Switzer on Saturday

Is Wall St still addicted to vaccine hopes?

Founder and Publisher of the Switzer Report
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Stocks on Wall Street continue to rise, despite increasing Coronavirus infections. Interestingly, the big driver wasn’t tech stocks but a rotation into more traditional company sectors. This could be a positive sign that there is an expectation that the not-stay-at-home businesses in the old economy will do well.

For the US this week, transport stocks were up 6%, industrials 6%, small caps 4%, energy 3%, while tech was down 1%. It’s not a huge swing away from markets that only wanted tech and businesses that served the world working from home.

Interestingly, one company that was expected to ‘kill them’ because of the new Coronavirus-infected world i.e. Netflix, actually reported badly. Its stock dropped 7% overnight and was down around 11% for the week. Amazon lost 11%, Microsoft 5%, Facebook 2% but Apple snuck up 0.5%.

Now this better outlook for the majority of old world businesses can only happen if normalcy reasserts itself sooner rather than later. And given the infection worries, there’s got to be a bit of “a vaccine is coming” positivity behind all this. And I mentioned this last week that there had been a lot of good news around a COVID-19 vaccine and treatments.

Even the local AFR saw the value of great vaccine news, with this from William McInnes only yesterday: “Promising results from trials for a COVID-19 vaccine buoyed markets through the middle of the week, despite experts suggesting any vaccine wouldn’t be widely available until at least 2021.”

Goldman Sachs doesn’t concur with McInnes, overnight suggesting that a vaccine would be found before the end of this year! The investment bank’s virus expert, Salveen Richter, thinks that the rapid spread of the virus has led the U.S. government to fast track the development of a potential vaccine. He predicts “a vaccine may gain US approval in 2H20.” (CNBC)

And my old mate Chris Joye of Coolabah Capital Investments, whose bond fund thinking shows he doesn’t operate in a vacuum, has a view on which vaccine developments are going to be market-influencing. In his AFR column, he looked at what he took from the information provided Dr Anthony Fauci, the top medico in the USA’s fight against the virus. “Yet as a result of record public funding and support for COVID-19 vaccine research, Fauci has embraced a more optimistic assessment,” Joye wrote. “Following the release this week of the results of the first human trial of Moderna’s vaccine, which triggered the desired immune response in all 45 people tested, Fauci declared that the US was on track to develop a vaccine before the end of the year. ‘I feel good about the projected timetable,’ Fauci said.

This is guesswork but it has to be the biggest influence on this inexplicable, sustained optimism about stocks. In fact, overnight on Wall Street, vaccine research stocks went crazy mad high, with Moderna Inc up around 13%, Novavax 16% and Inovio Pharma up 10%.

All this explains why US stocks always seem to be rising.

You know I think a pullback for the US market is overdue, though our rebound has been more measured.  On Friday morning, before my Sky News report at 7.20, I pointed out that we need a 57% rebound in our market to get us back to our pre-crash high. We’ve come back 32%. That’s measured. The Yanks have passed their high on the Nasdaq and on the S&P 500 — it’s only 4.7% from its high.

Only vaccine optimism can explain that when the unemployment rate is 11.1%!

For the week, the S&P/ASX 200 Index added 114.4 points (or 1.9%) to finish at 6033.6.

And it was good to see the banks and miners back in favour. The latter was helped by solid Chinese economic data and a Rio Tinto report last week that pointed to the construction and infrastructure sectors on the rise in our most important export customer’s economy.  Pity we’re having a few political problems with China but it is what it is.

In case you missed it, BHP was up 4.8% for the week, Rio 6.3% and Fortescue 10.4%! Even the less reported did well, with South 32 up 8.8% and Mineral Resources 5.3% higher.

For bank supporters, it was a better week. CBA rose 2.8% to $72.60, ANZ 0.9% to $18.47, Westpac 1.3% to $17.89 and NAB 1.3% to $18.10.

Tech stock copped it here, with Afterpay off 6.8% to $67.37. If your favourite tech stock gave up some gains this week, blame it on the rotation.

And if you’re wondering why the gold price and related stocks were a bit softer, well, good vaccine news is not good for doomsday merchants and their beloved fallback commodity — gold!

