Considering what made the Dow Jones slump 166 points in double quick time (talk of delays to the Trump tax cuts, thanks to the nincompoop Republicans in the US Senate) our 20-point loss on the S&P/ASX 200 index was a ripper on Friday.
Yep, I call a 69-point gain (or 1.2%) for the week a ripping great week, after what we’ve endured from May to October 3, where we went sideways, with a cap on the index of 5800.
We’re now at 6029 but can we stay above this long sought after level of 6000?
As I posed this question, my thoughts went immediately to: what happened on Wall Street overnight? The tax-delay report from the Washington Post was a breaking story but was it a real McCoy revelation or what Donald hates — fake news?
The first positive sign is that US markets were down only around 0.2%, so there couldn’t be official confirmation of a likely tax cut delay. Previous talk had the President hoping on a pre-Thanksgiving passing of the reforms, with the day that all turkeys in the US fear most happening on November 30.
On Thursday, US stock markets convulsed at hearing a tax cut delay was possible but they closed well off their lows. That could mean smart investors doubt the Republicans could be that stupid or, better still, they think the positives driving US stock prices to record highs recently are only slightly driven by the timing of tax cuts.
Politically, Donald Trump needs these cuts passed as quickly as possible because he needs a big win. However, the economy could do OK even without them. That said, when they get passed, I’d expect another leg up for US stocks and we’d get a positive updraft, which, given this week’s nice rise, couldn’t come at a better time to help us wave goodbye to the 6000 level.
CMC’s equity strategist, Michael McCarthy, has become a great believer in this current Aussie market rally, though his enthusiasm for what he sees will turn into a broad-based rally next year was before we learnt about the Republican’s possible tax delay.
That said, the cuts will come because without them, Donald Trump will wind up as a lame duck President, with his only weapon for influence being his twitter account! The fact that stocks have not retreated significantly overnight makes me think the following view could be on the money. “The idea that the corporate tax rate cut will be delayed by a year — ‘fug-ged-about-it’. Not going to happen,” said Terry Haines, senior political strategist at Evercore ISI on CNBC. “The House will insist upon that. More importantly, the President will insist upon it.” OK, let’s run with that and forget that the President for whom I held out some good market-positive hope, and his Republican buddies, have recently looked like the crew from the movie Dumb and Dumber.
Let’s hope this is fake news, but I do worry it’s not, given reports say House leader Paul Ryan, who is the party’s key tax man, has looked at the need for a possible delay with the measures. I hope that is fake news too!
Back home and the news of the week had to be CBA’s quarterly sales update, which lifted its stock up 3.9% for the week. Also, surprisingly, listed property plays had a good one, following an 8.5% spike in Westfield shares. This was a knock on effect from better shopping mall news out of the US, where the company runs some 33 shopping centres. Could this be another example where stock markets have over-assessed the impact of Amazon, at least in the short-medium term?
What I liked
- This from Credit Suisse equity strategist Hasan Tevfik, “While Aussie equities are due for a pause in the short-term, we think there is more bull to come and we’re targeting an index level of 6500 by end 2018.” (SMH)
- The dominant view that the Reserve Bank appears comfortable with its current ‘neutral’ monetary policy settings, which means no rate rise soon. However, a 2018 rise is on the cards, given those growth forecasts.
- The RBA economic growth guess: June 2017 1.8%; December 2017, 2.5%; June 2018, 2.75%; December 2018, 3.25%; June 2019, 3.5% and December 2019, 3.25%.
- Job advertisements rebounded in October, increasing by 1.4% to 169,577 ads, after falling by a revised 0.7% in September. Job ads are up 12.5% on a year ago.
- The Melbourne Institute’s headline inflation gauge rose by 0.3% in October to 2.6% on a year ago, up from 2.5% in September. The annual reading has been above 2% for 10 consecutive months, well above the Reserve Bank’s latest reading of 1.8% in the September quarter. (Maybe the RBA’s readings could be unreliably low!)
