Monthly Archives: January 2016

Market Volatility — still sticking around

Market Volatility — still sticking around

As the Northeast dug out from #Blizzard2016 earlier this past week, you could say the slowdown from the storm was a harbinger of what was to come this week in the form of more data pointing toward a slowing domestic and global economy. From my perspective, the Fed’s commentary following their monetary policy meeting this week and the likelihood of the next Fed rate hike slipping from March to May simply confirm that the economy has indeed entered a rough patch. We didn’t really need to see the dismal December Durable Orders Report or the weaker-than-expected 4Q 2015 gross domestic product (GDP) report out this morning, because much of the data in recent weeks clued us in as to what was coming. What did catch me off guard was the Bank of Japan’s move to negative interest rates early this morning, which led to a sharp move higher for the market and the S&P 500 closing up 1.2% for the week, bringing its year-to-date return to -5.6%.

10 year truasury note

While that was happening, the yield on 10-year Treasuries fell once again, and that led many an investor back into higher-dividend-yielding stocks like the ones we’ve kept in our Tematica Select List. In particular, Physicians Realty Trust (DOC), Philip Morris International (PM), American Capital Agency (AGNC) and AT&T (T) all outperformed the S&P 500 this week from a stock price perspective. The big winner for us, however, was our PayPal (PYPL) position, as the company delivered a great quarter that popped the shares over 13% this week. That brings our return in PYPL shares to just under 8% since early September. By comparison, the S&P 500 fell 1.4% over the same time period. With more companies adopting mobile payments, and even more utilizing PayPal’s back-end services for both mobile and online payments as part of my Cashless Consumption investing theme, you should continue to hold your PYPL shares.

Next week, we have several hundred more companies reporting earnings and the usual start-of-the-month economic data will be coming in. This includes December Personal Income and Spending, which should offer some insight on consumers and their spending habits; the ISM manufacturing index; the global PMIs from Markit Economics; December factory orders and the usual assortment of job creation indicators. Based on the preponderance of January regional Fed reports and January flash PMI reports that showed the slowest expansion in the domestic services economy since December 2014 and the second-lowest reading for the manufacturing economy since October 2013, we should not expect a significant pickup to be seen in next week’s data. If this proves to be the case, I would expect to see the chatter grow over the Fed likely pushing out its rate hike from March to May, particularly if Friday’s January Employment Report disappoints.

I will continue to be vigilant during all of that next week. However, given the sheer number of companies reporting their results, there is a high probability there will be more than a few companies offering weaker-than-expected guidance, much like Apple (AAPL), Boeing (BA), Amazon (AMZN) and United Rentals (URI) did in recent days. Already I’m looking at the kinds of businesses that will weather a slower economy given their inelastic natures. For example, will people stop searching on the Internet? Will people stop eating? Are you likely to slow down your use of social media or streaming video? While we may slow down on discretionary spending, odds are those kinds of services and actions will see modest disruption at worst. I can add another — hopefully you will continue to clean both your house and yourself, just as I plan on doing.

As we exit the earnings storm, I expect calmer waters will start to emerge. At that time, we’ll be putting some cash to work, looking to take advantage of the drop in stocks to buy in at much better prices.

 

The Wild Ride Continues as the East Coast Braces for ‘Snowmageddon’ 2016

The Wild Ride Continues as the East Coast Braces for ‘Snowmageddon’ 2016

Amid the volatility that has led all the major markets lower on a year-to-date basis, yesterday we saw a bit of a reprieve following comments from European Central Bank President Mario Draghi suggesting perhaps another round of stimulative monetary policy could be in the cards. Perhaps he had a preview of this morning’s Eurozone Flash Composite PMI report for January, which hit an 11-month low with declines in both manufacturing and services orders.

Additionally, one of the main drivers of the stock market of late — falling oil prices — recovered a bit yesterday. The move higher in oil prices reflects a smaller inventory build per today’s Energy Information Administration (EIA) report, as compared with the American Petroleum Institute’s previous report. Peering into that EIA report, however, U.S. crude oil inventories are at levels not seen in the last 80 years. While oil prices probably will trend higher near term as the East Coast gets hit with a massive snowstorm this weekend, with U.S. refineries still clocking in at 90.6% capacity utilization and crude oil imports up year over year, I expect the recent oil price bump could be short lived amid the slowing global economy.

