Switzer on Saturday

Trump strikes! Plus or negative for stocks?

Founder and Publisher of the Switzer Report
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Apart from President Trump’s decisive move on Syria, the big news was a weaker-than-expected jobs report. Again, however, Wall Street showed a reluctance to sell off dramatically. That said, the US financials ETF is down 10% from their post-election highs but remains just over 20%. And all this partly explains the ups and recent downs of our banks.

Not surprisingly, Syria has helped the gold price. I don’t understand gold and this week I told our Sydney Investor Strategy Day crowd that I’d only ever buy the precious metal if its price was near record lows because then I could expect a spike over five years or so! Gold is OK for punters but it’s not really an investor play.

Back to the news overnight, and only 98,000 jobs showed up in March, which looks like a shocker, compared to the 180,000 tipped by ‘experts’. However, as with the oddity that can be with job numbers, unemployment fell from 4.7% to 4.5%.

Yesterday, in our Switzer Super Report webinar, Paul Rickard asked me what I’d be watching overnight. Clearly, it was the employment story in the US. Then I said how the bond market reacted was going to be an important watch. Well, the 10-year bond did go under 2.3%, which was the weakest reading since November last year.

Be clear on this: if the number was strong and there was no Syria worries, the bond yield would’ve gone up, reflecting the high chance of three rate rises from the Fed this year.  However the US economy needs to being going gangbusters before that happens. It’s going well but not great and it puts more pressure on Donnie to deliver with his tax cut plans.

This week’s revelation from Paul Ryan (the US House Speaker and the President’s key tax guy) that the tax bill could take longer than the health reform failure, clearly did not keep stock buyers strongly bullish.

In fact, ahead of the old “sell in May and go away” period of the year, the outflow of US funds investing domestically was nearly $13 billion, which isn’t huge – .03%. But as my mate, CNBC’s Bob Pisani (the NYSE resident reporter for the network) said: “it’s not big but it’s been all inflows” until now.

Of course, there has been a lot to hose down because of how hot Donald has been for market optimists.

The US military action not only helped gold, it also pushed up the greenback so the Oz dollar is 75.02 US cents this morning.

Back home, it was go nowhere week for the S&P/ASX 200 index, up only 0.1% on Friday. However we start next week at 5862.5 with a lot more expert forecasters jumping on board my 6000-call for the index this year. Some are even giving me support for my “all I want for Christmas” wish of 6300 by the time I pop the first cork on New Year’s Eve.

I don’t want much, do I?

It’s going to be interesting how the “sell in May” pressure works against 6000 in April, which Bell Potter’s Richard Coppleson has tipped. Go Ricky! (By the way, he’s no Ricky – definitely a Richard.)

The big story of the week has been the housing hysteria started by RBA Governor Dr. Phil Lowe’s speech in Melbourne this week, which was then escalated by a headline hungry media. I expect some Federal Budget action, such as a lower capital gains discount. Remember, this will also affect the discount on stocks as well!

By the way, APRA is muscling the banks to cut back on interest only loans and investors prowling properties in Sydney and Melbourne are bound to have less loving lenders out there. Not surprisingly, the big banks lost between 2.6% to 1.3% over the week, as the need to raise more capital was brought up by APRA sources.

We thought we were over that expectation, which helped bank share prices recently. That could be about to change if mad Melbourne-ites and silly Sydney-ians bid like there’s no tomorrow at this weekend’s auctions. Clearance rates will be closely watched to see if Phil’s jawboning has started to work.

In case you missed it, BHP was up 2.3% for the week and being diversified seems to be helping the “Big Austrafrican”!

And yep, Syria was good for the oil price and energy shares, with Santos up 2.9%

On Gold, Fairfax noted that the gold index “rose for five straight sessions, up 9.1 per cent over the week.” Those gold bugs have had a nice week but it’s a pity how they got it.

What I liked

  • Dwelling approvals rose by 8.3% in February, after rising by 2.2% in January. It was the third increase in the past four months and is a positive sign for growth and jobs.
  • On the local front, there were 105,410 new vehicles sold in March, the highest for any March month and 0.9% higher than a year ago.
  • The Oz Performance of Services index rose by 2.7 points to 51.7 in March and edging closer to the 8½-year high of 54.5 in January. The index remains over 50, signifying expansion of the services sector.
  • Our trade surplus lifted from $1,503 million to $3,574 million in February. Gold exports climbed by $352 million or 33%. Imports fell 5.3% and exports rose 1.5% and in trend terms, exports are up 30.9% on a year ago – the fastest pace in eight years!
  • The Fed talking about “balance sheet reduction”, which means it’s working towards normalcy and starts the unwinding process, where it bought bonds and securities to throw money at the USA’s GFC problems.
  • The latter could actually slow down the rate rises and this could help the US economy sustain its growth.
  • The ISM manufacturing index in the US eased from 57.7 to 57.2 in March (forecast 57.0) but the number is strong.
  • The ISM services index eased from 57.6 to 55.2 in March (forecast 57.0) but again it’s still a good number.
  • The ADP national employment report showed that private sector jobs rose by 263,000 in March (forecasts +187,000) but it seems out of whack with the official job numbers!
  • Economists are now in my rate rise camp but Shane Oliver has summed up what many are saying: “Our view is that rates have probably bottomed and that the next move will be a hike but not until the second half of 2018.” (I hope it comes before as it will mean our economy is doing well.)
  • The latest European economic story: “Eurozone retail sales rose more than expected in February and unemployment continued to fall, reaching 9.5%. While unemployment is still high from a growth perspective it’s the direction that counts and it’s down from a high of 12.1% in 2013.” (Oliver)
  • The Japanese Tankan business conditions survey showed further improvement in the March quarter, as did the March composite business conditions PMI, and consumer sentiment is up, all of which points to reasonable economic growth. (Oliver)

