Switzer on Saturday

What a week! Putin, Kerry, Perry and Borghetti

Founder and Publisher of the Switzer Report
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Putin the pest has done it again, with military manoeuvres on the Ukraine border spooking stocks. And the Crimean election this weekend could make things ever messier, if it goes the way Russia is expecting. In fact, Russian media is talking about an annexation as though it’s a past the post certainty!

You can’t be optimistic when the US Secretary of State, John Kerry, is warning that things will get “very serious” if Crimea votes to leave the Ukraine.

And this curve ball comes just as the economic data out of China was not inspiring. Let’s look at the numbers more closely.

Reuters says the combined industrial output for January and February rose 8.6% on year. That’s a lot less than the 9.5% the consensus number bandied around before the release. Also, the combined retail sales number was only 11.8% higher against an expert forecast of 13.5%.

This was not a great week for Chinese data, with the trade balance shocking many, going from a surplus of US$31.86 billion in January to a deficit of US$22.98 billion in February!

But the result was distorted by the Lunar New Year holidays. In fact, all the data is dodgy, just as US economic data is weather-drenched, so it will take a few months in both countries to get a clear snapshot on the two economies.

To add to the negativity, good old Dr Marc Faber, the author of The Gloom, Boom and Doom Report, who has been wrong on stocks for ages, told CNBC that he thinks China is growing at 4%, not the 7.5% the leadership has been targeting. I’d bet anything he’s wrong again.

To trump the Doc, I prefer the views of Christian Schulz, the Senior Economist at Berenberg Bank, who dismisses hard landing speculation.

“I think a further gradual slowdown of the Chinese economy is more reflected in this data than a hard landing,” he said. “We always have to remember that the Chinese government has huge new private savings in terms of savings rate, low inflation, sound public finances and huge foreign reserves, which allows them to intervene as well.”

Morgan’s chief economist, Michael Knox, is also a China bull and he pointed out on my TV show on Monday that China’s non-manufacturing sector, which expanded at a quicker rate in February than the previous month, actually has construction services in this statistic and that should be a good sign for commodity prices going forward.

Amidst all this bad data, the purchasing managers’ index (PMI) for services in China printed at 55 in February, after a read of 53.4 in January, which means the services sector is expanding at an increasing rate. Any number over 50 says expansion is happening.

Worry of the week was not the iron ore’s price falling under $US105 a tonne but Citi downgrading its earnings call for BHP and Rio this year. In addition, Goldman Sachs speculated that the price will go to $US80 in the next few years did worry me, as a believer/investor in the BHP/RIO story. However, to be more precise, Goldman sees the price at $US108 this year and $US80 a tonne in 2015.

And while Goldman is a respected, big kahuna institution, I do remember a March 2008 call of oil going to $US200 a barrel! They got that wildly wrong.

To Charlie’s Angels this week and Mr Aitken made me think about Yes, Prime Minister, with yours truly channelling Sir Humphrey Applebee in observing: “Courageous call, Charlie.”

This is what he said: “I can see a very clear situation where there is a short squeeze in listed ‘bricks & mortar’ Australian discretionary retailers over the next 12 months, with the biggest open short positions being HVN (12.3%), MYR (14%), DJS (6.7%), FLT (14.8%) and JBH (12.4%). Remember Fairfax (FXJ) was also seen as ‘structurally terminal’, but its shares also just rallied +100% from June 2013 as big shorts covered.”

His target price on JB Hi-Fi is $24 and Roger Montgomery has it at $23, so the heavies are piling on!

Roger’s CEO, David Buckland, says in the retail space Kathmandu has a good story and they like the company.

Lunch of the week

I only had one! It was at Neil Perry’s new Rockpool in the old Burns Philp building in Bridge Street. Gee, there’s some stock market history in the name Burns Philp but the way Perry is going with his link to Crown, he could be a listing proposition one day. Lunching with me was Matthew Michalewicz, author of that great book Life in Half a Second, which we did a giveaway of to subscribers last year.

Matt’s book is a great inspiration to anyone trying to learn how to set goals and make them happen. At lunch, he told me that Arnold Schwarzenegger, pre-acting, saw that the number one body builder did calf lifts of 500 pounds, so he started working out on 1,000 pounds! Michalewicz believes in doubling the efforts of your rivals.

And then dinner…

That was lunch but I did have a dinner last night with Virgin Australia’s John Borghetti, who was responsible for me doing Talking Business on Qantas for a decade before my TV show turned up. And given what his rival has been suggesting, he’s going to need deep pockets for this airline battle royale. I took a tape with me and they measure deeper than what many think!

