Switzer on Saturday

Earnings better than expected and momentum picking up

Founder and Publisher of the Switzer Report
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Trade deal dreaming has been disturbed again and we’re going to have to get used to this, as we wait for the meeting of Presidents Donald Trump and Xi Jinping in Chile at the APEC Forum held between November 11 and 17. US earnings season is a big distraction, so is Brexit as an MP vote on the latest deal looms. And a new curve ball of US tariffs is set to hit cheese, wine, olives and other European goods.

Global stock markets didn’t need another issue to stress about but it is what it is. “Washington introduced the measures in response to EU subsidies for European aircraft maker Airbus,” dw.com reports. “The plan will see duties of 10% on Airbus planes and 25% for agricultural products like French wine, Italian cheese, and Scottish whisky”.

By the way, this isn’t a pure unhelpful Trump trick but was in fact supported by the World Trade Organization (WTO) to make up for underhanded EU behaviour, so the US is seeking to recoup damages of $7.5 billion (€6.7 billion). Washington introduced the measures in response to EU subsidies for European aircraft maker Airbus.

Some EU politicians want to return fire but Germany is calling for calm, so it’s an issue for investors in potentially exposed companies.

Against this negative, US earnings beats are making the latest profit reporting season look better than expected – but there’s still over two weeks to go. That said, you should know that the Dow, S&P500 and Nasdaq hit three-week highs this week, so a sell off today could easily be more profit-taking than a sign of what’s to come. Going into earnings season, a 3% drop in overall earnings was expected for S&P500 companies but for the first 70 businesses out of the reporting blocks, over 81% topped consensus estimates. This suggests the trade war concerns might be overdone – but time will tell. “There was so much nervousness coming into the earnings season about what they would bring, there is some happiness that this is pretty good,” said JJ Kinahan, chief market strategist at TD Ameritrade to CNBC.

That’s good to read but what follows made an optimist like me even more relaxed, with all the curve balls that are being thrown at investors like you and me. “What they’ve [earnings] really done is two things: Show the financials are incredibly resilient, and confirm that the consumer is ridiculously healthy.”

Meanwhile, for trade deal dreamers, a key Trump lieutenant, Larry Kudlow (who’s a former CNBC host and now the director of the National Economic Council in Washington) relayed the message this week that there is “a lot of momentum” to get the deal done.

No one’s sure how much of a trade deal will happen after Phase One hopefully gets signed in Chile, but the market is happy that a trade truce looks likely, which means tariff escalations can be taken off the table, at least for now.

Like it or not but we’re locked into a waiting game on issues that can help or hinder stocks from the trade war to Brexit to new EU tariffs to talk about a possible recession looming.

Earlier in the week, the chief economist at Moody’s, Mark Zandi,  pressured Donald Trump to act to reduce the possibility of a recession. “I think risks are awfully high that if something doesn’t stick to script then we do have a recession,” Zandi said, adding that “even if we don’t have a recession over the next 12 to 18 months, I think it’s pretty clear that we’re going to have a much weaker economy.” (CNBC)

I agree we’re vulnerable and the Trump team has to know it. That’s why Kudlow is alerting the market that a deal is getting close, provided egos on both sides don’t get out of hand.

To the local investing wrap and the big news has to be the RBA Governor, Dr. Phil Lowe, telling a US audience this week that further rate cuts in Oz are not a done deal!

The AFR on Friday told us that “Lowe has hosed down prospects of further interest rate cuts, saying the economy is set to return to ‘trend growth’ next year, which will cut unemployment and boost wages.”

“A noticeably more upbeat Dr Lowe told a high-powered forum at the International Monetary Fund in Washington on Thursday (Friday AEDT) that while it was possible more cuts were needed ‘I wouldn’t assume it’.”

That’s good news if he’s on the money and it explains why our dollar is half-a-cent higher over the week at 68.51 US cents.

To the S&P/ASX 200 and despite a freaky Friday for tech stocks, the overall index was up 0.7% for the week, finishing at 6649.7, with the jobs data getting a tentative thumbs up from market analysts.

For those who were courageous and stuck with IOOF after its drubbing at the Royal Commission, the company saw its share price spike another 16.61% higher on the $125 million reduced price for its purchase of ANZ’s pension and investment financial services operation.

Clydesdale Bank (CYBG) went up 14.42% on positive Brexit talk. And anyone who watched my Rudi Filapek Vandyck interview on Monday might have got onto Nearmap (NEA), which was up 17% for the week. Well done, Rudi!

On the other hand, Afterpay lost 15.58% and Wisetech Global  (WTC) dropped 12.36%, after a hedge fund accused the company of “accounting trickery”, which has made the company’s CEO, Richard White, call for short sellers to be stopped from virtually dropping bombs and seeing share prices sink like a stone. I’m sure Gerry Harvey would support a public hanging for short-selling hedge fund managers.

Failure of the week was the jettisoning of the $3.2 billion Latitude float, with the $1.78 starting share price not sucking in enough ‘punters’ to make the IPO fly.

Finally, you can’t be surprised that the gold price has been falling with a better trade deal, Brexit and even Turkey invasion news but the drop in the share price for  great gold miner, Northern Star Resources, was  because production was down 40,000 ounces on the previous quarter.

Provided your portfolio hasn’t been hurt by an individual company that has copped a clobbering from the market, the overall run of news has been positive for stocks, as geopolitical tensions ease.

