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INDEPENDENT Financial Advisor / Professional Investor- with over 30 years of navigating the Stock market's "fear and greed" cycles that challenge the average investor. Investment strategies that combine Theory, Practice and Experience to produce Portfolios focused on achieving positive... More
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  • Market Update 4/19 - Words Of Wisdom

    Words of Wisdom - not from me but from Oaktree capital :

    "Most great investments begin in discomfort. The things most people feel good about - investments where the underlying premise is widely accepted, the recent performance has been positive and the outlook is rosy - are unlikely to be available at bargain prices. Rather, bargains are usually found among things that are controversial, that people are pessimistic about, and that have been performing badly of late."

    "Superior investment results can only stem from a better-than-average ability to figure out when risk-taking will lead to gain and when it will end in loss. There is no alternative."

    "Unconventional behavior is the only road to superior investment results, but it isn't for everyone. In addition to superior skill, successful investing requires the ability to look wrong for a while and survive some mistakes."

    I took a good look at those words this week to remind myself the role that "market psychology" plays when trying to achieve better than average results when it comes to investing.. More on that later....

    With the recent volatility and intraday swings that we witnessed this week alone not to mention the action during the first quarter, I believe all investors need to take a look at Oaktree's words to reaffirm their plan, strategy and goals going forward. For me its helpful in staying "on track" while avoiding the daily market mayhem.

    Last week I highlighted two of the themes that many investment managers are focused on now. Both of those "themes" contend that the market is prime for a sell off this time of the year. Given the positive results produced by the major averages this week, it seems they have been put on the shelf, at least for now.

    And now they've rolled out "Sell in May and Go Away" -- It's a well-known market phenomenon that over the past 70 years, stocks tend to perform less well (up only 1.2%) during the May-through-October period, compared with a more robust 6.9% gain during November through April.

    What do the present technicals tell us? From an overbought reading of a record 1,897.28 on 4/4 in the wake of a good jobs report, the S&P has fallen by 4.1% to an oversold reading of 1,815 just one week later. At that point everyone who could get to a microphone or write a column was suggesting recession, deep correction and I even heard the word "bear" market thrown in.

    Technical support remains near the 200-day moving average of 1,766, just above the February lows. As mentioned last week the bulls don't want to see a breach of those lows which are around the 1735 - 1740 level.

    Exactly 4 trading days later the S & P now stands @1,864 a mere 1.4% from its all time high .. The NASDAQ flirted with its 200 day MA, bounced off of that and in a sharp reversal last Tuesday seems to have stabilized. So for the moment all seems well. Even the dreaded Biotech index (IBB) reversed during this time. I penned an article this past week highlighting Gilead. Suggesting that all biotechs are not the same, as there may be some gems there that are fairly priced in that group that have been thrown away.

    As investors constructed this proverbial Wall of Worry over the past month, they have also executed a discernible defensive rotation, by raising some cash & adding to Treasuries. They lowered overall portfolio beta by taking profits in some of the more expensive higher-flying categories, and shifted those equity assets into cheaper and more conservative dividend-paying stocks, such as REITs, utilities, telecoms, consumer staples ( food, beverage and tobacco) and health care ( big drug companies).

    That's a fairly typical portfolio strategy to hide out during the uncertain summer months, given the warnings that have been laid out for us. Perhaps many will flip the "risk-on" switch again later in the year, and pile back into the now-cheaper higher-beta growth stocks. Who knows when that may occur.. I'll add a data point to those who are suggesting the "mid term election cycle will cause a large drop in the averages.. And that is "the average return one year later from the low of that "cycle" is 32%."

    So, I suggest IF the averages do correct sharply - it could turn out to be a wonderful buying opportunity. Of course, IF and when that occurs, many will be paralyzed with fear and lose sight of their plan and strategy, hence the suggestion to review the words from "Oaktree". Don't lose sight of how market psychology can be a demon at work.

    People who worry will say this "market churn" often heralds a change in direction and some are now announcing the next "bear" may be here soon.