This morning’s December read on the Chicago Fed’s National Activity Index marked the fifth consecutive month of contracting national activity in the United States. To me, that adds to the concern raised by the January Empire Manufacturing Report that was published last week and showed “that business activity declined for New York manufacturers at the fastest pace since the Great Recession.” Digging into that report, new orders, shipments and overall business conditions fell sharply during the month. That weakening outlook was reiterated this week in the January Philly Fed Index, which not only remained in contraction territory, but also showed yet another drop in its six-month outlook indicator — down to 19.1 from 24.1 in December and 43.4 in November.

Against that backdrop, it’s not hard to see how in its December earnings report this morning, General Electric’s ([stock_quote symbol=”GE”]) industrials segment posted a 1% decline in both organic profit and revenue for the quarter.

In other economic news, a rather unsurprising December Consumer Price Index report showed a deflationary environment, which I chalk up to the drop in oil and gas prices. Given the weakening economic climate and continued lack of inflationary pressures thus far in the data, there is a high probability the Federal Reserve will leave interest rates unchanged at their meeting next week (Jan. 26-27).

Amid those latest gleanings that show the domestic economy is losing ground, the velocity of earnings reports has started to pick up, and so far I have to say we’ve seen more than a fair amount of disappointing, if not flat out weaker-than-expected, outlooks from IBM ([stock_quote symbol=”IBM”]), Starbucks ([stock_quote symbol=”SBUX”]), Deutsche Bank ([stock_quote symbol=”DB”]), United Continental ([stock_quote symbol=”UAL”]), Intel ([stock_quote symbol=”INTC”]), Union Pacific ([stock_quote symbol=”UNP”]), American Express ([stock_quote symbol=”AXP”]) and others. That velocity only will accelerate further given the number of companies that will be reporting their quarterly earnings next week and the week after. In total, I count more than 1,200 companies issuing their December quarterly results in the next two weeks, with a good percentage of them updating their outlook for the coming months. It’s not all going to be peaches and cream, it probably won’t even be close, given the economic climate that is developing and other factors that are helping to ratchet up uncertainty. In such an environment, management teams tend to be cautious, if not overly so.

Turning to our Tematica Select List holdings, even after factoring in yesterday’s 0.5% move higher in the S&P 500, the index is still down some 8.6% on the year as of Thursday’s market close. That should leave us feeling pretty good with the decision to shed more growth-oriented, and therefore more volatile, positions. Granted, on Wednesday we saw what could have been our first glimmer of market capitulation as the S&P swung 63.9 points (or 3.4%), but the data — both economic and earnings — suggest we have more to go in terms of expectations being reset lower. Such volatility tells me we should continue to treat any bounce as something of the dead cat kind until we see the market gyrations settle down on a sustained basis. I suspect that, like me, you do not want to walk headlong into an unexpected frying pan to the face just because we’d like to think things have settled down even though they probably haven’t.

To me, this is time to calmly and coolly sit back and add to our thematic investing shopping list. That’s what I’ve been doing and plan on continuing to do in the coming week. In the meantime, let’s continue to keep our insurance position, the ProShares Short S&P 500 ETF ([stock_quote symbol=”SH”]), intact as it will help hedge us against additional market turbulence.

As I look over our current crop of holdings, many of which offer hefty dividend yields, I am placing our shares of American Capital Agency Corp. ([stock_quote symbol=”AGNC”]) on my watch-closely list. We enjoy a monthly $0.20 per share dividend, which equates to a staggering 15% dividend yield at the current share price, and the shares are trading near a 30% discount to book value at current levels. To me, the factor to watch will be the Fed’s language next week — if it softens a bit, and Fed Chair Janet Yellen once again touts her now infamous “data dependent” line. If she does, I suspect shares of our deeply discounted real estate investment trust will get a boost. If Yellen continues her “tough” interest rate talk, then it could be time to re-evaluate this positon.

For those of you on the East Coast, and more specifically in and around the Washington, D.C., area like me, please hunker down and stay safe this weekend. For those of you looking to generate a short-term profit from the storm, there are the obvious players, such as Home Depot ([stock_quote symbol=”HD”]) and the Utilities Sector SPDR ([stock_quote symbol=”XLU”]), that you should consider. Given our thematic investing perspective and medium-to-longer-term investing time horizon, I’m not making a formal recommendation, but I easily can see those getting a short-term boost from the storm.

