How is everyone today? I was just about to do a portfolio update today but felt that this article was more appropriate for the latest market fluctuations. The update can wait until Sunday.
This week we have faced some really strong headwinds that have caused the markets to tumble and to test our mettle.
Some Of The Issues
Obviously there are a bunch of issues for us to wrap our brains around so let's do a very brief outline of the hottest topics we are looking at and listening to.
- The Eurozone has flared up again with Spain now taking center stage. Greece is still mumbling and Germany is still grumbling, but when we pick it apart, what is different this week from the last 2 years? Nothing much. Spain is near default but it looks like bonds will be issued. Greece is still in denial but they have a bailout PLUS a contingency plan. Germany wants to run the whole shebang, but they have as much clout as the USA will let them. Of course Merkel does not want to realize that, but the wild card, folks, is that the US will step in, and force the issue. We need to remember what the safe haven is here. The US dollar. With a strong dollar, even by default, the USA is once again center stage and in my opinion, will not let things get out of control.
- China's PMI numbers were not wonderful and showed weakness once again. To me this is a result of their efforts to contain inflation. All bets are off with inflation if they are not manufacturing enough or consuming enough. So far, China has done everything right, even if our government is not keen on a lot of it. I am looking for the Chinese government to step in quickly (no Congress to battle) and ease up on all monetary policies, prop up the Yuan, and pump money into their economy big time.
- Other nations in Asia, Australia, and even the UK had weaker PMI numbers but those were expected with China leading the way. Those markets overreacted in my opinion. I am looking for a sideways global market environment with more upside potential in the coming weeks.
- The US employment numbers came in below expectations and it appears we have taken a few steps back in that department. It is not a great scenario to be sure, but let's remember that we are in an election year. I believe that the numbers will swing back simply because our corporate earnings have been so good and we have an expanding economy, even if it is slow paced. We cannot go straight up yet, but to me the Fed will step in with a nice QE3 pop since the Fed and our government will not let the economy drop back into a recession.
- Housing has not recovered, again. Well, maybe it has and maybe it hasn't. From my view I see building going on and banks that are willing to dump the inventory of foreclosed homes much easier and faster through short sales, and different uniquely tailored programs, to clean up their balance sheets and by doing that, clear out the existing home inventory. Eventually a recovery will show up.
Okay, so this is my spin, which is probably just as good as the talking heads on TV. We can look at the issues (and yes there are more) and choose to see the end of the world, or we can also look at the situation and see opportunity!
Some Good News
It is not all bad, folks. As a matter of fact, there is plenty of good stuff happening that we should remind ourselves of.
- Corporate earnings came in very strong
- The price of gasoline has dropped by 20-25%, which adds dollars back into the economy
- Mortgage rates are as low as they have been since World War II and more people can actually afford the payments on a new home once they qualify
- Boomers are retiring and the workplace will finally be hiring younger workers who have been out of work. These younger workers will not have to compete with the boomers for jobs much longer and there should be more openings just by that fact alone
- Fixed income rates are so low that most money managers are positioning their clients' portfolios for dividend paying stocks and higher yielding investments. Where else will they be able to make money?
- Investors running for the exits are leaving the door open for some really great bargains within our core portfolio (see below) and even outside of it. We can go shopping for those accidental high yielders!
- Car sales (manufacturing) is better now than in the last half decade or more, which signals greater consumer spending and pent up demand
- The US is leading the world in technology in all facets of our lives. From computers to telecom to healthcare to agriculture. Is there another country that comes close?
- The accidental strong dollar is a safe haven for the rest of the world to invest in folks. WE are the nation that everyone is looking at to lead the way, and we have been, we are, and we will. Ergo; a stronger dollar.
- Inflation is non existent and deflation is more of a concern in my opinion. Enter QE3 and I have no idea what they could do more than they have but the Fed has made it very clear that they will do whatever they can do and whatever is needed within their authority and maybe even beyond it.
