Switzer on Saturday

Westpac and Trump’s horse trading hurts stocks!

Founder and Publisher of the Switzer Report
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It’s been a week of disappointment for those of us long banks and long Donald Trump and his trade deal. The Westpac/AUSTRAC embarrassment and poor performance not only brought down the bank’s share price nearly 7% over the week, it led Goldman Sachs to drag its target price for the bank down by 10%. “In all cases, banks underperform peers in the 12 months after the incident by an average of 18 per cent,” the U.S. investment bank said in its report about Westpac.

The Westpac blow up is not only terrible for the bank’s brand and reputation, it hurts bank share prices and takes the stock market down, also not helping confidence that our struggling economy really needs right now. The strength and the reputation of our banks were important in helping our economy resist the negative winds of the GFC and in part helped explain why we didn’t end up in recession, which in turn was responsible for why our jobless rate didn’t top 6% over that time.

Meanwhile, Donald gave trade deal believers like yours truly a reminder that with this unique US President you always have to expect the unexpected. That said, his market-rocking comments/tweets that if a trade deal isn’t done and if the Chinese keep welching on the deal, as well as keep asking for more tariff reductions, he’d raise more tariffs on December 15!

Of course, this is classic Trump and his famous Art of the Deal, which is the title of his now unforgettable book. However, the Chinese know a thing or two about deal-making and horse-trading, and it’s fair to say that there are no innocent parties in this trade war, so we have to expect this kind of argy-bargy until the deal is signed.

The last minute revelation that the phase one/60% trade deal isn’t a done deal brought Wall Street down for the first week since the start of October but it was green on the trading screens on Friday, with Donald again telling us, wait for it, “potentially very close!” Note he did throw “potentially” for the first time, which makes sense, given the fact that the Chinese aren’t laying down and rolling like the way a puppy meets a fully grown big dog.

A side story that could be really important for stock players like us is that the impeachment action against Mr Trump is not the only reason why he needs to get the good news of a trade deal happening. The other news item is that Michael Bloomberg has launched a $5 million TV ad blitz targeted at 25 local markets ahead of a possible run for the presidency!

Interestingly, Bloomberg reports that their founder “has not purchased any time in Iowa, New Hampshire, Nevada or South Carolina, the states that hold the first four presidential nominating contests in February.” That said, if the polling tells the former mayor of New York that he is a real chance, then we could soon see a battle of the entrepreneurs for the US Presidency, which I’m sure Wall Street would be happy with.

This good news that a Democrat that would be less left than an Elizabeth Warren or Bernie Sanders, comes as Goldman Sachs hoses down fears that 2020 will bring the recession that the inverted yield curve was predicting earlier this year. “This easing in financial conditions suggests not only that global growth is likely to pick up somewhat in absolute terms, but also that growth may come in stronger than currently predicted by the forecaster community,” wrote Jan Hatzius, Goldman’s chief economist this week.

“We expect the global growth slowdown that began in early 2018 to end soon, in response to easier financial conditions and an end to the trade escalation,” he explained.

To the local story and the S&P/ASX 200 Index lost 1.23% for the week to end at 6709.8, driven by the Trump trade deal warnings and the fact that Westpac’s breaching of anti-money laundering regulations could easily cost the banks way over a billion dollars in fines.

And of course Westpac’s sins affected all the banks’ share prices, with the AFR reporting that the Banks Index was down 3.5% for the week. And even more worrying is whether this could this affect the bank’s dividends going forward. How the CEO and chairman survive this huge mistake should be interesting to watch but I don’t know if it would be great for the share price.

The miners had a good week, which is consistent with the view at the Sohn Hearts & Minds conference I attended yesterday, in company with Australia’s top fund managers and the legends of US investing – Ray Dalio of Bridgewater Associates and Howard Marks of Oaktree Capital.

One stock loved by a number of fundie-presenters was Mineral Resources (MIN) and not surprisingly it rose 4.6% yesterday! While on mining, BHP was up 1.25% to $37.19, while Rio put on 0.8% to end the week on local trading at $94.05.

