Switzer on Saturday

The positives continue to trump the negatives

Founder and Publisher of the Switzer Report
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They’re selling stocks here and on Wall Street but don’t worry, there’s no real commitment. In Europe, they were far more worried and news reports reckon it was on US-China tension concerns.

However, the sell off in New York was far less dramatic, with concerns about falling tech stocks seemingly more worrying than Donald Trump exploiting his willingness to poke the China bear. Like him or loathe him, he’s the only leader in the modern era to stick it to China and Beijing does need to be brought down to a more internationally cooperative level.

That said, Donald has a Coronavirus problem. Escalating fears about China will be an election ploy for this very transparent Trump. And that could hurt stocks.

On the local front, the S&P/ASX 200 Index gave up only 10 points (or 0.2%) for the week to end at 6024. You might not have noticed but the Index hit a four-month high. The market can come up with a whole range of reasons for a pullback but profit-taking is a pretty good one.

The rising dollar also had a role when you consider CSL slipped 2.3% to $277.02. This is a great company that’s likely to be a producer of vaccine for Australia when one shows up. However, a rising Aussie currency would hurt overall profits. The stock is moving towards compelling buying territory but I’m not sure we’re there just yet. The analysts have a target around $307 and $270.88 was its closing low when the Coronavirus took stocks down until March 23.

When you reflect on the week, here are the market-moving news stories:

  • The existence and extension of JobKeeper, which will create a Budget Deficit of $85.8 billion for 2019-20. This will grow to $184.5 billion over this financial year. The debt numbers are scary but the potential growth and therefore company profit numbers explain the four-month high for stocks this week.
  • Continued good news on the vaccine front from a host of companies and the USA’s top Coronavirus medico, Dr Anthony Fauci, predicting that a vaccine will show up later this year has been an important market-driver.
  • The EU’s huge 750 billion euros ($856 billion) for its COVID-19 recovery fund kept market optimism going in the right direction.
  • And US company reporting so far has been surprisingly good. Before Friday’s trade, 58 companies in the S&P 500 had reported earnings and according to Refinitiv, 77.6% of results had beaten forecasts.

Throw in new reasons like China being told to close down its Houston consulate, which led to China telling the Yanks to close theirs in Chengdu, it’s no surprise that stocks are giving into gravity. The Shanghai Composite took this new ‘spat’ pretty seriously, losing 3.9% in one session!

Wall Street was also not happy about a rise in jobless claims but a one-off shock like this can be over-used by the stock market, especially when there’s been a huge bounce since late March.

For anyone scratching their head trying to explain the comeback for US stocks, this from Mike Loewengart, (MD of investment strategy at E-Trade) shows you’re not alone being surprised at the current high levels of optimism on Wall Street.

Looking at the rise in claims for unemployment relief, he said that this is “no doubt sobering and a clear reminder that the pandemic is far from finished exacting its toll on our economy. While we’re hanging on to hopes of a stimulus bill, Americans are feeling the pain of stalled re-openings and renewed shutdowns across the country.” (CNBC)

A few weeks ago I gave 10 reasons for a pullback. They’re still live but I will add it doesn’t have to be a huge pullback but more an overdue more sensible one, given the potential threats to profits and stocks prices out there.

For miner-investors, BHP Group lost 2.2% for the week, slipping to $37.08, Rio gave up 1.2% to $102.92 and Fortescue was off 0.6% to $16.29. But this was simply profit-taking, with BHP up over 8% for the past month. The rising currency was another reason for a slip in the miners’ share prices.

To other widely-held stocks, Telstra fell 3.8% to $3.33, Brambles was down 5.5% to $10.67 and Aurizon Holdings was 2.5% lower to $4.66. Defensive stocks were not in favour, especially when we learnt of the extension of JobKeeper.

Surprise of the week was QBE, as the AFR explained: “QBE Insurance saw its shares end the week 11 per cent higher at $10.40 despite warning the COVID-19 pandemic could cost it almost $840 million. Analysts said the company’s base margins and capital levels were positive however, noting the underlying numbers were very strong.”

