Switzer on Saturday

There’s good news but it’s battling virus, stimulus and US election concerns

Founder and Publisher of the Switzer Report
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Just when the charts on Monday were screaming that the bear market was over and a bull market had started, we see the worst week for US stocks since March. Locally it has been a hard week at the office, with the S&P/ASX 200 down 3.9% for the week, but you can’t blame local causes.

This is nearly an all-American problem, with a little bit of help from their European buddies, who’ve made the same mismanagement/go-back-to-normal problems with the Coronavirus. The German Dax index slid 4.2% on Wednesday after Chancellor Angela Merkel reached a deal for a one-month partial lockdown to curb the spread of the virus. France’s CAC 40 index fell 3.4% ahead of President Emmanuel Macron’s lockdown order.

It gets worse for the Yanks because they have an election next Tuesday (their time) and the escalation of COVID-19 cases has worried Wall Street for both business closure/economic reasons and election effect concerns.

Big investors can cope with a Biden victory, as Goldman Sachs has calculated that the tax and regulation hits of the Democrats will be more than offset by the bigger stimulus package. However, they could be worried about a ‘blue wave’ (Democrats win both the House and the Senate) where Joe and the Democrats could really rattle the big end of town.

And I guess Wall Street even cares about the infection and death rates that ultimately have a personal and economic cost. Daily infection rates are now over 90,000 and even the death rates are climbing, underlining something I’ve been arguing for months — a vaccine is the crucial gamechanger if you want to be an optimist on stocks.

But wait, there are more American challenges for shares and that’s the stimulus stalemate. These talks have broken down and given the expected negative consequences for consumer and business confidence (given all the above problems), stimulus is needed and fast!

So it’s a waiting game. I think US stock market indexes are bound to fall harder than ours because they’ve risen faster, driven by the unbelievably high valuations of tech stocks. In April, Amazon had a P/E of 48. It’s now 71!

Ironically, any partial lockdown will be good for Amazon but I’ve always queried why these stocks rose during the lockdown but then didn’t retrace backwards to a degree, once the US tried going back to normal. This year, Amazon is up 64%, Apple 47%, Facebook 28% and Alphabet 21%. And while this week we saw most of these companies report well, these rises make you think that a pullback was always on the cards.

Put on your seatbelts, as our stock market gets rocked by the consequences of American madness. But I’m not expecting a huge sell off of a ‘March this year’ kind and our market should outperform Wall Street.

The S&P 500 is on track for a 5.6% drop this week, while (as I’ve said) we lost 3.9%.

In contrast, for the month, our S&P/ASX 200 Index was up 1.9% so my next big task is to pick the right time for me to tell you that the buying opportunity has arrived. And if it wasn’t for the spikes in Coronavirus cases in the US, the only variable you’d have to take in would be the election result. But now you have to factor in what a Biden commitment to lockdowns and business closures will do to economic activity and then stock prices.

Amidst the gloom, long-suffering AMP shareholders saw a 19.5% spike in the company’s share price after it received a conditional offer from Ares Management Corporation to acquire 100% of the shares by way of a scheme of arrangement. The stock was up 12.9% for the week, which shows it started the trading period under pressure.

Another gainer over the month on takeover interest was Link Administration  — up 27.9% following an offer from a private equity consortium of Carlyle Group and Pacific Equity Partners. And then there’s Coca-Cola Amatil, which the AFR said “was the top performer for the month with a gain of 30.8% after Coca-Cola European Partners unveiled a $9.3 billion bid for the bottler. The stock was also the best performer over the week with a gain of 15.6%.”

For Afterpay watchers, the BNPL business put on 20.9% for the month, while Mesoblast was the biggest loser, off 39.8% after the FDA sold it the dump. Local tech stocks have benefitted from the US desire to buy these popular new age shares, so they’ll be under pressure as US investors reassess their support for these businesses. And some linked to the reopening trade will be under more pressure because of the problems with this damn virus that have ruined 2020!

