Switzer on Saturday

Trade deal optimism continues to rise

Founder and Publisher of the Switzer Report
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Wall Street was positive overnight, with company earnings and trade deal optimism driving stock market indices higher.

For most of this week, investors remained optimistic about China-US trade talks, while hopes that the UK could avoid a disorderly Brexit from the EU also buoyed confidence.

Personally, I can’t get excited about Brexit because the Poms in the House of Commons remind me of out-of-touch debating schoolboys, who seem mindless about the economic implications for their fellow Brits, businesses and jobs – let alone the economies of the rest of the world. On this subject, I’ll keep my fingers crossed but it’s not what I call a mature investment strategy and it’s why my exposure to UK and European stocks is limited.

To the US and you should love this headline from CNBC this morning: “US and China are close to finalizing some sections of the trade deal…” I’ve been arguing that the White House economics team led by Larry Kudlow has been putting out positive messages to the media. It has to be doing this because Larry knows the Yanks can’t drag this trade war out because both the US and global economies are very vulnerable and need a shot-in-the-arm of confidence that a trade truce, a trade war de-escalation and, eventually, a real trade deal would deliver.

I suspect the Chinese see the need for a workable solution as their economic growth trends down to 6%, which was below expectations.

Helping stocks overnight were good company reports from Intel, which is critical to the IT sector, given the computer-dependence on this company’s products. Also, Visa beat on both the top and bottom lines and gave a good account of what it expects the US consumer would be doing going forward.

This is a bellwether company for the consumer and when Wall Street combined that news with the latest overall summary of reporting season, with 38% of companies showing their results, the fact that 78% had beaten expectations supported those market players, who remain positive on the US economy and being long stocks.

Back home and we registered a positive week, with the S&P/ASX 200 Index rising 89.5 points (or 1.3%) to 6739.2. And that was five days in a row, which hasn’t happened since July.

Anyone not sure if I’ve been on the money being positive on stocks should look at this from yesterday’s AFR.

“Year-to-date, the market is up 23 per cent and this has been a really, really strong year for Aussie equities,” said T. Rowe Price head of Australian equities Randal Jenneke. “Valuations are fine because the reality is rates are zero and in a world of zero interest rates, a market trading on 15 times is not expensive. Equity markets look pretty good.”

What he’s basically saying is that we compare stock market returns to benchmarks like term deposits and because they are so low, a market with a P/E of 15 doesn’t look too dear.

In the normal stock market world, when a stock or market got to a P/E of 20 and term deposits were 5%, I’d ask why take a risk on a market at 20 when I can get a safe 5% in a term deposit?

I think a market at 25 would still be attractive with term deposits around 2%!

One thing I have to agree with Mr Jenneke is that a pullback is possible after a 23% rise and any silly trade or Brexit development or a bad economic reading could do that. However, if that happens, I’ll probably tell you that’s it’s another “buy the dip” opportunity.

Iron ore stocks did well this week, following more bad news for Vale and its tailings dam problem. BHP rose 2.8% to $35.77 and Rio added 3.3%.

Better Brexit news was good for CYBG, which put on 9.8%.

I loved the fact that JB Hi-FI continues to report well to stick it to the short sellers and also loved the banks all sneaking higher. A trade deal will be good for our economic growth outlook and bank share prices.

And what a tragic week for Wisetech, with one wit using the Wise-wreck headline. The company lost 12.1% for the week and there is a case building that ASIC should vet these sensational reports from hedge funds and especially those overseas, where legal action for false reporting is virtually impossible.

Obviously, if your favourite tech stock copped it this week, it was probably because of the knock on effect. I noted even Xero was down 4.1%, which I’m sure is because it’s in the local WAAAX stocks fraternity.

