Transcript IBD MEETUP/NORTHRIDGE

IBD MEETUP/NORTHRIDGE
LET’S MEETUP AND DISCUSS
STRATEGY FOR Q2-2014
AND REVISE OUR WATCHLIST
06/14/2014
DISCLAIMER
• During the course of this meeting we will
review stocks that should be considered as
additions to your watch list.
• These are not trade recommendations.
These are candidate trades. Do your own
research, keep position sizes modest, and
stay diversified.
• Also past performance is no indication of
future stock trends.
FED VIEW OF ECONOMY – 6/4/14
• The U.S. economy expanded in all 12 Federal Reserve
bank districts in the past six weeks as consumers and
businesses continued to shake off the harsh winter.
• The Fed's Beige Book marked an improvement over the
previous edition, which had 10 regions expanding.
• In April and May, growth was moderate in Boston, New
York, Richmond, Chicago, Minneapolis, Dallas and San
Francisco regions, with modest growth in Philadelphia,
Kansas City, Cleveland, St. Louis and Atlanta regions.
• Manufacturing picked up smartly across much of the
country, consumer spending and housing were mixed as
the remnants of the adverse weather effected Northeast.
FED KEY HIGHLIGHTS
• EMPLOYMENT: Businesses add 179,000 jobs in May
• ECONOMY: Service firms grow at fastest pace since
August
• New car sales were "robust" across much of the
nation, other types of retail activity amounted to a
mixed bag.
• Weather was cited as somewhat of a negative factor
in the northeast districts suggesting the economy still
could benefit from good weather in coming months.
Tourism saw activity picking up in the Boston, New
York, Richmond, Atlanta and Minneapolis regions.
FED NOTES
• Manufacturing accelerated-industry picked up
robustly in the Boston, New York, Atlanta and
Kansas City districts
• Factories that churn out cars, aerospace parts
and metals were busy, with constructionrelated production tempered.
• Housing recovery continued its spotty
performance. Home building gained some
steam in the New York, Richmond, Atlanta,
Chicago, Kansas City and Dallas areas but
weakened in Philadelphia, St. Louis and
Minneapolis.
MORE FED NOTES
• Multifamily construction continued to lead the
gains.
• WORKFORCE: Productivity fell sharply in first
quarter
• TRADE: April trade deficit widens to $47.2
billion
• "Employment levels were flat to up modestly"
across most districts, the Fed said.
• Payroll processor ADP's survey Wednesday
indicated that businesses added 179,000 jobs
in May, down from an average 200,000-plus
additions the previous three months.
PBR
CPFL
BBD
GE
EXPANDED MAP OF MARKET
‘BUBBLE’ WARNING
• But the argument that the market is overinflated,
that it’s a bubble, it’s too expensive, it’s been
going on too long is wrong.
• If you look at the historical data. And especially
bull markets, modern bull markets, since the end
of World War II -we’ve had seven of them - three
of them have gone up less than 100%.
• The other three have gone up 319%, 414% - I’m
sorry, 391%, 414% and 516%.
• Our current bull market is up 185%.
P/E RATIO
• P/E ratios, everybody says, “The market’s
expensive.”
• It’s true. The S&P’s trading at about 17 times
earnings, a little bit over. A little bit higher than
the historical average.
• But again, looking at the bull markets, historical
bull markets - now this is going all the way back
to 1871 - the top P/E, the P/E at the top of the
bull market historically is over 21.
CENTRAL BANKS
• Credibility. The first lesson in investment school is: “Don’t fight
the Fed.” or today “Don’t fight the central banks.”
A.
B.
Since late 2008, they’ve committed to providing ultra-easy
monetary policy to avert another Lehman-style financial crisis.
They’ve also been hoping that their policies would boost global
economic growth.
• They’ve succeeded in A but have been less successful in B reviving self-sustaining economic growth, which remains subpar
almost everywhere.
– That’s especially obvious in the Eurozone. Real GDP growth has been
weak in the region since the start of the current expansion.
– Japan is struggling to end deflationary stagnation.
– China’s growth rate is slowing.
– The same can be said for Brazil and India.
