Switzer on Saturday

Trump, Turkey, tariffs and trade war trash talk

Founder and Publisher of the Switzer Report
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Non-believing Democrats have rudely called the US President a ‘turkey’ and I know Charlie Aitken isn’t complimentary about Donald either when he looks at what his tariffs have done to the Chinese stock market and the share prices of some of Charlie’s biggest holdings, such as Tencent. But now the actual country Turkey has been trumped by Donald and the markets have looked at this once beacon of democracy and economic success in the Middle East and have seen it as a financial crisis.

US stock markets are into the red, with the Dow down close to 200 points. Is this only a black mark for Turkey or a black swan? Remember, an unseen curve ball for financial markets is (excuse the mixed metaphor) a black swan event.

This drama started with the Turkish lira, which fell to the lowest level ever against the greenback overnight.

This Turkey concern isn’t anything new, with the economy under pressure for some time. And it follows a lot of political issues that have dogged the country recently. It shouldn’t surprise you that this new and deeper concern about Turkey was prompted when President Trump doubled the tariffs on metals coming out of this ally of the USA.

Underlining the troubling political issues in the country, Mr Trump made his tariff call after the President of Turkey, Recep Tayyip Erdogan,  implored his fellow citizens to, wait for it, “change the euros, the dollars and the gold that you are keeping beneath your pillows into lira,” he said. “[This is] a domestic and national struggle.” (CNBC)

By the way, there is a back story to all this, with a US pastor, Andrew Brunson, arrested and detained in Turkey, accused of supporting a failed coup in 2016 against the Turkish President. A recent Turkish delegation to Washington DC made no progress on releasing Brunson, so Donald raised the stakes with his tariff play!

The most watched ETF for Turkey, the MSCI Turkey ETF, was down 15% overnight but over 2018 it has been crushed 42.3%. Clearly, Donald knew what his poking could do and it certainly has put the Turkish leader on the backfoot, when he asks his people to potentially take an economic loss for their president and country.

The observation of Daryl Kerrigan from the movie, The Castle, looks appropriate: “Tell him he’s dreamin’.”

Along with the $16 billion extra tariffs both the USA and China imposed on each other, this has made what should have been a good week for stocks (with the US reporting season looking like an absolute ripper) a disappointment. Meanwhile, the US economy continues its progress towards normalcy, with the annual inflation rate sneaking up to 2.4% – that’s the highest rate since September 2008.

All this Turkey and tariff stuff needs to be put into context. Michael Geraghty, equity strategist at Cornerstone Capital Group, did exactly that, telling CNBC that “The fact of the matter is, when you have 19 times earnings [on the S&P 500], it’s not surprising to get a bit of a tumble but I do think there is still strength left in equities” as earnings have been “undoubtedly strong”.

Again, the question for you and me is: is this a Turkey or black swan event? I say “no” but the Trump use of tariffs is more scary than I anticipated. The progress he made with the EU, with news that there had been a move towards a deal was promising but his China trade war is hotting up, not cooling down. We can’t be too complacent. If you throw in the Trump sanctions on Iran, you can see why I’m not complacent about geopolitical threats right now.

But wait, there’s more Trump stuff to worry stock players and wealth builders!

On Friday, the Russian PM, Dmitry Medvedev said if the US President imposes sanctions on Russia for allegedly being involved with the killing of a ex-Russian spy living in Britain, then it would be treated as a “declaration of an economic war”!

Donald does make investing in stocks a tad more worrying, doesn’t he?

All this international gloom contrasts with the blue skies we saw locally for stocks, with the S&P/ASX 200 index up nearly 44 points (or 0.7%) for the week, to end at 6278.4. You’d have to largely thank an OK start to reporting season for this.

The biggie for the week was always going to be CBA. As someone who has been arguing here and elsewhere that the banks look like buys, CBA’s 3.6% gain for the week to end at $75.47 was nice to see. On June 14, the stock went to $67.45 and it was around then that I posed the question about whether it was close to “buy time”? It’s up around 12% since then and justifies my often argued case for buying quality companies when the market beats them up excessively.

Meanwhile, Suncorp delivered on whispers that this regional bank was on a roll with a $1.1 billion profit, which sent its share price up 5%. You can only hope this type of company profit reporting continues next week, with a huge number of businesses set to do show-and-tell.

Magellan Financial was another star performer, helped by raising its dividend, but that 17.7% rise in its share price for the week must have made Hamish Douglass supporters smile.

All up, it has been a good start to reporting season but next week will give us a clearer picture of whether an improving economy is delivering better profits. I just hope Trump, Turkey, tariffs and trade war trash talk doesn’t rob us of higher stock prices.

What I liked

  • The RBA left the cash rate at a record low of 1.5% for the 24th straight month. The last rate change was a quarter percent rate cut on 2 August 2016 and they had no choice with inflation and wage rises not big enough to justify a rates move.
  • ANZ job advertisements rose by 1.5% in July and now just stand 0.2% away from the 7-year high set in May.
  • The weekly ANZ-Roy Morgan consumer confidence rating fell by 0.8% to 118.9 but is still well above the average of 114 since 2014 and the average of 113 since 1990.
  • The Performance of Construction index rose from 50.6 to 52 in July. The index has been above 50 for 18 straight months, indicating expansion in the construction sector.
  • The proportion of first home buyers in the market hit 6-year highs.
  • US chain store sales in the last week were up 5.6% on a year ago, up from the 4.2% annual gain in the prior week.
  • Consumer prices in China rose by 2.1% in the year to July (forecast 1.9%), up from 1.9% in June. (Inflation on the rise is seen as a plus nowadays!)
  • Over the year to July, Chinese exports lifted 12.2%, with imports up 27.3%. As a result, the trade surplus narrowed from US$41.47 billion to US$28.05 billion. China importing a lot of stuff is a good economic sign!

