FYI | Jun 04 2014
By Peter Switzer, Switzer Super Report
If you’re worried about remaining long stocks, with even some respected professionals talking about a 20% drop in stocks, it might pay to be across five big issues, which should determine how you run your investments inside your SMSF.
1) The new order
First, there is a huge event on Thursday and that involves the European Central Bank, which is worried about deflation, with inflation at 0.5% and the pace of the economic growth of the Euro zone. Spain’s inflation is only 0.2%, while Italy’s is at 0.4%.
Pete Najarian, co-founder of US-based OptionMonster.com, thinks it’s of huge importance saying: "I think that's going to be the biggest market mover in a long, long time."
The ECB is tipped to introduce a negative deposit rate, which means the central bank would charge banks for leaving money with them! This is designed to force banks to lend more, create growth and jobs. This is a huge play! Also, any plan for quantitative easing would have an impact on stocks to the positive.
On Saturday, I suggested that stocks had been bought ahead of what Mario Draghi might do. If he really shocks and awes the market, there could be another spike. However, if he underwhelms, there could be slide.
2) Jobs
Second, the Yanks get another jobs report on Friday. Given that it covers May, and is now well clear of the cold months of the March quarter, which delivered a miserable minus 1% GDP growth rate, you’d want to see a nice rise for job creation if you believe that -1% was a rogue result. Goldman Sachs has actually pushed up its guess of second quarter GDP growth forecast from 3.7% to 3.9%, following that bad number.
Clearly, if this jobs report rocks confidence about the US recovery comeback, then sellers would have a strong hand over share buyers on Wall St.
3) Interest rates
Third, what happens if the good growth story gets reinforced by jobs and stats on factory production, housing sales and surging services sector? Well, the Yanks could move quicker than expected to raise interest rates, if the economy surprises on the high side in coming months and stocks remain around all-time highs as they are now. Right now, the bond market is suggesting that US economic weakness is ahead but it could be a host of other factors, from European safe haven seekers with funds chasing US bonds, to some stock players finding it hard to find value in share markets and parking their money in bonds.
I believe the ‘US-is-on-the-way up’ story but I could stand corrected, though I doubt it. The Chicago Purchasing Managers Index in May went up to 65.5 from 61 and that kept me on good terms with my optimism. Gold sliding is another plus for stock bulls.
The Fed chief from Kansas City Federal Reserve Bank, Esther George, said the Fed should raise rates, sooner rather than later, but she is in a minority when it comes to Fed officials. The bond-buying program ends in what the Yanks call the fall – we’d call it spring – and that’s when things could get interesting, if rate rise speculation starts.
And what could that bring? Peter Boockvar of The Lindsey Group in the US thinks the end of bond buying or quantitative easing could usher in a 15-20% drop in stocks! Of course, he could be wrong, but it could be a real stimulus to the overdue correction I’ve been talking about.
This could be a real test of the dip-buyers, who have stopped a serious correction happening in recent times.
4) Fear and loathing
That leads me to my fourth issue. If the fear of US rate rises leads to a big sell off, I’ll be a big buyer, because it takes a few years of rate rises to KO a bull market. I also subscribe to the view that we might be still in the tail end of the skepticism phase of this market, and so the optimism and euphoric phases lie ahead.
It’s kind of weird, as I thought we were in the optimism phase until the big freeze and the pause of European growth came along, but these two slower periods could serve to stretch out this bull market. That is, it will be a longer, slower growing bull market, which will suit me fine. Macquarie tipped a long, slow grind higher and it just might be happening that way.
5) China
The fifth watch issue will be China. I started writing this before the latest PMI reading for Chinese manufacturing was released. The official Purchasing Managers' Index rose to 50.8 in May from April's 50.4 beating expectations!
This is the fastest growth in five months, driven by new orders. Reuters said: “the official survey showed a broad-based recovery in manufacturing activity in May, with nine out of the 13 sub-indices pointing to improvement from the previous month.”
As Bart Simpson would say, and this is reserved for China doubters, who always want to link stock market Armageddon to a China slowdown: “Eat my shorts!”
China doubters say growth is heading to 6%, or even lower, but a Reuters poll of economists say 7.3% against a government goal of 7.5%, but this 7.3% guess was before these PMI numbers showed up yesterday.
This better economic news for China comes as many of the emerging economies’ markets are trading stronger, which is another plus for optimists, considering how emerging economies were trashed earlier in the year, and were seen as possible canaries in the coalmine.
All-time highs and some technical analysis that looks negative make me accept a correction could come but the overall fundamental messages from these five big issues tells me that stocks are still the place to be.
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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