Switzer on Saturday

Psst…Wall Street is buying again!

Founder and Publisher of the Switzer Report
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The good news is that Wall Street is not so panicky and cautious buying has resumed, after the Dow gave up close to 6% on Thursday. In fact, stock buyers bounded out of the gate and the Dow was up over 830 points but the enthusiasm did taper off over the trading day.

Analysis by technical types says the big gap of overbought to oversold stocks, which was quite huge, has now closed. And history says that gives way to a step-like gain for stocks. Let’s hope history can be relied on.

You might be asking: why the sell off? Well, here are my answers:

  • It was overdue, with the S&P 500 around 5% off its pre-Coronavirus crash level! We were about 16% off ours and both were ahead of themselves.
  • The Fed chair, Jerome Powell, was honest and didn’t gild the lily on the outlook. But he did say 2020 would be a 5% rebound year!
  • Second-wave infections in Texas and California slightly spooked the market. As I’ve argued, this has always been the big watch factor. Given the overbought situation for US stocks, a 6% slide of the Dow Jones Industrial Average is totally understandable, especially when you throw in computer trading, AI and the explosion of ETFs. We live in a more volatile stock market world and that’s that.

JJ Kinahan, chief market strategist at TD Ameritrade, puts the US story into sensible context. “We had gone straight up more than 30% without a real sell off, so you’re due for one, and I don’t think it’s the worst thing in the world,” he told CNBC. “As more States get back, the question becomes: Are they going to ramp up fast enough to please Wall Street? What you’re seeing is, it’ll be hard to do that.”

This is why it’s hard to see big rises that we’ve seen recently, as big stock market players gauge the success of reopening the economy and how serious second-wave infections end up being.

One thing the market liked was the US Treasury Secretary, Steve Mnuchin, saying the US can’t close the economy again.

Your next question should be: How come we only fell 112.8 points (or 1.89%) on Friday, when the S&P 500 gave up around 5% in one day?

As I pointed out above, the S&P 500 was around 5% off its pre COVID-19 high, while we were 16% off that level. I suspect a big part of the difference was the outperformance of the FAANG stocks, which have done so well in recent years. In the Coronavirus crash weeks, they outperformed, surpassing their previous highs. They account for 15% of the S&P 500 nowadays. That would explain a big part of the S&P 500’s surprisingly big rebound out of March 23, which was the low for the market. A good but more normal business, say like Ralph Lauren, is still 25% below its COVID-19 high and companies in travel, hospitality and other virus-exposed businesses are even worse off. FAANG stocks have certainly exaggerated the S&P 500 Index’s rebound.

Given our success with the virus, we had less reason to fall and that has to play into how much we need to retrace what does look like some excessive buying by many of us. However, if the buyers are long-term investors, who can cope with likely pullbacks (which one day will again be replaced by sustainable steps up for the stock market), then the propensity for these buyers to dump their shares like panicky fund managers, who have to show-and-tell their monthly or quarterly performance, would be pretty low.

Only a full-blown big second-wave infection problem, which threatens economic closures and lockdowns, could make us relive those terrible 28 days between February 24 and March 23, when our market slumped about 38%!

To this week’s local story and we only lost 150 points on the S&P/ASX 200 Index. And despite my media mates loving to talk about the banks being “smashed”, this is the real story: “Commonwealth Bank dropped 2.1 per cent to $67.32, Westpac slid 4.8 per cent to $17.89, NAB declined 4.6 per cent to $18.59 and ANZ fell 4.3 per cent to $18.92,” the AFR reported.

However, let’s just take a stock Paul Rickard and I have liked (i.e. Westpac) and see what how its share price has moved in recent weeks.

Westpac (WBC)

On March 23, WBC was a $14.10 stock, so it has surged 26%! When it comes to stocks, a daily or weekly view can be very misleading. I rest my case.

One important point you have to understand is that some really good companies such as CSL, Macquarie and Amcor will cop some headwinds from the high Aussie dollar. Amcor lost 9.1% this week but Macquarie only lost around 2%. But the impact of a rising dollar on currency-exposed stocks should be considered at the moment.

Energy had a few challenges because its recent rebound has been linked to a better outlook for the global economy, cars driving and planes flying. Demand for jet fuel corresponds to 8% of the daily demand for fuel in the world!

I always like to see what companies do well in a tough week: Bank of Queensland had a good one, up 10.35%, Pilbara Minerals 6.9% higher and Sydney Airport up 5.9%.

If you’re good at praying, here’s a really important thing to pray for: a containment of second-wave infections. This is an odd time in life when praying for God to be kind to humanity will also coincide with a very good outcome for those of us who have a big love of money!

Go God!