    I'll gladly take the other side of that argument, given the current technical and fundamental backdrop. A "churn" that doesn't hurt the overall market can introduce the next leg up in a bull trend. So far, as I pointed out, the rebound of last week suggests that may be the case.

    And keep in mind, historical studies show that most technical corrections tend to be non-events in a long uptrend, IF the basic fundamentals of earnings and economic growth are intact and stock valuations aren't stretched out. And on that note :

    From Thompson Reuters : "We saw the first full week of q1 '14 SP 500 earnings this past week, with the SP 500 "forward 4-quarter" estimate falling to $122.86, versus last week's $123.04.

    With the SP 500′s 1.7% gain this past week, the p.e ratio on the forward estimate rose to 15(x). The PEG ratio jumped to 2.25(x).

    The "earnings yield" on the SP 500 is now 6.359%, still very elevated relative to the 10-year Treasury yield at 2.72%. For those Fed model followers, stocks remain pretty attractive in terms of relative value to the bond market."

    Going into 2014 the most under owned sectors were Emerging Markets, Commodities, Energy , & Telecoms. Investors may find it rewarding to take a good look for value in these sectors.

    Money has now started to find a home in these areas as the rebound in EM's has been sharp, and I have seen rebounds in individual names in the other under owned sectors as well. As an example, (CVX) has gone from 109 to just under 124 since Feb 1.

    The Energy sector has suffered the last two years from negative earnings growth, and negative revenue growth as well, but that may be about to change and the recent money flow could be signaling just that.

    The forward estimates are now suggesting the first year-over-year growth for the energy sector in two years, as we move through 2014. The second quarter reports are looking especially strong, although we won't see those earnings reports until mid-July, 2014.

    Many of the E & P oil stocks I have mentioned in the past (CXO),(WLL) both made new highs this week. (PXD) has bounced along its 200 day MA and has now risen from 178 to 203 in the last 2 weeks. Despite the positive outlook for energy, I wouldn't chase these names here, but rather would add on pullbacks.

    An area within the energy complex that is intriguing is the oil service sector. A complete list of those stocks is here.

    These are the companies that supply the industry with goods and services. Many names in this complex have yet to experience that big price move, and are now attractively priced.

    (CAM) is a name I own (it's also one of my "stocks for '14"). Its up just over 10% when I mentioned it back then. I think it still has upside from the low 60 level - with a price target of 75. I'll be writing a special report on that name in the next day or so.

    (ESV), (RIG) have underperformed since i mentioned them a while ago. I believe if one has a LT view, (of course i mention that since in the short term they have been huge disappointments) there is value in names like those two. I own both and for those that may be new to my blog, I do not suggest a stock that I do not own myself.

    Best of luck to all ....

    Disclosure: I am long CAM, RIG, ESV, PXD, WLL, CXO.

    Additional disclosure: I am long numerous equity positions - all of which can be seen here in this blog .

    Apr 19 9:52 AM | Link | Comment!
  • Micron (MU) -- An Update

    I wanted to provide an update to one of the companies that I mentioned in my " weekly update" back in mid January - Micron (MU)

    Comments I made back then :

    " select fundamentally sound companies that will be tossed aside with the same gusto as the overvalued high flyers. As an example,the fundamentals of a name like (MU) haven't changed since their last earnings report that was fantastic. I added this name last week, it has the potential to earn $3-$3.50 this year and is selling @ 22-23. The stock barely budged during the S & P's 2.6% loss this week.. A sign of strength... First target 30..."

    On April 3rd Micron posted its earnings for the second fiscal quarter in which the company beat analysts' expectations. Micron doubled its revenues year-over-year to $4.1B which translated to a non-GAAP EPS of 85 cents. Analysts were expecting $4.02 billion in revenues and an EPS of 76 cents.