• Yesterday, the World Bank predicted that the world economy
would grow 2.8% this year, below its prior forecast of 3.2% made
in January, but it expressed confidence that activity already was
shifting to more solid footing.
MSCI Global Equity Indexes
• The MSCI Global Equity Indexes are widely
tracked global equity benchmarks and serve as
the basis for over 650 exchanged traded funds*
throughout the world. The indexes provide
exhaustive equity market coverage for over 75
countries in the Developed, Emerging and
Frontier Markets, applying a consistent index
construction and maintenance methodology.
This methodology allows for meaningful global
views and cross regional comparisons across all
market capitalization size, sector and style
segments and combinations.
• *Indexes
MSCI WORLD
INDEX
(US$)
06/11/14, the World MSCI matched its previous record high (10/31/07) rising
147% since its (02/27/09) low. Achieved via a 40% increase in its forward P/E
since mid-2011. The World ex-US MSCI isn’t as exuberant, rising 117% since
its March 2009 low. It is still 18.0% below its 2007 record high, with the forward
P/E up about 30% since mid-2011.
BIGGEST RISKS TO THE GLOBAL BULL MARKET
• One is that central banks lose their credibility.
– Rising stock prices haven’t had a positive wealth effect on
incomes.
– Wealth inequality has certainly increased.
– CB’s ultra-easy policies may be losing their effectiveness. Their
Bazookas may be turning into Pea Shooters.
• (1) 06/05/14, the ECB lowered its official interest rate by 10bps to
0.15%. The rate paid on bank reserves was lowered to minus 0.1%.
– There isn’t much firepower in these lame actions.
– ECB announced that cheap loans, possibly worth up to €400
billion, to banks under a program of “Targeted Long-Term
Refinancing Operations” for credit to small businesses.
– The 6/9 FT notes that it will take some time for this program to
“provide an economic stimulus to those parts of the EuroZone
most at risk of falling into a dangerous deflationary spiral.”
ECB
• Of course, the ECB also hoped that its new policy package would
lower the foreign exchange value of the euro. The euro is down from
a recent high of $1.39 to $1.35
• On July 26, 2012, ECB President Mario Draghi pledged to do whatever
it takes to defend the euro. He succeeded all too well because now
he is struggling to weaken it.
• He also succeeded in stabilizing the banks. His 2012 pledge gave the
banks the confidence to load up on sovereign bonds, especially those
of the peripheral Eurozone countries.
• As a result, bond yields plunged, with the Spanish 10-year yield now
equal to the 10-year US Treasury yield.
• Unfortunately, while the banks have been loading up on bonds,
they’ve reduced their loan portfolios. That’s because they are
subjected to regular stress tests that make government bonds more
attractive than loans.
PBOC
• (2) PBOC, 06/09/14, announced a cut in the reserve requirement
ratio by 50bps for banks that have sizeable loans to the farming
sector and small- and medium-sized firms; also to financial firms
that provide consumer or auto credit.
• This targeted approach is aimed at boosting China’s flagging
economic growth rate without creating more excess capacity and
without sparking more debt-fueled speculation.
• The Chinese stock market is not enthusiastic.
– The Shanghai-Shenzhen 300, which is down 7.3% YTD, has been flatlining for the past six weeks.
– The China MSCI share price index (in Yuan) is down only 2.3% YTD, and
has risen 7.9% only since its recent low.
• China’s May trade data. Imports are down 1.6% y/y, while exports
are up a relatively low 7.0%.
• China’s May PPI data shows PPI still fell 1.4% Y/Y, better than the
2.0% and 2.3% declines the prior 2 months, but is the 27th
consecutive month of deflation in the PPI (lots of excess capacity
in China’s manufacturing sector.)
BOJ
• (3) BOJ. The jury is still out on Abenomics (Shinzō Abe’s “3 arrows"
of fiscal stimulus, monetary easing and structural reforms.)
• Led by the Bank of Japan QQE program aimed at increasing the
monetary base significantly.
– Devalued the foreign exchange value of the yen, which boosted
import prices enough to stop deflation.
– The weak yen also lifted the forward earnings of Japanese
companies, especially the exporters. That triggered a huge rally in
the Nikkei. That all happened in late 2012 and through mid-2013.
