Note:There is no Investment Strategy for XXXX. The most recent Investment Strategy from XXXX is available below.
Note: There is no Investment Strategy for Month dd. The most recent Investment Strategy from November 8 is available below.
â??The violent swings in the U.S. stock market have damaged investorsâ?? psyches, but money managers at this weekâ??s 2012 Reuters Investment Outlook Summit see the environment as a buying opportunity. The sell-offs this year have produced low price-to-earnings multiples on the stocks of companies with world-class, global franchises and strong balance sheets, investors said. In fact, U.S. corporations still have record amounts of cash on their balance sheets ($2 trillion), which could lead to shareholder-friendly moves including share buybacks, dividend increases, and mergers and acquisitions. â??I think this is going to be a good environment for shareholder value,â?? said Leo Grohowski, chief investment officer of BNY Mellon Wealth Management. Technology and energy stocks warrant overweighting, said Grohowski, adding that he is â??slightly overweight financials.â?? He predicts the benchmark S&P 500 index will end 2012 at 1,350 points, an 8 percent gain from current levels. For the most part, money managers like Grohowski think bad news from Europe is already priced into the markets. â??The economy globally is much stronger than people think,â?? said Ken Fisher, chief executive of Fisher Investments, who said he is overweight anything â??economically sensitiveâ??.â? . . . Reuters News, 12/7/11
As I read the above quip from the Reuters organization, I could not shake the feeling that it was me who wrote said article. Indeed, the volatility of the past five months has clearly dampened investorsâ?? psyches to the point where the world is profoundly underinvested in U.S. stocks, which I think may be one of the best investments you can make over the next few years. Verily, hedge funds are having a terrible year, having been caught â??short,â? as well as underinvested with only a 43.8% net long investment position. Or how about the endowment funds that are only ~12% net long U.S. stocks? How can those endowment funds achieve their mandates of roughly 8% per year using 2%-yielding 10-year Treasury Notes? The answer is they canâ??t! Then there is the retail investor that is so freaked out they never want to own U.S. stocks again. Ladies and gentlemen, for the well prepared investor, who raised some cash last March/April, the July â?? August decline presented a great opportunity to reinvest that cash because the S&P 500 (SPX/1255.19) has rallied more than 17% from its recent reaction low. Moreover, I think there is more to come on the upside. Consider this â?? it looks to me like the economic expansion is becoming self-sustaining, as can be seen in the attendant chart on page 3 from our friends at the Bespoke Investment Group, whose Economic Diffusion Index is near a six-month high. The self-sustaining sequence goes something like this: vehicle sales increase, vehicle production increases, employment increases, retail sales increase, profits increase, capital expenditures increase, credit expands, employment increases (again), and the virtuous circle repeats. Clearly there are potential headwinds â?? Iran could erupt, leading to $150+ per barrel oil, real estate could have another death spiral, our elected leaders could make a policy mistake, Euroquake could implode, etc. Yet, it increasingly seems to me that none of those â?boogie menâ?? are going to burst on the scene. However, last Thursday it was a subtle sneak preview from the Euroquake â??boogie manâ? that spooked the equity markets when Mario (3-card Monte) Draghi pulled a â??now you see it â?? now you donâ??tâ? card trick by contradicting a â??street friendlyâ? statement from the ECB that hit the news wires just 10 minutes before. That sleight of hand caused a Dow Dump of 198 points. By Friday cooler heads had prevailed when the ECB clarified its comments. While the restatement fell short of the 50-basis point reduction in interest rates, as well as the equivalent of a QE2 type of announcement investors were hoping for, the ECB still made some pretty big moves. For example, the ECB now has a complete set of tools to provide unlimited liquidity to the banks. As the astute GaveKal organization writes:
We think you will see additional positive comments this week when the FOMC releases its policy statement Tuesday afternoon (2:15 p.m.). To wit, parsing recent comments from Fed Governors suggests there is another QE2 type of maneuver in the works. Accordingly, to the underinvested crowd the current news backdrop continues to be a nightmare. Speaking of underinvested, consider this insight from The Economist:
â??Meanwhile, the financial assets of developing-world investors are growing fast, but such investors tend to have a very small exposure to stock markets. Indians have only 8% of their wealth in equities. As they get richer, investors in the developing world will diversify their portfolios. McKinsey estimates they would have to raise their equity allocations to the 42% owned by American households to close the gap completely.â?
