Switzer on Saturday

Wall Street gets really positive! But can it last?

Founder and Publisher of the Switzer Report
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Friday Close
Change
Change %
Week Change %
Dow Jones
16,093.51
210.83
1.33%
0.66%
S&P 500
1,906.90
37.91
2.03%
1.41%
NASDAQ
4,591.18
119.12
2.66%
2.29%
ASX 200
4,916.00
52.00
1.07%
0.47%
Data for week commencing 18 January

With serial scare merchant, George Soros, trying to make the current sell off worse by telling us that Europe is about to break up and this is a China-created GFC rerun, it was good to see the European Central Bank boss, Super Mario Draghi, weigh into the market madness with a “don’t forget us” reminder. In case you missed it, he hinted that more monetary policy stimulus was possible and the market liked it.

This helped global stock markets and the Yanks celebrated again on Wall Street overnight, with oil’s price spiking. You can thank Mario Draghi and, possibly, the belief that Japan’s central bank will get stimulatory next week. Also, there would be less fear that the Fed will raise interest rates when it meets on Wednesday.

Yes, all it took was one word from Mario and oil spikes and stocks head up. However, I’m not getting carried away with only four good days for stocks in 2016, but it has proved my two main points that I’ve been arguing this year.

First, every time markets sell off too far, smarties come in and swoop – they know this is a buying opportunity and they don’t really buy the crap about a US recession and a Chinese hard landing.

Second, all we need is a bit more good news to offset the long list of bad news out there at the moment – much of which is based on negative speculation that could be proved wrong – and we could see a decent surge in stocks.

Next week brings a deluge of US big businesses reporting, with 402 companies up for show-and-tell, which could confirm concerns or hopefully blow them out of the water! You can guess what I’m hoping for and I’m also hoping that analysis is done that shows what’s happening to overall earnings, if you rule out non-energy companies, which get too much attention.

As I have argued before, eventually these lower oil prices have to be helping a whole pile of businesses and consumers out there and even the US Treasury Secretary, Jack Lew, said as much at the World Economic Forum in Davos this week.

I really hope this positive cost shock to business and the income boost to consumers right around the world actually powers better growth than is currently expected.

But for now, I’m not getting carried away as the rallies haven’t been hugely convincing, so that means the hedge funds and other short sellers, who now have control of stock markets, still have a shot or two left in the locker.

What I liked

  • Bloomberg analysis discounted George Soros’ hard-landing scenario for China. They think he’s looking at old indicators, such as manufacturing and ignoring new ones, such as the services sector as the economy rebalances.
  • The oil price fall is seen by some experts as a nice offset for the possibility of hyperinflation that could result if growth was hugely strong and oil prices were spiking. That’s an issue for 2017 or 2018, if my more positive views come to pass this year.
  • Shane Oliver of AMP thinks our dollar will eventually head towards 60 US cents, which will be bad for holidays overseas but great for stocks that are currency sensitive, as well as the economy.
  • Super Mario’s promise to review monetary policy at the ECB’s upcoming meeting, which is code for ‘stand by for stimulus’.
  • We didn’t hit a 20% bear market, with our stocks down 19% but Japan went down 23% and Eurozone shares have lost 22%.
  • Chinese economic data for GDP, retail, industrial production, etc. weren’t as bad as doomsday merchants predicted, so, of course they raised doubts about the data. Why do they only believe the data when it’s bad? Hmmm.
  • This from Shane Oliver: “… signs of extreme pessimism and investor capitulation are continuing to build, with our investor sentiment index on US shares nearing levels associated with bounces.”
  • The Philadelphia Federal Reserve index, which surveys manufacturing, improved from minus 10.2 points to minus 3.5 points in January.
  • US earnings season has actually started pretty well, despite the expectations that it will be a shocker. The energy story will hurt the overall earnings numbers but big name companies from Goldman Sachs to Bank of America to Citigroup to even IBM have done better than expected.
  • In Australia, there were 33,713 homes in the September quarter that had been approved for construction but where work hadn’t commenced, down 2% from record highs, which has to help growth in 2016.
  • The BHP bounce back of 7.46% yesterday!
  • The 5% plus rise in the Japanese stock market on Friday, with talk of more central bank easing next week – they needed that!
  • The Markit Flash Manufacturing PMI for the US came in at 52.7, which beat December’s 51.2 (anything over 50 equals expansion).

What I didn’t like

  • The oil price plunged to a new low of $US26.6 during the week but, thankfully, it was over $US31 overnight.
  • Wall Street is down about 13% and is still seen as overvalued, so if they sell off again, we could sneak into bear territory on a “follow the leader” basis.
  • Most mornings when I woke up and didn’t see green on the screen for US stock market indexes but instead it was red when I tuned into US business TV!

