Switzer on Saturday

Wall St ignores the bad stuff. How come?

Founder and Publisher of the Switzer Report
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The local stock market was ‘Melbourned’ this week as the tragedy unfolding down south is hurting confidence at all levels, taking our market down 92 points (or 1.5%) for the week to finish at 5927.8.

Ironically we were up for the month (that’s four in a row) but the 123 point sell off on Friday has to make you ask (and worry) if this is a sign before reporting season hots up over August?

Our southern capital and its second-wave problem is being mirrored in Europe and the US so you have to wonder how long the stock market can remain relatively positive in face of this dam virus and some of the crazy behaviour that has been feeding this infection spread.

The Yanks too are resisting turning negative but things wouldn’t look too great if we’d never heard of the FAANG stocks.

Overnight, Apple reported a huge surge in profits, with sales up 11% and the company announced a 4-for-1 split. This is the fifth time the stock has been split and Apple investors will get three extra shares for every one share they own. This means the stock price will be divided by four, making it a $US100 stock.

Apple’s boss Tim Cook effectively explained the move suggesting that the lower price tag will attract investors who are spooked by the idea of buying a $US400 stock.

This kind of news helped stock market indexes go higher in the US but Europe is starting to worry about second-wave (or Melbourne issues). The pan-European Stoxx 600 lost 0.9%, which was the region’s first monthly drop in four months.

And the concerns about a rise in Coronavirus infections hit travel stocks, which are vulnerable to the re-instigation of border closures and lockdowns. Airlines easyJet and BA’s parent IAG were down 22% and 20% respectively.

This comes as the Eurozone contracted 12.1% in the June quarter. France was down 13.8% growth-wise, while Germany contracted 10.1%.

All this seems so logical, in contrast to the US, where investors are seemingly looking through bad news. This week they saw their economy contract by 32.9% and the respected University of Michigan’s consumer sentiment index came in at 72.5 for July, down from June’s 78.1 and below estimates of 72.7.

And I have to say that the Federal Reserve chair Jerome Powell didn’t help positivity, after leaving the target range for the federal funds rate at 0-0.25%, and then noting: “The path of the economy was extraordinarily uncertain.”

Helping is Congress debating the idea of sending every American a $1,000 cheque, so a family of four could pocket $4,000! And this won’t surprise you — President Trump wants the cheques to be bigger than the $1,200 proposed by the Democrats, saying: “I’d like to see it be very high because I love the people…I want the people to get it.”

On the local front, yesterday was a shocker, with the S&P/ASX 200 Index down 123.3 points (or 2%). That was the worst day for July, in a month where stocks were up 0.5%. This would have been a different story if Melbourne had dodged the COVID-19 bullet it now suffers from.

Recovery-related stocks have to be under pressure as economists have to rework their numbers on the September quarter, which now looks set to be negative and the degree to which our economy contracts and then rebounds in 2021.

Miners had a good month but none better than Fortescue, which rose 25.7% to $17.41 (don’t miss my interview this Monday night with CEO Elizabeth Gaines on Switzer TV investing on youtube). Rio was up but only 4.1% to $102 and BHP Group rose 2.6% to $36.75.

Mineral Resources (a stock we tipped you after the Hearts & Minds conference late last year) added 21.6% to $25.74!

The gold miners have had a great run over the month as infection concerns worldwide drove the price up, while hopes of a vaccine sooner rather than later have best explained why Wall Street fights negativity and gravity!

Banks struggled in July. The CBA did add 2.6% to $71.20 but Westpac lost 4.8% to $17.09, ANZ gave up 3.6% to $17.96, while NAB slipped 3.1% to $17.66.

One company that’s benefiting from the locked up, online-buying world is Goodman Group (GMG), as we’ve been telling you, as it’s a key warehouse supplier to online retailers such as Amazon. The company’s share price was up 14% for the month to $16.93, which was about 30 cents higher than it was before Covid struck.

I hate to rub it in but travel stocks copped it too. Webjet gave up 14.8% to $2.83, Qantas dropped 14.6% to $3.23, Corporate Travel was down 9.9% to $8.73, Sydney Airport lost 7.8% to $5.23 and Flight Centre was off 4.8% to $10.59.

Meanwhile, the buy now pay later (or BNPL) tech stocks like Afterpay and Zip were up around 10%.