What I liked

  • The Westpac consumer sentiment index rose by 6.3% in June to 93.7 points. Confidence is up 23.9% after hitting 29 year lows of 75.6 points in April. But sentiment is still down 7% from a year ago and below the long-run average of 101.3 points. A reading below 100 points denotes pessimism but this is a nice comeback!
  • The NAB business confidence index rose by a record 25.5 points to -20 points in May. (The long-term average is +5.2 points). Confidence had previously hit record lows of -65.2 in March. While it’s a negative reading, it’s a plus that the negativity is disappearing at a pretty fast rate.
  • According to the CBA, spending in the week to June 5 was up 5.2% on a year ago (week prior: +3.3%), with online spending up 8.5% and in-store spending up 3.9%. This shows the Aussie consumer isn’t Coronavirus scared of spending.
  • This headline: “Moody’s: Australia’s policy response to COVID lowers banks’ risks.” SMH’s Alex Druce wrote: “Australia’s policy responses to the COVID-19 pandemic has improved financial stability in the banking system and, in particular, banks’ funding and liquidity positions, according to Moody’s Investors Service.”
  • The OECD’s forecast of a 2020 economic contraction of 5%, which is miles better than the 10% that Treasury once predicted. Treasury this week pulled it back to 8%.
  • According to employment website SEEK, new job ads posted on its website between 25 May and 7 June 2020 rose by 60.6%. This compares to rises of 26.8%, 39.7% and 49.2% respectively in the previous three fortnights.
  • ANZ job advertisements rose by 0.5% to 63,428 positions in May. (I’m not really caring about May data because it should be bad but as this is surprisingly positive, I thought I’d showpiece it!)
  • In seasonally-adjusted terms, private new detached home sales fell by 4.2% in May, which is so much better than 30% fall calls out there! (Doomsday dopes!)
  • A record $7.9 billion of owner-occupier home loans were refinanced in April.

What I don’t like

  • Second-wave infections talk anywhere, anytime.
  • The Oz dollar at 70 US cents right now. However it does rise when the global economic outlook improves, so I guess I am conflicted on this dislike.
  • The weekly ANZ-Roy Morgan consumer confidence rating fell by 1.3% to 97 points but it was the first fall in 10 weeks (long-run average since 1990 is 112.9). Sentiment had lifted for nine successive weeks (the longest stretch on record) since hitting record lows of 65.3 points on March 29. This is a ‘not-so-bad’ dislike.
  • The so-called market reaction to the Fed boss, Jerome Powell, being objective about the uncertain future. He really wasn’t as negative as these turkeys on Wall Street allegedly had it but he did say to get the job market back will “take a whole lot of time.” Well, der! Why would that surprise the market?

Best thing I heard this week

Jerome Powell in handling his conference in zoom-mode was asked by a journalist if we were in danger of falling into another Great Depression and the response was gracious but scoffing-like.

He pooh-poohed the idea that what was happening here was like the Great Depression. “First the Government response has been so fast and so forceful. The origin was quite different…the economy was in a healthy place [with] 15-year low in unemployment…the financial system this time was in very good shape – much better capitalized, so it’s just not the right model.”

I don’t think Powell is a liar or a dope and he’s telling us he sees a full US recovery over time, provided the virus dramas are contained.

The week in review:

On our YouTube channel this week:

Top Stocks – how they fared:

The Week Ahead:

Monday June 15 – Tourist arrivals & departures (April)
Tuesday June 16 – CBA Household Spending Intentions
Tuesday June 16 – Reserve Bank Board minutes
Tuesday June 16 – Provisional overseas travel statistics (May)
Tuesday June 16 – Weekly payroll jobs & wages (May 30)
Tuesday June 16 – Residential Property Price Indexes (March Qtr.)
Thursday June 18 – Employment/unemployment (May)
Thursday June 18 – Population (December Quarter)
Friday June 19 – Preliminary retail trade (May)

Monday June 15 – China retail sales/production/investment (May)
Monday June 15 –  China home prices (May, annual)
Monday June 15 – US Empire manufacturing index (June)
Tuesday June 16 –  US Retail sales (May)
Tuesday June 16 – US Industrial production (May)
Tuesday June 16 – US Fderal Reserve Chair Powell speech
Tuesday June 16 – US NAHB housing market index (June)
Tuesday June 16 – US Business inventories (April)
Wednesday June 17 – US Housing starts & building permits (May)
Thursday June 18 – US Philadelphia Fed manufacturing index (June)
Thursday June 18 – US Weekly initial jobless claims (June 13)
Thursday June 18 – US Leading index (May)
Friday June 19 – US Current account (March quarter)

Food for thought:

“Like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up someday in a particularly foolish mood, you are free to ignore him or take advantage of him, but it will be disastrous if you fall under his influence.” – Warren Buffett

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:

The following chart from AMP Capital using data from Oxford University shows how the lockdown of OECD countries during COVID-19 has changed over the past four months:

Top 5 most clicked:

Recent Switzer Reports:

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