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US stocks could not keep up Thursday’s positivity and it was a case of what drives stocks up can pull stocks down. And yep, it’s all about Donald Trump’s tax cuts, with some doubts about it being passed soon, again worrying Wall Street.
In case you missed it, some nincompoop Republicans in the US Senate – supposedly the President’s allies – could stand in the way of these tax cuts. This not only means a delay in the cuts being passed but a possible delay of the starting date and some changes to the actual tax measures.
At this stage, the potential obstacles to the bill getting passed in the Senate have the capability of really hurting stocks and that’s why Wall Street was negative, though not dramatically, on Friday.
Despite current concerns, Treasury Secretary Steven Mnuchin told CNBC that he expects a Republican tax reform bill to be sent to President Trump by Christmas!
He thinks the Senate will vote on the reforms after Thanksgiving – November 23 – and let’s hope he has done the headcount or the Santa Claus rally we expect in December could be well and truly trumped!
“Tax reform is the big macro story that’s driving everything,” said Luke Bartholomew, investment manager at Aberdeen Standard Investments. There is “cautious optimism at the moment” about tax reform getting done this year. (CNBC)
Back home, it has been a tough week at the office for bulls, with the S&P/ASX 200 index down 72 points (or 1.2%) for the week to end at 5957. After four bad days, Friday went positive and it was inspired by Wall Street and the belief that US tax changes look more likely.
This US tax anxiety put paid to our precious 6000 level but most experts believe that we will retest it soon, provided the US Senate doesn’t derail the President’s tax plan. More importantly, economists such as Beta Share’s David Bassanese, admitted to me this week that he’s become more positive on the Oz economy, while the likes of Bell Direct’s Julia Lee and others of her ilk, who watch stocks 24/7, all agree that the earnings of local companies have been recalculated to higher levels, which is always good for stocks.
Not helping the index last week was the dip in metal and energy prices, and note that Shell’s decision to sell its 13% holding of Woodside led to big institutions selling their bank shares to get the cash to go long on Woodside. But on Friday, the newly-created buying opportunity on bank stocks brought in the buyers, which partly helped explain Friday’s stock price comeback.
That said, BHP dropped 3.6% for the week, while Rio gave up 3%! And while these weekly worries about the ups and downs of stock prices can be largely ignored until we see a believable trend, the big news I liked was that the once basket case Santos was able to attract an all cash, $11 billion takeover offer from Harbour Energy from the USA. This is not just an endorsement for the good work of the new CEO, Kevin Gallagher, who I have often praised here and on TV, it says something about the potential for energy prices and stocks.
It’s hard not to equate higher energy prices with a stronger global economy, which has to underpin better stock prices.
What I liked
- The NAB business conditions index rose from +13.9 points in September to a record high of +21.1 points in October. The business confidence index was unchanged at +7.6 points in October, remaining above its long-run average of 5.9 points.
- The measure of business profitability in the NAB survey surged from +16.6 points in September to an all-time high of +26.2 points in October.
- The weekly ANZ/Roy Morgan consumer confidence rating rose by 2% to 114.8 – its highest level in seven weeks – after falling by 0.7% in the prior week. Sentiment towards current and future economic conditions rose by 3.5% and 7% respectively but the latest Westpac-Melbourne Institute survey showed consumer sentiment fell to 99.7 in November, back below the 100-point level that indicates where optimists equal pessimists.
- In September, tourists from mainland China were 117,900, ahead of New Zealand (111,300). Over the past year, a record 1,347,400 tourists came to Australia from China, up 12.6% over the year. Tourists from New Zealand totaled 1,347,300 visitors over the past year, but were up just 1.2%.
- The Commonwealth Bank Business Sales Indicator (BSI), a measure of economy-wide spending, rose by 0.6% in trend terms in October, after a 0.5% increase in September. But the service sectors were the main winners of the month, with retailers continuing to find conditions tough.
- This headline: “Longest run of job gains in 23 years.”
