Switzer on Saturday

Whose ruined reporting season? CBA, Telstra or Trump?

Founder and Publisher of the Switzer Report
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Early in the week, there was a relief rally on Kim Jong-un being less a threat. Then a market slide came along, on CEOs exiting President Trump’s business councils and a key White House economic adviser, Gary Cohn, leaving his leader’s team. And overnight, Donald’s key strategist, Steve Bannon, is out! And a negative stock market actually turned positive!

So is his exit good news for stocks? Bannon was an extremist on tax reform changes and trade policies, so this could make the eventual proposals more palatable to a Congress that’s making a tough political life for Mr. Trump even tougher.

This reporting season is a bit like watching a footie match where anything can happen, and while your team isn’t losing, they’re not giving you great signs that they can pull this one off.

And the market reaction is a bit like that too, where there have been bloated expectations from analysts (a bit like a one-eyed footie fan) but the performance, while good enough to say there has been progress, hasn’t been good enough to match forecasts.

JB Hi-Fi, Domino’s, Challenger CSL and others like that are cases in point. QBE, Seek and Computershare have been disappointing without being disastrous but Telstra is another story.

My colleague, Paul Rickard, will give us a detailed analysis on Monday but what was revealed this week can’t give dividend seekers any confidence about what they’ll get in the future beyond 2018. And given no firm idea of what replaces NBN booty, this once reliable money-spinner doesn’t look as dependable as it has been. Of course, all good things don’t last but, unlike BHP when it cut its dividend, there hasn’t been a bounce up for the share price.

Will it be a case of good things come to those who wait? That’s not always a great strategy for a company that’s not laying out a big plan to reinvent itself.

QBE is another disappointment. While I think that one day it will spike when US interest rates rise with stronger bond market yields, I’m not convinced that this will happen all that soon. The CEO, John Neal, told me that a 1% rise in US Treasury yields delivers $US250 million to his bottom line. But how long will that take to happen, with US inflation still struggling to give us an ounce of a scare?

Big picture-wise, reporting season and the results have been mixed and, regrettably, the company stories going forward so far aren’t going to add to stock market positivity. That said, I can’t see what we’ve seen so far that’s likely to force the market down significantly.

But despite all this unnerving stuff from reporting season, our market did end up – the S&P/ASX 200 Index was up 0.9% to 5747. So I guess at what you might call half time, we’re in with a chance for a win or a draw, with the latter outcome more likely.

That said, with Telstra down about 9% since it did its show-and-tell, this overall market result is pretty damn good. This is especially so when you throw in that the CBA was off 1.8% for the week, though Westpac did rise 1.9%, ANZ 2.6% and the NAB 2.3%, which all shows how the CBA has been hurt by all that has gone on with the money-laundering scandal.

Meanwhile, the economic story has been a help to stocks, as CommSec’s Craig James pointed to with his headline this week: “Best job growth in 12½ years!”

On the other hand, one negative for stocks has been the behavior of Donald Trump, with CEOs exiting his business councils and a rumour on Thursday that Gary Cohn, Goldman Sachs economics adviser to the White House, could pull the exit chord over the President’s views on the troubles in Charlottesville. The Bannon exit could turn this negative for our market into a positive.

It was thought that if Cohn leaves, Wall Street could slump because he’s important to the passage of Mr. Trump’s tax package! It was interesting to see stocks spike higher on the news that Bannon had been fired, though his version is that he left.

Pray for sanity to make a comeback in Washington.

What I liked

  • Unemployment eased from 5.7% to 5.6%. The participation rate rose 0.1 percentage point to 65.1%.
  • A sense of calm over the North Korean issue drove a relief rally across markets early in the week.
  • US industrial production rose by 0.2% in July (forecast +0.3%). The leading index rose by 0.3% in July as expected. The Philadelphia Federal Reserve index eased from +19.5 to +18.9 in August (forecast +18.5). And new claims for unemployment insurance fell by 12,000 to 232,000 in the past week.
  • US retail sales rose by 0.6% in July (forecast +0.4%), and excluding autos, sales rose by 0.5% (forecast +0.3%).
  • Employment rose for the 10th straight month, up by 27,900 in July, after rising by 20,000 in June (previously reported as a rise of 14,000 jobs). Full-time jobs fell by 20,300, while part-time jobs rose by 48,200. Economists had tipped a 20,000 increase in jobs. Over the past five months, 189,100 jobs were created – the best equivalent period for job creation in 12½ years.
  • Eurozone GDP (economic growth) rose 0.6% in the June quarter and annual growth lifted from 2.1% to 2.2%.
  • Europe’s second quarter earnings season is coming to an end, with earnings currently 15% higher than a year ago.
  • “Zinc continued to roar higher on Friday, reaching a new 10-year high. The metal is now up by 21.5 per cent so far this year after also performing strongly in 2016.” (Fairfax)

What I didn’t like

  • Barcelona and another terrorist tragedy!
  • The weekly ANZ/Roy Morgan consumer confidence rating eased from 113.7 to 111.7 in the week to August 13. Confidence is down 5% over the year.
  • Average weekly total earnings for Australian adults rose by 2.1% over the year, which is too low for the economy.
  • This from the Fed minutes: “Many participants…saw some likelihood that inflation might remain below 2 percent for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside.”

