You guys know me, I always look for the good even in bad news, primarily for money-making reasons. And the best thing I can say about this North Korean military madness is that the stock market is coping with it and fighting the gravitational pull that many have been expecting would soon take hold of the market.
But combined with hurricanes, such as Irma now set to devastate Florida (and this on the back of Texas Harvey), US stock markets are trending down slightly but not diving, which must be seen as a good thing.
In fact, the resilience of stock markets right now was shown with the Dow actually up on Friday, while the S&P500 and Nasdaq were blown not too far off course with small drops.
Here in Australia, we’re dealing with Kim Jong-un versus Donald Trump, plus our OK but not great reporting season, plus our damn dollar that’s now over 80US cents, plus our bank bashing by everyone (Treasurer Morrison with his bank levy; South Australia with its desire to put on a separate bank levy; APRA with its ‘three wise men’ review of CBA that has implications for all banks, and AUSTRAC with the CBA money laundering fiasco). And we have an unhelpful political situation coming out of Canberra, with all the ‘foreigners’ in Parliament, the unpopularity of the Turnbull government, the Senate not passing bills, etc.
And then from overseas, Wall Street isn’t being helped by the hurricane season in the US, which has weakened the greenback and strengthened the Aussie. In addition, the economic slug of the stormy weather could even make the Fed less keen to add imposts of higher interest rates.
Meantime, we’re growing at a faster rate, with our March quarter result of 0.3%, topped by a 0.8% pace in the June quarter. And economists expect the second half of 2017 will be economically stronger than the first.
Even the usually more negative AFR led with the headline over the weekend: “Economy gathering steam on global pick-up.” And better readings on construction, business investment, employment and other key indicators make it understandable why our stock market won’t overdo the negative reaction stuff.
Over the week, our S&P/ASX 200 Index gave up 0.9%, so over the past three weeks we’re down 1.3% or so, showing how the market seems defiant towards a bigger sell off.
It’s not a bad effort when you think about the trouble our banks have been in since reporting season. This week alone, CBA dropped 3%, NAB lost 1%, ANZ gave up 2.5%, while Westpac was off 1.7% but these beloved bank stocks would not be benefiting from the sell off of banks in the US, as analysts start to doubt another rate rise this year. Financial stocks aren’t seen as safe havens and, of course, they do better with rising interest rates.
So in all fairness, we have to thank the resources gods for the good news for our miners, which has added some supportive steel to our stock market. Fortunately, the signs say that these mining companies aren’t going to let us down in the future. Macquarie this week upgraded the big miners and JPMorgan analysts think the sector will grind higher in the short term. “The sector is in the best shape we have seen from a balance sheet perspective, with a large part of our coverage either net cash or close to ungeared,” Fairfax reported the JPM smarties observed.
And one of my ex-students, Citi strategist Tony Brennan, is keeping his old tutor’s optimistic flag flying. He told Fairfax “that with earnings growth close to trend at around 5 per cent, plus the market dividend yield of 4-5 per cent, equities could still deliver roughly 10 per cent returns which compares well to low rates and yields on other investments.”
And he threw this in for good measure: “And returns could be higher near term with resource earnings recovering, reflected in our forecast for the S&P/ASX 200 to reach 6,400 by mid-2018, a gain of 12 per cent.”
Incidentally, Contango’s CIO, George Boubouras, has a similar target for the local index. George is never driven by gut-feeling – the numbers have to stack up.
What I liked
- The trade surplus narrowed from $888 million to $460 million in July but the rolling 12-month surplus rose from $12.2 billion to $14.4 billion (the biggest surplus in six years). Exports to China hit a record $96.2 billion in the year to July.
- The economy grew by 0.8% in the June quarter after rising by 0.3% in the March quarter. Annual economic growth held at 1.8%. The economy has just completed its 26th consecutive year of growth – the last recession was January-June 1991.
- The weekly ANZ/Roy Morgan consumer confidence rating rose by 0.5% in the latest week after a sharp 3.9% rise in the previous week.
- According to the Federal Chamber of Automotive Industries (FCAI), new motor vehicle sales totalled 96,662 in August, up 1.8% on a year ago and a record for the August month.
- Company operating profits fell by 4.5% in the June quarter, after rising 24% in the previous six months but in the year to June, profits hit a record $304 billion, up 20.9% on a year ago.
- Job ads rose for the sixth straight month, up by 2% in August to 181,435 ads – a six-year high. Job ads are up 13.3% on a year ago.
- The RBA left the official rate of interest at 1.5% but the Governor, Phil Lowe, in his speech this week implied the next move is up when it’s appropriate.
- In the US, the ISM services index rose from 53.9 to 55.3 in August (forecast 55.4).
- The prospect that dividends totaling $20 billion will be paid out by listed companies to their shareholders in the four weeks beginning September 18.
- The number of loans (commitments) for budding home owners (owner-occupiers) rose by 2.9% in July.
- Loans to buy newly-erected homes hit 38-year highs in July.
What I didn’t like
- News that North Korea had successfully tested a hydrogen bomb!
- Hurricanes!
- The US bond market, with the 10-year Treasury yield of 2.07%. If it drops below 2%, even I could go negative!
- The number 34% because this is what money market speculators are saying are the chances of a US rate rise in December. I’d like it to be 80% plus to ensure the belief in the US economy and to help our dollar dive.
- Retail trade locally was unchanged in July, after posting average gains of 0.6% a month in the previous three months. Retail trade is up 3.6% over the year but it’s not a great reading.
