 13 April 2017: Buying opportunities ahead? [17]
- Monday, 10 April 2017: Not worried about the US [18]
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.