What I didn’t like

  • The chemical gas incident in Syria and the need for the air strike. It was a necessary response but the whole affair makes you wonder about aspects of humanity, if you can call it that!
  • With two weeks to go, French polls show Marine Le Pen, the anti-EU right-wing politician, doing too well. We don’t need to hear any silly Frexit talk this year!
  • US GDP growth for the March quarter is tracking just 1.2% annualized, according to the Atlanta Fed’s GDPNow. However, US March quarter growth is often soft and you can usually blame cold weather.
  • In the US, announced job layoffs rose by 43,310 in March, according to the Challenger, Gray and Christmas survey, up from 36,957 in February.
  • Retail sales locally fell by 0.1% in February, after rising by 0.4% in January. Spending is up 2.7% over the year and we need a more bullish consumer!
  • My answer to Trudy in Friday’s webinar when she asked Paul and me about Tesla. Her 16-year old son wants to invest in it. I listed all the reasons not to do it but the limbic part of my brain told me Tesla and Musk are hard to ignore. I sometimes think young people see the future better than the age-challenged. And this from Musk himself made me feel OK for being risky on this heavily-shorted stock: “Tesla is absurdly overvalued if based on the past, but that’s irrelevant.”

The week in review:

  • I explained why I’m rooting for stocks this year but will be more on guard in 12 months’ time.
  • Both our model income and growth portfolios added 3% in March, and returned more than 4% for the first quarter of 2017. Don’t miss Paul Rickard’s portfolio recap.
  • Could Ramsay shares fall over the next few months? Charlie Aitken provided four reasons to be cautious about the health care company.
  • There are challenges and rewards of contrarian investing. Tony Featherstone revealed three rising stocks that may go further.
  • When assessing mining companies, knowing the differences in coals is important, especially following a major cyclone like Cyclone Debbie. Max Williamson explained why.
  • Stephen Scott said IT services company, RXP Services, is attractively priced.
  • The brokers placed Bank of Queensland in the good books this week, while Suncorp was downgraded.
  • In our second broker update, two brokers upgraded ERM Power this week, while Wesfarmers was in the not-so-good books.
  • And our stock selectors like Bapcor and Ardent Leisure but dislike Aurizon.

Top stocks – how they fared

20170407-topstocks

What moved the market?

  • News that the US Fed is considering trimming its $4.5 trillion balance sheet.
  • US House Speaker, Paul Ryan, said talks about tax reform may take longer than expected.
  • Expectations on the outcome of US-China talks.
  • Higher oil prices partly due to a production outage in the US North Sea.

Calls of the week

  • The RBA left the cash rate steady at 1.50%.
  • Speaking of the RBA, Governor Philip Lowe called on mortgage lenders to rein in their reliance on interest-only loans.
  • And in this week’s Switzer Super Report, Tony Featherstone said BWX, Webjet and Costa Group could have further to run. Find out why.

The week ahead

Australia

  • Monday April 10 – Housing finance (February)
  • Tuesday April 11 – NAB Business survey (March)
  • Wednesday April 12 – Lending finance (February)
  • Wednesday April 12 – Tourist arrivals (March)
  • Wednesday April 12 – Consumer confidence (April)
  • Wednesday April 12 – Credit & debit card lending (February)
  • Thursday April 13 – Employment (March)
  • Thursday April 13 – Reserve Bank Financial Stability Review

Overseas

  • Wednesday April 12 – China inflation (March)
  • Wednesday April 12 – US Import/Export price indices (March)
  • Thursday April 13 – China Trade (March)
  • Thursday April 13 – US Producer price index (March)
  • Thursday April 13 – US Consumer confidence (April)
  • Friday April 14 – US Consumer price index (March)
  • Friday April 14 – US Retail sales (March)
  • Friday April 14 – US Business inventories (February)

Food for thought

Accept the challenges so that you can feel the exhilaration of victory.

– George S. Patton

Last week’s TV roundup

  • The big end of town wants to help the Government build the case for tax reform and in particular lower taxes for companies. To discuss, Tony Shepherd joins the show.
  • Morgans’ Simon Bond joins Super TV to share his views on Telstra and more.
  • George Boubouras of Contango Asset Management joins the show to discuss the RBA’s latest call on interest rates and what it means for markets.
  • What does FNArena’s Rudi Filapek-Vandyck think about some well-known stocks like Telstra? Find out on Super 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.

This week one of the biggest movers was Syrah Resources, with its short position increasing by 1.35 percentage points to 16.39%. Quintis went the other way, with its short position decreasing 2.29 percentage points to 11.62%.

20170407-shortstocks

Source: ASIC

Chart of the week

Booming export growth

export

Australian exports are doing better than ever – well, better than the last eight years anyway! According to CommSec, exports increased 30.9% on a year ago (in trend terms). That’s the fastest pace in eight years. Increases were seen in China, Hong Kong and India in particular.

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