FYI..below is an email from earlier today in which I responded to an investor re Nike (NYSE:NKE), a stock that has been on my 'shopping list' for when/if we get a meaningful pullback. The question was whether I thought it was time to re-enter, and not just NKE, but also other stocks/ETFs that have been on my 'shopping list'. My response in the context of general market commentary is below…fyi….
I have NKE on my radar....but I'm not inclined to buy yet. In fact, I've been doing a great deal of analysis on a broad array of topics around the globe, and I'm not feeling any better about the global markets.
You know I'm "defensive", which is a word that I've been using for a long time. In real terms that has meant running cash levels at between approx 20 and 30%, holding much less in materials and industrials, holding more in utilities, telecoms, reits, consumer staples and some 'staple-like' discretionaries. That has been a good way to be positioned in tough markets, but if things really fall apart, the only 'defense' will likely be a much greater %age in cash and Treasuries...and the latter is even questionable as we approach the summer and the intensifying discussion that will be forthcoming on the 'fiscal cliff'...and of course, the election.
In sum, the US economy is showing more and more evidence of slowing. The monetary stimulus that has been in overdrive is not producing the desired results in terms of pumping up growth, hiring and spending. Europe is increasingly deserving of the label that market commentators have been using of late: a basket case! And even if the ECB accepts more junky collateral in exchange for loans, that is not likely to cure the disease despite temporarily ameliorating the symptoms....the ultimate issue is structural....bloated government budgets, entitlement programs which are bankrupting the gov'ts, inefficient economies, rigid labor markets, and populist movements that want to avoid any change in these things. Even today, Berlusconi, who has been quiet for months since leaving office, resurfaced and challenged the technocrat Monti as being too austere and driving voters away from Berlusconi's conservative party. Even though Italy is a better credit than Spain, if Berlusconi were to bring down Monti's government, the market reaction could be pretty awful. Then there's Spain...described by many as "a total mess"...massive unemployment, explosive levels of bank debt, etc.
Finally, there's Asia...one of the few relative bright spots on the planet, and even there, other than the Philippines and Indonesia and few others, there's some serious concerns about just how much growth is possible without China revving it up. And more and more data is coming up showing that China is in fact slowing down in a way that might yield a 'hard landing'. (I don't think it will, but the risk weighting on that possibility is higher now than it was).
Finally (really this time) we have Q2 earnings around the corner in a few weeks.....earnings growth was already slowing in Q1. And we've had a number of companies reduce guidance for Q2 and beyond. So I'd expect this upcoming earnings parade to be pretty 'blah' at best!
In sum, there's an understandable perception in the marketplace that Equities look attractive vs other asset classes and that most companies are in good financial shape (low debt, high cash, global franchises and markets, increased opportunities in emerging countries, etc). Now most people who make that statement refer to the simple P/E of the S&P 500, and they note that at current levels, it's below historical averages. So they assume that the market is a buy because by the "P" going up, the P/E will rise to historical norms.
I go the other way....or at least am concerned that the other way for P/E to go up is by "E" going down due to the headwinds mentioned above. (BTW, the famous economist, Robert Shiller has an adjusted P/E ratio that takes into account inflation and smoothes for business cycles, and according to that statistic, many people argue that the market is in fact expensive compared to historical averages!).
In any event, I'm standing my ground for now....still holding a shopping list of names that I'd like to add on more of a pullback, but also first considering raising even more cash in anticipation of that pullback which could be greater than it might have been absent all of the above.
I'm not assuming that since the market is well off the highs and has had a bounce last week, that it's time to 'bottom fish'. I think the world is a much riskier place now than it was, and I plan on positioning accordingly.
Will keep you posted….
(Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: While I have no current plans to initiate any positions within the next 72 hours, positions and plans may change at any time without notice based on changing global market conditions.