What I liked

  • Employment rose by a record 210,800 in June after falling by 264,100 in May (previously reported as a 227,700 decline), though full-time jobs fell by 38,100, while part-time jobs rose by 249,000. (It’s better than nothing!)
  • Unemployment rose from 7.1% to 7.4% in June. It was the highest jobless rate in 21½ years (since November 1998) but was a smaller rise than expected.
  • The participation rate rose from a 21-year low of 62.7% in May to 64% in June — be grateful for small mercies!
  • The number of dwelling starts rose by 3.8% to 44,434 in the March quarter. There are currently 189,247 homes being built across Australia. In original terms, work started on 173,707 new dwellings over the 12 months to March but this is the lowest number in six years.
  • According to CBA, our plastic card spending in the week to July 10 was up 7.2% on a year ago, compared to a 12.1% lift for the week ended July 3.
  • The NAB business confidence index improved from -20.3 points to +1.5 points in June. (The long-term average is +5.2 points). Confidence had previously hit record lows of -65.4 in March but this wasn’t affected or infected by the recent Victorian lockdowns. The July number is bound to be more negative.
  • US industrial production rose by 5.4% in June (forecast +4.3%). Factory output rose 7.2% — the most in 74 years!
  • The US consumer price index rose by 0.6% in June (forecast +0.5%) to be up 0.6% on the year — a rise in worrying times is a good thing!
  • US retail sales rose by 7.5% in June (survey consensus was +5%).
  • The US NAHB Housing Market Index rose from 58 to 72 in July (survey consensus was 61).

What I didn’t like

  • The Westpac/Melbourne Institute survey of consumer sentiment index fell by 6.1% in July to 87.9. Confidence is still 16.3% higher than the 29-year low of 75.6 in April. Victorian consumer confidence fell by 10.4% to 85. A reading below 100 denotes pessimism.
  • The weekly ANZ-Roy Morgan consumer confidence rating fell by 0.5% to a 9-week low of 91.6 (long-run average since 1990 is 112.8). You can blame the Victorian infection crisis for that.

How’s your home looking?

I keep hearing that a lot of tradies are being run off their feet, with customers now locked up at home looking at those jobs around the house that have been put off for way too long. In the US this week, Pool Corp was up 6%, the hardware mob Lowes (who came here with the failed Masters Home Improvement store) up 5%, and others in this space with even bigger rises.

Along with the fact that workers working from home are not only fixing their nests, they’re doing a lot more cooking and I bet a bit more drinking. It explains why a company like Metcash, whose pillars are food, liquor and hardware has a six months stock chart, like the one below.

Metcash (MTS)

I bet this is one company that hopes the work-at-home trend doesn’t go away too soon. I suspect it won’t.

The week in review:

On our YouTube channel this week:

Top Stocks – how they fared:

The Week Ahead:

Tuesday July 21 – CBA Household Spending Intentions (June)
Tuesday July 21 – CBA Weekly card spending (July 17)
Tuesday July 21 – Reserve Bank Board meeting minutes
Tuesday July 21 – Weekly consumer confidence (July 19)
Tuesday July 21 – Speech by Reserve Bank Governor
Wednesday July 22 – Retail trade (June)
Thursday July 23 – July Economic & Fiscal Update (JEFU)
Friday July 24 – CBA Purchasing managers indexes (July)
Friday July 24 – Preliminary trade in goods (June)

Monday July 20 – China Loan prime rates (July)
Tuesday July 21 – US National Activity index (June)
Wednesday July 22 – US House price index (May)
Wednesday July 22 – US Existing home sales (June)
Thursday July 23 – US Leading index (June)
Thursday July 23 – US Weekly jobless claims
Thursday July 23 – US Kansas Federal Reserve index (July)
Friday July 24 – US New home sales (June)
Friday July 24 – US Purchasing managers index (July)

Food for thought:

“The stock market is never obvious. It is designed to fool most of the people, most of the time.” – Jesse Livermore

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:

Shane Oliver noted that AMP Capital’s Australian Economic Activity Tracker has faltered over the past few weeks due to the second wave of COVID-19 cases in Australia:

Top 5 most clicked:

Recent Switzer Reports:

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