What I liked

  • Federal, State and Territory Governments have committed $301 billion (or around 15% of GDP) in support and stimulus measures in the wake of COVID-19.
  • The extension of JobKeeper in its new form.
  • The economy is estimated to have contracted 0.25% in 2019/20 and is expected to contract 2.5% in the current year (2020/21) – the first back-to back decline since 1946 and 1947. But these numbers are way lower than what was predicted a few months ago. I recall one alarmist tipping a 10% contraction!
  • Preliminary retail trade rose by 2.4% in June after rising a record 16.9% in May (highest in 38 years of records). Retail spending is up 8.2% on the year.
  • In seasonally-adjusted terms, skilled vacancies rose 26.3% in June but were still down 31% on the year.
  • According to the CBA, card spending in the week to July 17 was up 11.4% on a year ago, compared to a 7.2% lift for the week ending July 10. Online spending rose 22.2% (previous week: +6.3%) and in-store spending was up 7.4% over the period (previous week: +8.5%).
  • Treasury believing borders will be open for flying, albeit with two-week quarantines, was music to my ears. I hope it’s a right call. This explains why Corporate Travel Management rose 5.4% to $9.33, Flight Centre was up 4% to $10.88, Webjet went up 2.7% to $3.08 and Qantas was 0.6% higher to $3.64.
  • The Commonwealth Bank-IHS Markit ‘flash’ PMI for manufacturing rose from 51.2 to an 18-month high of 53.4 in July. The services PMI was up from 53.1 to a record high 58.5 (since records began in May 2016). The composite PMI rose from 52.7 to 57.9 – the fastest expansion since April 2017. A reading above 50 indicates expansion in activity.
  • In the year to June, the trade surplus (exports less imports) was $83.4 billion, down from a record high $86.9 billion in May. It was down from record highs but was still a great number.
  • European Union leaders secured an “historic” deal on a 750 billion euro ($856 billion) recovery fund and its related 1.1 trillion euro budget for 2017-2021.
  • In the US, the leading index rose by 2% in June (forecast +2.1%). The Kansas Federal Reserve manufacturing index rose from 2 points to 7 points in July.
  • Existing home sales rose by 20.7% in June to a 4.72 million annual rate (forecast 4.78 million). New mortgage applications rose 4.1% in the past week.

What I didn’t like

  • The weekly ANZ-Roy Morgan consumer confidence rating fell by 1% to a 10-week low of 90.7 (long-run average since 1990 is 112.8). Sentiment fell for a fourth successive week but is still up by 38.9%, since hitting record lows of 65.3 on March 29 (lowest since 1973).
  • Initial data suggests the federal budget was $85.8 billion in deficit (4.3% of GDP) over the past year (2019/20). The Government forecasts a $184.5 billion deficit (9.7% of GDP) in the current year. The expected 2020/21 deficit would be the highest (as a share of GDP) in 75 years (since 1946). These numbers are hard to like but all I can say is they could be worse if we had a lesser economic potential or a more timid Government.
  • Infection rates in Victoria and the US.
  • Investors on Wall Street reacted to a surprise lift in new claims for unemployment insurance.
  • US-China rising tensions, with China saying that the US had told it to close its consulate in Houston, Texas.

If  current optimism worries you, read this.

It’s what the Reserve Bank told us this week:

  • “Economic conditions had stabilised and the downturn had been less severe than earlier expected. There had been a pick-up in consumer spending in response to the decline in infections and the easing of restrictions across most of the country.”
  • “…timely indicators of economic activity had generally picked up, suggesting that the worst of the global economic contraction had passed. However, the outlook remained uncertain and would depend upon containment of the virus.”
  • “…the downturn had been less severe than feared a few months earlier. Consumer spending in May and June had been stronger than expected, and had also held up better than in most other countries. Manufacturing and construction activity had also been less affected in Australia than elsewhere. Similarly, the contraction in the labour market had been less severe than expected in May. Nevertheless, the shock to the Australian economy would be the most severe since the 1930s, and the outlook remained highly uncertain as it depended in large part upon containment of the pandemic.”

That was worth reading if you’re a little too nervous nowadays.

The week in review:

Our videos of the week:

Top Stocks – how they fared:

The Week Ahead:

Australia
Monday July 27 – CommSec State of the States
Monday July 27 – Speech by RBA Assistant Governor
Tuesday July 28 – CBA Weekly card spending (July 24)
Tuesday July 28 – Weekly Payroll Jobs & Wages
Tuesday July 28 – Weekly consumer confidence (July 26)
Wednesday July 29 – Consumer Price Index (June quarter)
Thursday July 30 – Building approvals (June)
Thursday July 30 – International trade prices (June quarter)
Friday July 31 – Producer prices (June quarter)
Friday July 31 – Private sector credit (June)

Overseas
Monday July 27 – China Industrial profits (June, annual)
Monday July 27 – US Durable goods orders (June)
Tuesday July 28 – US Richmond Federal Reserve index (July)
Tuesday July 28 – US S&P/Case-Shiller home prices (May)
Tuesday July 28 – US Consumer Confidence (July)
July 28-29 – US Federal Reserve meeting
Wednesday July 29 – US Goods trade balance (June)
Wednesday July 29 – US Pending home sales (June)
Thursday July 30 – US Economic growth (June quarter, annual)
Friday July 31 – US Personal income & spending (June)
Friday July 31 – China Purchasing Managers’ Indexes (July)

Food for thought:

“To earn the highest of returns that are realistically possible, you should invest with simplicity.” – John Bogle

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.

Chart of the week:

CommSec published the following chart this week while examining the “war-time budget deficit”:

Top 5 most clicked:

Recent Switzer Reports:

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.