Switzer on Saturday

Impeachment talk is just peachy for trade deal optimists!

Founder and Publisher of the Switzer Report
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Change
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Week Change %
Dow Jones
27,681.24
6.44
0.02%
1.22%
S&P 500
3,093.08
7.90
0.26%
0.85%
NASDAQ
8,475.31
40.80
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Data for week commencing 04 November 2019

OK, call me an obsessed Trump watcher (after trying to work this guy out for three years) but the chance of his impeachment increasing has resulted in a great trade deal dividend. And it’s got so impactful that the headlines overnight tell us that not only could there be actual tariff reductions on China and therefore on US products but even German cars won’t be tariffed.

Donald is playing Mr Nice Guy to his old trade adversaries. You have to assume that impeachment fears are building up, as we see the US election year looming undoubtedly means that the President and his economic advisers want a strong end to the year for stocks, as a prelude to an economic growth lift in the 12 months before the poll.

Not even Donald would want to play out the campaign with a beaten up stock market, a recession-threatened economy and having to blame China for the country’s woes, as a possible impeachment dominates the headlines.

I’m sure he could deal with it but whether he could beat all those threats and win an election would be a greater ask.

Away from future speculation, let’s look at the revelations that explain why stocks crept higher this week, with the Dow up a tick over one per cent. Here goes:

  • On Tuesday our time, Reuters reported: “US Commerce Secretary Wilbur Ross said on Sunday licences for US companies to sell components to China’s Huawei Technologies Co would come “very shortly”, adding there was no reason a trade deal could not be on track to be signed this month.”
  • According to Reuters again, on Thursday, China’s Commerce Ministry said that Beijing had agreed with the US to lift existing trade tariffs between the two nations in phases. Reuters later reported that the plan “faces resistance from the US and that no decision has yet been made on a [tariff] rollback.”
  • Making both good news developments more believable, we saw the price of gold fall and the bond market did its best to erase memories about that pesky negative yield curve that was given a near infallible tag by those who’d love a good recession. And I love this chart that shows the yield curve is no longer inverted!Source: CNBC

    “The risk-on sentiment and improving tone around trade took a big bite out of bonds,” CNBC reported. “The U.S. 10-year Treasury yield jumped more than 15 basis points at one point on Thursday, its biggest upward move since the 2016 election. The 10-year rate hovered around 1.92% on Friday after starting the week near 1.75%”. This is huge.

  • And as the Dow heads for its third up-week in a row, the good trade truce news comes with a better-than-expected US company reporting season, with FactSet telling us that of the 425 S&P 500 companies that have reported, 74% have beaten expectations. This is a genuine reason to have faith in US stocks, especially with trade talk on the improve.
  • Finally, we learnt overnight from the retiring president of the EU, Jean Claude Junker, that he believed the White House wouldn’t slam German cars with tariffs. That has to be good news for the German economy, which is teetering close to recession.

That’s all the good stuff but I have to report that the President did tell the media that he hadn’t agreed to a tariff rollback, so that remains as a wait-and-see drama for next week. But is anyone surprised that Donald can never give unbridled optimism on what he might do a chance?

The Democrats might need to ramp up the impeachment speculation next week.

To the local story and the S&P/ASX 200 was up 55 points (or 0.8%) for the week and you don’t have to be a market junkie to note how critical the trade talks have been for the market. If a trade deal helps global growth, which is the expectation, it’s good for mining stocks and they had a good week with the materials sector up nearly 3% for the week.

BHP ended the week up 4.5% to $37.30, Rio put on 5.2% to $95.23 and South 32 (which I’ve been rooting for when put on the spot) happily added 8.3%!

Another happy surprise was better-than-expected reporting from James Hardie, which then helped Adelaide Brighton, another stock that we’d given the thumbs up to. With the housing construction sector facing so many headwinds, those results were encouraging.

This contrasted with the poor old banks, with financials up only 0.46%. This wasn’t too bad considering the news Westpac put out earlier in the week with cash profit down 15% and cutting the dividend from 94 cent to 80 cents, followed by NAB’s 13.6% fall in net profit.

Doing even worse were our tech stocks, with the AFR reporting that “Nearmap shares slid 5.7 per cent to $2.46, Appen lost 1.2 per cent to $20.70 and Afterpay Touch dropped 1.7 per cent to $26.97.”

I’ll look at our so-called WAAAX stocks on my TV show on Monday.

