Switzer on Saturday

All-times high at bloody last!

Founder and Publisher of the Switzer Report
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All-time closes are happening almost everywhere, with the Nasdaq and S&P500 beating previous record highs to join our All Ords, which hit 6901.9 on Thursday. However, a “Houston, we have a problem” issue surfaced last night for the US market, with the Yanks’ economy growing faster than experts thought!

Growth was supposed to be around 1.8% (like ours) but came in at 2.1%. It’s notable that consuming spending rose by 4.3% but business investment dropped by 5.5%, which has to be linked to the trade war.

While better-than-expected growth should be a nice problem to have, it raises question marks about the future course of interest rates in the States. Could the Fed seriously cut by 0.5% next Wednesday July 31? The answer has to be “No” but will they still be able to cut at all? Maybe the fall in business investment could be hard to ignore. That partly explains why US stocks had another good night, with the Nasdaq up 91 points to a record close of 8,330.21 and the S&P500 up 22 points to a record close of 3,025.86.

I expect a 25 basis point cut from the Fed next week.

But that’s not all, with the Nasdaq really boosted by the good earnings stories from Alphabet (Google’s parent) and Intel. And you should know that the euphoria was trimmed because of unexpected comments from President Trump’s economics adviser, Larry Kudlow, who hosed down any fired up hopes that the meeting between Chinese and US trade negotiators next week would produce a “grand deal”.

Apart from beating earnings, Alphabet created extra market excitement by announcing a $US25 billion share repurchase program. Meanwhile, at long last, Twitter is delivering, with its share price up 8.92%, on rising evidence that it’s monetizing its huge audience of opinionated tweeters.

Overall, this reporting season is looking better than expected. And while it’s not over until the weight-challenged opera singer comes on stage and belts one out, over 40% of S&P500 companies have reported and 76.4% have come up with better-than-forecasted profits.

On the local front, we keep marching higher, which is primarily driven by interest rate cuts. I suggest that on Monday night on our YouTube channel (or our website www.switzer.com.au) that you watch my interview with Roger Montgomery, who can’t see any value in the current market for a value investor, though he does give an interesting US stock that he really likes.

And he’s not alone being surprised at the march higher of our stock market. “Growth, inflation and earnings are all slowing, economic growth in China is languishing, yet equity markets are chasing record highs,” said Saxo Capital Markets market strategist Eleanor Creagh to the SMH.

“For now, the multiple expansion story is winning out, as a desperate reach for yield drives investors up the risk spectrum, but the deteriorating growth and lacklustre corporate earnings outlook is largely [being] ignored at current equity prices and the anticipation of central bank support is already formidable, leaving little else to propel further multiple expansion without a material uplift in corporate earnings growth.”

Certainly, low rates are making yield-paying stocks attractive but there also could be some investors gambling that a second-half economic rebound in the Oz economy could help via the two interest rate cuts, the tax cuts, the minimum wage rise, the banks lending more easily, the dollar dipping and infrastructure spending still kicking in right across all levels of government. And maybe a Trump trade deal could help boost confidence and business investment in coming months.

And if that’s not enough, the RBA will cut on Cup Day. “The Reserve Bank will likely take a few months to see how the economy is responding to the two rate cuts as well as other events or developments that have occurred in recent months,” said CommSec’s Craig James. “These events include tax cuts, the minimum wage decision, record-breaking share markets here and abroad and the stabilisation of home prices in key capital cities.”

Unfortunately in the short term, the global economy won’t help, with the International Monetary Fund (IMF) lowering its forecast for global economic growth to 3.2% (from 3.3%) in 2019. However, it expects it to rise to 3.5% in 2020. If realised this year, James says it would be the slowest pace of growth in 10 years.

The 40-year average global growth rate is 3.5%. And while there was no IMF update for Australia, the economy is forecasted to grow by 2.1% in 2019 and 2.8% in 2020. It’s worth adding that these forecasts might not have the benefit of recent interest rate and tax cuts factored in because they’re so recent.

By the way, I’m not the only optimist in town on the Oz economy, with ANZ economists believing the Reserve Bank can reach its predicted target unemployment rate of 4.5%. However, the economics team thinks it’s unlikely to happen before 2021. Even then, it’s heavily contingent on a number of factors. “We think that getting the unemployment rate to 4.5% by the end of 2021 is achievable, providing there is an additional one or two rate cuts, global growth holds up and the Australian dollar weakens,” said market economist Hayden Dimes. “As such, we think the RBA will have an easing bias for the next one to two years.”

Clearly, this is guesswork on how many cuts will be needed. I like the fact that the ANZ economic crystal ball isn’t showing any upcoming recession. Let’s hope they’re on the money.

Finally, the S&P/ASX 200 Index ended up 93.1 points (or 1.4%) for the week, stopping at 6793.4. On Thursday, it got within 10 points of its all-time high of 6828 but I think, given this Wall Street lead-in, we could see it reach that on Monday.

