Switzer on Saturday

Tricky Trump trade talk teasing the stock market

Founder and Publisher of the Switzer Report
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A surprisingly strong trading session on Friday took the S&P/ASX 200 index to a two-month high of 5905, after rising 39 points (or 0.68%) on the last day of the week. And as Paul Rickard and James Dunn predicted in this Report a few weeks ago, interest rate sensitive stocks are in favour, as bond yields are still on the slide.

However, one income-related stock, AMP, had a shocker, after the company announced the final half-year dividend would be cut from 14 cents to 4 cents to cover ‘fix up’ fees for remedying its past mistakes with customers. The Royal Commission strikes again.

It hasn’t been a great week for some financials, with Challenger down 18% plus over the week, after the company fessed up to a shocker of a December quarter, thanks to the stocks’ sell off.

Economically, it was interesting that “the Australian dollar rose in the immediate aftermath of a better-than-expected labour market report for December with unemployment back down to 5 per cent,” said National Australia Bank’s David De Garis. (AFR).

While some local issues have minor relevance to what we’re seeing with stocks right now, though reporting season and the Royal Commission recommendations are both out next month, the major force for stocks is coming from the US. And overnight we learnt President Trump was to announce temporary plans to reopen closed government departments, though the related funding doesn’t bankroll a Mexican wall!

It looks very likely that US stocks will clock up a fifth week of gains and underlines that while the market has some enduring concerns, such as the trade war, the Fed and rate rises and the US and global growth downgrades, there’s still not a structural fear about companies and their ability to make profits.

That said, this could turn on a dime, as the Yanks love to say, if relative optimistic expectations about how those “enduring concerns” play out, end up seriously negative. Tech stocks always gain when better news shows up and the temporary solution to the shutdown revelations helped FAANG-type stocks head higher. Imagine what a trade deal could do if something can be inked next month!

On that subject, and Treasury Secretary, Steve Mnuchin, added to positivity by telling the market that on trade with China, both sides were “making a lot of progress.” (Reuters)

This comes as the Trump team continues to give conflicting signals over the US-China negotiations.

On Tuesday, US share markets fell for the first time in five sessions on concerns about a slowdown in the global economy caused investors to take profits. And why wouldn’t they, when there has been a 13% plus rally since Christmas Eve! Not helping was a report that the US turned down China’s offer of preparatory trade talks but this was later rejected as not correct.

Then, on Wednesday, President Trump said that the US was “doing well” in trade talks with China and the market liked what they heard but on Thursday, sentiment was dented, following comments from US Commerce Secretary, Wilbur Ross, who said that the US and China were “miles and miles away from a trade agreement”!

But then Mnuchin put out his lots of “progress” comments and you wonder why I say this is the hardest US President and political team ever to read for money-making reasons!

Underpinning this market move upwards is a pretty good reporting season so far. Before the overnight trade, (according to Refinitiv data), of the 97 S&P 500 companies that have reported fourth-quarter results, 75.3% have topped profit estimates. That’s promising and is at odds with the extreme sell off we saw pre-Christmas.

Shares in IBM rose 8.5% after its profit beat analyst forecasts. Shares in United Technologies rose by 5.4% and shares in Proctor & Gamble rose by 4.9% in response to their earnings results.

Overnight, Intel beat expectations on earnings but not revenue. That shouldn’t surprise too many, as Intel has its stuff inside a lot of the stock that tech companies sell to China and there’s a trade impasse not helping at the moment. I liked seeing Starbucks’ revenue up 9% for the same period last year.

Next week will be a big week for economic data both here and abroad. We get inflation, credit numbers and home prices for January, while the Yanks get retail, consumer confidence, manufacturing and job numbers. There will also be the latest economic growth numbers and the Fed meets. Throw in more company reporting and if the news is better than expected, this rally could go into a sixth week! That said, a lot of experts think the December lows could be retested but I think the Trump team could determine that unwanted outcome.

What I liked

  • Employment rose by 21,600 in December after a revised 39,000 increase in jobs in November (previously reported as a 37,100 increase in jobs). Full-time jobs fell by 3,000 but part-time jobs rose by 24,600. Economists had tipped an increase in total jobs of around 18,000. (December is the month for part-time work but, importantly, the jobs market isn’t looking sick.)
  • Unemployment fell from 5.1% to 5% in seasonally adjusted terms. In trend terms, the jobless rate remained at a 10-year low of 5%. The participation rate fell 0.1 but the lower jobless rate is good psychology.
  • The Internet Vacancy Index rose by 0.7% in trend terms to 9-month highs in December. It was the third straight gain in the trend index. The index is 1.4% higher than a year ago and 31.4% above its October 2013 low. In seasonally adjusted terms, there were 185,547 skilled job vacancies in December – the highest level in 6½ years
  • The Commonwealth Bank Business Sales Indicator (BSI), a measure of economy-wide spending, rose by 0.4% in trend terms in December. While this result is in line with the long-term average monthly growth pace, the performance was more mixed across sectors.
  • In November, passenger numbers were up 0.2% on a year ago, while capacity fell 1.3%. So the load factor on planes hit a 10-year high of 83.3%.
  • The Chinese economy grew at a 6.4% annual rate in the December quarter. The economy grew 6.6% in 2018 – not great numbers but they hardly scream: “Be very scared!”
  • The Markit flash composite index in the US rose from 54.4 to 54.5 in January (forecast 54.2), with any number over 50 indicating expansion
  • Oil prices are on the rise, which, for complex reasons, helps the US stock market.

