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  • "Free Trade", The Oxymoron's Portfolio Impact
    I’ve discovered a new oxymoron to join the ranks of those often used in bouts of humor such as “a fine mess” or “second best” or “pretty ugly”…..namely: “Free Trade”, as in “Free Trade Agreements”.
    I participate in an online discussion group focused on foreign policy issues and in the past few days, there has been a great deal of talk about recent trade deals, both of the formal variety such as the South Korea-US Free Trade Agreement (KORUS FTA), and of the less comprehensive type such as the major deals that US companies inked with India on President Obama’s November trip. The discussions have revolved around a number of issues:
      • What is "free" about trade agreements that are chock full of lingering tariffs, quotas, restrictions, regulations, etc?
      • Will these deals create jobs in the US and if so, how many?
      • Is the US aggressive enough in establishing FTA’s or are we losing ground to other countries that are swifter at negotiating, approving and executing such deals?
      • Are these deals, especially in the Asia-Pacific region, likely to have any impact on the geopolitical balance in the region especially as the US is forced to trim its budget deficits and possibly have to reduce its policing presence, which could, in turn, provide China (and others) an opportunity to fill the void left behind?
    What does this have to do with “actionable trade ideas” that are more suitable for this site? In a word, everything! As I’ve stated in numerous articles in the past, investors are best equipped to opine and decide on their investment choices if they include in their analysis a global view of events that can impact overall economic growth, specific company revenues and profits, and of course, trade related issues that impact imports and exports. Again, as readers will know, my portfolios have been built around a global view that sees meaningful sustainable growth in various spots around the globe, most notably in Asia and Latin America (and increasingly in Africa in specific industries/sectors). Around that view, I’ve targeted companies that are exposed to those opportunities, both US companies that are penetrating those markets, and domestic companies in the respective regions who are leaders in their space and have acceptable (to me) degrees of corporate governance and transparency of operations.
    I’ve also been constructive on the US as economic data has started to show signs of a bottoming, if not pickup, in activity. In addition, tax cuts appear to be in the offing, QE2 (maybe 3) continues to pump up liquidity, and companies are about as lean and mean as they’ve been in some time leaving them prone to start hiring once demand picks up.
    That said, there are headwinds that are likely to continue preventing markets from straight-lining to higher levels, such as the debt stresses of European sovereigns and banks, the China “foot on the brake” fight against inflation, and the US municipalities who are increasingly being talked about as being the next big candidate for a federal bailout. On top of all of that, there remains the possibility of escalation in the Korea conflict, a potential for the US bond rally to unravel causing a spike in rates, and the ever present threat of a major terrorist event.
    So how am I positioning in this environment? Before answering, please note that everything in this article is solely meant to be thought-provoking, and is in no way meant to be taken as personalized investment advice. Each investor has to decide for themselves as to the relevance of comments made here to their unique investment goals, financial profile and risk tolerances.
    In sum, I have continued to shift the weighting more in favor or Consumer Discretionary stocks vs Consumer Staples. That doesn’t mean I’m vacating the latter space, but new money is going to stocks such as Lowes (NYSE:LOW) and Stanley Black & Decker (NYSE:SWK) rather than Campbell Soup (NYSE:CPB). Along the same lines, I’ve been adding to Materials and Industrials such as Nucor (NYSE:NUE), Alcoa (NYSE:AA), 3M (NYSE:MMM), United Technologies (NYSE:UTX) and Waste Management (NYSE:WM). In the Tech space I’ve added Intel (NASDAQ:INTC) and EMC (NYSE:EMC). In Energy, Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL) and Devon Energy (NYSE:DVN). In Healthcare, I’d added Abbott (NYSE:ABT) and Teva (NYSE:TEVA). Despite my general ambivalence towards Financials in general at this time, I maintain a position in Citigroup (NYSE:C) and have added Hudson City (NASDAQ:HCBK). In REITs I’ve added Senior Housing (NYSE:SNH) and Omega Healthcare (NYSE:OHI). Finally, in the Utilities space, I’ve added ConEd (NYSE:ED), Exelon (NYSE:EXC) and Duke (NYSE:DUK). Also on my shopping list are some Emerging Market plays such as China (FXI and HAO), Australia (NYSEARCA:EWA), Brazil (NYSEARCA:BRXX) and the diversified EM ETF (NYSEARCA:EEM).
    This list is not all-inclusive, but is meant to give some idea of the kinds of companies that collectively, I believe, start to represent a well-diversified portfolio of global businesses that are likely to benefit from the world view I mentioned above. Some of these companies are also likely to be impacted, some directly, some indirectly, by the recent trade deals with Korea and India, and others that are under discussion. To sum it up, it would be “pretty ugly” to “think out loud” about “stunted growth” in the US and be “deliberately thoughtless” about “somewhat awesome” global opportunities that might result in “incredibly real” results if things play out absent the “normal deviation” from “expected serendipity”.
     
    Disclaimer: Please read and consider important information related to all communication made by Soos Global on Seeking Alpha by clicking here.
     
     


    Disclosure: I am Long LOW, SWK, CPB, NUE, AA, MMM, UTX, WM, INTC, EMC, SLB, HAL, ABT, TEVA, HCBK, C, SNH, OHI, ED, DUK, EXC, FXI, HAO, EWA, BRXX, EEM.

    Additional disclosure: Positions can change at any time without notice.
    Dec 08 11:19 AM | Link | Comment!
  • Portfolio Diversification: Don't get "vioxxed"!
    I’m about to share a story with you about a client portfolio (with his full consent) that came my way for review and management, a story that includes many key themes in portfolio management at all levels, and ultimately provides some thoughts on specific stocks that might be worth considering. 