By this time next week, there will have been a lot of economic data revelations, central bank decisions and US company reports, so I hope we will be celebrating a decent turnaround in market sentiment. I’d really love to tell George Soros to eat my shorts and shut the f… up! But maybe that is going too far!

Top stocks – how they fared

Company
Friday Close
Change on Week
Change on Week %
S&P/ASX 200
4916.0
23.20
0.47%
Consumer Staples
Coca-Cola Amatil
$8.21
-$0.06
-0.73%
Wesfarmers
$41.77
$2.45
6.23%
Woolworths
$23.89
$1.23
5.43%
Energy
Santos
$2.84
-$0.03
-1.05%
Woodside
$25.45
-$1.54
-5.71%
Financials
AMP
$5.27
$0.02
0.38%
ANZ
$23.35
-$1.56
-6.26%
CBA
$76.56
-$2.32
-2.94%
NAB
$26.92
-$0.09
-0.33%
Westpac
$29.93
-$1.16
-3.73%
Health
CSL
$107.24
$3.96
3.83%
Industrials
Brambles
$11.00
$0.35
3.29%
Transurban
$10.58
$0.45
4.44%
Materials
BHP
$15.26
$0.19
1.26%
Rio
$39.65
$0.14
0.35%
Property
Westfield
$9.78
$0.45
4.82%
Telco
Telstra
$5.54
$0.21
3.94%
Utilities
AGL
$18.25
$0.59
3.34%

The week in review

(click the blue text to read more)

  • This week I told you what we need to turn this negative market sentiment around.
  • Paul Rickard updated our SSR growth-oriented portfolio to reflect our view on the key investment themes set to play out in 2016.
  • Roger Montgomery explained why the value of Chorus (CNU) has ample opportunity to rise.
  • The brokers upgraded AGL Energy and Alumina, but downgraded South32. In our second broker report for the week, a number of A-REITs were upgraded including Charter Hall Retail (CQR), Dexus Property Group (DXS) and Westfield Corp (WFD).
  • Tony Featherstone revealed three strong performers beneath the retail gloom including Nick Scali (NCK), RCG Corp (RCG), and Premier Investments (PMV).
  • Our guest contributor Randal Jenneke said Australia is more than just a resources story, with more important drivers of growth giving investors a reason to remain positive!
  • Barrie Dunstan is back and with a good message – SMSF investors need to remember to stick with a long-term strategy for their portfolio.

What moved the market

  • The S&P/ASX 200 reacted positively after key economic data from China was released. The GDP figure came in at 6.8% annual pace in quarter four – in line with forecasts – while retail sales increased 11.1% year on year.
  • The local market moved higher on the back of investors snapping up bargains in the health and telecommunications sectors.
  • The oil price continued to rattle global markets this week, but enter Super Samurai Mario Draghi, who pledged to review the ECB’s monetary policy at the next meeting. This sent the oil price, and stocks, higher!

The week ahead

Australia

  • Wednesday January 27 – NAB Business survey (December)
  • Wednesday January 27 – State of the States (January)
  •  Wednesday January 27 – Consumer price index (December qtr.)
  •  Thursday January 28 – Import & export prices (December qtr.)
  • Friday January 29 – Producer price index (December qtr.)
  • Friday January 29 – Private sector credit (December)

Overseas

  • Tuesday January 26 – US Home prices (November)
  • Tuesday January 26 – US Consumer confidence (January)
  • Tuesday January 26 – US Richmond Fed index (January)
  • Wednesday January 27 – US New home sales (December)
  • Wednesday January 27 – US Federal Reserve decision
  • Thursday January 28 – US Durable goods orders (December)
  • Friday January 29 – US Economic growth (December qtr.)
  • Friday January 29 – US Employment costs (December qtr.)
  • Friday January 29 – US Consumer sentiment (January)

Calls of the week

  • Woolworths made the call to axe its Master’s business. Read Paul Rickard’s analysis on why the company still has a little way to go.
  • Federal Treasurer ScoMo said investors shouldn’t fret about current market turmoil. On Sky TV he said Australians need to have faith in the fundamentals of our economy and said analysts should keep a “cool head”. I like his thinking!
  • And the IMF came out with its 2016 economic forecast. While it cut its forecast slightly from 3.5% to just 3.4%, it was still an improvement on 2015’s 3.1%! Growth is still there!

Food for thought

“The primary cause of failure is that they pay too much attention to what the stock market is doing currently”

– Benjamin Graham, American economist and investor

Last week’s TV roundup

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.

Primary Health Care once again had the highest proportion of its ordinary shorts sold short, increasing to 11.98% this week from 10.73% last week.

20160122-shortstockslarge

Source: ASIC

My favourite charts

Building boom!

20160122-housingstarts

A record 194,252 homes were being built at the September quarter – that’s the most in Australia’s history. CommSec’s Craig James says that anyone questioning the economy’s health should look at figures like these!

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