    This quarter also includes results from Elpida Memory Inc. that Micron purchased in 2013. Elpida was a Japanese semiconductor maker and was acquired while it was on the verge of bankruptcy. This acquisition has proved a huge positive for Micron since its sales have doubled in a period of 18 months. In my view it was and will continue to be a "Game Changer". Perhaps more synergies are yet to come from this acquisition as Elpida is the primary chip supplier to Apple Inc.

    On the margin front Micron's gross profit margin slightly increased from 32% in the first fiscal quarter to 34% in the second fiscal quarter. However, the operating margin and net margins have improved impressively by 7% and 9%, respectively.

    The company has forecasted capital expenditures for the fiscal year will fall in the range of $2.6 - $3.2 billion. Micron had cash and marketable investments of $5.06 billion at the end of the second fiscal quarter while during the quarter it generated cash flow from its operations of $1.39 billion. This leads me to believe that the company is able to generate enough cash flows to support its capital expenditures and R & D activities.

    As reported on the recent earnings call (MU) anticipates the memory chip industry to remain favorable and therefore it aims to switch its production lines to make NAND chips from DRAM chips. NAND chips are used in smartphones and tablets while DRAM chips are used for personal computers. The strategy makes sense as the "world" has moved toward mobile technology for on-the-go usage. The outlook for the memory industry seems positive. The strong expansion of DRAM and NAND flash memory markets in 2013 which rose 35% and 28% respectively, is expected to occur in 2014 as well. Given these facts Micron's growth should continue well into 2015.

    So with all of that good news the stock sold off 9% and is now off 14% from its February high.

    A slew of negative reports from analysts followed the report, questioning the forward guidance to talk of slowing demand for NAND chips going forward. Combine that with a technology sell off and the "perfect storm " hit the shares.

    Critics have stated that the company has a history of turbulent earnings and that is certainly true. Many also note that the stock has advanced some 400% from its low.. That is also true, but the earnings have been commensurate with that move,, should the shares be selling for $5-10, with earnings per share of $3-$4. ?

    That logic is convoluted --- where a stock has come from has no bearing on where it may go, especially when the fundamentals are there to support that increase.. This isn't a biotech that has moved 400% and has no earnings !!

    So one combines that "mindset" with a tech sell off, and in my view an opportunity has been laid at the doorstep. It's now time to see if Micron will indeed be a different company given the "game changing " synergies of their acquisition.

    At this point in time I don't believe (MU) is a "core" holding by any means, its an intermediate holding (6 months - 1 yr), and as i would name it -- "special situation"

    I'm fully aware of the "history" and cyclical nature of (MU), but my view on the stock does go back to the fall of '13, when I came upon the fact that (MU) purchased Elpida.

    I wrote back then, "As Micron fully integrates Elpida over the next few quarters, I expected margins, estimates, and the multiple to expand as investors fully digest Micron's new earnings profile."

    So far, at least from the earnings and margin standpoint that has worked out .

    I wasn't disappointed with the last quarter at all, and in fact in the recent report, what's interesting is that despite Hynix' Wuxi fab coming online and a seasonally slow demand environment, Micron was able to meet its expectations for ASPs (average selling price) in both DRAM and NAND.

    Therefore, I am not deterred by anything that I have seen or heard from detractors. In my view the reason I bought the shares initially is still in tact.

    There are many times when the market will go against a position as sentiment towards a particular stock or a sector changes in the short term.. The technicals shape up as follows in the daily chart below :

    Might there be more downside to the 200 day MA is anyone's guess. With the present price under $22, I believe it is a good time to step in and start a position. With the thought of adding to that position if any "market" weakness in technology shares take the stock down to the $19-20 level.

    Given the quarterly EPS of 85 cents the annual EPS for fiscal year 2014, estimates call for $3.25. The estimate of $3.50 that I am most comfortable using for 2015 is on the low end of the spectrum.

    The high for 2015 comes in at a whopping $5.27. While that would be great news, I'm not in that camp at the moment.

    At the end of the day, Micron shares are inexpensive trading at only 7 times earnings. When i find a company that is selling at less than the "market" average with decent growth perspective, I take a look especially when all around me are clamoring that the "market" is overvalued. Here is one that certainly isn't.

