Switzer on Saturday

What’s driving our stocks positivity?

Founder and Publisher of the Switzer Report
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Reporting season locally is important but it’s a bit part player compared to what Wall Street is doing. There’s been an updraft out of New York, the home of the world’s most important stock indices, helping all markets creep up.

This week the big watch has been: will the S&P 500 Index reach and beat its February (as well as pre-Coronavirus) high? How could the US market even contemplate that? The answer is twofold and simple.

This chart of the S&P 500 says it all in one shot. But how come?

First, there’s a belief that a vaccine will show up faster than ever before. And second, there’s the multi-barrel stimulus out there. These have even countered the negatives of unsuccessful avoidance of second-wave infections in the US and the Trump-China trade tensions that are simmering and getting hotter by the week.

I’ve been staggered that the US market can keep on rising but there are a few question marks sneaking into the picture that could slow down the S&P 500’s rise until a vaccine is operating (Vladimir Putin’s vaccine tested on his offspring aside)!

“With the S&P 500 failing to puncture its February 2020 highs, despite a few attempts this week, many observers believe it’s a clear sign of exhaustion,” said the executive director at Instinet, Frank Cappelleri, in a note that was reported by CNBC.

Three indicators that tech guys and girls see as warning signs have emerged recently, which have alerted the chart-watching fraternity. “While these don’t always pinpoint a top and/or precede a huge drawdown, over the last three years, the S&P 500 eventually has pulled back to where these signals first hit every time,” Cappelleri said.

For the past few weeks we’ve seen tech stocks rise and then fall. When this has happened, companies that would benefit from a fuller reopening of the economy have spiked higher.

Only a successful and imminent arrival of a vaccine could make this happen big time. Until it does, there has to be apprehension about a full-on buying assault on stocks, other than the over-adored FAANG plus Microsoft play.

Their rise is understandable but its magnitude will be tested when there’s a wholesale and worldwide rotation back into companies/stocks that will benefit from a vaccine-safe world!

One problem for the US stock market that I’ll be watching is the Republican/Democrat debate over what the next round of stimulus should look like. It looks like there’ll be no US government help for the economy over August, given the way the arguments are going right now. That could take some of the wind out of Wall Street’s sails.

To the local story and our Coronavirus comeback is less impressive (as the chart below shows) but we don’t have FAANGs plus Microsoft powering our index. Our chart is more sensible, given the viral challenge that still threatens our economy.

S&P/ASX 200

We still need our market to rebound another 16.9% to be back to where we were before COVID-19 invaded our lives. And reporting season has helped a tiny bit.

Despite some lacklustre efforts in this first big week of company reporting revelations, the S&P/ASX 200 Index snuck up 2% (or 121.4 points) to finish at 6126.20. And someone like me, who you know has remained solid in supporting the future of our banks, had to be happy about this week’s trading.

The priced-to-perfection CBA only rose 0.3% despite a pretty OK report in a very ‘un-OK’ environment for banks that have been recruited to help rescue the economy. But it was its report that took Westpac up 7.6% for the week, NAB 7.4% and ANZ 5.6%.

Eight out of the eleven sectors of the ASX were up just over 4% to just under 2%. Consumer staples were up 4.19%, as Victorians fight over toilet paper and probably make some of us in New South Wales follow suit.

However I liked the gains for financials (3.87%) and REITS (3.46%) as a sign that some market-influencing players see the possibility of life normalcy coming closer.

But be clear on this: the market and many share prices would be higher if Victoria had avoided this need for stage four restrictions.

Crazy stock of the week went to Mesoblast, which spiked 39% on Friday after a 40% smashing earlier in the week. The fall was on a belief that the FDA in the US would create problems for the company. That was proved wrong, after the key drug approving body in the US gave Mesoblast a green light! Whoever spread the rumour that the FDA’s computer was about to say “No” should be investigated. The whole story looks dodgy!

This Monday in my Switzer Report story and TV show, I want to look at what the market price reaction to reporting companies is telling us about these operations with upside and those that might be under pressure or unfairly sold off, which makes them good buying opportunities.

For example, what’s the deal with AMP up 10.9%? Is that a sign of the future? Why was Breville down 8.4% when we’re all at home cooking and making coffee? And is Telstra a buy after the 8.3% sell off or is there a dividend-under-pressure problem brewing?