Consistent with these thoughts, we continue to favor the upside unless the often mention 1217 level on the SPX is decisively violated to the downside. For trading ideas playing to the upside seasonality, we screened our research universe looking for the favorably rated stocks that have had the best relative strength since the â??buying stampedeâ? began on 11/28/11. That list includes: Dollar Tree (DLTR/$82.55/Strong Buy); Mastercard (MA/$377.42/Outperform); Nuance Communications (NUAN/$24.74/Strong Buy); Polaris Industries (PII/$59.80/Strong Buy); Ulta Salon (ULTA/$74.06/Outperform); and W.W. Grainger (GWW/$186.52/Outperform). We have encouraged investors to consider numerous master limited partnerships (MLPs) over the past three years. Many of these stocks have done well and we continue to like the group overall. Last Tuesday our MLP analysts upgraded their recommendation on 4.4%-yielding Tesoro Logistics (TLLP/$31.74) from Outperform to Strong Buy. Their reasoning goes like this:
Please see the company comment dated December 6, 2011 for the full story, including the full justification of the price target. The call for this week: Last week the ECBâ??s interest rate cut took center stage, but that â??cutâ? should be viewed within the context of the 40 world wide interest rate cuts that preceded it. Clearly, there is a global easing cycle underway; and, we think you will see more such news this week when the FOMC announces it policy statement Tuesday afternoon. Accordingly, I think stocks will continue to grind irregularly higher driven by portfolio managers trying to play â??catch upâ? (read: performance anxiety), the upside seasonal bias, low valuations, improving economic trends, still depressed sentiment readings, and the knowledge that we have now entered the best performing six months of the year for stocks. And donâ??t look now, but our Analysts Best Picks for 2012 will be released after the close today.
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I spent last week in New York City seeing accounts and doing the media â??thing.â? On Thursday I went to CNBCâ??s Englewood Cliffs studio to see some friends and do a TV â??hitâ? with my friend Brian Sullivan. Much to my surprise, Brian began the show by talking about the â??Sauta Clauseâ? rally, not only because I was on the show, but because I have been suggesting that the Santa Clause rally had already begun. Indeed, in my commentary of November 28, 2011, titled â??The Oath,â? I wrote:
â??Last weekâ??s wilt brought the â??selling stampedeâ?? to session 19, as well it punctuated the now ~8.2% decline by the senior index since the Dow Jones Industrial Average closing reaction high of October 28, 2011 (12231.11). Recall that such stampedes typically last 17-25 sessions with only one- to three-session pauses, or rally attempts, before they exhaust themselves. In addition, the S&P 500 has experienced seven consecutive sessions on the downside, and markets rarely go that many days in a row in any one direction. Moreover, as of last Friday the selling skein has left the McClellan Oscillator as oversold as it was at the August 8 and 9 â??lows.â?? Therefore, the stage is set for some sort of tradable bottom.â?
Since then the stock market has rallied some 7% as measured by the DJIA. Despite that surge the McClellan Oscillator is not in overbought territory, although it has traveled into neutral ground, as can be seen in the chart on page 3. Still, I think the equity markets will continue to work their way irregularly higher. The driver for that view should be multifaceted. This weekâ??s causa proxima will likely be the Sarkozy â?? Merkel â??hook upâ? slated for today, followed by Fridayâ??s European Union Summit. I believe some sort of progress will be made in buying time for the Club Med countries. To that point, last week I was asked by numerous accounts why I have been somewhat optimistic about Euroquake. After listing the litany of reasons so often scribed in these missives, I said, â??The ECB, as well as the bureaucrats surrounding it, do NOT want to lose their power. If the Euro falls apart they most assuredly will lose power. Additionally, in my 41 years in this business when something absolutely had to happen, it typically happened; remember in 1974 when NYC was broke?â?