    If the thesis that I believe doesn't transpire, I'll have to re-evaluate. So far that isn't the case. and if it does continue I believe one has to give it the time it deserves to work thru the negative "mindset" to eventually play out in a higher share price ..

    My initial target remains @ $30

    Best of luck to all

    Disclosure: I am long MU.

    Additional disclosure: I am long numerous equity positions -- all can be seen here in my blog

    Apr 15 11:24 AM | Link | 1 Comment
  • Market Update 4/12 -

    The S&P 500 hit an all-time high just a few days ago, on April 4. However, if you take a look at the chart below, you'd see the market is flat for the year (light yellow line=2014 open). And this may be a good development for the long term. Perhaps as I have mentioned before the market is consolidating in "time" and not price. In my view, this will set us up for a healthy, longer-term move higher.

    (click to enlarge)

    And that's the good news for the Long Term. However, what about all of the talk recently about corrections, and even articles about "bear markets" surfacing lately.

    There have been 27 corrections of between 10 and 20 percent in the post-World War II period that did not become full-blown bear markets (20% or more drop). This averages out to one 10 percent-plus correction roughly every twenty months. The average one of these episodes results in a decline of 13.3 percent and plays itself out over about 71 days. We've had three of these episodes since the market bottomed in March of 2009 - a 16% correction in 2010, a 20% correction in 2011, a 9.9% mini-correction in 2012 and nothing in 2013, not even a hint of volatility. So far 2014 has ushered in more volatility in 3 + months than we saw in all of 2013.

    Perhaps last year's absence of "fear" has given rise to a mindset where many investors and traders now seem to be unaccustomed to short-term declines. In my view that really isn't a good thing, as history suggests market participants will be better off getting used to them, as they are a permanent feature of equity markets.

    There are two 'themes' that are currently being bandied about lately.

    First , the 'mid term" election cycle :

    As the information in the two articles suggest, this cycle maintains that a significant correction will materialize during the second and third quarter of this year, as they suggest history calls for that in 2014.

    Second, is it 2011 all over again?

    In 2011, the SP 500 earnings grew 15% year-over-year, but the SP 500 corrected 20% from the spring through early October, 2011. The p.e compressed from 13(x) to 11(x) from the first week of January, 2011 to the first week of October, 2011. The SP 500 total return in 2011 was 2.11%, far from the earnings growth that was shown.

    What many are now suggesting is that 2014 looks like and maybe will play out like it's 2011. There were friendly bond markets back then, but the market was a difficult place to make money in that year given that 20% mid year drop.

    Now, one has to wonder if the weakness we are experiencing is simply a self fulfilling prophecy, since it is THE "talk' around the investment manager circles. OR is there really something to these cycles and comparisons. Well, no one can be absolutely sure .

    One thing i do know for sure are the two important issues I discussed last week, sentiment and earnings . & then highlighted this message ;

    "And yet the potential change in sentiment in the latter part has me concerned as it should not be dismissed, It can trump all of the fundamentals on a temporary basis."

    During this past week, the S & P hit an all time high of 1890 and then tested the lower end of the short term trading range @ 1840, and then broke decisively to the downside. Amidst the volatility and choppiness we witnessed in the market this week, no one should lose sight of the fact that the LT trend is decidedly "UP". As mentioned on 4/4, the "sentiment" surrounding equities seems to have changed, traders now appear to be in charge as the market and individual stocks react to every headline & word that is uttered on a given day. I believe anyone can make an argument that the market can continue to make new highs and on the other hand a case can easily be made that the market is about to break down. That's the tug of war, and For investors, it maybe time to sit back and watch.

