Overnight: Profit Taking

By Greg Peel

Sell the Winners I

Australia’s workforce rose by 211,000 jobs in June, following May’s loss of -264,000, which is encouraging but unfortunately misleading in the current circumstances.

Firstly, all of those June jobs are part-time. Full-time jobs actually fell by -38,000 with part-time adding 249,000. Presumably employers are trying to spread what work there is around former employers to avoid lay-offs, and/or are not prepared to commit to full-time employment in these uncertain times.

Secondly, the unemployment rate rose to 7.4%, slightly more than expected, to be at the highest level since 1998. The increase reflects more people looking for work than a month ago but not finding it. This figure does not count those still on JobKeeper, who are being paid not to work, nor those on JobSeeker who believe it’s still a waste of time trying to seek. The underemployment rate fell -1.4ppt, but is at 11.7%.

Thirdly, the data pre-date the Melbourne and Mitchell Shire re-lockdowns, which according to ANZ Bank economists represents 21% of the national workforce. Notwithstanding the Victorian experience will no doubt have businesses elsewhere, such as in NSW, feeling nervous about employing again.

So things aren’t going to get better on the labour front anytime soon.

The ASX200 was already falling when the jobs numbers were released, likely disturbed by a new record daily case-count in the Plague State, which is a record for any state at any time during the pandemic. Thereafter it bounced around for about an hour while the market tried to figure out if the jobs news was good or bad. Then China released its data for the day.

China’s GDP rebounded by 3.2% year on year in the June quarter according to a CCP directive, after having fallen -6.8% in the March quarter, and beating 2.5% forecasts. Quarter on quarter growth was 11.5%, first half GDP fell -1.6%.

These numbers seem pretty good, but then the accompanying month-of-June data were not so flash.

Industrial production rose 4.8% year on year compared to a 5.2% estimate. Retail sales fell -1.8% compared to a +0.5% estimate, and fixed asset investment fell -3.1% year to date compared to -3.3%. The standout here is disappointment on the retail sales front.

Selling on the ASX accelerated from midday on these numbers before flattening out late afternoon.

Healthcare was the worst performing sector in falling -1.5%, having been the best performer on Wednesday. Property fell -1.4%, which would reflect fears of further rent issues for landlords.

IT fell -1.2% as selling continued unabated for the likes of Zip Co ((Z1P)) and Sezzle ((SZL)), while Afterpay ((APT)) was also weaker.

All other sectors fell largely in accordance with the index, except for industrials and telcos which both rose by 0.3%.

Investors also sold Breville Group ((BRG)), by -4.3%, and a2 milk ((A2M)), by -4.3%, and sold down the staples sector by -0.8%. These moves, along with healthcare, suggest selling in those stocks that have performed the best during the pandemic to date, i.e. locking in profits.

Those funds were to some extent redirected to stocks initially considered virus losers, such as Michael Hill International ((MHJ)), which rose 6.6% after announcing a boom in June quarter sales, and Beacon Lighting ((BLX)), which rose 9.7% after pre-releasing full-year headline results.

Pariah Whitehaven Coal ((WHC)) topped the index winners with 6.4%, two days after its production report release. Despite the stigma, analysts remain convince coal prices can rally back from the depths.

The ever rising case-count here and abroad clearly has investors feeling nervous once more, but not panicked. Lock in profits, seek out some value, and cross fingers.

Sell the Winners II

Netflix reported after the closing bell on Wall Street last night and is down -10% in the aftermarket. The first of the FANGs to report missed on earnings and disappointed with September quarter subscriber guidance, suggesting a big pull-forward of new subscriptions in the lockdown months.

Netflix was also up over 60% for the year, so a bit of “sell the fact” is likely evident.

During the session, the Dow had opened lower, climbed back to square, fallen -270 points to the last hour and then recovered to be down -135. The other indices followed the same pattern, but once again the Nasdaq underperformed.

The Big Tech virus winners should still be winners as the US case-count surges, but clearly success has been more than priced in. Hence investors are locking in profits.

On Wednesday night investors piled back into virus losers such as airlines, cruise lines and Boeing, on positive vaccine news, and last night these were all trashed again. Despite ongoing encouraging trial news, the availability of a vaccine by year’s end is still considered an absolute best case scenario, if not a miracle, and a year away remains the average assumption.

Thus if Wall Street has priced in vaccine success, what does it do for six to twelve months while waiting for confirmation? And what if they can’t find a vaccine?

All the while the US case-count rises. The only saving grace is the mortality rate is much lower at this stage than it was early on when the north east was the epicentre, reflecting younger patients and improved responses.

That said, the US testing system is still considered to be haphazard and inefficient by experts.

To top things off, the White House has now redirected patient information to the US Department of Health and Human Services in Washington, bypassing the Centre for Disease Control. The CDC makes its database public, the DHHS does not. Researchers, modellers and health officials rely on CDC data to make projections and crucial policy decisions. Will this data now become classified by the government?

Anyone would think there was an election coming up.

To further underscore the sell-the-winners theme, gold is down -US$14.50/oz at a time one might expect it to be up. But it has been up, a lot.

In economic news, a 7.5% increase in June retail sales, ahead of 5.4% expectations, was encouraging, but the failure of weekly new jobless claims to stop rising, even if it’s at a slowing pace, and the stubborn level of continuous claims, are not.

In earnings news, Morgan Stanley shot the lights out (+2.5%) with its numbers while Bank of America beat expectations but fell -2.5%. With the big bank results all in now, clearly the winners are the investment banks with their proprietary trading desks and the losers are the commercial banks with their massive loan books.

In more sell-the-winners news, Domino’s Pizza (US) absolutely smashed earnings expectations, and fell -1.5%.

Commodities

See: China.

Finally the greenback has ticked up for once, hence the Aussie is down -0.5% at US$0.6972. There was little immediate reaction to the jobs numbers.

Today

The SPI Overnight closed up 14 points in the face of big falls for gold and iron ore, and a weaker Wall Street.

Rio Tinto ((RIO)) posts its quarterly production report today.

The Australian share market over the past thirty days…