Will Putin turn May into a selling or buying opportunity?

Founder and Publisher of the Switzer Report
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As the hardly merry month of May looms, recall that stocks have dipped five years in a row around this so-called merry month! In the US, there is a general belief that the first few months are great for stocks, so traders pocket their gains and head to the beach.

In the UK, they say “sell in May and come back on St. Leger Day.”  This is September 13 and marks the recommencement of serious stock trading. The dear old Poms have a penchant to go sports mad in summer with Royal Ascot, Wimbledon, rowing at Henley, sailing at Cowes and then a spot of cricket at Lords.

The UK Telegraph cites work done by Bestinvest, which showed the FTSE index actually went up 15 out of 25 times between May 1 and the second week in September. But when stocks fall over this time, it can be serious.

Bestinvest says if you sell in May and go away, your annual return would only have been better nine out of 25 years. Also, looking at the chart suggests that the strategy best works when either there’s real market turmoil, as in the Dotcom bust of 2002-03 and the pre-and immediate post-GFC crash of 2007-2009.

There was another in 2012 but that was before Mario Draghi of the European Central Bank (ECB) came out with his “whatever it takes”.

I can’t see an economic drama of equivalent magnitude on the horizon. Even if the Ukraine issue causes a sell-off, as it is now, I will be a buyer after a time, on the supposition there could be another quick bounce back, especially with the earnings I’ve been seeing in the US. (As of Saturday morning, around 240 companies had reported from the S&P 500 and 68% beat market expectations, 11% came in as expected and only 21% disappointed.)

In fact, Citigroup analysis in the US predicts earnings for quarter one will be around 3.8%, when a flat to 1% result was expected. The likes of  Apple, Facebook, Netflix, etc., which were trashed recently, have reported better than expected and this is good news for optimists.

The Citigroup team predicts US earnings to keep going higher, with Q2 at 7.4%, Q3 at 7% and Q4 at 8.7%. This is a very good omen for stocks!

There have also been some convincing signs that inflation is increasing, with companies starting to raise prices, which is not only a good growth sign but suggests that normalcy is creeping back in the US.

I know many economists and politicians deride inflation but it can correspond with a rising stock market. With up to 3.5% inflation, US market P/Es can climb to 17.4 but once inflation beats this rate, P/Es start to slide, meaning the market goes off the boil. Between -0.5% and +0.5%, the average P/E is 12.8, so I’m rooting for US inflation.

What I am watching is the S&P 500 level of 1885 and if the US market can beat this, then May might be a merry month for us all.

A big call merchant, David Hunt, who occasionally appears on my TV show, thinks a May sell-off is coming. If Ukraine can be settled peaceably, I think he’ll be wrong.

However, the Ukraine-Russian problem had Wall St spooked overnight and the fear went uptown to Broadway, where the Nasdaq really slumped. Remember, hi-tech shares are genuine risk-on stocks and hot geo-political issues can be used by short-sellers and cautious investors to take profit.

That said, economics and earnings are keeping me positive. The smart strategy could be to buy into any stock slide on the basis that a Russian-Ukraine settlement will bring investor focus back on to earnings and the economy.

Roger’s tip

On my show, Roger Montgomery waved the flag on a company called Bursons, which has recently floated. He has bought it for his fund and believes it’s a good business that’s under the radar screen. It’s a rival of Repco and not affected by the exit of carmakers, as they sell stuff for cars that have already been bought. Its demand comes from repairs and rev-head renovations.

What I’m watching this week

  • Putin
  • US job numbers on Friday and the raft of economic data over the week.

What I’m hoping for

My pre-Budget wish has to be that Joe Hockey’s Budget pain plan is constructed over a long timeframe. This economy of ours is recovering but it doesn’t need a fiscal strategy that robs us of demand, just when consumers and businesses are starting to spend.

The most important fact I’ll be searching for on May 13 will be the Budget’s impact on aggregate demand. All this talk about Budget pain is hurting confidence, so I hope the actual Treasurer’s speech turns negativity into positivity.

A final word

The Poms still go to their sporting events but in a new age of computers, the internet and smart phones you can kill a stock while you’re making a killing at Ascot! Hasn’t the world changed…

Top stocks – how they fared

Numbers that moved the market

On Wednesday, the Consumer Price Index (CPI) came in lower than expected, rising just 0.6% in the March quarter, compared to forecasts of an 0.8% increase. That translated to a 2.9% annual rise. It’s good to see inflation not too high at the moment, which means interest rates could remain low for the time being.

Also on Wednesday, China’s flash manufacturing PMI for April was released, rising from 48.0 to 48.3 and marking a two-month high. Despite the increase, the figure is still below 50, which indicates the industry is in contraction.