Again, this is my take on the situation and I am more positive than the doom and gloom crowd, but I can also face reality. We ARE facing difficult situations and some are not completely within our control. That being said, what is it that we should and could be doing right now for our portfolios?
- Do not panic
- Review the fundamentals of the core stocks. Has anything changed?
- How are those dividend checks looking? Pretty good right?
- There are some bargains out there. We have our "dry powder" to use full blast soon, right?
- If there are any clunkers maybe we should sell them and add another stock or two at bargain prices
- Select some stocks and look at selling some put options to boost cash and maybe add even cheaper shares
- Sell some covered calls with solid premiums for even more cash flow to deploy into bargain shares or build cash reserves
- Check your gut. Yep, how do you feel right now? Are you OK with your investments and your risk tolerance? How are your expenses? Are they being managed?
Obviously there are other steps that I have not mentioned that you folks can chime in on, but really when we boil it all down, this is why we are investing: to ride out these corrections and to jump at really strong opportunities.
Remember: Buy The Dips, Add To The Core!
Our Portfolio's Bargains To Consider
Our "Team Alpha" portfolio consists of ExxonMobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), AT&T (NYSE:T), General Electric (NYSE:GE), Annaly Capital (NYSE:NLY), Southern Company (NYSE:SO), Procter & Gamble (NYSE:PG), Philip Morris (NYSE:PM), Intel (NASDAQ:INTC), Realty Income (NYSE:O), Chevron (NYSE:CVX), E.I. du Pont (NYSE:DD), Duke Energy (NYSE:DUK), Coca-Cola (NYSE:KO), Bank of America (NYSE:BAC), and McDonald's (NYSE:MCD).
We can find bargains across the board right now as the entire market has quietly been correcting (maybe not so quietly for some investors) and a drop of nearly 300 points today was pretty close to a capitulation point in my opinion.
On April 2nd the S&P stood at 1419 and is now at 1278. That reflects a solid 10% drop in a rather short period of time.
Can the markets go lower? Sure, but we are not trying to "time" the markets, we are looking for bargains within our portfolio. (Or even adding some new names)
The following should be at the top of our shopping list right now:
On May 1st the PPS was $87.00 and the correction has been over 12% as of now. I do not believe it will drop much more and is at bargain prices to consider adding shares. Oil has dropped to around $80 bucks a barrel and it is just about time for OPEC to make the usual announcement of cutting production to "stabilize" prices.
- Johnson & Johnson
On April 2nd the PPS was about $66.00 and the correction has reached roughly 8%. Nothing has changed here at all and at about $61.00 this stock is also a bargain.
- Procter & Gamble
Back on March 14th the PPS was about $68.00 and the 11% correction gives us an opportunity to buy a defensive stock at a cheap price now at about $61.00.
On March 7th the PPS was $100.00 and the stock has taken a hit of 14% as of now and at $86.00/share I believe it is time to pull the trigger. The dividend yield is now at 3.2% and this is another defensive play that makes sense.
- Phillip Morris
On May 2nd the price was over $90/share and now stands at about $82/share. Nearly a 10% correction has left this defensive stock a GREAT bargain right now with the dividend yield approaching 4% as well!
- E.I. du Pont
On April 25th the PPS was at about $54.00 and has corrected by roughly 13% to about $47.00. Fundamentally nothing has changed here either and the dividend yield is nearing 4.0% as well. Time to scoop up some shares in my book.
On May 2nd the PPS was over $29.00/share and has over corrected by more than 13% down to about $25.00/share. The dividend yield is now nearing 3.5% and this stock is too cheap to ignore.
Taking a good look at the stocks I have noted is a great place to begin our shopping trip. Obviously they could dip a bit more but I believe these have seen their inflection point and do represent very good bargains. The added bonus is that we already have them in our portfolio and without even expanding it, we can strengthen our core to position it for the inevitable trip back up in prices. We will also be tweaking our overall yield at the same time.
Make a plan, keep a plan, implement the plan, and over time we will come out ahead.
Time to put the shopping sneakers on, folks!