What I didn’t like

  • The euro area saw its Markit composite index slip down from 51.1 to 50.7 in January.
  • Corporate updates were generally negative, including those from UK bank, Metro Bank, French payment group Ingenico and chipmaker supplier ASML Holdings.
  • US existing home sales fell by 6.4% to a 3-year low of a 4.99 million annual rate in December (forecast -1% to 5.25 million).
  • The weekly ANZ-Roy Morgan consumer confidence rating fell by 0.9% to 115.7, however the reading was still above the average of 114.3 held since 2014 and higher than the longer term average of 113 held since 1990.
  • Total new lending commitments (housing, personal, commercial and lease finance) fell by 0.7% in November to $69.9 billion. Lending is down 6.5% on the year, which isn’t as dramatic as you might have thought, given all the post-Royal Commission talk about banks playing hardball with loans.
  • The IMF’s downgrade for global growth from 3.7% to 3.5%.The drop is small but the market reaction was excessive and the related fear only lasted a day!

What’s in Trump’s tactics?

This week, White House economic adviser Kevin Hassett warned that the government shutdown could result in the economy contracting in the March quarter and, overnight, we saw a temporary deal to get the government operating properly again. Second-guessing Donald Trump in the short term is very hard but, long term, he can’t have a recession and a stock market crash so inevitably he has to help the economy and stocks. Sure, he could screw up splicing his political plays with the serious world of making profits, goods and services, as well as jobs. But that’s a part of our ‘punt’ when we give up the safer world of term deposits and government bonds.

Have a happy Australia Day!

The Week in Review:

  • I looked at the ASX 21 to 50 stocks to see which ones analysts believe have potential for double-digit gains.
  • Charlie Aitken believes we could see a retest of the December lows over the next few months, which would be a tremendous buying opportunity in high quality long duration companies that are rarely on sale, including Aristocrat Leisure.
  • Last November, 530,915 Aussies became shareholders in Coles, making it one of the most widely held stocks. Here’s what Paul Rickard had to say about buying, selling or holding this stock.
  • Julia Lee told us which stocks are affected by the current Aussie housing market and where she sees an opportunity.
  • While there are big headwinds against shares, Tony Featherstone wrote that one funeral operator stands out: Invocare.
  • In the first Buy, Hold, Sell – what the brokers say this week, there were 16 upgrades versus nine downgrades from analysts last week, and in the second edition there were even more upgrades and downgrades.
  • For Stock of the Week, Managing Director at Medallion Financial Group, Michael Wayne, explained why he likes accounting software company Xero.
  • Out hot stock from CMC Markets’ Chief Market Strategist, Michael McCarthy was Ramsay Health Care.
  • And in Questions of the Week, we answered readers’ queries about franking credits, a listed investment company and an ETF that aims to maximise yield.

Top Stocks – how they fared:

What moved the market?

  • The International Monetary Fund downgraded its prediction for global growth in 2019 from 3.7% to 3.5%.
  • 76% of the S&P 500 companies that have reported in the US fourth quarter earnings season so far have beaten estimates.

Calls of the week:

  • In his analysis of Aristocrat Leisure, Charlie Aitken wrote: “I don’t believe there’s any great rush to do anything and that patience in times of volatility will be rewarded.”
  • Paul Rickard believes that Coles will be a buy, but not yet.

The Week Ahead:

Tuesday January 29 – CommSec State of the States
Wednesday January 30 – Weekly consumer confidence
Wednesday January 30 – Consumer Price Index (December quarter)
Thursday January 31 – Export/import price indexes (December quarter)
Thursday January 31 – Private sector credit (November)
Thursday January 31 – Detailed jobs data (December)
Friday February 1 – Producer Price Indexes (December quarter)
Friday February 1 – CBA/AiGroup indexes (January)
Friday February 1 – CoreLogic home value index (January)

Overseas (US release dates subject to change)
Monday January 28 – Chicago Federal Reserve national activity index
January 29-30 – US Federal Reserve meeting
Tuesday January 29 – US S&P/Shiller home prices
Thursday January 31 – China purchasing manager indexes (January)
Thursday January 31 – US Personal income/spending (December)
Friday February 1 – US ISM manufacturing (January)
Friday February 1 – US Non-farm payrolls (January)
Friday February 1 – US Auto sales (January)
Friday February 1 – China Caixin manufacturing (January)

Food for thought:

“Life has its ups and downs but you can only look forward.” – Frank Lowy

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:

This chart from AMP Capital tracks the IMF’s recent forecasts for global growth:

Source: IMF, AMP Capital

Top 5 most clicked:

Recent Switzer Reports:

Monday 07 January: Brimming with stocks to check out

Thursday 10 January: Charlie’s back!

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.