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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 5/9 - Opportunities Arrive With Sector Rotation. Amid A "Stealth" Correction 10 comments
    May 10, 2014 12:54 PM | about stocks: MU, GILD, LAZ, MSFT, CPA, CTRP, AAP, RIG, NVDA

    The equity markets churned around again this week , S & P and NASDAQ had big moves during the week but finished slightly lower from where they started last Monday, so for the most part the markets just "ran in place". The upside exception -- a small gain for the Dow 30.

    If you are looking at your portfolio and scratching your head, you are not alone. While the S & P is off less than 1% from an all time high. Individual stocks and select sectors tell a different story.

    I've mentioned "sector rotation" during the course of the year and often that spawns what is often referred to as an "internal" correction. For example, there are a lot of NASDAQ stocks are already down 20% - 30%. In addition, the average stock in the small-cap S&P 600 is off ~19% from its high, while the average larger-cap S&P 500 stock is down a little over 9%.

    As a side note, the Dow 30 which had been a laggard for quite some time, outperformed the other indices this past week and when I look at the valuations there, they arent expensive at all.

    The point is that while the major averages are hovering near their highs, the average stock has been hurt over the past few weeks.

    This type of action is "positive", as many stocks are, and have been correcting, both in price and "time". If you are a long-term investor, shopping for new positions, you can use volatility to your advantage. More on that theme later...

    Truth be told, it is the business cycle that determines equity returns and that is true in any season of the year, even in the summer season where everyone is expecting equity weakness.

    The direction in leading indicators is the best gauge of market returns in the summer months. In years during which PMIs are headed higher, the average performance of the S&P 500 has been almost +6% percent, while those in which PMIs are falling have come in at -2%. It is important to note that the PMIs in the U.S. are just turning up. To that end, the April PMI report didn't disappoint -- coming in at 54.9, beating the consensus of economists that track this data of 54.1 The new orders segment of that report registered 55.1 percent, equal to the reading in March, indicating growth in new orders for the 11th consecutive month. That dovetails nicely with the strong Chicago PMI numbers that were released on April 30th.

    On the employment front there is continuing consternation about the employment numbers. Much of it is coming from the same crowd that has dissed the economic recovery from the beginning -

    From the Scott Grannis Blog : "As the chart below shows, the number of private sector jobs hit a new all-time high in March. The private sector has finally finished recovering from the Great Recession and is now moving on to new highs. Since the post-recession low in early 2010, the private sector has created almost 9 million jobs, and private sector employment just reached a new high."

    (click to enlarge) Enough said -- This is one reason that tells me its not at all necessary to have the employment issue on my radar screen. Yet many pundits, the media, and of course the naysayers continue to pound their drum.

    The 'cry" now is that the job participation rate is trending lower month by month.. and of course they weave that into how frightful that will be for consumer spending.

    I have quite a different "take" on that situation and have believed for quite some time now that what we are seeing on that front is a function of the demographics here in the U.S. In my view, anyone waiting for this number to trend up will be waiting for quite some time.

    Consider that the first baby boomer turned 18 in 1964 and there is no coincidence that the participation rate began to rise.

    Conversely, the first baby boomer turned 60 in 2006 and the participation rate has been declining ever since. Its hardly a coincidence .. Now with 10,000 boomers retiring per day, (that is not a typo) this trend has a long way to go ..

    I'll also add thoughts form my personal experiences. Many boomers that left the Corporate world due to downsizing initiatives by the various industries or just plain retired before the financial crisis found themselves in a quandary. They woke up and found their nest egg had been drastically reduced. So many decided, and some were simply forced, to go back to the job market & take any job available to bridge the income gap after looking at their IRA's.

    Turn the page to the recent Bull run and the "wealth effect" & positive changes in the accounts of these same folks has been remarkable. Many that went back to work no longer have that desire or need to be back in the workplace. This all adds to the participation rate falling off a cliff.

    And its nothing to fret about, consider this recent report I found on a PR newswire;

    Widespread Labor Shortages Ahead for the U.S. - For Now, Jobs Remain Scarce - But an Aging Population and the Recession's Aftermath Are Poised to Create Historic "Seller's Market" for Skilled Workers - PR Newswire . . . new study from The Conference Board. From a Buyer's Market to a Seller's Market predicts unemployment in the United States - currently 6.7 percent and falling rapidly - will reach its "natural rate" of 5.5 percent by late-2015.

    The decline will continue well past this benchmark; over the next 15 to 20 years, U.S. unemployment may even dip below 3.8 percent, the lowest rate recorded since the 1960s.

    M & A activity and earnings positives continue.