One big dislike

This silly constitutional section that has turned true blue Aussie pollies into a team of ‘foreigners’! This is starting to undermine the small amount of credibility the Turnbull Government was hanging on to, as the PM grappled with a one seat majority, Tony Abbott and a group of rejected conservative politicians, who not only want their agendas on the table but themselves in more senior positions.

David Murray, the former CEO of the CBA, chair of the Future Fund and the head of the recent Financial System Inquiry, says all this instability is unsettling for foreign investors. I say it could affect local business investors and job creators as well.

The fact that our market hasn’t sold off on all this craziness is a plus that can’t be ignored. I hope it can last. Thinking of it not lasting is another huge dislike!

The week in review

  • I posed an important question for all investors: Are the key market signals telling you it’s time to bail?
  • Paul Rickard made the case to own Transurban in your portfolio. So should you buy it, or wait? Read his analysis here.
  • Despite the mixed market reaction, Tony Featherstone said there were three stocks with standout earnings results.
  • Charlie Aitken said reporting season isn’t off to a great start, with companies failing to meet expectations. He also revealed the stocks he’s watching right now.
  • Bill Laister explained why he likes Praemium (PPS) in this week’s Professional’s Pick.
  • Aventus Retail Property Fund and Magellan Financial Group were upgraded by the brokers this week, while Trade Me Group was downgraded.
  • In our second broker report, Ansell was upgraded, while Sigma Healthcare copped a downgrade.
  • And Paul Rickard answered reader queries about IOOF and Djerriwarrh Investments, as well as a question about finding upcoming dividend dates.

Top stocks – how they fared

20180818-topstocks

What moved the market?

  • In the US, investors were concerned about Trump’s pro-growth policies after he decided to disband two business councils.
  • Mixed results from reporting season. After Telstra released its result and said future dividends would be cut back, the telco fell by 10.6% to a five-year low of $3.87.
  • Other stocks were rewarded by the market. Cochlear rose 7% after lifting its final dividend, while Bendigo and Adelaide Bank also saw a positive share price reaction.
  • And the miners rose on the back of improved commodity prices.

Calls of the week

  • We already knew our Senate was wacky, but Pauline Hanson wore a burqa to Question Time and got a tearing down from Attorney-General, George Brandis.
  • Telstra made the call to scale back its dividend outlook. Next year, the telco plans to cut its full-year payout by 30% to 22 cents per share.
  • Actor Amber Heard had the last laugh after Barnaby Joyce became one of the latest politicians to have dual-citizenship issues. Barnaby had a stern talking to Heard for not quarantining her dogs before they entered Australia two years ago, so this week she wrote on Twitter, “To comfort Mr Joyce in his hour [of] need, I have sent him a box of New Zealand’s finest kiwi fruit (assuming this passes his biosecurity laws)”.
  • And in case you missed it, in this week’s Switzer Super Report, Tony Featherstone named three profit season opportunities. Find out more.

The week ahead

Australia

  • Monday August 21 – Commonwealth Bank Business Sales Index
  • Thursday August 24 – Housing outlook report Winter 2007
  • Thursday August 24 – Detailed job data (July)

Overseas

  • Tuesday August 22 – US Monthly home prices (June)
  • Tuesday August 22 – US Richmond Federal Reserve index
  • Wednesday August 23 – US New home sales (July)
  • Wednesday August 23 – “Flash” manufacturing surveys
  • Thursday August 24 – Jackson Hole symposium starts
  • Thursday August 24 – US Existing home sales (July)
  • Friday August 25 – US Durable goods orders (July)

Food for thought

The price of success is hard work, dedication to the job at hand, and the determination that whether we win or lose, we have applied the best of ourselves to the task at hand.

Vince Lombardi

Last week’s TV roundup

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, Galaxy Resources was the biggest mover, with its short position increasing 2.03 percentage points to 11.58%. Western Areas went the other way, with its short position decreasing from 20.10% to 18.39%.

screen-shot-2017-08-18-at-10-41-55

Source: ASIC

Chart of the week

screen-shot-2017-08-18-at-10-42-47

Employment rose by nearly 28,000 in July after rising by 20,000 in June. CommSec’s Craig James notes that employment has now risen for the tenth straight month, and over the past five months, 189,000 jobs have been created. That’s the best equivalent period for job creation in 12½ years!

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