    Looking at the recent market action, combined with the sentiment backdrop in place, I am now inclined to believe that even if we see decent or good earnings reports, the markets may in fact shrug them off and the weakness in the equity markets might well continue. Case in point --- regarding good news - and market reaction -- the jobless claims number came in at the lowest level since 2007 , yet that was the same day the NASDAQ sold off 3+% and the Dow was down 266 points. Then the Consumer sentiment index reported the very next day on Friday as it comes in at the highest level since last July and the sell off continues during the day ..

    My comments from last week :

    Putting the pieces together, investors should not lose sight of the fact that with the 8% 2013 earnings growth that was achieved we also had the S & P rise 32% . and that may be what this is all about folks.

    So, perhaps this recent weakness should come as no surprise given the gains on the S & P as they are the signals that may be telling us all that it is time to rest now, work off the excesses and recharge for the next move higher.

    While the volatility continues and both the upper and lower trading levels are tested, what you don't want to see if you have a "bullish" view, is the next pullback be lower than the pullback in mid-February or 1735- 1740 on the S & P . So far, over the past two years, every major pullback "low" has been higher than the previous one as shown on this weekly S & P chart.

    But let's not get ahead of ourselves like so many others.

    Both the 'bulls" and the 'bears " seem to be doing just that with this recent volatility. Speaking to that , the latest AAII survey indicates the lowest reading of "bulls" since Feb. when the S & P closed at 1741.

    That low puts everything into perspective as in my view, there wont be a material change in the uptrend until the 1730-1740 area on the S & P is decisively violated. So sitting and watching the action to the downside may be nerve wracking to some, however there are times when doing nothing is the best approach.

    I will say, this sell off has a different "feel" to it. And that is because of the negative "sentiment" out there. No one can tell when this present market mindset will subside and when that sentiment will shift back. I do believe the volatility will continue, the market can just bounce around, bide time, & remain in a trading range with wild swings in between.

    I've heard many tell me in the last week that the economy looks good, why is the market selling off now.?

    The market will confound many, remember when the market was in full bull mode and the economy didn't look so good and the same folks questioned how can the market go up in this environment...? I explained how that was surely possible by "watching the price action", and I believe we may be seeing the "reverse" the price action now tells a different story, in spite of what appears to be good economic news.

    It's simple market psychology, just when the masses think they have it figured out -- the market spoils their party.. It's nothing new, as soon as investors realize that fact, the better they will be at managing their portfolios.

    Bottom line : "this too shall pass", as market psychology & sentiment are fickle..

    It is a time to look over & evaluate portfolios. If you are so inclined and haven't done so as recommended, sell calls for income...Be diligent and watch the companies that report good earnings , yet their stock price comes under pressure, as these will be opportunities.

    I don't believe its a time to panic nor do I believe we take out the "wish" list of stocks and start buying indiscriminately. Depending on one's equity exposure, LT investors can either choose to sit back & do nothing, while others can add or initiate slowly, with the thought that what you are buying today "may" in fact be a bit cheaper later.. However since there is no way of knowing that, assess what u want to purchase and answer a few simple questions..

    How expensive is the stock compared to the overall market.?

    Has the fundamental backdrop changed for the company.. ? Is it better, worse , or the same ?

    If the answers lean to the positive, and the stock has been thrown away with the overall market sell off, it surely may be an opportunity as a good LT investment.

    With that in mind, (BAC) and (C) have been trashed and if one does not have any exposure to the financial sector, now would be the time to start a position. (LAZ) has also come down, while it may have a bit further to go, the 2.8% yield and what I believe are above average growth prospects, make it a name worth looking at.

    Both (C) & (BAC) reports earnings next week. (BAC) is very interesting, now that it is under $16.

    I may add to my position after the announcement, assuming the stock is still under 16 .. As of now my 12 month target is 20, or 25% upside from these levels.

    Looking over my portfolio, other dividend names that have above average yields and are selling below market multiples are (RIG), (ESV), (FCX).

    Best of Luck to all !

    Disclosure: I am long C, BAC, RIG, ESV, FCX.

    Tags: C, BAC, RIG, ESV, FCX
    Apr 12 3:15 PM | Link | 9 Comments
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