What I liked

  • The RBA left the cash rate of interest at 0.75%.
  • Lending to households rose by 1.1% in September, after a 3.8% lift in August. The annual growth rate of 0.6% is the highest in 19 months.
  • This from CommSec’s Craig James on the RBA’s Statement this week: “The Reserve Bank Governor continues to express optimism, saying that the economy has reached a ‘gentle turning point’. Home prices have certainly lifted since the election, especially in Sydney and Melbourne. Encouragingly, employment continues to grow, lifting purchasing power in the economy.”
  • The value of loans to businesses rose by 19.1% in September. Within business loans, the value of commercial lending rose by 19.5% – the biggest increase in over two years.
  • The RBA forecast for 2020 and 2021 economic growth – 2.5% to 3%.
  • The trade surplus rose to $7.18 billion in September from $6.62 billion (previously $5.93 billion) in August. Australia has recorded 21 successive monthly trade surpluses. The rolling annual surplus was a record $63.35 billion in the year to September.
  • The wages PCI sub-index in the construction sector rose by 7.1 points – the biggest monthly increase in 5½ years – to 62.9 points in October.
  • The 6.4% (up $240 million in seasonally adjusted terms) lift in rural exports in September – the biggest monthly increase this year. Exports of cereals were particularly strong – up by 18% – boosting incomes of grain producers.
  • The ISM services gauge in the US rose from 52.6 to 54.7 in October (forecast 53.5).
  • European share markets rose to 4-year highs on Thursday on US-China trade progress.

What I didn’t like

  • This CommSec heading: “Weakest retail spending in 28 years.” (Retail trade rose by 0.2% in September after a 0.4% increase in August. Economists had tipped a 0.4% lift in sales.)
  • ANZ job advertisements fell by 1% in October after rising by 0.3% in September. Ads were down by 11.4% over the year to 155,972.
  • The Australian Industry Group (AiG) Performance of Construction Index (PCI) rose from 42.6 points in September to 43.9 points in October – the 14thconsecutive month of contraction. Readings below 50 indicate a contraction of activity.
  • In October, 82,456 new vehicles were sold, down by 9.1% over the year. In the 12 months to October, sales totalled 1,075,308 units, down 8.6% on a year ago and the biggest annual decline in a decade (November 2009).
  • Factory orders in the US fell by 0.6% in September (forecast -0.5%).
  • Total US consumer credit grew by US$9.51 billion but the forecast was US$15 billion in September.

Dalio says “World’s Gone Mad!”

The founder of the world’s biggest hedge fund, Ray Dalio of Bridgewater Associates, says debt, central banks and so many things in the world of finance are screwy and could lead to seriously bad consequences. (See my Weekend Switzer story on the subject.) While another billionaire hedge fund manager, Paul Tudor Jones says efforts to stimulate global economies are boosting equities in a way he’s never seen before. “I just look at the fiscal monetary mix, it’s the most stimulative that I think I’ve ever seen,” he told the audience at the Greenwich Economic Forum in Connecticut. “It’s no wonder that the stock market’s hitting new highs. It’s literally the most conducive environment, certainly in the short run, for economic growth and strength that I’ve ever seen.”

Tudor Jones’s net worth is $7.4 billion and he made the above observations sitting beside one Ray Dalio. I’m running with PTJ “in the short run.”

The week in review:

On our YouTube channel this week:

Top Stocks – how they fared:

The Week Ahead:

Australia
Monday November 11 – CommSec Home Size Trends Report
Monday November 11 – Overseas arrivals/departures (September)
Tuesday November 12 – NAB business survey (October)
Tuesday November 12 – Credit/debit card lending (September)
Wednesday November 13 – Wage price index (September quarter)
Wednesday November 13 – Consumer confidence (November)
Thursday November 14 – Employment/unemployment (October)
Friday November 15 – State accounts (2018/19)
Friday November 15 – Speech by Reserve Bank official

Overseas
Monday November 11 – China vehicle sales (October)
Wednesday November 13 – Testimony by US Federal Reserve chair
Wednesday November 13 – US Consumer prices (October)
Thursday November 14 – US Producer prices (October)
Thursday November 14 – China business activity (October)
Friday November 15 – US Retail sales (October)
Friday November 15 – US Production (October)
Friday November 15 – US Empire State manufacturing index

Food for thought:

“Time is your Friend; Impulse is your Enemy.” – John Bogle

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:

AMP Capital’s Shane Oliver wrote this week that the yield curve inversion earlier in the year may have been a false recession signal similar to the ones seen in 1996 and 1998 (circled below):

Top 5 most clicked:

Recent Switzer Reports:

Monday 04 November: Our model portfolios surged!

Thursday 07 November: US companies reporting well

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.