What I liked

  • The opening up of Victoria!
  • The weekly ANZ-Roy Morgan consumer confidence rating rose by 1.6% to an 8-month high of 99.7 (long-run average since 1990 is 112.6). Confidence has lifted in 10 of the past 11 weeks. Sentiment is up by 52.7% since hitting record lows of 65.3 on March 29 (lowest since 1973).
  • CBA says card spending in the week to October 23 lifted 4.4% on a year ago, compared to a 6.9% lift for the week ended October 9. Online spending rose 18.1% on a year ago.
  • The “final demand” component of producer prices (business inflation) rose 0.4% in the September quarter but was down 0.4% on a year ago.
  • The Australian Bureau of Statistics (ABS) has released quarterly data on business counts. In the August 2020 quarter (in seasonally adjusted terms) the number of businesses in the Australian economy increased by 0.7% after also increasing by 0.7% in the May quarter. Business entries were up 2.3% and business exits were up 1.1%. (Have I said this is the craziest recession ever?)
  • The Consumer Price Index rose by 1.6% in the September quarter. The result follows the 1.9% decline in the CPI in the June quarter — the biggest quarterly decline in 89 years.
  • The value of exports of goods rose by 3% to $28.9 billion in September to be 12.2% lower than a year ago. The value of goods imported was down 1% to $23.8 billion — 8.5% lower compared to a year ago. In the year to September, the goods trade surplus (exports less imports) was $71.3 billion, down from the record high of $87.3 billion in April. (These are lower numbers but are still good ones, especially considering the Coronavirus’ impacts.)
  • US GDP expanded at a record 33.1% annualised rate in the September quarter (survey: 32%). On a year-on-year basis, GDP jumped by 7.4%.
  • US durable goods orders lifted 1.9% in September (survey: 0.5%). In August, the FHFA house price index rose 1.5% (survey: 0.7%) and the S&P/Case-Shiller 20-city home price index gained 0.5% (survey: 0.5%).
  • The Richmond Fed manufacturing index lifted from 21 to 29 points in October (survey: 18). Redbook chain store sales rose by 1.2% last week compared to a year ago.

What I didn’t like

  • America’s and Europe’s handling of the Coronavirus and the economic, market and personal effects. New virus lockdown measures in France and Germany will hurt global economic growth and commodity price rebounds.
  • Private sector credit (effectively outstanding loans) rose by 0.1% in September to be up 2% over the year – the weakest annual growth in 10½ years.
  • The Conference Board consumer confidence index for the US fell from 101.3 to 100.9 points in October (survey: 102).
  • US new home sales fell by 3.5% to an annual rate of 959,000 in September (survey: 1.4%). The Chicago Fed national activity index fell from 1.11 to 0.27 points in September (survey: 0.73).

Twits can be kill a business

Facebook and Twitter have been beaten up overnight, even though the former actually reported well this week. Their falling user numbers and the overdue realisation that these companies are overvalued have worked together to hurt their share prices, big time.

Facebook was down about 7% overnight, while Twitter was smashed to lose over 20%!

Personally, I liked the idea of Twitter to alert potential readers about my most recent stories and to read stories by other writers, hoping that it would lead to an intellectual debate. However, history taught me that Twitter in particular is the domain of very angry, generally left-leaning, tribal people, who are really pissed off at life and hate those who are running both the economic and political show.

That will draw a response!

The week in review:

Our videos of the week:

Top Stocks – how they fared:

The Week Ahead:

Australia
Monday November 2 – AiGroup and Markit manufacturing indexes (Oct.)
Monday November 2 – CoreLogic home value (October)
Monday November 2 – Lending indicators (September)
Monday November 2 – Building approvals (September)
Monday November 2 – ANZ job advertisements (October)
Tuesday November 3 – Reserve Bank Board meeting
Tuesday November 3 – Weekly consumer confidence (November 1)
Wednesday November 4 – Retail trade (Final, September)
Wednesday November 4 – Weekly payroll jobs & wages (October 17)
Wednesday November 4 – New vehicle sales (October)
Thursday November 5 – International trade (September)
Friday November 6 – AiGroup Performance of Services index (October)
Friday November 6 – Reserve Bank Statement on Monetary Policy

Overseas
Monday November 2 – China Caixin manufacturing index (October)
Monday November 2 – US ISM manufacturing index (October)
Monday November 2 – US Construction spending (September)
Tuesday November 3 – US Presidential election
Tuesday November 3 – US Factory orders (September)
Wednesday November 4 – China Caixin services index (October)
November 4-5 – US Federal Reserve meeting
Wednesday November 4 – US ADP employment change (October)
Wednesday November 4 – US International trade balance (September)
Wednesday November 4 – US ISM services index (October)
Friday November 6 – US Nonfarm payrolls (October)
Saturday November 7 – China International trade (October)

Food for thought:

“The real key to making money in stocks is not to get scared out of them.” – Peter Lynch

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:

Historically, Democrat Presidents have always presided over secular bull markets except for Roosevelt in the latter half of the 1930s as can be seen in the following chart shared in the Switzer Report earlier this week:

Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.) DIMENSIONAL FUND ADVISORS 

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