Switzer on Saturday

Donald, China and the US economy have killed them overnight!

Founder and Publisher of the Switzer Report
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Wall Street surged to record highs on the back of a better-than-expected jobs number for October (Go, Donald!) and a headline revelation from the Chinese trade negotiators that they’ve reached a “consensus in principle” with the White House negotiating team. Go Donald, again!

To me, this adds muscle to the bones of a better story, which kind of surprised me yesterday when the market seemingly ignored one of the President’s best tweets ever. This is what it said: “China and the USA are working on selecting a new site for signing of Phase One of Trade Agreement, about 60% of total deal, after APEC in Chile was cancelled due to unrelated circumstances. The new location will be announced soon. President Xi and President Trump will do signing!”

No one ever talked about Phase One producing a 60% result. I’d kind of assumed 30% would be a good start and I don’t think I was alone holding that view.

Back to the jobs report and 75,000 new positions were expected by economists, given the data drop that is the basis of these forecasts. But 128,000 showed up, which implies the momentum in the US economy is stronger than the experts were thinking. This coincides with the earnings season that has also come in better than expected.

On last count, with 70% of companies in the S&P500 already showing their top and bottom line results, three-quarters have topped the forecasts, which, combined with the employment numbers, justifies my expectation (which I’ve shared with you many times) that a trade deal has to be good for another leg-up for stocks.

And if you’re wondering what’s my argument for this belief, then just think about the businesses that are holding back on investments into their operations because they simply don’t know how good or bad the trade deal will end up being. I believe the same apprehension could be holding back Australian and global business investment decisions.

That’s why I’m buoyed by this revelation from the Chinese (not Donald) that a “consensus” has been reached. Go China!

That 128,000 jobs creation figure has come about despite 42,000 jobs being cancelled because of a GM auto strike. But wait, there’s more – the September number was revised up from 136,000 to 180,000, while the August count went from 168,000 to a whopping 291,000!

Yep, that’s a pretty good reason for the S&P500 Index hitting another all-time high overnight, in case you were wondering how these new record levels were coming about. This trade and data news couldn’t have come at a better time, with the November to April time period being the best for stocks and with the third and fourth years of a US Presidency being the best for Wall Street.

If I hadn’t been disappointed by Trump tweets in the past I’d being doing a Big Kev and declaring that “I’m excited!”

To the week on our stock market and the S&P/ASX 200 ended the week down 70.1 points (or around 1%) to 6669.1, which would be a potentially ‘devilish’ omen/number, if the Yanks and Chinese hadn’t delivered the great news I cited above.

The news many of us hated was ANZ cutting its franking credits to 70%, which came on top of a 10% fall in retail and commercial profit. The bank had a shocker and its CEO Shayne Elliott has nowhere to hide, as his share price lost 6.56% over the week to $26.19. And the bank’s bad numbers didn’t help the other banks, with CBA down 3.05%, Westpac off 4.03% and the NAB losing 2.64%.

And the Westpac court loss over its general advice screw up to clients over the phone is just another headwind our financial businesses have to deal with.

Call of the week goes to CMC Market’s Michael McCarthy, who on my TV show on Monday tipped Pilbara Minerals as his stock of the week and it went up a huge 23.1%! Need I say anymore except that you should sign up for the alert that tells you when the program goes out on our dedicated YouTube Channel.

On the flipside, our food businesses struggled as the drought laid bare the efforts of Costa Group and Bega Cheese to make the best of the worst of circumstances. The former lost another 21.97% for the week, while the latter gave up 17.5%. If you were a good long-range forecaster, lumping our struggling food businesses into a contrarian play might make sense but you’d have to wait for the breaking of the drought. You’d need the courage of a farmer to try that stock play!

And if you were wondering why the likes of Galaxy Resources (up 16.77%) and Orocobre (up 14.29%) had a good week, it was because producers have pulled back on production and Chile (a big supplier) is gripped in political turmoil.

By the way, a trade deal should be good for commodities, so if you’re long the sector (and who isn’t?), you’d have to be thinking, go Donald!

