The market got a breather from the news yesterday and all three major indices (Dow, S&P 500 and Nasdaq) are in positive territory. This bounce was due but as a pragmatic investor, investors would be better off in trimming some of our long positions in selected names. I'll start with Microsoft (NASDAQ:MSFT), which is getting a decent 4% pop today. This stock is a prime candidate for trimming long positions by selling into up days like yesterday. We have not seen Microsoft gaining any traction in the high growth businesses. Given that PC sales are declining at a much faster pace and Windows Mobile has no meaningful share in the mobile and tablet markets, we don't see any growth driver for this company. So Microsoft, even with cheap valuation, is a "value trap." This business is declining albiet slowly, which is reflected in the stock, too. This stock is a definite sell in any major up day with a 4% pop on the upside.
Secondly, the chip sector is suffering from a glut even after the huge earthquake and supply disruptions in Japan. So as the Japan supply slowly comes back, we can't help but wonder how much more glut will be created for chips. So chip stocks like Micron (NASDAQ:MU), Texas Instruments (NYSE:TXN) and even Applied Materials (NASDAQ:AMAT) are becoming strong candidates for selling. The problem is that it is not economical to produce chips in a small quantity, so manufacturers have to produce more chips but uptake for new gadgets is slowing quite a bit with inflation and struggling job markets around the world.
Also, the Greece default is imminent and in fact it's occurring much sooner. Rating agencies had warned that any restructuring in terms of extending the maturity of Greek bonds or writing down the par value will amount to default. But we are already getting the news that some banks are agreeing to rollover Greek debt, which in effect amounts to extending the maturity. The only technicality is that instead of extending the maturity of the same bond, they are issuing a new paper to buy into, thus avoiding the technical default and huge costs associated with CDS executions. While this may be a clever way for some banks to avoid exposing their balance sheets once again, Greece, for all intents and purposes, is already in default. And even with these sleight of hands, Greece will have to formally default and exit out of the European Union to get rid of its pain. There is now no way around it.
This means that barring the short-term bounce in the euro (NYSEARCA:FXE), it is headed down. We believe that euro might even go to parity with dollar in 2 to 3 year's time as more Euro zone economies struggle to find growth internally. Of course, this downward trend will not be straight as the euro-zone leaders and regulators fight off to hide the real problems plaguing the region. But eventually reality will sink in that not all euro-zone economies are created equal and while it is convenient to have one currency for a bigger region, it does not mean that it has to be one of the strongest currencies. We think that sooner rather than later, the euro will be a currency for convenience rather than a currency as a reserve unless major euro-zone reforms are taken into consideration.
This means that stock market valuation for a lot of companies will have to come down. So stock picking is even more important now. And that means being pragmatic about selling points for each stock in the portfolio. As I discussed above, right now, investors should look into trimming positions in selected stocks.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in MSFT, FXE over the next 72 hours.