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15 good omens so don’t worry, be happy

It was only six days ago that I argued that I was ‘right’ on my 6000 call for the stock market by year’s end but it could be a little delayed! And then by the week’s end, I advanced the argument put forward by US market watcher Dennis Gartman that maybe we’re looking at, wait for it, a market melt-up!

Recall that I think we’d need a scary, black swan event to give us a chance of seeing a 10% correction because the economic news is generally so good and interest rates are so low that dip buyers will be keen to go long stocks whenever the market dives at least 5%. (A Russian convoy of 90 trucks carrying supplies for humanitarian reasons crossed into Ukraine overnight, if they’re attacked, it could really hurt this week’s optimism.)

Technical experts think we need a correction to bring us back to fair value but those historically low interest rates are distorting the normal way markets play.

Against this, we’re close to the most troublesome months of all – September and October – and we hit them as the S&P 500 has made record highs 28 times this year, though it lost a few points overnight probably down to the convoy concerns. Some analysts argue that both Janet Yellen, the Fed boss, and Mario Draghi of the ECB said all the right things at the central banker double header at Jackson Hole, which stopped stock markets give into geopolitical worries.

But September awaits…

History shows the key US stock market indexes usually perform the poorest in September. Since 1950, the month has seen an average decline of 1.1% for the Dow, and a 0.7% decline for the S&P 500. Why? Summer brings low trading volumes but in September, when autumn (or fall as the Yanks call it) starts, investors return to work and exit positions they’d been planning on selling. I think this is a bit dodgy. I suspect the fact that mutual funds end their fiscal year in this month is more influential, as fund managers sell off dud stocks before year-end.

But there has to be a catalyst and without one, we could see the market melt-up!

How a market melt-up happens

Try a very good company reporting season – tick! Continuing good economic data – tick! A central bank that won’t raise interest rates until the economy is going gangbusters – tick! And the Russian-Ukraine heat cools down – if this had copped a tick it would’ve been market-melt up time.

Macquarie this week gave the US a thumbs up. If you don’t have exposure to overseas markets in your portfolio, maybe an ETF for the S&P 500 could be the shot. Any foreign play could also bring a currency windfall when the Oz dollar eventually falls.

And the stock or company reporting news has been great locally as well.

We had seven sessions in a row of the market on the rise and we’re at six-year highs. And while earnings aren’t shooting the lights out, they’re pretty good and there have been encouraging outlook statements.

That said, earnings have helped our market go higher – unquestionably. We’re up 2.4% since mid-August and if the Yanks keep spiking higher, we’re set to go along for the ride.

CEOs views on our economy

This week I interviewed Wesfarmer’s Richard Goyder. What a company this has proven to be! He is positive on his company’s future and his company cuts across a lot of Australia. He even was talking up coal. Meanwhile, I was impressed with Seek’s CEO Andrew Bassatt and I especially liked the fact that he agreed with me that the latest 6.4% unemployment number isn’t telling the true employment story. I suspect he likes the ANZ job ad numbers better and his own company should even be a coalface test of where our economy is going.

15 good omens

I have 15 reasons to like our economy and these will help companies’ earnings going forward.

Recapping on reporting

AMP’s Shane Oliver has done the numbers on our reporting season and concludes “the bottom line is that the June half earnings results are nowhere near as bad as many feared.”

Here’s the summary:

This chart above will make dividend chasers smile – something we’ve actively encouraged. I’m not giving up on the chase for yield just yet, despite the fact that looking to position yourself for stocks that will do well out of a lower dollar, eventually, makes good investment sense.

Macquarie’s Martin Lakos thinks Computershare, James Hardie and Brambles are typical stocks that fill this bill.

What I liked this week

Top stocks – how they fared

Numbers that moved the market:

In his bi-annual testimony [2] to the House of Representative Economics Committee, Reserve Bank Governor, Glenn Stevens, said the economy is OK but not as good as he’d like – so it looks like the 2.50% cash rate will hold well into the New Year! Following this, Goldman Sachs – the only financial institution tipping a rate cut – finally recoiled on this call!