    M&A deals have been coming fast and furious, reflecting a better economy, lots of funds to be invested, and accommodative monetary policies that the Fed this week signaled will remain in place. Deutsche Bank says the volume of large-cap M&A deals is now reaching pre-financial crisis levels, with 14 deals or bids worth at least $10 billion announced so far this year, the most since 2007, and the dollar volume of deals topping $1 trillion in the year's first four months, also the fastest pace since 2007. Bloomberg reports that the average premium paid by acquirers remains in line with historical averages (19-20%), suggesting there is some restraint being shown by corporate management. A beneficiary of all of this is LAZ

    On the Earnings front :

    Per Thomson Reuter's "This Week in Earnings" the forward 4-quarter estimate for the SP 500 actually increased this week to $123.19, up from last week's $122.77.

    The p.e ratio on the forward estimate is now 15.3(x), and the PEG ratio as of Friday, May 2nd, 2014 is 1.86(x).

    The earnings yield on the SP 500 is 6.55%.

    Most importantly, the year-over-year (y/y) growth rate is 8.21%, which exceeds the previous highs of 8.02% in late December '13, and is now the highest y/y growth rate since January, 2012.

    A number of metrics this week show the SP 500 at a valuation that is fairly valued, almost attractive if you look at the 1.86(x) PEG (P.E-to-Growth) ratio, and the y/y growth rate in earnings. The 1.86(x) PEG hasn't been this low (consistently) since the first quarter of 2012, so it will be nice to see if this trend continues for a few weeks or months. The increase in the y/y growth rate for the SP 500 is very important, but it also needs to be sustained for the S&P 500 to continue on a march higher.

    There has been a significant change in earnings estimates for the Health Care sector. Not only have the earnings growth estimate revisions been higher in April and through early May, but the full-year 2014 earnings growth estimate for full-year 2014, is now HIGHER than on Jan 1, 2014. That is a very unusual, and out-of-the-ordinary pattern for estimate trends, and bodes positively for the sector. Many inexpensive names here, my pick is GILD. In addition to the positives I have mentioned about the stock, they just announced a new share buyback program.

    The other sector with improved earnings is Technology: and I continue to think the sector is attractive. Of course Im referring to the names that have solid fundamentals and earnings to match.

    So with an improved earnings picture on the horizon combined with some indiscriminate selling in that sector - it spells opportunity. As we can see from the accompanying chart, tech investors have recently given up on this group.

    (click to enlarge)

    Note that every time this index has dropped to these levels there has been a very nice rebound.. The companies that have real earnings and true growth will bounce back the quickest.

    Nothing wrong with MSFT at these levels.. and a stock like MU continues on its trek to new highs. A name I have owned in the past and am now considering again is (NASDAQ:FFIV). They reported a nice quarter and the shares are down to $102 from a high of $117, as they too have "corrected" because of overall tech weakness, while their fundamentals are improving. I like this name now that it has come down in price, My target -- $130.

    (NASDAQ:NVDA) sold off sharply because of tepid guidance after another stellar earnings report . Nvidia does NOT give upbeat guidance, ever, yet has beaten consensus earnings estimate for the last 8 quarters ! The shares hit 19.50 on April 24th, yields 2 %, is cash rich, and with all of that it dropped to a low of $17.70 this past Friday. I have owned the shares since early 2013 getting in at $14.78. My target is around $22-23, so there is plenty of runway left in this name after the drop.

    Healthcare and Technology are roughly 13% and 19% of the SP 500 when weighted by market cap. If these two sectors continue to improve on the earnings front the market may soon recognize the value there.

    Volatility continues to produce opportunities for the astute investor with recent examples of names that I own (NASDAQ:CTRP) & (NYSE:CPA).

    (CTRP) a 2014 stock pick, has been punished because of it's "internet " connotation. The stock hit a high of 55 in March , and has sold off with the tech sector hitting a low of 45 on May 7th.. The company just reported another solid quarter. Now with revenue growth of 35%, this is the largest online travel agent for the republic of China. The shares rebounded after saner heads prevailed on Friday 5/9 as they advanced $4 to $49 . In my view this price represents an opportunity to participate in this growth story.

    Copa Holdings (CPA) another 2014 stock selection that has been whipsawed due to market volatility this year. Another great quarter was just reported for this Latin American Airline. The company also recently raised its dividend by 30% in February, the shares now yield 2.9%

    Both of these shares are attractive at these levels. (CTRP) @49 (CPA) @ 140... Target $60 and $160 respectively .

    But - it doesn't end there,

    Advance Auto Parts (NYSE:AAP) is a specialty retailer that I recently commented on. They have catalysts in place that will take their shares much higher over time.. Shares are down from a high of $129 to a recent low of $116 where I picked up these shares at a discount -- Any weakness in these shares represents an opportunity, as I believe the shares have upside to the $135 - $140 level..

