Tuesday, April 7, 2015

Soos Global Investor Update....(April 7, 2015)

(A Friendly and Important Disclaimer Note (in addition to legal language below):   If you’re reading this post and are not currently investing with Soos Global (which, of course, is something we should discuss!), please bear in mind that while we share details on changes made to our portfolios, it's important to consider that our portfolio decisions are taken in a much broader context of our overall portfolio strategies and our assessment of each of our investor's unique financial profiles.  As such, what we do, and when we do it, is specific to our investor portfolios and is NOT intended, in any way, as advice for use by others.  Readers are reminded that all comments posted here are for information and entertainment purposes only!  Any commentary, especially those that include specific mentions of 'buying' or 'selling' or 'positions', is made solely for those limited informational and entertainment purposes, and NOT as advice.  We're delighted to hear thoughts and comments.  Thx!)

Soos Global Investors:  below are a few of my thoughts on markets overall, and in some cases, on specific positions in our portfolios. 

Today's data in Europe, EuroZone (EZ) manufacturing PMI, beat estimates.  This raises expectations that EZ economic growth is picking up, expectations that have already been bolstered by ECB QE kicking in.  The Euro has bounced off recent lows and appears to be finding some floor from which to recover after having been sold-off aggressively in the past year (from levels of 1.4000 to 1.0500, and now 1.0850.  See chart below).

European stocks have rallied YTD, reflecting renewed optimism about European economic prospects.   As you can see in the chart below, the ETF of European equities, VGK, has rallied YTD.  What's not as evident, however, is that part of the upside was lost due to the EUR currency weakness over that time period.  Looking ahead, if the EZ economy continues to improve and the EUR is able to continue its recent rebound, then VGK could have meaningful upside through 2015.  I'm still of the view that the EUR has fallen too much (USD rallied too much), and that EZ's economy should continue to slowly improve, therefore, I'm watching this situation closely as a new add to our positions.

When that time arrives, I would expect to consider using an ETF (such as VGK) that diversifies the risk across several countries and industry sectors.  I wouldn't hedge the EUR exposure inherent in that position since, as I've mentioned, I think over time the EUR will rally back. (fyi…there are ETFs that provide the same exposure to European stocks but embed a currency hedge to protect against a fall in the EUR, and if my currency view should change, I'd consider those alternatives). 

One final note regarding Europe:   our current exposure.   On a direct basis, it is quite limited.  Namely, we own Unilever (UN) and Telefonica (TEF)….but our 'indirect' exposure is more meaningful given that many of our large, multi-national holdings have significant business footprints in Europe (and, correspondingly, in most cases, in Emerging Markets, where our direct exposure is also very limited).  Until recently, I've felt that this 'indirect' exposure was the better risk/reward tradeoff, however with improving growth prospects and current valuations, that could change.

With Q1 over and earnings starting to be reported in coming days, I'm a bit concerned about earnings disappointment.  That said,  the concern isn't too high since many analysts have lowered earnings estimates throughout the first Quarter as more and more companies announced sober guidance.   With broader US stock indexes still at or close to historic highs, any meaningful disappointments in earnings could result in a market selloff, though any selloff would likely be mitigated by the market's reaction that weakness in the US economy would delay a Fed rate hike.  So this balancing act between strong/weak economic and corporate earnings growth vs expectations of Fed rate hikes, in my view, is likely to keep the equity markets somewhat volatile, but within reasonable ranges close to current levels.  Correction?  Certainly possible.  Debacle?  Some new catalyst would have to emerge for the outlook to migrate to this extreme. 

Clearly, individual stocks' volatility will vary and when I perceive an overreaction by the market, in either direction, I expect to adjust our positions accordingly.

In that light, our Walgreens (WBA) position has performed quite well, and is currently the highest percentage holding in the portfolio.  I expect to maintain a strong position in WBA, though I might consider trimming part of it at higher levels.

I'm still looking to exit Davita (DVA), having sold ½ of it earlier this year, as I continue to prefer valuations and potential in other sectors.  I'm concerned that the further we get into the Presidential race, the more talk there will be about cutting Federal funding for all kinds of Medicare, Medicaid, Obamacare issues.  It will be very challenging to anticipate which stocks will be the winners/losers in those debates, so with this kind of anticipated lack of visibility, I'm looking to exit healthcare for now, and at best maintain only small opportunistic positions over time as they become available.

I have been looking to add some biotech, though I still believe that the sector, after having been the outperformer of 2014, is still too pricey.  Many street analysts refer to it as being in a 'bubble'.  Whether that's true or not, I do think we'll see some sector rotation out of biotech into other sectors that have ytd underperformed, most notably, energy.  If that happens, and in turn, biotech cheapens to reasonable valuations, I'd be interested in adding an ETF of the sector (such as XBI…see below), in that way diversifying the individual company risk of FDA approvals, new-product testing, etc.

Finally, I continue to like the 'yieldy' assets in our portfolio such as fixed income ETFs, preferred stock/bond ETFs, a convertible closed end fund, a utility ETF and some REITs.  As I've been saying for some time, the Fed's need to raise short-term rates is likely to be minimal for quite a while, and while that's going on, in the face of world where the risk of 'Deflation' continues to outweigh 'Inflation', I remain a fan of longer-term fixed income and yieldy assets.

As always, if you have any questions, please email or call.
I look forward to keeping you posted.

Please continue to visit Soos Global Market Musings for updates.

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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 including UN, DVA, WBA, TEF.  Positions may change at any time without notice.