- The number of loans (commitments) for home owners (owner-occupiers) fell by 2.3% in September – the first decline in five months — but regulators want less home buying. However, the proportion of first home buyers in the market increased strongly in September, representing 17.4% of loan commitments – a 4 ½-year high.
- The Australian Industry Group Performance of Construction index eased to 53.2 in October from 54.7 in September. Engineering construction activity remained buoyant, rising by 4.0 points to a 10-year high of 60.9, supported by strong infrastructure-related spending. Any reading above 50 signifies expansion or growth of activity.
- In the US, the employment trends index rose from 132.9 to 135.6 in October.
- China’s inflation rose to a 9-month high of 1.9% in the year to September (forecast 1.8%).
- Two-thirds of Europe’s earnings season has been completed and earnings for MSCI Europe were up 5.9% on a year ago, according to Thomson Reuters data.
- European manufacturing looked strong, with the “flash” IHS Markit’s composite manufacturing index revised up from 55.9 to 56.0 in October, well above the 50 line that suggests expansion.
What I didn’t like
- The RBA lowered its core inflation forecasts. Underlying inflation is now forecast to rise at an annual pace of 1.75% through to the end of 2018, below the Reserve Bank’s 2%-3% target band. The previous forecast was for annual underlying inflation of 1.5%-2.5% over the period.
- The dollar ended the week at around 76.85 US cents, up from 76.49 US cents at the start of the week but I want a lower dollar to cement this jump over the 6000 level.
- The nickel price slumped over the week and I hope it’s not a sign that the great run for mineral stocks could be nearing an end.
- The US VIX index had a big surge this week, which means unless some really good news pops up, such as no delay to tax cuts, then we might have to cop some stock market volatility in coming weeks.
- This SMH headline: “Hasty interest rate hikes could trigger a property crash, UBS warns” but no one thinks the RBA is contemplating a hasty rise! It’s like saying if you put your hand in the fire, you will get burnt but few of us contemplate doing that!
Return to form
Tom Waterhouse came on my TV show on Monday and tipped Wall of Fire from his Dad but told us there was a lot of money coming in for a horse called Rekindling! He’s had two washout years after a few on the money years with his tips on Switzer. Just like with stocks, it does show the value of watching where the smart money is going.
By the way, if you weren’t watching the show, you could have got the tip by reading my daily column on Switzer Daily, where I concluded my Cup Day story with Tom’s tips. Hope you got on board Rekindling.
The Week in Review:
- With overseas markets still in record territory, is the best contrarian play to go longer on local stocks? I looked at the Oz market [1] and explained why I think we’ll play catch up!
- Paul Rickard [2] updated the income and growth portfolios, find out what changes were made.
- In this week’s likes and dislikes [3] was a popular electronics retailer and a dairy company.
- This week in Buy, Hold, Sell – What the brokers say [4], Oz Minerals and Sandfire Resources were in the good books, while Isentia Group was downgraded to ‘Underperform.’
- And in the second Buy, Hold, Sell [5], Westpac landed itself in the not-so-good books while JB Hi-Fi was Upgraded.
- The Melbourne Cup [6] stopped the nation on Tuesday, and James Dunn gave a punter’s overview of the market.
- Paul Rickard [7] answered your queries about H-Shares and financial terminology.
- BetaShares Global Banks ETF [8] was this week’s Professional’s Pick by Marcel von Pfyffer of Arminius Capital.
- Tony Featherstone [9] reviewed the upcoming listing of property services group Domain – and he likes it!
- Charlie Aitken [10] explained why he sees high dividend pay out ratios, as was the case with Telstra (TLS), as a clear warning sign to investors.
Top Stocks – how they fared
What moved the market?
- On Monday, Westpac undershot expectations with cash profit up 3% to 8.062 billion.
- Ardent Leisure shares took a tumble after the sudden exit of CEO Simon Kelly.