What I didn’t like

  • For around a decade, CommSec has been tracking an index of luxury cars. Changes at the ‘top-end’ of markets – cars, houses and other assets – have tended to lead activity more broadly. The CommSec index of luxury marques peaked in the 2016 calendar year, with sales totalling 106,658 units. In the period since, annual sales of luxury marques have fallen by almost 11%. Broader car sales peaked in March and have now turned down but low interest rates have brought forward a hell of a lot of sales. That said, we know the housing sector is slowing.
  • The tariff trash talk and actions, which has unsettled the US stock market overnight.
  • The number of loans (commitments) by home owners (owner-occupiers) fell by 1.1% in June and the value of new housing commitments (owner occupier and investment) fell by 1.6% in June. Investor loans are at 5-year lows. (It is what regulators wanted but I hope it doesn’t get out of hand.)
  • Mortgage applications in the US fell by 3%, with the Mortgage Market Index falling to its lowest level in two and a half years, at 342.5 for the week ended August 3.
  • China confirmed a 25% tariff charge on US$16 billion worth of US goods.

One BIG dislike

I get it – house prices in Sydney and Melbourne are falling. But they have risen by so much since 2011. For Sydney, the rise was around 80%, so we’ve had it coming. However, let’s keep it in perspective. When I wrote a piece this week saying “don’t worry”  about house prices, a guy tweeted against me, pointing out that we’d had a record fall in house prices in July. That’s true but did this guy go past the headline that newspapers revelled in? Look at the facts! Here they are presented by Craig James of Commsec: “The CoreLogic Home Value Index of national home price index fell 0.6 per cent in July to be down 1.6 per cent over the year – the biggest annual fall in six years.”

Open your eyes and see that this “biggest annual fall in six years” is only 0.6% for the month and 1.6% for 12 months! We’ve had so many months of rises and smaller falls that this is seen as huge! Give me a break!

On Monday, on my Sky News Business show, I’ll interview a 24 gold carat expert on housing to see what the true story looks like for house prices. Rob Mellor is the MD of BIS Oxford Economics and I’m sure he’ll put the kaibosh on the fake news when it comes to house prices.

The Week in Review:

  • Can you still bank on the banks? I took a look at the data to find out.
  • Paul Rickard delivered an update to our income and growth portfolios, with some positive revelations.
  • With reporting season upon us, James Dunn offered the names and numbers of six companies you need to keep an eye on.
  • In our first Buy, Hold, Sell – What the brokers say, The opening week of reporting season was pretty busy for brokers, with upgrades for AMP and APA Group. And in our second edition, Regis Resources and Seek got upgrades, while Eclipx Group got a double downgrade.
  • In this week’s Hot stocks Lendlease Group got a tick for breaking above its 2007 high of last week.
  • In our Question of the Week, one reader asked can you put your home into your super or is it a no-no?
  • Charlie Aitken revealed a new stock pick in a classic top down meets bottom up idea. Check that out here.
  • Many listed investment companies that invest in small and micro-caps are trading at a discount. Tony Featherstone explained how to find gems in 3 bargain basement small-cap LICs.
  • What happens when you underpay a super pension? Graeme Colley shares the penalties and administration burdens you will probably want to avoid.

Top Stocks – how they fared:

What moved the market?

  • The RBA confirmed it has downgraded its 2018 inflation forecast after flagging the change in Tuesday’s rates decision.
  • Majors CBA and AMP both reported reduced profits from the year before. The Commonwealth Bank reported a 5% drop in cash profit to $9.23 billion. An increase in the dividend of one cent to $2.31 was viewed as a sign of confidence.
  • Most company reports this earnings season have been positive.
  • The Trump administration has announced a new round of tariffs on Chinese goods worth $US16 billion ($22 billion). Meanwhile, China is slapping extra tariffs of 25% on $16 billion worth of US imports, from fuel and steel products to autos and medical equipment. Both sets of tariffs are set to be activated on August 23.

Calls of the week:

  • Elon Musk made a call to tweet his intention of taking the electric car company Tesla private.
  • NAB CEO Andrew Thorburn also made a call to jump on Twitter to share a public apology over recent examples raised in the Royal Commission where the bank had failed to serve customers “with honor.”
  • Andrew Gaff was suspended from playing in the AFL for eight weeks after he broke the jaw of Fremantle’s Andrew Brayshaw last weekend.

The Week Ahead:

Australia

Monday August 13 – Credit & debit card lending (June)
Tuesday August 14 – NAB business survey (July)
Wednesday August 15 – Wage Price Index (June quarter)
Wednesday August 15 – Monthly consumer confidence (August)
Thursday August 16 – Employment/Unemployment (July)
Thursday August 16 – Average Weekly Earnings (May)
Friday August 17 – Reserve Bank Speech

Overseas

Tuesday August 14 – China activity data (July)
Tuesday August 14 – US NFIB Small Business Optimism (July)
Tuesday August 14 – US Export & import prices (July)
Wednesday August 15 – China House Prices (July)
Wednesday August 15 – US Empire State index (August.)
Wednesday August 15 – US Retail sales (July)
Wednesday August 15 – US Industrial production (July)
Wednesday August 15 – US NAHB housing market (August)
Thursday August 16 – US Housing starts (July)
Thursday August 16 – US Philadelphia Federal Reserve (August)
Friday August 17 – US Leading index (July)
Friday August 17 – US Consumer confidence (August)

Food for thought:

“The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency.”– Bill Gates

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:

Source: Commsec

Top 5 most clicked:

Recent Switzer Super Reports:

Monday 06 August: Bank on the banks
Thursday 09 August: Aussie Battlers

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.