The yen is up 3.0% ytd, and the Nikkei is down 5.2% ytd.
• Fearing that QQE is already losing its effectiveness, the government is
planning to purchase stocks.
• The 6/10 WSJ reported, “Japan's $1.26 trillion public pension fund
will likely announce a boost to stock and foreign-bond investments in
early autumn, the head of its investment committee said Tuesday,
potentially sending tens of billions of dollars into new markets.”
THE FED
• (4) Fed. Debate is all about inflation, whether there is too
much or too little slack in the US labor market. In the 6/9
WSJ, Martin Feldstein warned, “Inflation is rising in the
United States and could become a serious problem sooner
than the Federal Reserve and many others now
recognize.”
• This will undoubtedly be a big issue for discussion at the
next meeting of the FOMC on June 17 and 18. Indeed, it
was discussed at length during the previous meeting on
April 29-30.
• According to the minutes of that meeting: “Participants
discussed a range of research and analysis bearing on the
amount of available slack remaining in the labor market.”
WORLD EMOTIONS
• Emotion is ever present in the stock market. Feelings
do not discriminate among amateur and professional
investors.
• Positive and negative feelings do creep into the stock
market and have an effect on stock market
performance triggering irrational decision-making.
• Current Examples:
• Major conflicts in Afghanistan, Somali, Nigeria,
Pakistan, Mexican Drug War, Egypt, Syria, Iraq Central
African Republic, Sudan all 1000+ deaths/Y
• Eric Cantor’s primary loss can lead to Congress
deadlock
STRATEGY
• Why did stock prices recently? They were overdue for a
bit of profit-taking.
• The S&P 500 rose to new record highs almost every day
since the start of June and recently falling 0.35%.
• Here are the major events that might have unnerved
the market:
– (1) Global growth. As noted above, the World Bank lowered
its growth forecast for this year. However, the overall report
had an optimistic spin, especially on the outlook for the US.
The Eurozone’s recovery remains “hesitant.” The near-term
outlook for Japan is “challenging,” while the structural
reform agenda “has begun to advance.” There are signs of
“modest strengthening” among developing countries.
• (2) Gridlock. Bloomberg reported yesterday that “the
primary election loss of U.S. House Majority Leader Eric
Cantor, who helped broker deals to end standoffs on the
federal debt ceiling in October and February, has investors
concerned that policy makers may find future agreements
more difficult to reach.”
• (3) Terrorism. Iraq is going rogue. Now that the US has left a
power vacuum there, Islamic terrorists are pouring into the
country. The big shock happened on Tuesday when Mosul,
Iraq's second-largest city, fell to the Islamic State of Iraq
and al-Sham, an al Qaeda offshoot. According to the WSJ
report, “It was the most significant territorial conquest for
the radical group, which has also taken control of parts of
Syria during the civil war.” The Obama administration has
been claiming that al Qaeda is on the run. That’s true if
they mean the terrorists are running toward every vacuum
left by departing American troops in the Middle East.
• (4) Sentiment. Bull/Bear Ratio edged higher again this
week to 3.64 from 3.57 the week before. The
percentage of bulls rose to 62.6% from 62.2%. There
simply may be too many bulls.
• The IBD charts for 6/12/14 confirmed the Bulls vs.
Bears is at 62.6% Bullish which is a 5 year high.
• NYSE Short Interest Ratio is at 4.84 which is also a 5
year high.
• The AAII Bull Ratio advanced for the second week last
week from 53.5% to a 14-week high of 64.0% over the
period.
• Bullish sentiment rose from 30.4% to 39.5% over the
two-week span; bearish sentiment fell from 26.4% to
22.2%.
US ECONOMIC INDICATORS
• Federal Budget:
– The federal government ran a $130.0 billion deficit in May,
$8.7 billion lower than last May’s $138.7 billion gap.
– Through the first eight months of the current fiscal year,
the deficit totaled $436.4 billion (the smallest since 2008)
versus $626.3 billion over the comparable period a year
ago.
– Over this period, revenues increased 7.5% y/y (with
corporate income-tax receipts up 15.6% and individual
receipts up 3.3%); outlays fell 1.7%.