You have to hope that Donald and his team respect this historical chart below that shows stocks do well November to April but struggle May to October.

Source: CNBC

With a US election at the end of that bad period for stocks, a rational US President would want to create the conditions for a big stock rebound going into the festive season, with a surge on Wall Street the best Christmas gift imaginable for Donald, who has to want his size 12 shoes under the desk in The Oval Office in 2021.

What I liked

  • Employment rose for a record 36th consecutive month, up by 14,700 jobs in September. Full-time jobs rose by 26,200, with part-time jobs down by 11,400. Economists had tipped an increase in total jobs of around 15,000.
  • The unemployment rate fell from 5.3% in August (in seasonally adjusted terms) to 5.2% in September.
  • The International Monetary Fund expects global economic growth to lift from 3% to 3.4% in 2020.
  • Tourist arrivals rose by 2.7% in August to record highs with departures up by 1.5%. There were record tourism inflows from nine separate countries, including Hong Kong.
  • The NAHB housing market index in the US rose from +68 to +71 in October (forecast +68).
  • President Jean-Claude Junker and UK Prime Minister Boris Johnson have agreed to a Brexit deal. The deal will be voted on by the UK parliament today.

What I didn’t like

  • The lift in retail spending intentions in August on the CBA analysis of household spending via bank accounts was reversed in September.
  • The average credit card balance hit a 19-month low of $3,161.11 in August, down 1.8% on a year ago. People aren’t spending.
  • By value, the sum of credit and debit card purchases rose by 0.2% in August, the weakest gain in three months. Card purchases were up 5.5% on the year. Smoothed annual growth (12 month average) fell to a record (15-year) low of 5.7%.
  • China’s economy expanded at its slowest pace in about 30 years at 6% in the third quarter of 2019, compared to a year earlier.
  • US retail sales fell by 0.3% in September (forecast +0.3%).
  • From Beige Book commentary, the US Federal Reserve said that the economy grew at a slight to modest pace in September/early October and manufacturing activity edged lower.
  • The weekly ANZ-Roy Morgan consumer confidence rating fell by 1.2% to 110.9 points. Sentiment is below the average of 114.4 points held since 2014 and the longer-term average of 113.1 points since 1990.
  • The Philadelphia Federal Reserve manufacturing index eased from +12 points to +5.6 points in October (forecast +8).
  • US housing starts fell by 9.4% to 1.256 million in September (forecast 1.32 million).
  • US industrial production fell by 0.4% in September (forecast -0.1%).
  • The UK Labour Party and Northern Ireland’s Democratic Unionist Party said that they will vote against the deal.

Likes -v- dislikes

Today, the dislikes outnumber the likes – see above. That doesn’t happen often, which is why I’m pointing it out. Fortunately, the job numbers and the better news revelations on the trade deal and Brexit fronts are all more important but it has been these issues and the policies that have been pursued that have contributed to negativity and some unimpressive economic data readings.

We are poised to get better economic and market news but equally we could slide into recession and a big market sell off, if politicians and central bankers screw up. However, I like the news that Dr Phil is starting to talk “we’ve had enough rate cuts” because there is a growing belief that the solution of lower and lower interest rates is starting to spook Aussies.

Here’s CommSec’s Craig James on the subject after consumer sentiment dipped again:  “Aussie consumers may have liked rate cuts in the past when interest rates were at higher levels, but the current ultra-low rates have got consumers spooked. There seems to be a general perception that low rates indicate an economy in trouble, rather than one that just needs a push along. While the Reserve Bank’s mathematical models still perceive that rate cuts work to boost economic activity, the behavioural evidence is that they don’t – or at least that rate cuts have become ineffective.”

I think Craig is right and if our economy needs more help, it should come from Treasurer Josh Frydenberg and the Budget coffers.

The week in review:

Top Stocks – how they fared:

The Week Ahead:

Tuesday October 22 – Weekly consumer confidence (October 20)
Wednesday October 23 – Skilled internet job vacancies (September)
Wednesday October 23 – Panel participation by Reserve Bank official
Thursday October 24 – CBA ‘flash’ purchasing managers indexes (Oct.)
Thursday October 24 – Detailed labour force (September)

Monday October 21 – China Home prices (September)
Tuesday October 22 – US Existing home sales (September)
Tuesday October 22 – US Richmond Fed Manufacturing Index (Oct.)
Wednesday October 23 – US FHFA House Price index (August)
Thursday October 24 – US Durable goods orders (September)
Thursday October 24 – Markit/IHS ‘Flash’ purchasing managers (Oct.)
Thursday October 24 – US New home sales (September)
Thursday October 24 – US Kansas City Fed Manufacturing index (Oct.)
Friday October 25 – US Consumer confidence (October)
Sunday October 27 – China Industrial profits (September) 

Food for thought:

“An investor who has all the answers doesn’t even understand the questions. Success is a process of continually seeking answers to new questions.” – John Templeton

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 chief economist Shane Oliver this week compared the yield on a range of investments between December 2009 and today:

Source: Bloomberg, REIA, RBA, JLL, AMP Capital

Top 5 most clicked:

Recent Switzer Reports:

Monday 14 October: My 10 stock tips from the trade deal

Thursday 17 October: Good news on 3 big brands; 2 small caps 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.