What I liked

  • According to the Commonwealth Bank (CBA), card spending in the week to July 24 was up 9.8% on a year ago, compared to an 11.4% lift for the week ending July 17. Online spending rose 20.4% (previous week: +22.2%) and in-store spending was up 5.7% over the period (previous week: +7.4%).
  • Private sector credit (effectively outstanding loans) fell by 0.2% in June (the biggest decline in 27½ years) but was still up 2.9% on the year. Business credit was down 0.8%, which was the biggest fall in 9 years. (These aren’t positive numbers but they’re not as bad as they could be!).
  • US pending home sales rose by 16.6% in June (forecast +15%).
  • The Richmond Federal Reserve manufacturing index in the US rose from 0 to +10 in July (forecast +5). The S&P/Case Shiller measure of home prices rose by 3.7% over the year to May (forecast 4%). Prices rose 0.4% in the month.
  • The official China manufacturing purchasing managers’ index rose to 51.1 in July from 50.9 in June (consensus: 50.8). The services (non-manufacturing) gauge eased to 54.2 in July from 54.4 in June (consensus: 54.5). Any reading above 50 denotes an expansion in activity.

What I didn’t like

  • The weekly ANZ-Roy Morgan consumer confidence rating fell by 1.9% to a 13-week low of 89 (the long-run average since 1990 is 112.8). Sentiment fell for a fifth successive week but is still up by 36.3% since hitting record lows of 65.3 on March 29 (lowest since 1973).
  • The Consumer Price Index fell by 1.9% in the June quarter (consensus: -2%). It was the biggest quarterly fall for the CPI since 1948.
  • The Kepler index of retail sales activity reported that aggregate sales fell by 9% last week (July 26) and sales were down 6.7% on the year. Average transaction value rose 1.5% last week to be up 27.9% on a year ago.
  • The Bureau of Statistics (ABS) reported that between the week ending 14 March 2020 and the week ending 11 July 2020 employee jobs decreased by 5.6% and total wages decreased by 4.8%. Jobs fell mostly in Victoria (-7.3%).
  • US consumer confidence fell from 98.3 to 92.6 in July (forecast 94.5).
  • The US economy contracted by 32.9%, the biggest since records were kept in 1947. The only good news was that it was about 2% less than what economists expected!

The numbers say that we need a vaccine!

Clearly, the infection numbers (let alone deaths) in Melbourne (as well as those in Europe and the USA) are all saying that a quick economic rebound can’t be expected any time soon. And worryingly my “likes compared to dislikes” lists above confirm the reason for my negativity, with only five likes compared to seven dislikes.

This made me type “Vaccine news” into my search engine and The Guardian delivered with this headline: “Fauci ‘cautiously optimistic’ US could have vaccine by end of the year.”

Speaking to Congress, the USA’s top medico for fighting COVID-19 told us a vaccine by year’s end is a believable possibility. Let’s hope so because the world and stocks need one ASAP!

By the way, despite the bad news, the Dow Jones Index ended up 114 points — only in America!

The week in review:

Our videos of the week:

Top Stocks – how they fared:

The Week Ahead:

Monday August 3 – CBA & AiGroup purchasing managers (July)
Monday August 3 – CoreLogic Home Value index (July)
Monday August 3 – ANZ Job advertisements (July)
Tuesday August 4 – Reserve Bank Board meeting
Tuesday August 4 – Retail trade (June)
Tuesday August 4 – International trade (June)
Wednesday August 5 – Lending indicators (June)
Wednesday August 5 – New vehicle sales (July)
Friday August 7 – Statement on Monetary Policy
Friday August 7 – Speech by RBA official

Monday August 3 – China Caixin purchasing managers (July)
Monday August 3 – US Purchasing managers (July)
Monday August 3 – US Construction spending (June)
Tuesday August 4 – US Factory orders (June)
Tuesday August 4 – US IBD/TIPP Economic Optimism (Aug)
Wednesday August 5 – US ADP employment (July)
Wednesday August 5 – US ISM services (July)
Wednesday August 5 – US Trade (June)
Wednesday August 5 – China Caixin services (July)
Thursday August 6 – US Challenger job cuts (July)
Friday August 7 – US Non-farm payrolls (July)
Friday August 7 – US Consumer credit (June)
Friday August 7 – China Trade (July)

Food for thought:

“If you look around the room, and you’re the smartest person in the room, you’re in the wrong room.”– Lorne Michaels

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:

Top 5 most clicked:

Recent Switzer Reports:

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.