This weekâ??s aforementioned duo of events will be followed by next weekâ??s Fed confab. Parsing recent comments from various Fed Governors suggests there is the potential for a QE2 type of announcement from the December 13th FOMC gathering. To wit, Fed Governor Yellen recently said, â??The Fed continues to provide highly accommodative monetary conditions to foster a stronger economic recovery in a context of price stability." She further opined, â??The scope remains to provide additional accommodation through enhanced guidance on the path of the federal funds rate or through additional purchases of longer term financial assets." While Janet Yellen is considered â??a doveâ? on policy, history shows Fed members choose their words extremely carefully. The inference is that she would not be using such language unless something was afoot. Other Fed members have been uttering similar thoughts. Accordingly, I think there is the potential for a trifecta of positive announcements over the next two weeks, which might have positive ramifications for the equity markets, especially with so many folks underinvested.
Manifestly, most of the hedge funds I met with last week were actually hoping the equity markets would decline because they are underinvested. Unfortunately, they are not alone. To be sure, only 23% of stock-fund managers are outperforming the S&P 500 (SPX/1244.28) this year, while most endowment funds are performing just as badly because they too are underinvested in U.S. equities. If these â??thin reedâ? insights become weaved into an â??investment bouquet,â? I believe the ensuing â??performance anxietyâ? will force such investors to chase stocks irregularly higher into the end of the year. If thatâ??s correct, the question then becomes what do you buy on a risk-adjusted basis.
Firstly, looking back at the past few years we have found that coal stocks tend to outperform in December. This can be attributed to several factors including higher seasonal demand in the winter, depletion of coal stockpiles at utilities, and relatively weak performance during the summer months. Although the strong December performance may be a challenge this year, given the sharp rally on November 30, we thought it worthwhile to point out the historical trends that might work in favor of the sector this year, especially given the horrendous year-to-date performance. All in, with recent positive economic data points improving investor sentiment, we would expect the high beta nature of coal stocks to lead to outperformance if we see continued strength in the markets. Interestingly, the best performing stock in the S&P 500 last week was a coal stock, as Alpha Natural Resources (ANR/$24.11/Strong Buy) rose by 28.2%. A potentially better risk-adjusted coal stock for your consideration is Rhino Resources (RNO/$19.22/Outperform), a diversified met and steam coal producer with reserves in Central Appalachia, Northern Appalachia, the Illinois Basin, and Western Bituminous regions. As our fundamental analyst writes in a company comment published November 9, 2011 (please see the comment for the full story, including the justification of the stockâ??s price target):
â??RNOâ??s valuation remains attractive for yield-focused investors, despite a weaker than expected quarter. The company boasts a robust 10.4% yield and given the strong (dividend) coverage ratio, and reiterated 2012 guidance, we stand by our Outperform rating while slightly lowering our target price to $25.50. Based on Tuesday's (11/8/11) closing price of $18.50, we estimate RNO offers a nearly 50% total return; 38% per unit upside to our target price plus a very attractive 10.4% yield.â?
Another risk-adjusted name is Rayonier (RYN/$40.64/Outperform), a leading international forest products company with three core businesses: timber, real estate, and performance fibers. Hereto, our fundamental analyst writes in a company comment published October 26 (again, please see the comment for the full story):
â??Currently, RYN shares trade at a 12% discount to our $45.64 NAV estimate. In comparison, our REIT coverage universe trades at a 7% premium to NAV. Moreover, we also find shares yielding an attractive 4.0%, 40 basis points above our REIT coverage universe average. Our $49.00 price target reflects shares trading at a 7% premium to our NAV estimate, which we believe is warranted due to 1) rising demand and strong earnings growth we anticipate in performance fibers, and 2) healthy international demand for U.S. timber and lumber products.â?
For mutual fund investors, we continue to like The Goldman Sachs Dynamic Allocation Fund (GDAFX/$10.36), which attempts to manage the risk by targeting the volatility for the fund to about half that of the S&P 500. Another exchange-traded fund (ETF), while not actually managing volatility but does have the characteristic of capturing ~100% of the stock marketâ??s upside and only ~65% of the downside, is WisdomTreeâ??s Dividend ex-Financials Fund (DTN/$50.86). I had lunch last week with DTNâ??s portfolio manager (PM) and was duly impressed. I am also impressed with my friends at the GaveKal organization and think the recent weakness in The GaveKal Platform Company Fund (GAVIX/$10.71) should be used to buy a second tranche. For fixed income investors I would also use the recent weakness in The Putnam Diversified Income trust (PDINX/$7.30) to purchase another tranche; and the same can be said for The Lord Abbett Bond Debenture Fund (LBNDX/$7.57). I spent time last weekâ??s with Chris Towle, the PM of LBNDX, and continue to think he adds value in the fixed income space. In fact, I spent four hours with eight different PMs at the Lord Abbett organization last Friday and came away quite impressed. My last visit of the day was with Tom Oâ??Halloran, captain of The Growth Leaders Fund (LGLAX/$14.41). About halfway though his discussion I began shaking my head and was subsequently asked, â??Whatâ??s wrong?â? My response was, â??Tom is giving my exact presentation.â? Indeed, as Tom discussed his themes I felt like it was me talking to me!
