Switzer on Saturday

There’s one big question – is the worst over?

Founder and Publisher of the Switzer Report
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Am I happy that my call that the stock market selling was excessive and that a bounce was to be expected was right? Yep! And it has been a great week, with our S&P/ASX 200 index up 3.9%, Japan a huge 6.8%, Germany 5%, France 5.5%, Shanghai 3.5% and the US market around 2.6%.

For us, it was the best performance since November last year but we saw the momentum peter out on Friday, with the index down 0.8%. It was annoying that we couldn’t beat the 5000-level, ending at 4952.8.

Of course, the biggest driver was the 7% spike in the oil price but it rests on a convincing deal on production cuts or freezes between OPEC and their non-member rivals, such as Russia and Iran.

The big news of the week was that the Iranian Oil Minister was talking to OPEC and his follow up comments really pushed up the oil price and material stocks responded. Adding to the positivity, iron ore’s price went up 8%, so BHP put on 10% and Rio rose 5.3%.

This crazy link between the oil price and our banks persisted, with our really beaten up banks (ANZ, NAB and Westpac) up 5-6%. The CBA was up less but it went ex-dividend during the week.

Personally, I’m happy stocks have rebounded but this comeback rests on a deal with some unreliable oil suppliers! If this turns out to be a dud, oil prices will fall and panic could quickly resume. The level we have to take out on oil is around $US37 a barrel for West Texas Intermediate crude (WTI).

Meanwhile, the new level that technical-types are watching on the S&P 500 is 1950, after the Yanks bounced heavily off my Tchaikovsky’s 1812 Overture level. The 1950 mark will give us the real thumbs up that the worst is behind us and it would coincide with a real deal being struck between OPEC and their rivals.

On Friday, WTI ended down, at $US29.60. The reason advanced for this drop was that the plus of the ‘deal-talk’ was slightly offset by a big build up of US oil inventories. The price fall in the US was 4% but there was a 14% rise during the week!

On the positive side, for those sweating on an oil deal to help stocks head up, the US rig count by Baker Hughes found that 26 oil rigs stopped producing this week. Over the year, the number was 606! Looks like the Saudis are winning.

This should help the case for a higher oil price but it worries me a little: “If other producers want to limit or agree to a freeze in terms of additional production, that may have an impact on the market, but Saudi Arabia is not prepared to cut production,” said foreign minister Adel al-Jubeir with Agence France-Presse (CNBC).

I know I don’t usually give a news report. I mainly comment and make observations laced with facts. However, oil news, central bank minutes and central banker utterances all move markets. You can tell that I’m not sure if we’re out of the woods but I’m glad, at least, that the oil producers are talking production freezes, if cuts aren’t possible. A stable oil price in the $30-region would put a foundation under stocks and not add to production costs and would also maintain the big tax cut to consumers worldwide, thanks to a lower oil price.

Back home and earnings season has been good for an optimist like me, with some 54% of results beating expectations, against a norm of 44%! My buddy, AMP’s Shane Oliver, says 68% of companies have seen their profits up on a year ago and 69% have raised their dividends relative to a year ago, against a norm of 62%. If you looked at our market without resources, you’d see a much healthier stock market.

Shane says miners are now only 10% of the index and Rio is only, wait for it, 1.5%, while BHP is 4.2%!

The chart below shows how this reporting season, to date, compares to past ones and shows that despite the Turnbull Government’s lack of policies, so far, our non-mining companies are on the comeback trail.

swos-20160220-001

As I’ve argued, news flow will be critical to this stock market bounce back. This week, we have a G20 Finance Ministers’ meeting in Shanghai on Friday and Saturday. A joint statement there on growth could be helpful.

The Markit manufacturing conditions PMI (Monday) and services PMI (Wednesday) will be watched around the world to gauge the impact of recent financial volatility on business confidence.

Meanwhile, here, 83 major companies report. These include QBE, BHP, Qantas, Wesfarmers, Woolworths and Harvey Norman. And if it wasn’t for external concerns about oil, I think this reporting season would have really given our stock market a real shot in the arm.

 What I liked

  • After New Year celebrations, China’s return to the stock market didn’t derail the market turnaround.
  • The rise in the share price for BHP and Rio. I’d been tipping and hoping that the worst was behind these two beaten up companies. Let’s hope it holds.
  • The speech by ECB President Mario Draghi with his we “will not hesitate to act” line helped market confidence. More QE and cheap bank funding from the ECB is on the way.
  • The oil deal talk, especially from Iran!
  • China’s head central banker, Governor Zhou, who suggested that a yuan depreciation was not on the cards, helped market confidence.
  • US economic data on manufacturing was better than expected and the Philadelphia Federal Reserve index improved from minus 3.5 to minus 2.8 in February.
  • The weekly ANZ/Roy Morgan consumer confidence rating rose by 2.2 points (2.0%) to 113.6 in the week to February 14. Confidence is up 3.5% over the year and above the average of 111.4 since 2014. None of the five components of the index fell in the latest week.