What I liked

  • This from the RBA Governor: “When we met six months ago, I said that there were signs that the Australian economy may have reached a gentle turning point. The data that we have received since then are consistent with this. Our central forecast is that economic growth in Australia will pick up from an average rate of 2 per cent over the past couple of years to 2¾ per cent this year and 3 per cent over 2021.”
  • Unemployment rose from 7.4% to 7.5% but economists expected it to go to 7.8%.
  • Employment was up 115,000, while economists tipped a small 25,000 rise.
  • The participation rate was up a big 0.6% to 64.7%, which is always a positive sign for an economy — workers wanting to work.
  • Full-time jobs were up 43,500. Part-time jobs were up 71,200. Both beat expectations.
  • The value of credit and debit card purchases rose by 12.7% in June. Card purchases were up 8.2% on the year.
  •  The NAB business conditions index improved from minus 7.7 points to a 6-month high of 0.3 points in July. (The long-term average is 5.3 points). Conditions had previously hit record lows of minus 34 points in April. This number talks about what it was like for business in July but Victoria’s problems could change this to the negative in August.
  • The number of available job openings in the US rose from 5.371 million to 5.889 million in June (survey: 4.91 million).
  • In the US, consumer prices lifted 0.6% in July (survey: 0.3%).

What I didn’t like

  • The NAB business confidence index weakened from 0.5 points to minus 13.9 points in July (The long-term average is 5.2 points). Confidence had previously hit record lows of minus 65.6 in March. You can blame Victoria for that.
  • The Wage Price Index (WPI) rose by 0.2% in the June quarter (consensus: 0.3%). Annual wage growth fell from an upwardly-revised 2.2% to a record low of 1.8% – the slowest annual growth rate on record (22 years) but this is understandable.
  • The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 9.5% to 79.5 in August – the second lowest reading in 12 years. This was Victoria-affected.
  • The weekly ANZ-Roy Morgan consumer confidence rating fell by 2.4% to a 15-week low of 86.5 (long-run average since 1990 is 112.7). Sentiment fell for a 7th successive week but is still up by 32.5% since the Coronavirus in March.
  • New home sales fell from 6,477 to 5,772 in July.
  • China’s retail sales fell at a 1.1% annual rate in July (consensus: 0.1%). Industrial production rose at a 4.8% annual rate (consensus: 5.2%). Fixed-asset investment contracted at a 1.6% annual rate (consensus: minus 1.6%). This Chinese data drop was underwhelming.

When will we back to normal?

Australian restaurant reservations were down 27.5% on August 9 from a year earlier, according to OpenTable. Sit down diners fell by 99.8% in Victoria but were up by 48.5% in Queensland and broadly flat in NSW.

This is a good economic indicator of normalcy. Victoria’s collapse is understandable, as the place has been closed down. Concerns and second-wave infections about hospitality operations, as well as restrictions on how many people can be accommodated explain the flat result in NSW. But the Queensland spike shows what normalcy looks like. Let’s hope it gets bigger and better in places like Queensland, WA, NT, SA and Tassie and that NSW continues to deal with outbreaks as well as it has so far and that Victoria gets on top of its challenges.

But let me finish with what I started with. Normalcy and its return depends on a vaccine, as it will help open borders, permit travel and kill the biggest threat to recreating our pre-Coronavirus world — FEAR!

The week in review:

Our videos of the week:

Top Stocks – how they fared:

The Week Ahead:

Australia
Monday August 17 – Overseas travel data (July)
Tuesday August 18 – Weekly CBA card spending (August 14)
Tuesday August 18 – CBA Household Spending Intentions (July)
Tuesday August 18 – Weekly consumer sentiment (August 16)
Tuesday August 18 – RBA Board meeting minutes
Wednesday August 19 – Skilled job vacancies (July)
Thursday August 20 – Detailed labour force (July)
Friday August 21 – CBA Purchasing managers (August)
Friday August 21 – Retail trade (preliminary, July)

Overseas
Monday August 17 – US NY Empire State index (August)
Monday August 17 – US NAHB Housing market index (August)
Monday August 17 – US Capital flows data (June)
Tuesday August 18 – US Housing starts (July)
Wednesday August 19 – US FOMC minutes
Thursday August 20 – US Philadelphia Federal Reserve index (Aug)
Thursday August 20 – US Conference Board leading index (July)
Thursday August 20 – China Loan prime rate
Friday August 21 – IHS Markit purchasing managers (August)
Friday August 21 – US Existing home sales (July)

Food for thought:

“Two essentials for successful retirement are sufficient funds to live on and sufficient things to live for.” – Ernie Zelinski

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:

The value of debit card purchases rose by 9.9% in June and is up 20% over the year according to ABS statistics highlighted by CommSec:

Top 5 most clicked:

Recent Switzer Reports:

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.