– In April, the CBO projected that the federal deficit will
decline to a six-year low of $492 billion this fiscal year,
down from $680 billion in FY 2013 and just one third of FY
2009’s record $1.4 trillion shortfall.
RICHARD’S VIEW
• I see the market overall as being in a slightly overvalued
area, that's what's the bottom-up product of our analysts'
fair value estimates indicate for the U.S. market.
• I think it's also consistent with a lot of other types of metrics.
If you look at longer-term P/E ratios, they are kind of in the
middle of the range of the last couple of decades.
– Perhaps there is going to be an upsurge in growth, and the stock
market can take off on that basis.
– But we've had a lot of expansion in the P/E multiple of the
market. That's what's really driven the bulk of the gains from the
S&P 500 over the last two years.
• I think that that has probably run most of its course, so really
what you're looking at from here is a combination of
dividend yield and growth in earnings and dividends per
share to drive long-term total return.
ONE STRATEGY
• Focus on rapidly growing companies that already are
popular—and often expensive by conventional
measures.
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Amazon.com, AMZN
Google, GOOGL
Apple, AAPL
Facebook, FB
Salesforce.com, CRM
Tesla Motors, TSLALinkedIn LNKD
Baidu,BIDU
Tencent Holdings TCEHY
Alibaba Group Holding [Soon to IPO]
• Clearly, the broad market has been in a non-trending
mode, but it is still possible to find and buy stocks that
are trending.
CONSUMER WATCHABLES
• There has been some notable sector
improvement but the next month or two will be
critical, as in addition to further improvement in
the outlook for housing, we need to see an
increase in consumer spending.
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–
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–
Select SPDR Consumer Discretionary (XLY)
Expedia, Inc. (EXPE)
Lennar Corp. (LEN)
Leggett & Platt (LEG)
ECB ACTED ON JUNE 5,2014
The ECB took bold steps cutting interest rates and offering to pump more money into the
financial system.
Economists generally praised the moves designed to raise dangerously low inflation in
the 18 Euro countries making exporters more competitive by reducing the euro's value
and thereby making Europe's goods less expensive abroad.
But they say Europe's economy won't return to health until it receives long-term fixes
that the ECB can't provide on its own.
EFFECT OF HIGH OIL PRICES
• Food Prices increase because oil is used in growing and
transporting food, as well as biofuels effect on land
price.
• Salaries don’t increase despite increase in cost.
• Consumers cutback on discretionary spending.
• Housing prices drop because more dollars go into oil
and food.
• Discretionary sector businesses cutback or fail.
• Airlines and other transportation companies are
immediately impacted by fuel cost.
• Industry and Retail are highly impacted
• Government spending rises to offset debt defaults
A WATCH LIST FOR JUNE
Here are 40 stocks for your
watch list.
This is a list for your Technical
Analysis.
I watch these using a chart that
has:
1. Price using Candlesticks
because Candlesticks are a
great gauge of emotions
2. Volume with 50MA
3. ADX/DI as an indicator of
trend change and strength
4. Bollinger Bands see
overbought and oversold
conditions
5. RSI to confirm overbought
and oversold conditions of
an asset.
AAPL
ACHN
AMCC
AN
ATML
CIG
CLDX
CODE
CTRP
DRYS
EA
EMC
FF
FRF
FSLR
FTNT
GALE
GERN
GILD
GOOG
GSAT
IDIX
IDRA
IGT
ILMN
JBLU
MU
ODP
OREX
OVTI
QSII
RPTP
S
SWI
TAP
TRLA
TSLA
VNDA
XLI
WTI
STATUS OF OUR WATCHLIST
As of Close
6/12/14
----------------Plus six new
stocks
added as of
6/14/14
HOLI
LNG
DNOW
ATHL
GRFS
BITA
SUMMARY
• This is an exciting time for Investors
• The Market is in transition
• You have to be diligent and disciplined in your
investing
• Avoid emotions, develop a trading plan and
stick to it
• Plan your exit on entry
REMINDER
• THERE IS NO MEETING IN THE MONTH OF
JULY
• ENJOY THE TIME AWAY AND INVEST WISELY
• NOW WE GO ONLINE TO LOOK AT STOCKS ON
THE MOVE