In contrast, US Fed officials suggested they might pull back on their stimulus objectives sooner rather than later – this suggests a faster than expected hike in interest rates [3] as long as the US economy continues on an upswing.

The US showed off some respectable economic data this week; inflation levels [4] rose by 0.1% in July and home construction [5] rose by 15.7% in June.

And China’s Flash Manufacturing PMI [6] figures disappointed this week, falling to 50.3% in August, from 51.7% in July. This took the Oz dollar under 93 US cents on Thursday.

The week ahead:

Australia:

Wednesday August 27 – Construction work done (June quarter)
Thursday August 28 – Business investment (June quarter)
Thursday August 28 – New home sales (July)
Friday August 29 – Private sector credit (July)

Overseas:

Monday August 25 – US New home sales (July)
Tuesday August 26 – US Durable goods orders (July)
Tuesday August 26 – US Home prices (June)
Tuesday August 26 – US Consumer confidence (August)
Tuesday August 26 – Richmond Fed survey (August)
Thursday August 28 – US Economic growth (June quarter)
Friday August 29 – US Personal income (July)

As earnings season starts to wind up next week, investors will start to shift their focus towards other key pieces of data that contribute to the economic growth of great ol’Aussie land. Construction work done is one of these all-important figures – along with the Business Investment Survey that reveals private capital expenditure – and both will be released for the June quarter. Other numbers of interest next week include new home sales and data on loans outstanding (aka private sector credit) for the July period.

By comparison, it’s a much busier week in the US, with numbers coming from all areas of the economic spectrum! Some highlights include the Chicago Fed National Activity Index (CFNAI) for July, along with the Consumer Confidence Index for August and preliminary economic growth (GDP) figures for the June quarter.

Calls of the Week:

From one politician’s gaffe to another, this week Clive Palmer risked offending our largest trading partner when he labelled the Chinese [7] “mongrels’’ and “bastards’’ on the ABC’s Q&A. He remains unrepentant because he said he wasn’t making a comment about China’s people, but one-state owned company he’s in a legal battle with – Citic Pacific.

Sportsbet.com came out with this cracker following Clive’s outburst… for those who don’t follow NRL, Canberra Raiders coach Ricky Stuart is under the pump and struggling to win games.

And our very own Paul Rickard made the call that it’s a “no brainer” to accept the Telstra off-market buyback if you’re in pension phase in his Switzer Super Report article [8] this week.

Food for thought

Education is not preparation for life, education is life itself – philosopher and education reformer John Dewey.

Last week’s TV roundup

Is there anything Domino’s Pizza can’t do? After full year underlying net profits hit $45.8 million – that’s an increase of 50.4% on the previous year – CEO of Domino’s Pizza, Don Meij, explained their fairy-tale performance [9]and the rate at which the company is growing. He also explained their new ‘’Pizza Mogul’’ app where you can create, name and then order your very own pizza – imagine that! Hmmm, pizza.

SEEK share prices experienced a blip this week, and full year net profits fell 35%, but week in week out the company has been celebrated by brokers everywhere as it continues to deliver the goods. To explain the events behind SEEK’s performance this week, CEO and co-founder Andrew Bassat joined Super TV. [10]

And just when you thought retail was dead, Super Retail Group’s CEO Peter Birtles [11] shared his super retail secrets with me after their great earnings report.

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.

This week the biggest mover was Monadelphous (MND) which had its short position decrease by 3.34% to 7.86%.

Source: ASIC

My favourite charts:

Is business on the comeback trail?

Source: CBA

The above graph shows the Commonwealth Bank Business Sales Indicator (BSI) since January 2004 – it’s a measure of spending across the economy, and in July, it grew for the 36th month straight!

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