- Unemployment fell in October from 5.5% to 5.4%, while employment rose for the 13th straight month, up by 3,700 in October after rising by 26,600 in September (previously reported as a rise of 19,800 jobs). Full-time jobs rose by 24,300, while part-time jobs fell by 20,700.
- US producer prices rose by 0.4% in October (forecast +0.1%), while the core rate (excludes food and energy) rose by 0.4% (forecast +0.2%).
- The NFIB business optimism index in the US rose from 103.0 to 103.8 in October.
- US industrial production rose by 0.9% (forecast: +0.5%) in October – a 6-month high – after rising by a revised 0.4% in September.
- The National Association of Homebuilders Housing Market Index in the US increased by 2 points to 70 points in November, above forecasts of 68 points.
- US lawmakers in the House of Representatives passed the tax reform bill on Thursday but the Senate’s call comes next.
- The possibility that my mate John Borghetti smiled when his share price spiked 13% on Friday, after WAM’s Geoff Wilson talked up the company at a conference. He deserves some good news given how good he’s made the airline.
What I didn’t like
- Chinese retail sales rose at a 10% annual rate in the year to October – the slowest growth in eight months. The result was below the 10% forecast and below the 10.3% growth in the year to September. Real retail spending was up 8.6% over the year. (This wasn’t really bad news but I’d prefer the numbers to be more positive than a 10% increase! Am I asking too much? Probably.)
- Chinese industrial production rose at a 6.2% annual rate in October, below the forecast average (6.3%) and below the 6.6% growth in the year to September. (Once again, a small miss, so don’t get too stressed.)
- A story by Freelancer.com’s CEO, Matt Barrie, that predicted economic Armageddon caused by China. Matt tried this story on me three years ago and I told him “one day you might be right but it’s not now!” I repeated this message to him this week and was disappointed that so many news outlets treated his treatise with so much respect. Matt’s a smart guy but his analysis was one-sided but what can I expect? – he’s not an economist but simply a very smart tech entrepreneur!
- The share price slump of GE – this was once the greatest company on earth when I interviewed the former CEO Jack Welch in Sydney, just after he retired in 2001! (He was chairman and CEO of General Electric between 1981 and 2001. During his tenure at GE, the company’s value rose 4,000%.)
Have we overestimated Amazon?
This week in Switzer Daily I wondered whether I had underestimated what Amazon could do when I saw a video of an Amazon delivery guy place a parcel inside a woman’s house! How did it happen? The woman had an Amazon lock on her door and an Amazon camera and she was able to open the door remotely!
That said, I loved this news: shares in Wal-Mart rose by 10.2% after reporting strong store sales. It looks like big retailers can take on Amazon and do more than survive. I reckon the likes of JB Hi-Fi and Harvey Norman will learn a lot from the Wal-Mart/Amazon battle and it could mean our market has marked retailers down by too much, too early.
The Week in Review:
- We’ve finally crossed the 6000 line [1], so how much higher can we go? I proposed a new goal and explained why I think we’ll hit the 6800-threshold by next year.
- This bank reporting season can only be described as underwhelming. Paul Rickard [2] compared the latest results from the majors and gave his analysis on the sector.
- The Commonwealth Bank and Xero featured in the first Buy, Hold, Sell – What the Broker’s say [3].
- And in our second Buy, Hold, Sell [4], Coca Cola Amatil was in the good books while Rio Tinto was downgraded
- In this week’s Hot Stocks [5] was a building materials company, an entertainment retailer and a bank.
- This week there were a growing number of SaaS providers on the ASX. James Dunn [6] noted five of the most promising.
- This bank reporting season can only be described as underwhelming. Paul Rickard [2] compared the latest results from the majors and gave his analysis on the sector.
- Julia Lee of Bell Direct shared her Professionals Pick [7] this week. Find out what it is!
- Tony Featherstone [8] compared tech with telco and looked at the value of three small-to-large caps; Telstra, TPG and Amaysim.
- Charlie Aitken [9] claimed that we will never see cash rates and long bond yields lower than what we see today. The only question that remains is how fast they’ll rise!