When it comes to Fitbit (FIT), is now the right time to jump in?

When it comes to Fitbit (FIT), is now the right time to jump in?

If you saw a great product on sale at the store, you would be excited, maybe even ecstatic, if it was one you had been looking at for some time. The same is true with stocks!

We all tend to get caught up in the emotional response of the market moving lower, which usually is viewed as a bad thing, rather than an OPPORTUNITY to buy shares at an even better price. When viewed through that lens, who doesn’t love it when stocks go on sale… so long as the fundamentals and business drivers remain intact.

Here’s a great example — at the Consumer Electronics Show held earlier this month, Fitbit ([stock_quote symbol=”FIT”]) announced its first smart watch, dubbed the Blaze  . . .

Set a Protective Stop on a Winning Position to Lock in a Gain of More than 20%

Set a Protective Stop on a Winning Position to Lock in a Gain of More than 20%

Actions from this post

Ratings changes included in this dated post

  • Changing our rating on USA Technologies (USAT) to “Sell”, booking a near 30% return since our “Buy” rating was issued.
  • Updating Kraft Heinz (KHC) to a “Sell” rating, marking a hefty double-digit percentage return.
  • Closing out Disney (DIS), Under Armour (UA), Netflix (NFLX), LifeLock (LOCK), American Airlines (AAL) and Fitbit (FIT) — updated all with a “Sell” rating.
  • That leaves Physicians Reality Trust (DOC), Philip Morris (PM), American Capital Agency (AGNC), AT&T (T) and Regal Cinemas (RGC) in the Tematica Select List — all of which have dividend yields between 4.6% (Philip Morris) and 14% (American Capital Agency). Given the nature of their businesses as well as those dividend yields, those shares are apt to drum up investor interest as people look for safe havens.Let’s continue to hold these shares and “clip our dividend coupons” along the way.
  • Also, we recommend investors add some protection in the form of the ProShares Short S&P 500 ETF (SH), which trades in the opposite direction of the S&P 500.

What began as a bad start to 2016 only has gotten worse over the last few days. There are a number of reasons behind this move lower as II see the stock market, at best, moving sideways through earnings season, but more likely to come under additional pressure as expectations are scaled back. When I say expectations, I mean those for global growth, oil prices, corporate earnings and so on. You’ve seen me write more than a few times about the aggressive earnings expectations for the S&P 500 this year and the revisions lower that I’ve been expecting have only just begun.

In an environment like this, it tends to be shoot first and ask questions later, particularly as growth expectations get reset. While it is tempting to weather the storm, my preference is to lock in existing gains, limit losses and, above all, preserve capital at times such as this one. I know times like now, when the market seemingly goes down day after day, can be frustrating, if not confusing. I would not be surprised if you were having flashbacks to March 2008, wondering if we are heading for a repeat of what happened from May 2008 to March 2009, a period of intense pain for the stock market.

The famous phrase, “better safe than sorry,” comes to mind. For us, that means exiting the following positons:

  • Changing our rating on USA Technologies (USAT) to “Sell”, booking a near 30% return since our “Buy” rating was issued.
  • Updating Kraft Heinz (KHC) to a “Sell” rating, marking a hefty double-digit percentage return.
  • Closing out Disney (DIS), Under Armour (UA), Netflix (NFLX), LifeLock (LOCK), American Airlines (AAL) and Fitbit (FIT) — updated all with a “Sell” rating. 
  • That leaves Physicians Reality Trust (DOC), Philip Morris (PM), American Capital Agency (AGNC), AT&T (T) and Regal Cinemas (RGC) in the Tematica Select List — all of which have dividend yields between 4.6% (Philip Morris) and 14% (American Capital Agency). Given the nature of their businesses as well as those dividend yields, those shares are apt to drum up investor interest as people look for safe havens.Let’s continue to hold these shares and “clip our dividend coupons” along the way.
  • Also, we recommend investors add some protection in the form of the ProShares Short S&P 500 ETF (SH), which trades in the opposite direction of the S&P 500.

