Doomsday merchants were given another kick in the pants, with the US reporting a staggeringly good jobs number and Wall Street lapped it up. Some 228,000 jobs showed up in November, when only 200,000 was the economists’ guess. And the Dow Jones Index shot up over 100 points, which is not bad for an index in record territory staring down the barrel of a Fed meeting next week, which should bring an interest rate rise, especially after these figures.
The only negative from the jobs report was a 0.2% rise in hourly wage rates, when 0.3% was expected. This is the impact of digital disruption and all the price-killing aspects of the online world nowadays. Who has pricing power and then has the profits to make great pay rises? Apple does but most businesses aren’t in the Apple class.
This wage issue will be a key determinant of how many rate rises happen in the US next year. Currently, three rises are expected by market smarties.
While overseas, and another shot in the arm for the global economy and stocks, with European and the UK Brexit negotiators agreeing upon three particular issues that had impeded negotiations, paving the way for the next phase of discussions.
These two stories are the kinds of things that can really encourage Santa Claus rallies! ‘Yo ho ho’ seems appropriate!
Back home and it was the week that saw the Trump tax cuts get passed but it ended up a fizzer for stocks. We did end up in positive territory, though it was only a four-point gain, with the S&P/ASX 200 Index finishing at 5994 after a 16.7-point spike on Friday.
But that damn 6000 level keeps teasing us – we just might need some help from Santa over the next few weeks. Market experts say the rally time is actually in the last week rolling into the first couple of days of January but it can come early, depending on the news flow.
A plus for us is the slip in the dollar to 75.12 US cents and I did like hearing that Deutsche Bank’s equity team thinks banks look cheap, with a P/E of only 13, following the ‘terrorization’ since the May Budget right through to the Austrac blow up and now the Royal Commission.
It really wasn’t a bad effort this week for the market to end in positive territory, with the banking sector down 0.4% and the miners off 0.9%.
And what a difference an upgrade can make, with Mac Bank giving Telstra the thumbs up after an earnings revision up, with the telco’s share price up 7.9% for the week.
Contrarian plays on good companies tend to work but I guess many of us ponder just how good Telstra is. It should be a killer company but just hasn’t proved that argument yet.
Other significant economic highlights of the week include:
- The Reserve Bank Board has continued to highlight the positives of “above trend” economic growth, “strong” employment growth but with low wage and price growth. That said, the RBA implied labour market tightening as a precondition to wage rises in 2018, though this should bring inflation and our first interest rate rise.
- Our economy has moved into its 27th year of continued economic expansion – the last recession was January-June 1991.
- In nominal terms, GDP increased by 0.5% in the quarter and rose by 5.2% annually. Not long ago, negative readings on this measure made some pessimistic economists talk about “income recessions”. That talk has stopped.
What I liked
- The economy grew by 0.6% in the September quarter, after rising by 0.9% (revised) in the June quarter. Annual economic growth rose to 2.8%, which was the fastest pace since June 2016 – up from 1.9%.
- The household savings rate rose to 15-month highs of 3.2%.
- Sixteen of the 19 industry sectors expanded in the September quarter.
- Retail sales rose by 0.5% in October, after rising by 0.1% in September – the strongest outcome in five months. Spending rose across all states and territories, led by footwear and other personal accessories, together with cafes, restaurants and catering services.
- The weekly ANZ/Roy Morgan consumer confidence rating rose by 0.7% to 115.8 last week. Confidence remains above the average of 113.2 since 2014 and its long-run monthly average of 112.9 since 1990.
- Company operating profits fell by just 0.2% in the September quarter but are still up 20% in the year. Profits totaled a record $318.2 billion in the year to September. Profits are up 26.9% over the year – the strongest gain in 15½ years.
- Wages, sales and inventories all rose in the quarter.
- Job ads rose for the fifth time in six months in November to 172,395 ads – a 6-year high. Job ads are up 12.1% on a year ago.
