FYI | Jul 27 2016
By Peter Switzer, Switzer Super Report
With a nice rally for stocks still in train and the US stock markets in record high territory, are we getting close to a “sell everything!” situation? The AFR’s Christopher Joye used the “Sell Everything…” headline over the weekend but he did throw in “…not just yet.”
Early in 2016 the chief credit strategist at RBS, Andrew Roberts, told his clients and the world listened to “sell everything except high quality bonds” and this added to the stock market turmoil that lasted until around February 12.
Now the advice in early January was OK but he did not come back and tell us all to buy again in late February, so the sellers have missed out on about a 16% gain before dividends and franking credits.
Of course, some people might have done OK out of his call but let’s put it into perspective.
On December 31, our S&P/ASX 200 index was at 5,319.9 and by the time Roberts’ note went public on January 12 the market was at 4925.1, so he had missed 7.4% of the fall, and the closing low was only 4,765, so he only saved his followers 3.2% before the market turned around to climb 16%.
If someone had spent the period from January to now sailing the islands of the West Indies, ignoring the money world, and had just come back to the real world of high finance they would have been pleasantly surprised to learn that their portfolio is up 3.3% before dividends and franking credits, provided that their stock of stocks is as good as the index.
And in reality that should be the goal of a wealth-builder.
It clearly is a goal to one day warn you that I’m so worried about economic and market developments that I feel compelled to write and say “sell everything”, but it is such a big call that I will have to be unbelievably committed to the facts that drive such a conclusion.
I recall in September 2007 when the Shanghai stock market was highly volatile, my king of charts buddy Lance Lai contacted me with concerns that his technical analysis was worrying him. I, along with most of the world of experts, was blindsided by the reports out of the credit rating agencies that totally misrepresented the risks around sub-prime loans but it shows you how tricky this big call stuff can be.
I recall doing a lecture tour for a big four bank and I was asked to use the chief economist’s charts while making my own conclusions. The only chart I questioned him over was the forward P/E for the US market that had been ripping along but he stood by his calculations.
I think that if he had been given warnings from the credit rating agencies about the potential problems around sub-prime loans he might have been more cautious about the stock market going forward then.
Sure, we have an enormous load of debt out there and that could be the sub-prime curve ball of tomorrow but so long as interest rates remain so low, I think there is potential for global economic growth and market rises as well.
Sometime over the US earnings season I wouldn’t be surprised to see a pullback. So far reporting has seen 65% of S&P 500 companies beat expectations but with the Dow and the S&P 500 index at all-time highs, you have to expect profit-takers could easily do what they do, especially as the November 8 US election draws closer.
Markets can be hard to understand with iron ore up around 28% in 2016 while oil has made supporters about 11%. And as Chris Joye points out, even Aussie house prices are up 7.8% if you throw in rents. Given the efforts by the RBA and APRA to hose down the heat in the property market, that has been a pretty good effort.
While I worry about the debt growth, it’s the economic growth that keeps my concerns contained. Art Hogan of Wunderlich Securities in the US gave this to CNBC: “To me the macro picture is improving here and in Europe —that whole conception that Brexit’s going to happen and we have to go into recession is disappearing.”
He said this on the day it was reported that American manufacturing in July hit its best level since October. The purchasing manager’s flash index from Markit went to 52.9 from 51.3.
Working against my concerns about the Dow Jones and S&P 500 being in record high territory and how these developments increase the likelihood of a pullback is the fact that the Russell 2000 is still not at all-time highs. It is up 6% this year, but has some way to go before it tops its best reading.
The overall feeling by experts who expect a pullback is that the current rally has a little more to run and I think that should create space for our earnings season to kick in some more positivity.
And while the “sit tight” and go with the flow experts support stocks in the short run, the biggest negative I have heard lately has been Cornerstone Macro’s Carter Worth who does not like the charts on oil.
But charts are not always right and fundamental analysis by Tapstone Energy’s CEO Tom Ward thinks US production will not easily spike in the short-term and so he thinks the oil price can go to $US70 a barrel by the end of the year.
I don’t want higher oil prices for my driving budget but my stocks going up is a higher priority, so I hope Tom is more on the money than Carter.
As you can see, the time for a “sell everything” call is not here just yet but let me assure you when the facts and the charts stack up, I will make the call.
My big watches remain a growing USA and eventual rising bond yields, better growth signs out of Europe as well as Japan, while China just defying gravity on growth would be OK. And I’d prefer no President Donald Trump but I have to say that the argument that such an outcome would bring a central bank reaction greater than the Brexit shock which would actually be good for stocks, has a weird appeal.
That said, I resist believing in this possibility.
Donald as President could easily bring out a lot of “sell everything” calls.
Until that happens I am expecting not the unexpected, but the expected, and I hope I’m on the money.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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