    (Please note:   This is NOT personalized financial advice. Each investor is obligated to opine and decide for his/herself as to the relevance of what is stated in this article as to his/her own unique financial profile, risk appetite and portfolio goals. This article is solely meant to be a thought provoking note on global issues that investors should throw in the mix of their own investment analysis and decisions)
    The client presented me with a portfolio filled with some cash along with 34 securities, primarily stocks and a few ETF’s. From a ‘birds-eye-view’, which is about how deep of an analysis the “do-it-yourself” investor ever did on this portfolio, it appeared to be quite diversified due the sheer quantity of different companies represented in the mix.
    Upon closer scrutiny, in fact it didn’t require a look too much closer to the ground than the ‘birds-eye’ level, it was clear that while there was some diversification, the actual risk embedded in the portfolio was quite substantial. How so? 

    Of the 34 different stocks, 3 of them represented close to 50% of the dollar value exposure….and 2 out of those 3 were in the “health care” sector, more specifically, the ‘big pharma’ companies of Bristol-Myers Squibb and Pfizer. The third, by the way, was a “tech” name of household familiarity, IBM. From another vantage point, the portfolio actually had over 60% of the exposure solely in pharma and tech names, with the remainder spread around unevenly (and unscientifically) into industrials, consumer staples and a few telecoms, utilities and financials.
    The first thought that came to my mind was that this investor probably had never been “vioxxed”! 

    What’s that? 

    Most investors have a ‘war story’, often more than one, where the value of a stock that they owned got decimated due to a surprise announcement, usually referred to as “event risk”. For me, that was the Vioxx experience of Merck several years ago. More specifically, on September 30, 2004, Merck surprised the world by pulling their popular arthritis and pain drug, Vioxx, from the market due to tests that reportedly linked the drug to increased chances of cardiac side-effects. The value of Merck stock dropped over 25% on the news, wiping out over $25B in the company’s market value just like that! While I’ve lived through plenty of ‘event risks’, that one stood out in my mind for a variety in of reasons, most notably the up until then perceived quality of the company and its management, along with the seeming success and popularity of the Vioxx drug, and the ferocity of the stock’s instantaneous selloff on the news.
    So today, looking at a portfolio where close to a third of the risk was held in just 2 big-pharma names, it seemed prudent to explore some diversification of that risk and examination of the exposure in other sectors. Readers of my recent articles will know that my underlying investing premise is focused on the global infrastructure growth that appears evident in so many emerging and emerged countries around the globe which, in turn, has led to a growing demand for materials, machinery, resources, business services and technology products. In the case of this investor’s portfolio, as a starting point, I looked at lightening up on the concentrated positions in the pharma names and exploring some of the names that I’ve mentioned in recent articles such as GE, MMM, NUE, PKX, INTC and SWK. 
    Taking a look at sector performance is an important element in the process. (Source: ChartFacts.com)

    Using sector ETF’s as proxies for the component sectors within the S&P, the chart above shows, by looking at the latest date on the right hand side, the order of performance over the past year from top to bottom as:
    Consumer Discretionary (31.095)
    Industrial (25.488)
    Materials (19.356)
    Technology (18.285)
    Consumer Staples (11.405)
    Utilities (10.708)
    Energy (8.876)
    Financials (8.420)
    Health Care (8.336)
     
    Noting that HealthCare underperformed the bunch doesn’t by itself clamor for leaving that sector. Especially in this low interest rate environment, investor appetite for dividends could give many of these high dividend paying stocks a boost.

    Furthermore, much of the sector’s underperformance has to do with the expected impact on earnings due to this year’s passage of healthcare reform, in addition to the usual concerns around big pharma related to patent-cliffs and the surge in popularity of generics. On healthcare reform, regardless of one’s opinion on the subject, the political reality on the heels of last week’s US elections is that the Republican Congress plans on pushing back aggressively on many of the reform’s measures if not on the package in its entirety. In addition, portfolio managers in search of ‘underperformers’ could find Health Care appealing as they entertain sector rotation strategies.
    So back to my investor….the net result was to prudently diversify exposure so as to reduce concentration risk and the ‘event risk’ that necessarily overhangs the portfolio when so much is riding on so few names. That said, we still maintained reasonable exposure in the pharma sector, but we further diversified to include other names in that space. I’m not sure that one can fully protect against getting “vioxxed”, but mitigating the risk is an exercise worth considering. 

    Disclaimer: Please read and consider important information related to all communication made by Soos Global on SeekingAlpha.com by clicking here



    Disclosure: Long personally or in client accounts: BMY, PFE, IBM, MRK, GE, INTC, MMM, SWK, NUE, XLE, SPX, XLU
    Nov 08 4:08 PM | Link | Comment!
  • Friday's focus...ECI (Hysteresis?), GDP....in the shadows of next week...
    With ASEAN meetings this weekend on fx and trade, elections next Tuesday, Fed Wednesday, BOJ Thursday and NFP Friday, today's data might be eclipsed.....but nonetheless, in focus:

    As pointed out earlier in the week in Beyond G20: An Invitation to More Risk?:

    Of particular note in the chart (below)... is the increase in employment costs over the course of 2010. There's been a great deal of focus on this and rising concern that employers might be even slower to hire new employees due to the rising cost of employment.



    Also today, a first look at Q3 GDP:   

    Historical perspective....last few data points heading south, highlighting questions of recovery sustainability.....
    More later....

    Disclaimer: Please read and consider important information related to all communication made by Soos Global on SeekingAlpha.com by clicking here

    Tags: Economy
    Oct 29 5:42 AM | Link | Comment!
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