What I liked this week

  • The CoreLogic Home Value Index of national home prices rose by 1.2% in October, the biggest increase since May 2015. And capital city home prices rose by 1.4% – also the biggest lift in almost 4½ years. Regional home prices rose by 0.4% in the month. Melbourne home prices rose by 2.3% in October – the biggest increase since November 2009. Sydney home prices lifted by 1.7% for second successive month.
  • The annual rate of headline inflation lifted from 1.6% to 1.7% and RBA experts said forget a rate cut on Cup Day.
  • Export prices rose by 1.3% in the quarter to be up 14.7% on the year, while import prices rose by 0.4% in the September quarter and were up 1.2% on a year ago.
  • Council approvals to build new homes lifted 7.6% from 6½-year lows in September.
  • The value of home and commercial building approvals totalled $114.5 billion in the year to September, 15% above decade averages.
  • Over the year to September, bankruptcies fell by 6.4% to a 24½-year low of 3,692. New bankruptcies fell by 11.2% to a 29-year low of 600 in Victoria.
  • The value of Australian wine exports rose by 7% to $2.89 billion over the year to September. But wine export volumes declined by 8% to 774 million litres. The value of wine exports to China lifted by 18% to a record high $1.25 billion.
  • The Australian Industry Group (AiGroup) Performance of Manufacturing Index fell from 54.7 points to 51.6 points in October. And the ‘final’ CBA/IHS Markit Manufacturing Purchasing Managers’ Index fell from 50.3 to 50 points. Any reading over 50 indicates expansion so these ordinary numbers are still positive.
  • The Fed cut the official rate by 0.25% to be 1.5% to 1.75% and is now in data-dependent mode for future cuts.
  • The US economy grew at a 1.9% annual pace in the September quarter (forecast 1.6%) and while it was better than expected, it’s still not a great number. I call it OK, given the trade issues.
  • US reporting season and LVMH chasing Tiffany’s and Google chasing Fitbit.
  • Personal income in the US rose by 0.3% as expected in September, with personal spending up 0.2%, also as expected.

What I didn’t like

  • Private sector credit or outstanding loans rose by 0.2% in September after lifting 0.2% in August but annual credit growth fell from 2.9% to an 8-year low of 2.7%.
  • The cancellation of the Chile APAC meeting, as we expected the trade deal phase one to be signed there.
  • The Oz manufacturing purchasing managers index (PMI) fell from 49.8 to 49.3 in October (forecast 49.8). The services PMI fell from 53.7 to 52.8 (forecast 53.9). Any reading above 50 signifies expansion.
  • China’s Institute for Supply Management’s reading on October manufacturing (or PMI) came in at 48.3, which was a bigger-than-expected contraction, as any number under 50 means the sector is shrinking.
  • The Chicago purchasing managers index fell from 47.1 to a 4-year low of 43.2 in October (forecast 48).
  • Reports that Chinese officials have been casting doubt over the possibility of a long-term trade deal with the U.S. They’re also concerned about President Donald Trump’s “impulsive nature” and the risk of him backing out of any kind of deal. This came out before the consensus news overnight.
  • Chilean President Sebastian Pinera calling off the Asia-Pacific Economic Cooperation summit in Santiago in mid-November due to nationwide protests sparked by a proposed hike in public transport fares! This is a pretty pissed off country.

Fact of the week

International passenger traffic through Oz airports increased from 40.619 million in 2017/18 to a record-high 42.121 million in 2018/19 but the 3.7% was the slowest annual growth rate since the 1% lift in 2008/09. OK, that’s worth noting but who out there would’ve thought overseas passenger traffic numbered over 42 million? How important is tourism nowadays! Go, tourists!

If you missed our webinar on Friday, click here to view the recording.

The week in review:

Top Stocks – how they fared:

The Week Ahead:

Monday November 4 – Retail trade (September – month and quarter)
Monday November 4 – Monthly inflation gauge (October)
Monday November 4 – ANZ job advertisements (October)
Tuesday November 5 – Reserve Bank Board meeting
Tuesday November 5 – AiGroup & CBA services gauges (October)
Tuesday November 5 – New vehicle sales (October)
Thursday November 7 – International trade (September)
Friday November 8 – Reserve Bank Statement on Monetary Policy
Friday November 8 – Lending (September)

Monday November 4 – US Factory orders (September)
Tuesday November 5 – China Caixin Services index (October)
Tuesday November 5 – US International trade balance (September)
Tuesday November 5 – US JOLTS job openings (September)
Tuesday November 5 – US ISM Non-manufacturing index (October)
Wednesday November 6 – US Productivity & unit labour costs (Sep. Qtr.)
Thursday November 7 – US Consumer credit (September)
Friday November 8 – US Consumer confidence (November)
Friday November 8 – China international trade (October)
Saturday November 9 – China inflation (October)
Saturday November 9 – China vehicle sales (October)

Food for thought:

“The aim is to make money, not to be right.” – Ned Davis

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:

Ryan Detrick from US broker/dealer LPL Financial this week shared a look at the average performance on every day of the year for the S&P 500. Between 1950 and 2018, the best day has been October 28 with an average gain of 0.54%, while October 19 is the worst with an average loss of 0.51% (click below to see the full size image):

Top 5 most clicked:

Recent Switzer Reports:

Monday 28 October: When will this bull market end?

Thursday 31 October: Why I like the world’s biggest company

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.