What I liked

  • Preliminary auction clearance rates in Sydney at 81.5% and Melbourne over 70% say house price fears are subsiding.
  • The Commonwealth Bank/IHS Markit ‘Flash’ Manufacturing Purchasing Managers’ Index (PMI) fell from 52 in June to 51.4 in July. And the Commonwealth Bank/IHS Markit ‘Flash’ Services PMI fell from 52.6 in June to 51.9 in July. Any reading over 50 indicates expansion.
  • The weekly ANZ-Roy Morgan consumer confidence rating rose by 0.3% to 116.3 points. Consumer sentiment remains above the average of 114.4 points held since 2014 and the longer-term average of 113.1 points since 1990.
  • The estimate of family finances compared to a year ago was up from +10 points to +13.1 points – the highest reading since February.
  • US reporting season so far.
  • Orders of durable or long-lasting goods in the US rose 2% in June (forecast +0.7%).
  • Claims for unemployment insurance in the US fell by 10,000 to 206,000 in the past week (forecast 219,000).
  • US new home sales rose by 7% to a 646,000 annual rate in June (forecast 660,000), after falling 8.2% in the previous month.
  • The US Markit ‘flash’ manufacturing purchasing managers’ index fell from 50.6 to 50 in July (forecast 51). The services gauge rose from 51.5 to 52.5 (forecast 51.7). Any number over 50 means expansion.
  • A debt ceiling and budget deal between US President Trump and US Congress also buoyed sentiment.

What I didn’t like

  • In trend terms, the Internet Vacancy Index (IVI) fell for the sixth straight month, down by 0.6% in June to 79.6 – the lowest level since April 2017. The index is 6.7% lower than a year ago – the biggest annual decline since November 2013.
  • Economy-wide spending stalled in June. The Commonwealth Bank Business Sales Indicator (BSI) was broadly flat in trend terms – the weakest monthly growth rate in over two years. Spending growth has decelerated for four consecutive months and is below the 0.4% long-term average monthly growth pace.
  • The ECB chief Mario Draghi indicated potential to ease policy settings but didn’t seem in a rush to deliver more stimulus, disappointing investors. Draghi sees a very low chance of a Euro zone recession
  • The Richmond Fed Manufacturing Index in the US fell by 14 points to 6-year lows of -12 points (consensus: +5 points) in July.

Losers & winners

BHP and Rio Tinto were downgraded to “Hold” by London-based Liberum Capital, whose analysts suggested iron ore prices were now past their peak.

On the other hand, Morgan Stanley upgraded its rating on BlueScope Steel from “Equal-weight” to “Overweight” on Friday and increased its price target, saying market momentum was positive. The broker said favourable market fundamentals will only add to an already conservatively geared balance sheet. (SMH)

Switzer TV on YouTube

We’re now doing my old Switzer program (“Switzer”) in our own TV studio with our old team of experts, along with some new ones. Have a look. I’d love your feedback (info@switzer.com.au) if you have time.

This was Monday’s (22 July) show. As of this morning, we’ve had 9,899 views. I’d love to beat 10,000 before next Monday so maybe help me out by taking a look here

Time is ticking to get your complimentary tickets to the Switzer Listed Investment Conference. Click on the event you would like to attend below to get your tickets:

The week in review:

Top Stocks – how they fared:

The Week Ahead:

Monday July 29 – State of the States
Tuesday July 30 – Building approvals (June)
Wednesday July 31 – Consumer Price Index (June quarter)
Thursday August 1 – CoreLogic home prices (July)
Thursday August 1 – Purchasing managers indexes (July)
Thursday August 1 – Trade price indexes (June quarter)
Friday August 2 – Producer price indexes (June quarter)
Friday August 2 – Retail trade (June)

Tuesday July 30 – US Personal income (June)
Tuesday July 30 – US Consumer confidence (July)
Tuesday July 30 – US Home prices (May)
Tuesday July 30 – US Pending home sales (June)
July 30/31 US Federal Reserve rate decision
Wednesday July 31- US ADP employment (July)
Wednesday July 31- US Employment cost (June quarter)
Wednesday July 31- China purchasing managers (July)
Thursday August 1- China Caixin manufacturing (July)
Thursday August 1- US ISM manufacturing (July)
Thursday August 1- US New vehicle sales (July)
Friday August 2 – US Non-farm payrolls (July)
Friday August 2 – US Exports & imports (June)

Food for thought: 

“When buying shares, ask yourself, would you buy the whole company?” – Rene Rivkin

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:

Reserve Bank governor Philip Lowe this week defended the use of the 2-3% inflation target, while this chart from CommSec shows that inflation remains below the target band:

Top 5 most clicked:

Recent Switzer Reports:

Monday 22 July: 3 ETFs, 5 income stocks outside the Top 50 and 3 stocks under a $1

Thursday 25 July: Microsoft + 3 undervalued stocks

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.