Over the next few weeks, we could get a bounce in the market here and there, but I would feel much better putting capital to work with a strong conviction that the storm has passed. As such, I will keep one eye on the market (the indicator of price) and the other on our investing themes as I look for data points that show companies whose businesses will continue to perform regardless of what’s happened in the stock market over the last month or will happen in the next month or next few months. If you were with me while I write this update, you would hear me muttering questions like some of these:

  • Has the drop in the stock market changed the outlook for cyber attacks and related threats in 2016? Safety & Security
  • Despite the unseasonably warm temperatures in the eastern United States thanks to El Niño, has the California drought situation been eradicated? Scarce Resources
  • Has the shift toward streaming and other digital content consumption slowed because the stock market has lost close to $1 trillion in value, lessening the demand for content? Connected Society
  • By some strange hocus-pocus, have people been “de-aged” so that less than 15% of the population is over 65 years old? Aging of the Population
  • As if by magic, did all of those people with little to no retirement savings suddenly land on firm financial footing? Aging of the Population
  • Over the last few days, has the costly and deadly impact of obesity and the prevalent condition of so many people being overweight been reversed? Fattening of the Consumer
  • Have retailers, both brick & mortar as well as online, shifted to only taking cash and checks as payment for goods and services? Cashless Consumption
  • Are people all of a sudden smoking less in the last few days? If anything, I would argue those who do indulge in this guilty pleasure are probably smoking more and having an extra drink or two along with it. Guilty Pleasure/Affordable Luxury
  • Has the domestic middle class started to expand dramatically in January? Rise and Fall of the Middle Class

And so on… Foods with Integrity… Asset-Lite Business Models… Economic Acceleration/Deceleration… Tooling & Retooling

The bottom line is these investing themes of ours continue to benefit from the shifting and evolving landscape that is the intersection of the global economy, changing demographics, disruptive technologies, regulatory mandates and other tailwind drivers.

As I said earlier, the stock market is simply the indicator of price.

If you saw a great product on sale at the store, you would be excited, maybe even ecstatic, if it was one you had been looking at for some time. The same is true with stocks!

We tend to get caught up in the emotional response of the market moving lower, which usually is viewed as a bad thing, rather than an OPPORTUNITY to buy shares at an even better price. When viewed through that lens, who doesn’t love it when stocks go on sale… so long as the fundamentals and business drivers remain intact. To me, this says we’ll be able to buy back a number of the growth positions at the same or lower prices when the current market storm has cleared and things have settled down. Let’s be prudent and patient together.

Throwing in the towel on AAPL and SWKS

Throwing in the towel on AAPL and SWKS

We are throwing in the towel on both Apple ([stock_quote symbol=”AAPL”]) and Skyworks Solutions ([stock_quote symbol=”SWKS”]), given respective supplier and competitor warnings that point to a very rocky road ahead in the first half of 2016.

Following Thursday’s market close, both Cirrus Logic ([stock_quote symbol=”CRUS”]) and Qorvo ([stock_quote symbol=”QRVO”]) pre-announced weaker-than-expected December-quarter results, which they attribute to “customer demand.” I see that wording as code for demand from Apple (AAPL). Cirrus derives more than half of its revenue from Apple and Qorvo counts the smartphone company as a key supplier. There has been growing concern over iPhone production levels, which I’ve discussed at length — including Nikkei’s recent re-hash of a Morgan Stanley forecast predicting an iPhone production cut for the March quarter. However, Cirrus’s comments give me reason to think this will persist past the next few months. The company announced, “This weakness escalated over the last few weeks of December and is expected to continue to significantly impact our revenue in the March quarter.” To me, this suggests a weak outlook not only for the March quarter, but for the June quarter as well.

For Apple, the iPhone is its largest product business and sharp production cuts past the next few months mean the shares are likely to be dead money until perhaps its next iPhone refresh cycle. If history holds, that will not likely happen until the back half of 2016.

While I continue to like the rising dollar content and growth opportunities outside the smartphone market that is a key part of the Skyworks story, given the growing uncertainty of the overall market and potential for smartphone-related weakness to persist longer than previously expected, we would rather err on the cautious side, preserve capital and limit losses.

For those reasons, even though the shares have entered oversold territory, we are changing our rating on SWKS to “Sell” and dropping it from the Tematica Select List, as I suspect they will be in the “show me” camp for the next several months. We would look to revisit SWKS shares later in 2016 as smartphone industry expectations reset and non-smartphone growth opportunities that Skyworks has ahead of it mature further.