- According to the Federal Chamber of Automotive Industries (FCAI), new motor vehicle sales totaled 101,365 in November, up 2.5% on a year ago – the highest for a November month on record.
- The cash rate is at a record low of 1.50% for the 16th straight month (15th meeting) – it’s not time to increase rates yet.
- CommSec on the Goldilocks home loan market: “The home loan market is not too hot or cold, but just about right.”
- On our trade surplus: The rolling 12-month surplus rose from $18.9 billion to a record $20.1 billion. Exports to China hit a record $102.29 billion in the year to October.
- On our national debt servicing position and the ratio of net income on foreign debt to exports of goods and services stood at 6% in the September quarter, holding near the best levels in 36 years.
- The Australian Industry Group Performance of Construction index rose to 57.5 in November from 53.2 in October. Engineering construction activity increased by 3.2 points to 11-year highs of 64.1, supported by strong infrastructure-related spending. Any reading above 50 signifies expansion or growth of activity.
- US business sector productivity rose by 3.0% (forecast: +3.3%) in the quarter.
- The Trump tax bill getting passed.
- ISM non-manufacturing purchasing managers index for the US fell to 57.4 in November (forecast: 59.0) from 60.1 in October. Anything over 50 is good news.
- US durable goods excluding transport rose by a revised 0.9% in October, after a 0.4% gain in September.
What I didn’t like
- Fears of a partial US government shutdown capped gains in the broader stock market on Thursday on Wall Street.
- Bitcoin’s price spikes this week – it looks crazy and I can’t change my view on its price, though I don’t think it will ever go away as a concept. It’s just that the current unbelievably high price might go away!
Good news on Chinese debt
Fairfax reported a Bloomberg story that said: “There are signs that China’s attempts to rein in leverage levels is bearing fruit. Total debt for almost 4,000 non-financial firms listed on the mainland is now on average about the same size as earnings, down from 2.4 times a year earlier, according to data compiled by Bloomberg. Their operating profits can now cover over 18 times interest expense, a significant improvement from just five times in 2016.”
China doubters won’t like this one!
The Week in Review:
- The Trump tax cuts are across the line, so how will Wall Street react [1]? I looked at this and offered a contrarian play for the risk-adverse investor.
- Paul Rickard [2] updated our income and growth portfolios following a month of share market gains led by a buoyant Wall Street.
- The platform market is one of the fastest-growing areas of the financial services market. James Dunn [3] looked at four platforms to keep an eye on.
- Tony Featherstone [4] gave three stellar stock ideas for 2018 – don’t miss this one!
- Smart investors know how to take advantage of a sell off. Charlie Aitken [5] backed Aristocrat, claiming it a very ‘Big Fish (ing)’ opportunity.
- Among this week’s likes and dislikes [6] were a Chinese insurance firm and a major petroleum company.
- In Buy, hold sell: What the brokers say [7], Aristocrat Leisure was downgraded following a strong run up in the share price since September.
- In the second Buy, Hold, Sell [8], Commodity price revisions at Citi saw a bunch of commodity companies upgraded, while Metcash first half results disappoint Macquarie.
- A marketing and communications group was featured in this week’s Professional’s Pick. [9]
- Plus, Paul Rickard answered all your Questions of the week [10], including reader concerns about what influences the bank bill swap rate and whether all the hype around block chain is warranted.
Top Stocks – how they fared
What moved the market?
- The US Senate passed Trump’s Tax bill. The centrepiece of the reform package is a slashing of the business tax rate from 35% to only 20%, a move Republicans argue will boost the economy, create jobs and drive salaries higher.
- The Reserve Bank of Australia left the official cash rate on hold at 1.5% – ending the year the same way it started – with interest rates at a record low. Why? Because wage growth was going nowhere fast and inflation remained below the target of 2%.
- Bitcoin topped $US16, 000 for the first time this week. The largest cryptocurrency by market value has soared from less than $1,000 at the start of the year. The price surge has been accompanied by a growing chorus of warnings that the speculative frenzy is an asset bubble poised to burst.