The US flash manufacturing PMI was down a touch from 55.5 in March to 55.4 this month, while Europe’s flash manufacturing PMI was up from 53.0 in March, to 53.3 in April.

And US quarterly reporting season continued this week, with a few heavy hitters opening their books. Of the 158 companies that had reported as of Thursday morning, 118 (or 75%) had beaten estimates, according to Bloomberg. The industrial sector had the best result, with 89% of companies that had reported outdoing expectations.

The Week Ahead

April 30 – Private sector credit (March)
April 30 – Selected living cost indexes (March quarter)
May 1 – Import and export prices (March quarter)
May 1 – RP Data/Rismark home prices (April)
May 1 – Performance of Manufacturing (April)
May 2 – Producer Prices (March Quarter)
May 2 – New home sales (March)

April 28 – US Pending home sales (March)
April 29 – US CaseShiller home prices (February)
April 29 – US Consumer confidence (April)
April 29 – US Federal Reserve Meeting (day 1)
April 30 – US ADP employment (April)
April 30 – US GDP advance (March quarter)
April 30 – US Federal Reserve meeting (day 2)
May 1 – China Purchasing Managers Index (April)
May 1 – US Personal income (March)
May 1 – US ISM manufacturing (April)
May 1 – US Auto sales (April)
May 1 – US Construction spending (March)
May 1 – Speech by US Federal Reserve chair
May 2 – Non-farm payrolls (April)

After a very slow three-day week, the economic sector is heating up, with a spiel of meetings and data coming up. Locally we’ll see the Reserve Bank release its March figures for private sector credit on Wednesday, and on Thursday we’ll see how the manufacturing sector has been going with the Australian Performance on Manufacturing Index released.

Overseas we’ll see US pending home sales as well as the consumer confidence index. But the big event of the week will be on Tuesday, when the US Federal Reserve Open Market Committee has its next meeting.

Calls of the Week

This week, Tony Featherstone nominated six takeover targets as an exclusive for SSR readers. Perseus Mining, Reckon, Automotive Holdings, iiNet, NIB Holdings, and iCars Asia and iProperty Group are the ones to keep your eyes on.

Joe Hockey states the (sometimes overlooked) obvious in his speech about the upcoming budget: “nothing is free – someone always pays.” Some are interpreting this as a strong signal that it’s going to be a tough budget.

And I’d suggest this hilarious Peter Alexander catalogue if you can’t get enough of the Royals during their Aussie visit. They flew alookalikes out to Australia to do a shoot for Peter Alexander – check it out!

Food for thought

In memory of former Premier of New South Wales, Neville Wran, ABC’s Rodney Cavalier quotes Wran’s explanation of the most important element for political success. I’d say it translates pretty perfectly into investing as well!

“Not hard mate. It is timing. Get the timing right and you can do anything.”

Last week’s TV roundup

This week on Super TV, Rudi Filapek-Vandyk helped us pass judgement on health stocks and discussed whether or not you should buy in. He also made a call on some troubled tech stocks.

We usually hear ‘sell in May and go away’, but Michael Heffernan from Lonsec explains why a better strategy could be to ‘buy in May and stay.’ He tips the stocks he likes going forward. This is one to check out.

Also this week on Super TV, Mike Kendall had a discussion with me about our market’s impressive six-year high, and speculated on upcoming market volatility across the globe.

Bank of Queensland (BOQ) CEO, Stuart Grimshaw, spoke with me about the company’s stellar performance over the past 12 months, and what opportunities and challenges lie ahead.

And under the grim conditions for high-tech stocks, just how is Freelancer fairing? CEO of Freelancer, Matt Barrie, gave me some insight into the company’s performance.

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.

The three-day week didn’t slow down short sellers, with plenty of movers in the top 20. The biggest jump was Kingsgate Consolidated, who’s short position opened by a massive 6.33%!

Source: ASIC

My favourite charts

This week in Shortlisted, Paul Rickard tips Telstra as a great buying opportunity. “Telstra performed well last week and seems to have found strong support around $5.00,” he said.

With inflation out last week, this chart should put things in perspective. It shows the Australian inflation rate from 1975 to today.

Top five clicked stories of the week

  1. Charlie Aitken: Sell hares and buy the ASX20
  2. Questions of the week: The best five yield stocks
  3. Peter Switzer: Why I think this bull market has legs
  4. James Dunn: Infrastructure stocks that offer a good yield
  5. Penny Pryor: Shortlisted – Dick Smith, Telstra

Last week’s Switzer Super Reports

Tuesday, 22 April, 2014: A leg up
Thursday, 24 April, 2014: A trend or a tease

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.