Switzer on Saturday

Warning: What you’re about to read will shock you!

Founder and Publisher of the Switzer Report
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Friday Close
Change
Change %
Week Change %
Dow Jones
27,110.98
829.16
3.15%
6.81%
S&P 500
3,193.93
81.58
2.62%
4.91%
NASDAQ
9,814.08
198.27
2.06%
3.42%
ASX 200
5,998.70
6.90
0.12%
4.22%
Data for week commencing 01 June 2020

What I’m about to write is staggering! A little more than an hour before the close, The Dow was up over 1,000 points! And while the Yanks can get excited about anything, this time there was a real reason, with the US payroll numbers revealing that 2.5 million jobs were created in the ‘merry’ month of May! Economists had been tipping, wait for it, a loss of 8 million jobs! (Sorry for the exclamation marks but they’re deserved.)

But wait, there’s more.

Unemployment came in at 13.3% but, once again, economists expected a very different result, with a 20% jobless rate tipped!

If anyone was ever wondering what a V-shaped economic recovery looked like, well, now you’re seeing it! It has to mean the reopening of the economy and the related growth in goods and services produced is resulting in a much quicker jump in the demand for labour than anyone expected.

Given this big miscalculation by economists, you have to think that there could be an error. Maybe too many statisticians are using home computers and their kids have screwed around with the data. But I jest.

“The unemployment rate was solid; the participation rate was higher. This checks all the boxes for a solid report,” said Drew Matus, chief market strategist at MetLife Investment Management to CNBC. “So even though this was coming off a horrendous report the previous month, there’s nothing that screams this is some sort of error that can be ignored. If anything, it suggests we should be looking for more good news next month.”

Gotta hope he’s right.

And if you want a V-shaped stock recovery, check out the Nasdaq Composite.

Our market won’t be able to ignore this unbelievable news on Tuesday so market bears are going to have a restless long weekend. This has to be good for bank stocks, as there will be many economists wondering if our jobs rebound will also end up being a big surprise to them.

This week, Citigroup was up from US$48.36 to US$58.83, which was a rise of 21.6%!

This is such good news. But what could derail this unbridled optimism? Well, as this is linked to a reopening of the US economy, a second-wave of infections that reimposes closures and lockdowns would send stocks plummeting. And earnings season in the US looms and the numbers are bound to be more shocking than these surprisingly good job figures.

On the local front, banks had a good week, which partly explains why stocks gained for the sixth week in a row. The S&P/ASX 200 Index was up 4.2% for the week, and in case you haven’t been counting, that’s a 32% gain since the March low.

Banks gain when the economic outlook improves, so if we can count on some positive employment surprises, our stock market will react like Wall Street. In many ways, the power of the rebound will be linked to what State Premiers decide with regards to letting their economies click the back-to-normal switch.

The AFR reported that UBS bank analysts upgraded Westpac and NAB to “buy”, saying that in a good environment credit losses could fall back to mid-cycle levels by financial 2022 and risk-weighted asset inflation may begin to normalise.”

And those small bank doubters would be surprised at Bendigo and Adelaide Bank, up 19% to $7.32 and Bank of Queensland put on 17.2% to $6.21.

Other good performers included the travel industry stocks, with Flight Centre up 17.7% and Qantas rose 16%.

Later in the week, tech stocks lost out to the rotation, with profit-takers sending their money elsewhere. But Zip Co had a good one, up 13.4% but at one stage surged 68%! The rest of my ZEET stocks (ZEET is my new acronym for Zip Co, Elmo, EML Payments and Tyro) had an up-week but they all suffered from profit-taking after an early surge. But that’s the stock market.

It was a rough week for gold and it won’t get better next week, with this surprisingly good jobs number in the US bound to make the safe haven play less attractive.