- Plus, Paul Rickard answered all of your Questions of the Week [10].
Top Stocks – how they fared
What moved the market?
- Nervousness about the progress of tax reform in the USA put global markets on edge
- The ASX fell back below 6000 on Tuesday morning after suffering broad-based losses led by energy names.
- Energy giant Royal Dutch Shell sold its stake in Woodside Petroleum for $3.5 billion.
- The ABS wage index was released Thursday showing weaker than expected growth.
- On Thursday Domain started trading under the code ‘DHG’, beating expectations with a $2.2 billion valuation.
Calls of the week
I made a call that the market would reach 6800 by next year! [1]
“OMG! First there was Brexit, then Trump, and now this!” Patrick Commins Editor of Markets Live [11] after Italy’s national soccer team has failed to qualify for the World Cup for the first time since 1958.
“Australia says YES” – ABS Chief Statistician David Kalisch confirms it’s a win for the ‘yes’ vote. 7,817,247 people – or 61.6 per cent – voted ‘yes’.
The Week Ahead:
Australia
- Monday November 20 – CommSec Home Size report
- Tuesday November 21 – Reserve Bank Board minutes
- Tuesday November 21 – Speech by Reserve Bank Governor
- Wednesday November 22 – Construction work (September quarter)
- Thursday November 23 – Detailed job market data (October)
Overseas
- Monday November 20 – US Leading index (October)
- Tuesday November 21 – US Existing home sales (October)
- Tuesday November 21 – US Chicago Federal Reserve index (Oct)
- Wednesday November 22 – US Durable goods orders (October)
- Wednesday November 22 – US Federal Reserve minutes
- Thursday November 23 – US Thanksgiving Day
- Thursday November 23 – Europe ‘flash’ manufacturing (November)
- Friday November 24 – US ‘Flash’ purchasing manager surveys
Food for thought:
“The individual investor should act consistently as an investor and not as a speculator.” – Ben Graham
Last week’s TV Roundup
- Full speed ahead! The automotive industry is showing healthy growth and Carsales CEO Cameron McIntyre [12] joined Switzer TV to discuss.
- Should investors be afraid of the housing headlines? Will there be a property collapse? Margaret Lomas [13] founder of Destiny Group joined Switzer TV to assess the state of the housing market.
- Concerns around cyber security has been a hot topic this year and discussing her thoughts on the subject is Melinda Cilento [14] CEO of CEDO.
- Broad based selling pushed the S&P/ASX 200 below its hard earned 6000 milestone – should we be worried? Morgans’ Raymond Chan [15] joined Switzer TV to discuss the path we’re headed.
- Can you build your brand without google? Jim Stewart [16] from StewArt Media joined Switzer TV to give his opinion.
- The market has been dominated by head turning elections this year but as 2017 comes to an end how will investors be positioning themselves moving forward? To discuss CBA’s head of SMSF customers Marcus Evans [17] joined Switzer TV.
- Co-CEO of WCM Investment Management Paul Black [18], joined Switzer TV to share some global stocks with good growth opportunities, even in difficult times.
- We all know how hard finding good coffee in America is! Nicholas Stone [19] brought life to American coffee scenes after opening Bluestone Lane café. He joined Switzer TV to talk about his success.
- What are the key differences between sales development in America and sales development in Australia. Keynote’s John Lees [20] joined Switzer TV to share his opinion.
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 Mayne Pharma, with its short position decreasing by 0.3%.
Charts of the week
Source: Commsec
Source: ABS
Top 5 most clicked:
- James Dunn SaaS: 5 stocks to watch [6]
- Peter Switzer Now at 6000, so where to next? [1]
- Paul Rickard The new game in banking – cutting costs [2]
- Rudi Filapek-Vandyck Buy, Hold, Sell: Commonwealth Bank and Xero [3]
- Switzer Super Reporter Hot Stocks – Banking and property [5]
Recent Switzer Super Reports
- Monday 13th November – Major Bank Roundup [21]
- Thursday 16th November – Bonds Away [22]
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.