You might know I don’t invest in airlines but as a bloke I’d invest in JB any day of the week and so I am hoping both companies can set prices to turn a profit soon, for both their sakes.

Best news of the week was Treasurer Joe Hockey alluding to the fact that he would not go for a horror budget in May. All we need now is the media to actually report it! Confidence is key and the big job creation number – another beauty – on Thursday on top of the better than expected GDP figure the week before, makes me even more certain that the Oz economy is improving. This is critical to my 6,000 call for the S&P/ASX 200 this year and the current Russian rumble is undoubtedly creating a buying opportunity but these damn things often require courage in the face of fire.

My best thought for the week came when I read this Buffett reflection, which went like this: “I can’t remember what I paid for that first copy of The Intelligent Investor. Whatever the cost, it would underscore the truth of Ben’s adage: ‘Price is what you pay; value is what you get.’ Of all the investments I ever made, buying Benjamin Graham’s book was the best – except for my purchase of two marriage licences!”

I hope someday many of our subscribers will say the same about the Switzer Super Report.

Top stocks – how they fared

Numbers that moved the market

Among the major releases from the Australian Bureau of Statistics this week was the employment numbers – employment increased by 47,300 in February with full-time employment up 80,500 and part-time jobs down 33,300. The unemployment rate remained at six per cent.

Consumers were slightly less confident in early March with the Westpac/Melbourne Institute Index of Consumer Sentiment down 0.7 per cent to 99.5. A reading under 100 means consumers are pessimistic. Newspapers jumped on this as a big negative, but I think the only thing to fear is fear itself.

Businesses also lost confidence. The NAB business confidence index dropped to 7.3 from 8.6 in February. The business conditions index fell from 5.1 points to zero.

And over in China, combined retail sales increased 11.8 per cent, which was below expectations. Combined industrial output for January and February also came in less than expected at 8.6 per cent.

The Week Ahead

March 17 New car sales (February)
March 18 Imports of goods (February)
March 18 Reserve Bank Board minutes
March 20 Detailed employment data (February)

March 17 US Industrial production (February)
March 18 China House prices (February)
March 18 US Consumer prices (February)
March 18 US Housing starts (February)
March 18,19 US Federal Open Market Committee
March 20 US Existing home sales (February)
March 20 US Leading index (February)
March 20 US Philadelphia Fed (March)

It’s a pretty quiet week for data in Australia. Reserve Bank watchers will look to see what the Board discussed at its March meeting. It’s a different story in the US. They have a number of releases, from consumer prices and house starts to the Philly Fed survey. The big watch will be the US Federal Open Market Committee and what they will do with the taper of QE III.

Calls of the week

The economy is crook? Give me a break. This week I showed the positive news that hasn’t been given a big enough run, including the fact Joe Hockey said there won’t be horror budget this year! And also on that day, the 80,500 jobs showed up.

Plus, a big call from Charlie Aitken this week. Charlie reckons there’s a “pending boom in Australian discretionary retail spending” and JB Hi-fi is “well positioned to capture a disproportionate share” of it.

And a quote on interest rates from Reserve Bank Governor Glenn Stevens speaking at the House of Representatives Economics Committee on Friday 7 March:

“At the present time, our judgement is that monetary policy is doing the things that it can reasonably do in the circumstances we face. And we have signalled the likelihood, if the economy evolves more or less as expected, of a period of stability in interest rates.”

Food for thought

“The only thing we have to fear is fear itself” – Franklin D. Roosevelt

Last week’s TV roundup

This week I caught up with Dr. Steve Keen, and even the once scariest economist in Australia couldn’t see Apocalypse Dow this year!

I also spoke with Craig Woolford from Citi Research about talk of a David Jones/Myer merger, as well as the luxury retail sector.

And Ron Bewley joined Super TV to tell us whether the resources sector is worth buying into right now.

Plus, Paul Rickard and I did a wrap up of the particularly strong earnings season recently, and what it will mean for the next one.

And in case you missed our monthly webinar with Geoff Wilson and Paul Rickard, check it out here.

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 also shows how this has changed compared to the week before.

Source: ASIC

My favourite charts

This week’s chart shows Xero’s share price rise over the past year. I did praise the company when it was $12, but when I see this chart, I cry tears of blood! However, I didn’t get in because it was a speculative tech stock with no earnings!

Source: Yahoo!7, Data as at 14 March, 2014

Top five clicked stories of the week

Last week’s Switzer Super Reports

  • Thursday, 13 March 2014: Glass half full Download
  • Monday, 10 March 2014: A minute to midnight? Download