- Oil had a volatile trading week this week as a surge of gasoline supplies held in U.S. storage tanks signalled that refineries will need less crude.
Calls of the week
- “Australia, land of wimps [11]!” – Peter Switzer
- Miscall of the week goes to England’s Test Cricket Captain, Joe Root after deciding to bowl first after the winning toss, giving away the win to the Aussies in the second test match. Watch the winning moment here [12]!
- Aristocrat is a very Big Fish(ing) opportunity [5] – Charlie Aitken
The Week Ahead:
Australia
- Tuesday December 12 – Lending finance (October)
- Tuesday December 12 – Credit and debit card lending (October)
- Tuesday December 12 – NAB Business survey (November)
- Tuesday December 12 – ABS residential prices (September quarter)
- Wednesday December 12 – Speech by Reserve Bank Governor
- Wednesday December 13 – Consumer confidence (December)
- Wednesday December 13 – Employment/Unemployment (November)
- Thursday December 14 – Population (June quarter)
- Thursday December 14 – Overseas arrivals/departures (October)
Overseas
- Monday December 11 – US JOLTS job openings (October)
- Tuesday December 12 – US Producer prices (November)
- Tuesday December 12 – US NFIB small business survey (November)
- Wednesday December 13 – US Consumer prices (November)
- Thursday December 14 – US Trade prices (November)
- Thursday December 14 – US Retail sales (November)
- Thursday December 14 – China monthly data (November)
- Friday December 15 – US Industrial production (November)
Food for thought:
“Business is a game, played for fantastic stakes, and you’re in competition with experts. If you want to win, you have to learn to be a master of the game.” ― Sidney Sheldon
Last week’s TV Roundup
- Political Analyst Malcom Mackerras [13] joined Switzer TV to discuss the current state of politics and why we are living in such a crazy political world.
- Is the bond market telling us something? Could the US be heading towards a recession? Michael Knox [14] joined Switzer TV to share his thoughts.
- With the US senate approving Trump’s major tax cuts, is the threat of a Trump tumble overstated? Charlie Aitken [15] joined Switzer TV to discuss his opinion.
- When will the Reserve Bank raise interest rates? Can the RBA just show some positivity!? It’s hard to read between the lines but David Bassanese [16] does just that as he joined Switzer TV to share his thoughts on the decision.
- A royal commission into the banks? Bring it on! Kate Carnell [17] of Australian Small Business and Family Enterprise Ombudsman, argues that the disconnect between small business and big banks dating back to the GFC is too apparent to ignore.
- Sanjay Ayer [18] from WCM Investment Management discussed the main drives for investing overseas for someone who is eternally on the hunt for good foreign companies to put money into.
- We have seen a massive improvement in economic data over the past few weeks. Does that mean chief economist from PWC Jeremy Thorpe [19] will be updating his economic outlook for 2018? He shared his thoughts.
- Bitcoin has smashed through 16,000 and it is on the rise! Investors still remain critical of the cryptocurrency, fearing it may be the biggest bubble yet. To assess the value and identify some other red flags for investing in 2018, Roger Montgomery [20] of Montgomery Investment joined Switzer TV.
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.
Charts of the week
Source: Commsec
Value of Bitcoin over one week
Source: worldcoinindex.com
Top 5 most clicked:
- James Dunn – 4 platform stocks to watch [3]
- Peter Switzer – My contrarian stocks play on the passing of Trump’s tax bill [1]
- Tony Featherstone – 3 stellar stock ideas for 2018 [4]
- Charlie Aitken – Aristocrat is a very Big Fish (ing) opportunity [5]
- Rudi Filapek-Vandyk – Buy, Hold sell – What the Brokers say [7]
Recent Switzer Super Reports
Monday 4th December – Tax bill passed [21]
Thursday 7th December – Time to go fishing [22]
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.