Thursday, November 20, 2014

Hotspots: AUY, HIMX, XLE, TAN.....and putting cash to work in Preferreds

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Best, Ed
 (If you'd like to exchange thoughts on this post or on other subjects, please connect with me through the Private Chat tool on the right side of this page, or if you'd like to email thoughts, please do so through the Contact Form feature.  For public airings, please use the Comment feature below.  Looking forward to hearing your thoughts!)

(Below is a note sent to investors yesterday as part of our ongoing regular portfolio

Just a quick update on the portfolio and market thoughts.

You'll recall that in late September, I moved some of our cash position into fixed income ETFs with the thought that the market was overly pessimistic about interest rates rising.  Given the capacity excesses both in terms of labor and other means of production, it seemed then, and continues to seem to me now that long-term interest rates would be unlikely to spike higher any time soon.  Yes, with the Fed having completed QE and with the US economy continuing to show some signs of life, especially in the labor market, the market is correct to anticipate a move upwards in short-term rates by the Fed, but anything more than a small, deliberate move would not be in sync, in my opinion, with the economic realities.   In particular, while the Fed minutes of late have made a big deal of the improving labor market, the reality is that job growth of roughly 200k per month is still only a 'slow' pace of job growth and would really need to be over 300k per month to make a serious dent in the un- and under-employed numbers which then could trigger some meaningful wage pressures.  Until then, it's not surprising that wage growth has remained stagnant.

As we continue to be in an environment where equity markets are at or near all-time highs, where earnings are likely to have trouble keeping pace with previous quarterly gains, where Japan has recently been confirmed to be in recession and where Europe continues to struggle economically (in addition to geopolitically with Russia/Ukraine on its doorstep), I continue to believe that putting some portion of the portfolio in income producing assets makes sense, and, as I've been doing when specific equities retreat to more compelling valuations, using our cash, or money that is in fixed income ETFs, to then purchase more equities.

Currently, I'm considering adding some preferred bond/stock ETFs to the mix.  Their yields are north of 5%, they trade generally with less volatility, and the credit quality of the companies appears to be good.  I'm also looking to add some of the fixed income ETFs that we already have.

As for equities, I continue to position the portfolio around our key global macro themes, most notably being the global emergence of middle class consumers in a growing number of countries around the world.  While we have many successes in the diversified mix, and I'd be delighted to discuss them with you any time, I do want to comment on some of the 'hot spots' in the portfolio so that you're up to date on my tactical and strategic plans:

XLE, TAN:  The rout in oil prices has put pressure on our XLE etf, and our solar etf whose ticker is TAN.  I  believe that oil prices will bounce from current levels, so I expect to hold both for now, but I'm considering selling TAN  at higher levels as the theme of a global move into alternative energy sources should lose some urgency with oil and natural gas prices having fallen so low.  Some M&A activity in the wind/solar space of late has helped give TAN a boost, but a more meaningful run up in TAN, I believe, would have to be preceded by a move up in oil and related companies, which might likely be captured by XLE.

Yamana (AUY)….continues to suffer on weak gold prices, mostly due to strong USD, but also due to expectations of lower demand from India as the country looks to slow gold purchases in order to stem the current account deficit.  The stock got hit hard on its last earnings release which missed expectations and was muddied by higher taxes in Chile and by problems with their Brazilian mines.  Given how low the stock trades, it could easily be a target by other gold miners as the whole space is suffering currently from  weak global growth, strong USD and ample supplies.  There was talk last week that AUY would spin off their Brazilian mines, news that the market liked.  I plan on holding on and expect the current extreme negative sentiment in this pace to abate, at which point, AUY, being a low-cost producer, could stand to do well.

HIMX…has had a hard time recovering from market expectations that Google Glass is not going to happen.  HIMX, being partly owned by Google, was expected to play a big role in the Google Glass wearable market.  The whole wearable market is still evolving, and I expect HIMX to be a player in that space.  In the meantime, it is not a one-horse wonder.  It's ICs and semis are used in a growing diversity of products with a growing diversity of customers.  The coming months should be particularly telling as to consumer appetite for 'wearables'.  Many new products are being featured for the upcoming shopping season, and I'd expect the flurry of activity amongst designers and manufacturers to pick up once the most compelling versions of the products are identified.

In each of the cases above, I'm keeping a particularly close eye on how events unfold and will keep you posted if things evolve in a way that warrants a change in course.
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(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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Additional Disclaimer: currently long many stocks/ETFs incl HIMX, AUY, XLE, TAN, PFF, PFXF, PGF.  Positions may change at any time without notice.