I’m Not Afraid And This Is How I’m Investing

By Peter Switzer, Switzer Super Report

Following the Fed boss Janet Yellen’s inept communication after the Federal Open Market Committee (FOMC) meeting last week, which sparked a sell off on global stock markets and even took our S&P/ASX 200 index below the 5000 level on Thursday, the most powerful woman in the world ‘unblotted’ her copybook.

She now tells us that a rate rise before year’s end is “appropriate” and so all that speculation of the Fed knowing something we don’t know looks like rubbish. Good on you, Janet!

Negativity rules

Right now, negativity has taken control and that’s why the Dow Jones one-year chart looks like this:
 

And Wall Street’s negativity, interest rate anxiety and China economic reservations gave a bad lead to our market and that’s why our one-year S&P/ASX 200 index looks like this:

Yep, we peaked in May and so did Wall Street and it’s been downhill sense with crappy commodity prices, Greece, China’s stock market and then China’s economy all giving markets good reasons to sell off. And then there has been this infernal wait for the Fed to raise interest rates.

This was expected to temporarily hurt stock prices being the first rate rise in nearly nine years for the Yanks, but it was tipped that it would then give way to rising stock markets because we’d all see that it was all about a better than expected US economy.

But recently, doubts have not only surfaced about China, but also the US, and both were seemingly related after Janet Yellen worried stock markets two weeks ago.

The Doomsday merchants have been in the ascendency and investor surveys show significant negativity but historically these have been a great contrarian signal!

Against that, we have this Reuters story, which the Wall Street Journal headlined as: “Wall Street braces for grim third quarter earnings season.” If this report is right, then these sell offs are simply reflecting these anticipated bad reports from top US companies. We have the same lower than expected earnings forecasts out there and it also explains why our market has done so badly.

Reuters says: “Forecasts for third-quarter S&P 500 earnings now call for a 3.9% decline from a year ago, based on Thomson Reuters data, with half of the S&P sectors estimated to post lower profits thanks to falling oil prices, a strong US dollar and weak global demand.”

Great growth

That oil play and weak global demand has not helped our stock market and meanwhile our economic growth is around 2.3% but against that, the Yanks latest growth reading for the June quarter was 3.9%, up from a preliminary reading of 3.7%.

This is great growth and if US growth of the September quarter is better than expected and company earnings aren’t as bad as tipped, then we could see a stock market turnaround before the year is up.

Let me point out that this 3.9% figure was upgraded twice! The first statistical guess was 2.3% but then it went to 3.7% and then on Friday we learnt it was more like 3.9%! That’s a big difference and so it’s not crazy to hope for some better than expected economic growth news from those irrepressible Yanks.

While company profits are important, so is economic growth and lately China is being seen as important for US growth, partly because big US companies sell a lot of stuff there. By the end of March this year, Apple had sold more iPhones in China than in the US, flogging 61.2 million against 37.2 million in the equivalent period of the year before. In the quarter before, Apple sold 74.5 million units!

Reuters did make this point: “The S&P 500 is down about 9% from its May 21 closing high, dragged down by concern over the effect of slower Chinese growth on global demand and the uncertain interest rate outlook. The low earnings outlook adds another burden.”

Charts experts at Slingshot Trader, John Jagerson and Wayne Hansen, explain the key influences on stocks like this: “What is surprising to many investors is that actual performance is not really a very good indicator for where a stock’s price will be following an earnings report. The outlook for future earnings are the key trend driver, which helps to explain why prices change.”

That’s what we will be watching when US reporting season starts on October 8, with Alcoa jumping out of the boxes. But is there any reason to believe that there could be some better than expected news?

Well, yes there is, with The Australian newspaper’s Victoria Thieberger reporting the Cleveland Federal Reserve president Loretta Mester, who strongly made the point, with a headline that screamed: “China decline fears ‘overblown’.”

The China syndrome

Mester points to what China has already done to stimulate its economy but it’s too early to expect instantaneous economic responses, though they could show up in coming months (if we’re lucky) or early in 2016.

On China’s threat to US economic growth and the American economy’s ability to cope with slowly rising interest rates, this is what the professional, economic expert, Mester, says: “I think some of the rhetoric has been overblown about how big a risk that is. It’s a risk but not a significant risk at this point.”

I really hope she has more insight than the self-interested hedge fund managers, who are often quoted in the media as if they are genuine experts on China!

If China proves to be less of a risk, as Ms Mester says, and our economy starts to react to our biggest positive force that has only recently emerged — our falling Oz dollar — then there’s scope for our market to rebound. I hope it starts in the November to December period but I can wait until early 2016 if necessary.

This chart, which has ruined many of our overseas holidays, axiomatically is helping our economy grow stronger:

This time last year, we were in the 90US cents region so we’ve been given a 22% improvement in our competitive advantage, which will help growth in 2016, so I expect stock market smarties to buy before reality is plain for everyone to see.

My personal plan

What am I doing investment-wise? I am buying BHP in the $22 or so range for the medium term but I bet I make money with it over the next 12 months. Every time the banks get clobbered, I want to be a buyer because I have always liked dividends from reliable dividend payers.

Some experts tip the banks will eventually disappoint on dividends but this has been predicted before, so put “CBA dividend” into your search engine and see how many times it has been reduced since it floated. It does not make a good case for naysayers who want to turn you off buying banks for their dividends.

On big sell-off days when the index cops it, I have bought the SPDR S&P/ASX 200 Fund (STW), which is an ETF that gives me the index. Let’s imagine it takes two years to see the S&P/ASX 200 index at 6000. Then I make 20% in two years, plus probably around 4% dividends, even being conservative, plus franking credits, so I could make 15% plus for simply believing in the US, China, Australia and a low Aussie dollar.

By the way, given we nearly hit 6000 this year — 5996.4 to be precise — all we have to see is a lot more positivity, both globally and locally, and we could easily beat 6000 sooner rather than later.

Also, if the RBA decides to cut interest rates, that could be a help too, as fair value calculations for the index are interest rate sensitive but I’m hoping our economy defies the negative economists out there who think we need two or even more cuts.

Finally, I’m prowling the smaller cap stocks to build up my collection of reliable dividend payers away from the bigger dividend companies. I will look at what I’ve found next week.

By the way, my optimism will be tested this week with a swag of US economic data coming out, including the jobs report and the latest China Purchasing Managers’ Index.

And finally…I know I used this on Saturday but it’s worth repeating here now — Price Headley of BIGTRENDS.COM, told CNBC that we’ll see the Dow at 20,000 by mid 2016! He cites record levels of pessimism (like in 2008 and 2011), which ran ahead of big market take-offs. He argues earnings in October in the US will be better than expected and will drive the market comeback!

If the Dow is at 20,000, we’ll be at 6000 plus, so I hope this uber-bull is on the money. And that’s why I’m not afraid of buying stocks right now.
 

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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