    Unloved, underappreciated and downright thrown away - Im referring to the shares of (NYSE:RIG) .. A good quarterly report was dismissed - The earnings call transcript had this opening remark ; "Our revenue efficiency for the first quarter was 95.7%, the highest we've achieved since early 2008." The possibility of the dividend being increased to $3 next week is also being dismissed. Rather than go into more detail, I found a report here on SA that says it all .. The shares are value at these levels and when this sector comes back into favor, an investor buying this 7% yielder will not be disappointed..

    These are but a few examples of how "good" companies get tossed away due to sector rotation and how volatility creates great opportunities for the savvy investor..

    Stay the course.. use the Secular Bull theme as a backdrop - pick up shares of companies that show improving fundamentals, yet are 'correcting' due to sector rotation. These names will bounce back the quickest, the "cream" will rise to the top - it just takes time & patience...

    Best of Luck to all .......

    Disclosure: I am long MU, GILD, LAZ, MSFT, CPA, CTRP, AAP, RIG, NVDA.

    Additional disclosure: I am long numerous equity positions , all of which can be found here in my blog . "It is my intention to present an introduction to these securities and state my intent and position. It should be used as a 'Starting Point' to conduct your own Due Diligence before making any investment decision."

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Comments (10)
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  • southgent1951
    , contributor
    Comments (2542) | Send Message
     
    F & G: Low inflation and inflation expectations are conducive to higher than normal stock valuations.

     

    Low inflation, persisting over a long period of time, was one of the underlying secular forces underpinning the long term secular bull market between 1949-1966 (one high number during the Korean War).

     

    CONSUMER PRICE INDEX, 1913-
    http://bit.ly/WB2il7

     

    And problematic inflation was the underlying secular force that caused the long term secular bear market in bonds and stocks between 1966 to August 1982.

     

    The break-even spread on the 10 Year TIP closed last Friday at 2.18% last Friday. That is the market forecast now for the average rate of inflation over the next ten years

     

    The Cleveland Fed has a model that is currently predicting an even lower average annual CPI rate of 1.87% over the next ten years:

     

    http://bit.ly/VTYQkU

     

    If either of those predictions proves prescient, then stocks will have a tailwind at their back for many years to come. Those stocks that now yield more than the 2.6% fixed coupon ten year treasury and routinely raise their dividends at a faster rate than 2.18% per year (the CPI forecast embodied currently in the 10 year TIP pricing), look even more attractive compared to bonds.

     

    As to RIG, I noted earlier that I recently bought 30 shares. I read that RIG has 20 floaters coming off lease in both 2014 and 2015. The market appears to be assuming a negative outcome when those rigs come off lease given the current challenging market conditions, which RIG acknowledged in the conference call.

     

    It appears to me that the market is assuming the worse, which allows for upside price action based on the real re-lease rates as we move further into 2014. The DeepWater Horizon litigation is still ongoing and there is a tax problem in Norway which has not yet been resolved.

     

    The market has a tendency to take the present, which has some problems, and then forecast the worst; or to price stocks in an economic downturn as if conditions will never get any better.

     

    The flip side also occurs frequently and involves pricing stocks as if the good times will roll without interruption from a recession, or that two or three years of 20% growth can be rationally predicted to continue for another decade or more.

     

    There is a lot of bad news baked into RIG's price which has not yet come to pass.
    10 May, 01:36 PM Reply Like
  • Fear & Greed Trader
    , contributor
    Comments (4558) | Send Message
     
    Author’s reply » South

     

    Thanks for that insight,, As you pointed out, low inflation , may be just another piece that makes up the secular bull story .

     

    & that would indeed be good news for the "boomers' that had to go thru one of the worst financial episodes in quite some time .... I always felt they deserved better than what they received in 2008-2009, and those that didn't panic out are doing ok. Of course I am partial to their story since i am also a baby boomer... :)

     

    Agreed that the market is assuming the worst on (RIG) , so I'm ok with letting this story play out and collecting the div.
    10 May, 04:39 PM Reply Like
  • BlueSkyForever
    , contributor
    Comments (1416) | Send Message
     
    Good article F&G.

     

    Another positive that must be helping the finances of most companies is the historic low interest rates we've had now for years. So they can retire debt or refinance at much lower cost. These low interest rates are helping many people to pay off their mortgages too. For fiscally responsible people, their personal finances are doing very well.