What I liked

  • Of the 87 regions used to track unemployment, 33 have a jobless rate either at or below the Reserve Bank’s 4.5% ‘target level’.
  • Both manufacturing and the services sector continue to expand but at a slightly slower rate. The CBA ‘flash’ purchasing manager survey for manufacturing fell from 50.3 to 50.1 in October. The services index fell from 52.4 to 51.8. And the composite reading eased from 52 to 50.7. Any reading above 50 indicates expansion of activity.
  • Consumers getting a little more confident, with the weekly ANZ-Roy Morgan consumer confidence rating rising by 0.6% to 111.6 points. However, sentiment is below the average of 114.4 points held since 2014 and the longer-term average of 113.1 points since 1990.
  • The measure of whether it was a ‘good time to buy a major household item’ rose by 5.1% to 28.1 points – the highest level in 7 weeks – but still below the longer term average of 32.6 points.
  • Trade talk positivity, with White House economic adviser Larry Kudlow saying that tariffs on China that are scheduled for December could be withdrawn if trade talks continue to go well.

What I didn’t like

  • The Brexit balls up! Who is really surprised that UK politicians, who do the best impression of a group of snotty, dull-witted toffs and who speak like they are well educated, but on their collective actions show they are dopes when it comes to leading a country, an economy and a business sector!
  • In trend terms, the Internet Vacancy Index decreased by 0.7% in September – the 9thsuccessive monthly fall. The index is 7.1% lower than a year ago – the biggest annual decline in 5½ years. But the index is 8.1% above the level recorded five years ago.
  • How are we flying? Rolling annual passenger growth on the Sydney-Melbourne route is at 7-year lows but there were 5.43 million passengers carried on Australian domestic commercial aviation (including charter operations) in August 2019, an increase of 0.4% on August 2018.
  • Durable goods orders fell 1.1% in September, notching their largest drop in four months. The drop in orders comes as the world struggles with a global manufacturing slowdown.
  • The Institute for Supply Management said earlier this month that manufacturing activity in the U.S. fell to its lowest level in a decade.
  • US consumer sentiment dipped slightly in October to 95.5, according to the University of Michigan’s Surveys of Consumers.

Can’t wait for November and Cup Day

You have to be happy that the trade war/deal rhetoric is becoming increasingly more positive. The days ahead I’m looking forward to are November 15-17, when APEC meets in Chile, and that’s when a trade deal should be inked, if you can believe the current messages coming out of the White House. Clarity on the Chinese position is less certain but we’re heading in the right direction.

If we can see some better economic readings locally, and there are some small positive signs, and if this trade deal talk remains optimistic, then I bet the Reserve Bank gambles on Cup Day and doesn’t cut rates again.

A trade deal could put paid to these crazy cuts. Fingers crossed!

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The week in review:

Top Stocks – how they fared:

The Week Ahead:

Monday October 28 – State of the States
Tuesday October 29 – Speech by Reserve Bank Governor
Wednesday October 30 – Consumer price index (September quarter)
Thursday October 31 – Export & import prices (September quarter)
Thursday October 31 – Private sector credit (September)
Thursday October 31 – Building approvals (September)
Friday November 1 – CoreLogic Home Value index (October)
Friday November 1 – CBA/AiGroup purchasing surveys (October) 

Monday October 28 – Chicago Federal Reserve index (September)
Tuesday October 29 – US S&P/CaseShiller home prices (August)
Tuesday October 29 – US Pending home sales (September)
Tuesday October 29 – US Consumer confidence (October)
October 29/30 – US Federal Reserve rates decision
Wednesday October 30 – US Economic growth (September quarter)
Wednesday October 30 – US ADP employment (October)
Thursday October 31 – US Personal income/spending (Oct)
Thursday October 31 – US Challenger job cuts (October)
Thursday October 31 – China purchasing manager surveys
Friday November 1 – US Non-farm payrolls (October)
Friday November 1 – US ISM manufacturing (October)

Food for thought:

“October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

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:

In Westpac’s Red Book analysis of the Westpac-Melbourne Institute Index of Consumer Sentiment, they noted that consumers recalled news stories on interest rates, unemployment, budget & tax, economy and overseas more unfavourably compared to three months earlier:

Top 5 most clicked:

Recent Switzer Reports:

Monday 21 October: 2 stocks to watch; a2 Milk; 2 small caps

Thursday 24 October: Iron ore and A-REITs

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.