The call for this week: December has been the best performing month of the year over the past 100 years with positive returns 73% of the time. And while last weekâ??s 7.39% romp (basis the SPX) will likely not be duplicated quickly, the path of least resistance remains â??upâ? according to our work (as an aside, the real winner of the week was the Russell 2000, which was up 10.08% last week, while Natural Gas rallied 11.63%). That said, while the DJIA bettered its 200-day moving average (DMA @11946.18) last week, the SPX and D-J Transportation Index did not. Consequently, a divergence currently exists that could lead to some sort of pause and/or pullback. Therefore, look for opening strength this morning followed by attempts to sell stocks back down with the final hour being a toss-up. Still, with improving economic numbers (see the second chart on page 3), the potential for positive news out of the aforementioned trifecta, a profoundly underinvested â??crowd,â? and the upside seasonal bias, pullbacks should be contained and the upside should continue to be favored.
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Here is the oath that House and Senate Members take:
I do solemnly swear (or affirm) that I will support and defend the Constitution of the United States against all enemies, foreign and domestic; that I will bear true faith and allegiance to the same; that I take this obligation freely, without any mental reservation or purpose of evasion; and that I will well and faithfully discharge the duties of the office on which I am about to enter: So help me God.
Dereliction of duty is a specific offense under United States Code Title 10 § 892, Article 92, which applies to all branches of the U.S. military. A service member who is derelict has willfully refused to perform his duties (or follow a given order) or has incapacitated himself in such a way that he cannot perform his duties.
Last week, certain members of Congress were guilty of dereliction of duty when they â??willfully refused to perform their dutiesâ? by failing to cut government spending. While the focal point was the â??dirty dozenâ? (aka the Super Committee), by our count there are some 68 members of Congress that also qualify for dereliction of duty. No wonder a recent New York Times poll found that more Americans approve of polygamy than they do of Congress. Indeed, with a 9% approval rating Congress has the lowest rating ever! And, while we canâ??t vote them out quite yet, the D-J Industrial Average (INDU/11231.65) has certainly voted with the worst Thanksgiving week decline (-4.78%) since 1932. Last weekâ??s wilt brought the â??selling stampedeâ? to session 19, and punctuated the now ~8.2% decline by the senior index since the Industrialsâ?? closing reaction high of October 28, 2011 (12231.11). Recall that such stampedes typically last 17-25 sessions with only one- to three-session pauses, or rally attempts, before they exhaust themselves. In addition, the S&P 500 (SPX/1158.67) has experienced seven consecutive sessions on the downside, and markets rarely go that many days in a row in one direction. Moreover, as of last Friday the selling skein left the McClellan Oscillator as oversold as it was at the August 8-9, 2011 â??lows.â? Therefore, the stage was set for some sort of tradable bottom; last week certainly felt like capitulation to me.
Quite frankly, when I wrote the strategy report titled â??Crescendoâ? on October 31, 2011 where I suggested a trading top was â??in,â? I really didnâ??t think the ensuing decline would violate my long-standing pivot point of 1217 on the SPX, nor did I think some of our core investment positions such as EV Energy Partners (EVEP/$63.22/Strong Buy) and LINE Energy (LINE/$35.19/Strong Buy) would decline by the amount they have. Still, we like the MLPs and think 2012 will have some interesting twists for the group. As our energy analyst Kevin Smith writes:
â??Recently there have been several high-profile takeouts of C-corps with pipeline assets by master limited partnerships (MLPs), with at least one transaction sparking a bidding war. You are probably thinking: E&P companies donâ??t have pipeline assets â?? this wonâ??t affect our E&P investments. Donâ??t be so sure. The gates have been opened and the sharks have been let loose in your pool too. While Upstream MLP acquisition activity has picked up, the partnerships have generally lacked the need, the financial firepower, or desire to significantly ramp up C-corp acquisitions. That is changing. We believe the question should not be if, but when will the flood of C-corp acquisitions by MLPs manifest itself?â?