     

    IMO many foreign investors are buying US equities. This is because they might feel more confidence in the data reported by US companies as opposed to other countries, especially China. Plus the US economy is improving, giving all investors more confidence in owning stocks in our markets.

     

    Your graph on the baby boomer's effect on the labor force is interesting. Shows that we cannot meet our labor needs, especially at the high end, technical/research level and must allow more foreigners to come here. To fill advanced education programs and jobs, we need these people. Same must be true at the other end of the spectrum, because if there weren't jobs available here all those illegals from South America wouldn't be able to make a living here.

     

    If we can continue to keep inflation low, interest rates reasonable and the economy on the upswing it does look like a promising future.

     

    There will always be some stocks that are over valued and thank goodness, some that are undervalued. If you look at the DOW stocks, there are many that still have fairly low PE ratios. Travelers, IBM, and MSFT are all extremely low.

     

    The key is finding new opportunities to put money to work, while taking money out of investments that have become over valued. I think 10 years from now, we will be very happy to have continued buying and holding our investments.
    10 May, 03:33 PM Reply Like
  • Fear & Greed Trader
    , contributor
    Comments (4558) | Send Message
     
    Author’s reply » Blue ,

     

    I was also surprised on the Dow 30 components and their valuations when i ran across that summary.

     

    I would also tend to agree about foreign investment here in the U.S equity market .. Many don't understand what an impact that has ...

     

    I know other managers that have a few overseas clients and they all say the U.S is the place to be as far as their investments are concerned..
    10 May, 07:21 PM Reply Like
  • BlueSkyForever
    , contributor
    Comments (1416) | Send Message
     
    F&G, maybe it's because I live close to NYC that makes me a little bit optimistic. But then I see the midwest doing well too, when I go there. Granted there are still lots of people that aren't doing so well, but these seem to be the people that don't have the skills to find a better job. Or they live in areas where the economy hasn't rebounded as much.

     

    However, there has always been a large group that doesn't do as well, regardless of how the economy is doing. I don't know why this is, it's true we don't have all those low level factory jobs like decades ago. Yet, there are some industries where you can get in without a college degree. It's sad to me that those jobs don't pay better (like working at Walmart, etc) so I do think we need to have a higher minimum wage. That would go a long way towards helping this group. It would help all of us, put more of the burden on their employers than on the taxpayers. I would pay more for McDonalds etc if it meant the workers could earn a living wage.

     

    Hopefully we will see everyone doing better and not just the wealthy.
    10 May, 07:32 PM Reply Like
  • User 7415181
    , contributor
    Comments (569) | Send Message
     
    Nice weekly, again.

     

    BSF,

     

    If someone's more interested in work than school, there are still jobs that pay decently where even high school degree isn't needed. Driving a semi comes to mind (did that) - some companies will pay for truck driving school if you agree to work for them for two years or so.

     

    Perhaps a push to revitalize vo-tech programs in this country might do some good instead of tell everyone they need to go to college? Took woman a looong time to find a decent job after she got an English degree.
    10 May, 07:49 PM Reply Like
  • BlueSkyForever
    , contributor
    Comments (1416) | Send Message
     
    User, totally agree with you, college doesn't mean you get a job. In fact, vocational school is often a much better deal.

     

    I always wonder why more people don't become truck drivers, there's a huge shortage. It is a tough job but pays well. Also nurses, and the medical field in general seems to have good opportunities.

     

    No substitution for motivation & work ethic. However, I do see the middle class shrinking, opportunities for people seem to be harder & that's sad. I hope that changes, so we see a larger middle class like we had in the 70s.
    10 May, 09:44 PM Reply Like
  • maykiljil
    , contributor
    Comments (321) | Send Message
     
    F & G,

     

    Today Fear & Greed Index is in below.

     

    http://cnnmon.ie/1kiIOCS

     

    I think it is improving slowly. It was 19 points (people fear). Today neutral. Much more better. Can we say some amount of money pouring into NASDAQ? Will be better in summer?

     

    How do you think ? In term of investor stocks relationship?

     

    BR,

     

    MJ
    12 May, 01:58 PM Reply Like
  • Fear & Greed Trader
    , contributor
    Comments (4558) | Send Message
     
    Author’s reply » MJ,

     

    today was a good day - for all sectors --

     

    I believe many stocks in the nasdaq were oversold and the earnings revisions in that sector have been positive --

     

    Not sure about the summer months - we usually do get some flat seasonal weakness - but in my view it will be time to position portfolios for the future --IF we get any significant pullback .....
    12 May, 05:16 PM Reply Like
  • maykiljil
    , contributor
    Comments (321) | Send Message
     
    Thank you very much.

     

    BR,

     

    MJ
    13 May, 01:17 AM Reply Like
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