What I didn’t like

  • The rise in unemployment from 5.8% to 6% but Westpac says the participation rate remaining high (which is a good thing) partly explains it. CommSec says it was statistical payback, after months of great numbers in October and November, when 130,000 jobs were created. We lost 7,500 in January. So the impact is small but I hate the psychology of rising unemployment and the news headlines.
  • Bad trade figures in China. In the year to January, exports fell by 11.2% (forecast -1.9%), with imports down 18.8% (forecast -0.8%) but the market seemed to underreact to the result.

So is the worst over? I hope so. However, I suspect there will be a big test this week. This morning, Wall St was down but there is more a sideways move down rather than a significant drop. As I said, news flow will be critical this week but we’re in the hands of OPEC, Russia and Iran, which doesn’t raise my confidence levels. I’ll throw in that Russia and many other oil producers are in fiscal trouble and the equivalent cash rate in the old Evil Empire is 11%! Comrade Putin needs an economic break, so that gives me a flicker of hope but it’s a close run thing between positivity and negativity this week.

Fingers crossed!

Top stocks – how they fared

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 The week in review

(click the blue text to read more)

  • This week, I discussed whether we’re at a turning point with all this negativity!
  • My colleague Paul Rickard made the call to take profits on AGL Energy and to buy Boral in weakness.
  • Roger Montgomery listed the key things he’ll be on the lookout for when McMillan Shakespeare reports their half-year results next week.
  • The brokers upgraded BlueScope Steel and Boral. In our second broker report, Bendigo and Adelaide Bank was upgraded and Beach Energy was downgraded.
  • Our Super Stock Selectors liked the banks NAB and Westpac and disliked IOOF Holdings.
  • Charlie Aitken revisited a structural growth stock, Baby Bunting, which has lifted its forward guidance solidly and strengthened his confidence as a shareholder in the business.
  • Tony Featherstone shared five defensive opportunities to consider in uncertain markets – iShares Global Consumer Staples ETF, GPT Group, Macquarie Atlas Roads Group, Telstra Corporation and ANZ ETFS Physical Gold ETF.
  • Graeme Colley discussed the relationship between risk and return when operating a self-managed superannuation fund.
  • And Christine St Anne revisited some of our expert picks, including Nick Scali and JB-HiFi.

What moved the market

  • European markets liked super Mario Draghi’s well-chosen and reassuring words, “the ECB is ready to act”, in light of recent market volatility.
  • Wall Street was up after the Fed minutes said global concerns could change the path of interest rate rises.
  • Brent crude rose after Iran showed support for a move to freeze oil production by oil producers Saudi Arabia and Russia.
  • And the local market went higher on the back of improving oil prices.

The week ahead

Australia

  • Monday February 22 – CommBank Business Sales (January)
  • Monday February 22 – Reserve Bank speech
  • Tuesday February 23 – Weekly consumer sentiment
  • Wednesday February 24 – Wage price index (December quarter)
  • Wednesday February 24 – Construction work (December quarter)
  • Thursday February 25 – Business investment (December qtr.)
  • Thursday February 25 – Average weekly earnings (November)
  • Thursday February 25 – Detailed employment data (January)
  • Friday February 26 – Counts of businesses (June 2015)

Overseas

  • Monday February 22 – Markit “flash” manufacturing (February)
  • Tuesday February 23 – US CaseShiller home prices (Dec)
  • Tuesday February 23 – US Consumer confidence (February)
  • Tuesday February 23 – US Existing home sales (January)
  • Wednesday February 17 – US New home sales (January)
  • Thursday February 25 – US FHFA home prices (December)
  • Thursday February 25 – US Durable goods orders (January)
  • Friday February 26 – US Personal income (January)
  • Friday February 26 – US Economic growth (December Qtr.)

Calls of the week

  • US rapper Kanye West called on Facebook founder Mark Zuckerberg for a $1 billion dollar investment into his ideas from his Twitter account!
  • Reserve Bank official Malcolm Edey basically told investors to “just relax” in his speech to the Australian Shareholders Association this week. He was pointing the finger at those negative nellies in the media who are often “unjustifiably gloomy” and said current market volatility may be an overreaction. Let’s hope more leaders like him can learn to instil investors with confidence.
  • Apple CEO Tim Cook made the call to defy an FBI court order to create software that could access data in the iPhone of a San Bernardino terrorist. Cook took the stance to protect its customers against the order which “has implications far beyond the legal case at hand.’’

Food for thought

Innovation distinguishes between a leader and a follower.

Steve Jobs – cofounder of Apple Inc.

Last week’s TV roundup

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 also shows how this has changed compared to the week before.

This week one of the biggest movers was Vocus Communications with a 2.21 percentage point increase in the proportion of its shares sold short from 12.67% to 14.89%.

20160219-shortpositions

Source: ASIC

My favourite charts

Remember these words – “Over the long run!”

20160219-longterm

Source: Global Financial Data, AMP Capital

I know I have paraded charts like these around before but it is now more important than ever to remind you about the benefits of investing in stocks over the long run. Shane Oliver shows how over the VERY long run, $1 invested in Aussie shares on January 1900 equates to over $400,000 now compared to a tiddly $817 and $225 in bonds and cash respectively.

Market darling cracks $1 billion dollar profit

20160219-csl

Market darling CSL recorded a record $US 719 million (that’s $1 billion!) half-year profit this week. Take a look at this chart which shows the rise and rise of CSL since its listing in 1994!

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