- The broadest measure of the trade accounts (the current account) deteriorated in the June quarter (bigger deficit), with the deficit lifting from $4.75 billion to $9.56 billion
- Over 2016/17, household income grew by 2.8%, falling short of the 3.6% lift in nominal spending.
- US factory orders fell 3.3% as expected in July.
- The 7% fall in Bitcoin after news China might shut down Bitcoin exchanges. I’m being asked about Bitcoin all the time and keep saying I don’t understand it, so I stay away from it. Not knowing how China might deal with it explains my negativity towards the pretend currency.
One final like
I had my most controversial tussle on my Sky TV program this week (you can see this interview on Switzer Daily [1]) with Gerry Harvey over the issues the media always bring up – Amazon, his accounts, his franchisees and short selling! He hates all these subjects and his reactions and his insights on these topics even surprised me. The one conclusion I was forced to admit is this: I wish all CEOs and chairmen/women loved their business as much as Gerry. And I suspect he’ll do OK against Amazon.
A year ago, HVN was a $5.20 stock and now it’s at $3.85, despite a record profit. If the share price is higher in a year’s time than it is now, our best retailer has a right to blow off like Hurricane Harvey at his long queue of critics!
The week in review
- Optimism about the Australian economy [2] and stocks is catching on. I looked at what’s driven it.
- James Dunn [3] shared five promising companies trading under one dollar to keep an eye on.
- Tony Featherstone [4] discussed how three plumbing-related stocks are likely to perform as housing construction slows.
- Charlie Aitken continues to have a cautious view on the popular Ramsay Health Care. Here’s why [5].
- There are four main factors NAOS Asset Management’s Robert Miller [6] likes about software provider Gentrack.
- In the first Buy, Sell, Hold [7]this week, Healthscope was upgraded this week while Boral and Ramsay were downgraded.
- In the second Buy, Sell, Hold [8], two brokers upgraded Senex Energy this week while Suncorp was in the not-so-good books.
- In Questions of the Week [9], Paul Rickard answers reader queries about Telstra and also cryptocurrency like Bitcoin.
- Paul Rickard [10] updated the model portfolios, which produced mixed results following an underwhelming reporting season in August.
Top stocks – how they fared
What moved the market?
- Australia’s economy grew by 0.8% in the quarter following a rise of 0.3% in the March quarter. Annual economic growth was 1.8%.
- North Korea said on Sunday that it detonated a hydrogen bomb.
- US President Donald Trump sided with the Democrats and supported a short-term debt ceiling extension.
- The ECB upgraded growth forecasts for the euro zone, sending the euro higher. The US dollar lost ground, with the aussie dollar trading above 80 US cents.
Calls of the week
- Paul Rickard said CBA could underperform its peers until it can get some “clean air”. See more here [11].
- Tony Featherstone said Reliance Worldwide (RWC) is one of the more impressive mid-cap Australian companies. See more here [4].
- Gerry Harvey gave short sellers a serve in an interview this week. Watch it here [12].
The week ahead
Australia
- Monday September 11 – Lending Finance (July)
- Tuesday September 12 – Overseas arrivals/departures (July)
- Tuesday September 12 – Weekly consumer confidence
- Tuesday September 12 – NAB business survey (August)
- Tuesday September 12 – Credit & debit card lending (July)
- Wednesday September 13 – Consumer confidence (September)
- Wednesday September 13 – Household expenditure survey
- Thursday September 14 – Employment/unemployment (August)
Overseas
- Tuesday September 12 – US NFIB business optimism (August)
- Tuesday September 12 – US JOLTS job openings (July)
- Wednesday September 13 – US Producer prices (August)
- Thursday September 14 – US Consumer prices (August)
- Thursday September 14 – China monthly data (August)
- Friday September 15 – US Consumer credit (July)
- Friday September 15 – US Industrial production (August)
- Friday September 15 – US consumer sentiment (September)
Food for thought
“The investor of today does not profit from yesterday’s growth.” Warren Buffett
Last week’s TV roundup
- The Australian Financial Reviewtipped the second half of the year will be good for the Australian economy, so what will this mean for the Turnbull Government? To share his views on this and more, John Hewson [13] joins Super TV (broadcast on Monday 4 September, 2017):
- Paul Rickard [14] joins Super TV for a look at CBA, Telstra and CSL, plus how the stock market and its sectors performed over August (broadcast on Monday 4 September, 2017).
- Paul Rickard and Charlie Aitken discuss what happened during the August reporting season [15], some of the major reports, and answer reader queries.
- Magellan’s Hamish Douglass [16] spoke on global equities, disruption and how he’s investing at the 2017 Switzer Listed Investment Conference.
- Charlie Aitken [17] tells us how he’s investing and why he’s bullish on China at the 2017 Switzer Listed Investment Conference.
- Peter Switzer tests Gerry Harvey’s [12] annoyance with the market and media commentators who think they know more about retail than Gerry
- Harvey Norman’s Gerry Harvey [18] reflects on how he created and built his business.
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, one of the biggest movers was Healthscope, with its short position increasing by 1.18 percentage points to 9.05%.
Chart of the week
Australia’s economy has recorded 26 years in a row of growth, with the last recession occurring in January-June of 1991.
Top 5 most clicked stories
- Paul Rickard: Reporting season blues in August [10]
- Peter Switzer: Why you have to believe stocks will go higher [2]
- James Dunn: Five stocks under a dollar [3]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [7]
- Charlie Aitken: Ramsay Health Care (RHC): why I remain short [5]
Recent Switzer Super Reports
- Thursday 7 September – Stocks to watch [19]
- Monday 4 September – The case for optimism [20]
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.