What I liked

  • The Australian economy contracted by 0.3% in the March quarter (consensus -0.4%) but considering the bushfires plus the Coronavirus, it was a good small decline. It was the first fall in output in nine years and the economy grew 1.4% over the year. However, the June quarter will be very bad.
  • The weekly ANZ-Roy Morgan consumer confidence rating rose by 6% to 98.3 points (long-run average since 1990 is 112.9). Sentiment has lifted for nine successive weeks, which is the longest stretch on record since hitting record lows of 65.3 points on March 29 (lowest since 1973).
  • Those US job numbers and the ADP job report on Thursday indicated that private-sector payrolls fell by 2.76 million in May but the forecast fall was 9 million jobs, so this was giving us a clue that something strange was developing.
  • The trade surplus eased to $8.8 billion in April (consensus $7.5 billion surplus) from a record high of $10.4 billion in March (previously $10.602 billion). The rolling annual surplus was a record high of $76.1 billion in the year to April, up from $71.8 billion in March.
  • The Federal Government has announced a $688 million ‘HomeBuilder’ stimulus package that will offer one-off $25,000 cash payments to eligible owner-occupiers and first home buyers from July 4 to December 31 this year to entice investment in the sector. It wasn’t a great package but it’s a plus for the economy.
  • The ISM Services Index in the US rose from 41.8 to 45.4 in May (forecast 44).
  • The ‘final’ CBA/IHS Markit Services Purchasing Managers’ Index (PMI) rose to 26.9 points in May from a record low of 19.5 points in April (since May 2016). Any reading below 50 indicates a contraction in activity.
  • The AiGroup Performance of Construction Index (PCI) rose from a record low of 21.6 points in April (lowest since September 2005) to 24.9 points in May. Readings below 50 indicate a contraction of activity.
  • The RBA didn’t cut interest rates and Dr Phil Lowe ruled out negative interest rate nonsense.
  • The broadest measure of international trade – the current account – was in surplus by a record $8.395 billion in the March quarter in seasonally-adjusted terms. It was the fourth successive surplus. Over the year, the surplus was a record $22.246 billion. Net exports (exports less imports) will add around 0.5 percentage points to economic growth in the March quarter.
  • The CoreLogic Home Value Index of national home prices fell by 0.4% in May – the biggest decline in 12 months but it was a small drop. Home prices were still 8.3% higher over the year.
  • The AiGroup’s Performance of Manufacturing Index rose by 5.8 points in May to 41.6 points.

No dislikes

I know historically I’ve looked at What I Like and What I don’t like but any economic number from the months of April and May have to be very bad because of the artificial effects of the lockdown and closures.

When the June data comes through, I’ll have to be objective again on dislikes because I’ll be looking for evidence of either a quicker-than-expected or a slower-than-expected improvement in key economic data. As you can see, above weekly consumer confidence is a ripper, positive indicator and even some of the negative reading, such as house prices, are so small they actually should be seen as a positive.

Let’s hope this trend continues.

If you missed yesterday’s webinar with Michael Wayne from Medallion Financial Group, click here to watch the recording.

Join our new weekly video meeting called Boom! Doom! Zoom every Thursday at 12pm AEST using this link. The link to join will remain the same each week, so be sure to add it to your favourites.

The week in review:

On our YouTube channel this week:

Top Stocks – how they fared:

The Week Ahead:

Australia
Tuesday June 9 – ANZ job advertisements (May)
Tuesday June 9 – NAB Business survey (May)
Wednesday June 10 – Weekly consumer sentiment (June 7)
Wednesday June 10 – Monthly consumer confidence (June)
Wednesday June 10 – Lending (April)
Friday June 12 – Credit & debit card lending (April)

Overseas
Sunday June 7 – China Trade balance (May)
Tuesday June 9 – US NFIB business optimism (May)
Tuesday June 9 – US IBD/TIPP economic optimism (June)
Tuesday June 9 – US JOLTS job openings (April)
Wednesday June 10 – China Inflation (May)
Wednesday June 10 – US Consumer prices (May)
Wednesday June 10 – US Budget statement (May)
June 9,10 – US Federal Reserve meeting
Thursday June 11 – US Weekly jobless claims (June 6)
Thursday June 11 – US Producer prices (May)
Friday June 12 – US Consumer sentiment (June)
Friday June 12 – US International trade prices (May)
Friday June 12 – China Money & lending (May)

Food for thought:

“Our job is to find a few intelligent things to do, not to keep up with every damn thing in the world.” – Charlie Munger

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:

The Australian economy contracted by 0.3% in the March quarter, marking the first contraction in nine years as shown in this chart from CommSec:

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.