- It shows that the Melbourne Cup is really the race that stops the nation. Card transactions plummeted on Tuesday as people stopped to watch the race. According to Commbank, credit card transactions dropped 33% between 3:00pm and 3:05pm.
- The ASX 200 hit post GFC highs, soaring through 6000, as commodity prices firmed. Oil was a standout.
- Speculation that President Trump’s tax plan might be delayed by a year led to a softer finish on Friday. At one point on Thursday night, the Dow Jones was down by more than 200 points.
Calls of the week
- “The ASX 200 doesn’t matter” – Michael Pascoe, Journalist SMH
- “Trump and the Republicans – dumb and even dumber!” – Peter Switzer
- Tony Featherstone said he backs Domain’s spin-off from Fairfax, which is due to hit the ASX this Thursday.
The Week Ahead:
Australia
- Monday November 13 – Credit & debit card lending (September)
- Monday November 13 – Lending finance (September)
- Monday November 13 – Speech by Reserve Bank official
- Tuesday November 14 – NAB Business survey (October)
- Wednesday November 15 – Monthly consumer sentiment (November)
- Wednesday November 15 – Wage Price Index (September Quarter)
- Wednesday November 15 – Speech by Reserve Bank official
- Thursday November 16 – Employment/unemployment (October)
- Friday November 17 – New motor vehicle sales (October)
- Friday November 17 – Tourist arrivals/departures (September)
Overseas
- Tuesday November 14 – China monthly activity data (October)
- Tuesday November 14 – US Producer Price Index (October)
- Tuesday November 14 – Speech by US Federal Reserve Chair
- Wednesday November 15 – US Consumer prices (October)
- Wednesday November 15 – US Retail sales (October)
- Thursday November 16 – US Industrial production (October)
- Thursday November 16 – US Philadelphia Fed index (November)
- Thursday November 16 – US Housing market index (November)
- Friday November 17 – US Housing starts (October)
Food for thought:
“Buy when everyone else is selling and hold until everyone else is buying. That’s not just a catchy slogan. It’s the very essence of successful investing.“-J. Paul Getty
Last week’s TV Roundup
- Where is the future of bank share prices heading? The major banks have underperformed since the start of the reporting season. Paul Rickard [11] joined Switzer TV to discusse and answer why! (Broadcast Monday 6 November)
- Paul Dales [12] from Capital Economics and Sarah Hunter from BIS Oxford Economics joined Switzer TV to discuss the Australian Economy (broadcast Tuesday 7 November 2017)
- The market finally cracked 6000 on the SMP/ASX 2000 index, so are the charts looking positive for the future? Michael Gable [13] from Fairmont Equities joined Switzer TV to discuss (broadcast Tuesday 7 November 2017).
- David Lennox [14] from Fat Prophets joined Switzer TV to discuss the rebound in commodity prices and gives his opinion on the 2018 outlook (broadcast Tuesday 7 November 2017)
- Richard Cottee [15] from Central Petroleum spoke about all things oil and petroleum on Switzer TV (broadcast Wednesday 8 November 2017)
- Meredith Angwin and Danielle Szetho [16], joined Peter Switzer to talk about FinTech Australia and the EY Financial Services census (broadcast Thursday 9 November)
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.
Charts of the week
Source: Commsec
This graph shows the rapid decrease in Credit and Debit card transactions during the time of the Melbourne Cup Race. The race that literally stops the nation. Source: CBA
Top 5 most clicked
- James Dunn Melbourne Cup roundup: Stocks to take a punt on [6]
- Peter Switzer Oz stocks: Is the best contrarian play now simply going longer? [1]
- Charlie Aitken Australia for income, but beware very high pay out ratios [10]
- Rudi Filapek-Vandyck Buy, Hold, Sell: What the brokers say [4]
- Staff Reporter Hot stocks – Harvey Norman, dairy and telecommunications [3]
Recent Switzer Super Reports
- Monday 6th November Melbourne Cup highlight [17]
- Thursday 9th November Warning bells [18]
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.