Shock story of the week was poor old Metcash, which lost its supply contract with 7-Eleven stores, which took nearly 7% off its share price to end at $2.83.

And after being strongly tipped on my TV show on Monday by a number of my guests including Paul Rickard, a2 Milk rose 16.58% to end at $13.99.

I’m going to write about this stock’s bright future on Monday but if you want an early leg up, here it is!

What I liked

  • CBA’s chief economist Michael Blythe: “After a poor September, there was a small pick-up in retail spending intentions data in October.” And “the sharp upswing in home buying intentions continues and intentions are now approaching the record highs seen in early 2017.”
  • In the 12 months to October 2019, the Budget deficit stood at just $78 million.
  • The US consumer sentiment index for November rose to 96.8 from 95.5 in October.
  • The IHS Markit’s gauges for the U.S. services and manufacturing sectors also rose more than expected.

What I didn’t like

  • In trend terms, the Internet Vacancy Index decreased by 0.7% in September – the 9thsuccessive monthly fall. The index is 7.1% lower than a year ago – the biggest annual decline in 5½ years.
  • The weekly ANZ-Roy Morgan consumer confidence rating fell by 1.1% to 109.9 points. Sentiment is below both the average of 114.3 points held since 2014 and longer-term average of 113.1 points since 1990.
  • The measure of economic conditions over the next 12 months (‘current economic conditions’) fell by 2.6% to -9.4 points – the lowest level in 2½ years.
  • Minutes of the November 5 Board meeting were released and members said: “A case could be made to ease monetary policy at this meeting.”
  • According to data from MotorMouth and Informed Sources, daily average unleaded petrol prices rose by 41 cents a litre to 171.8 cents a litre in Adelaide last week. How does that happen when Sydneysiders are charged 134 cents and Melbournites 138 cents?
  • The US leading index fell by 0.1% in October, in line with forecasts.
  • Reuters reported that the completion of a “phase one” US-China trade deal could be delayed into next year, citing trade experts and people close to the White House.

Likes-v-dislikes

There’s no way I can look at these stats/numbers and convincingly argue that we’re on the comeback trail. Thankfully, the global picture is picking up, if we can believe Goldman Sachs but we need to see some more good news out of the local economy. The key date for the economy and the Treasurer Josh Frydenberg is December 4, when we get the September quarter economic growth numbers and if these don’t produce an annual growth figure 2% plus, then bringing forward tax cuts early will look like a policy option Josh and ScoMo would be foolish to ignore.

I hope they don’t have to but the latest run of data has been underwhelming, to say the least.

The week in review:

On our YouTube channel this week:

Top Stocks – how they fared:

The Week Ahead:

Australia
Tuesday November 26 – ANZ/Roy Morgan consumer confidence
Tuesday November 26 – Speech by Reserve Bank Deputy Governor
Tuesday November 26 – Speech by Reserve Bank Governor
Wednesday November 27 – Construction work done (September quarter)
Thursday November 28 – Business investment (September quarter)
Friday November 29 – Private sector credit (October)

Overseas
Monday November 25 – Speech by US Federal Reserve chair
Tuesday November 26 – US Home prices (September)
Tuesday November 26 – US Consumer confidence (November)
Tuesday November 26 – US New home sales (October)
Wednesday November 27 – US Personal income spending (October)
Wednesday November 27 – US Economic growth (September)
Wednesday November 27 – China Industrial profits (October)
Wednesday November 27 – US Durable goods orders (October)
Wednesday November 27 – US Beige Book
Thursday November 28 – US financial markets closed
Friday November 29 – China purchasing manager surveys (November) 

Food for thought:

“The study of economy usually shows us that the best time for purchase was last year.” – Woody Allen

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:

CommSec Senior Economist Ryan Felsman this week shared a chart showing the link between lower interest rates and consumer confidence:

Top 5 most clicked:

Recent Switzer Reports:

Monday 18 November: Stage set for stocks to spike

Thursday 21 November: Our Fixed Interest Masterclass

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.