Interestingly, most MLPs trade at 8-9x EBITDA, while E&P C-corps trade at 4-5x EBITDA. The implication is that an MLP could acquire a C-corp and the acquisition would be earnings accretive. Though neither the company nor our covering analyst have given any indication that a tie-up is in the picture, if this line of reasoning proves correct, one potential acquisition candidate would be Berry Petroleum (BRY/$36.93/Outperform) given its valuation metrics and our analystâ??s positive view of the companyâ??s fundamental outlook.
Another theme applicable for this time of year is the correlation between a decent stock market and good Christmas sales. Up until the past few sessions we have experienced a pretty good stock market. Said correlation is about 89%, so our sense is that this Christmas selling season is going to be good. Speaking to this, our softline retail analyst, Samantha Panella, said that Black Friday looks like it is going to be better than last year but that it is extremely promotional with heavy price discounting. Samâ??s observations at the Roosevelt Field Mall on Friday caused her to suggest the clear â??winnerâ? is Express Inc. (EXPR/$20.14/Outperform), while the clear loser is Gap Stores (GPS/$17.62/Market Perform). Yet, there is another player that has come to the fore over the past 15 years.
Indeed, according to www.ftportfolios.com:
â??A survey from Shop.org found that over 50% of all workers plan to do some of their holiday shopping online on Cyber Monday (November 28), according to CNNMoney.com. Eight out of 10 online retailers plan to offer special promotions on that day. Some 75.9 million workers in the U.S. have access to the Internet. Sales are expected to set a record at $1.2 billion, according to comScore. Internet stocks have performed quite well since the market bottomed on March 9, 2009. From 3/9/09-11/21/11, the Dow Jones Internet Composite Index posted a cumulative total return of 149.8%, compared to gains of 106.0% for the S&P Information Technology Index and 86.5% for the S&P 500.â?
As our Internet analyst Aaron Kessler writes, â??Through the first three weeks of the 2011 holiday season, e-commerce sales remained robust as indicated by ChannelAdvisor (same-store sales up 28% y/y) and the Chase Holiday Pulse Index (31% y/y). While still early in the holiday period (first three weeks represented 22% of the 2010 holiday season), the strong initial data increases our confidence in the 2011 e-commerce holiday season outlook.â? In addition, while I think it is a stretch to call it an e-commerce company, Shutterfly (SFLY/$31.28/Outperform) is one of Aaronâ??s favorites.
The call for this week: The week before Thanksgiving has been â??upâ? eight of the past nine years ... that is up until last week. While many pundits cited the failed German Bund auction, Chinaâ??s slowing PMI Index, another bank â??stress test,â? a downwardly revised GDP report, Euroquake, etc.; my hunch is the real reason for the recent swoon is our own dysfunctional government. To be sure, the breakdown of the Super Committee has clarified the differences between the two parties. Hence, it is pretty clear that Americans must now decide to accept either serious reductions in their healthcare and pension programs, or substantially higher taxes, and probably both. Whatever the reason, my sense is that the November weakness has burned itself out and consequently I look for a continuation of the traditional year-end rally that began on our â??buy â??emâ? call of October 4th. That belief is based on the fact that trading volume has contracted so sharply it reveals the public is g-o-n-e from the investing scene (read: bullishly), the economy is NOT slipping into recession (our recession indicator has the odds down to 11% from 35% in September), Euroquake will be resolved, earnings will continue to surprise on the upside (like they did in the 3Q10), that last weekâ??s reduction in real GDP was because of inventory adjustments that should actually boost growth in 4Q11, that Domestic Final Sales accelerated to 3.1% in the third quarter (versus 1.4% and 0.4% in the previous two quarters), and the â??bull listâ? goes on despite all of the negative nabobs rants. And this morning Germany and France are rumored to be exploring â??radicalâ? methods to solve Euroquake, which has the preopening futures up more than 30 points.
P.S. I am in New York City all week; these will be the only strategy comments of the week.
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