Soos Global Market Musings: 2014

Thursday, November 20, 2014

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

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.

Thanks for reading. And please email or call w/any questions or to discuss in more detail. Also, please visit http://stockcharts.com/public/1587236 to see our charts of close to 100 stocks/etfs on our radar screen.

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 updates..fyi).

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.

In the meantime, please email or call if you have any questions.

Best,

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).
Disclaimer: Please read and consider important information related to all communication made by Soos Global on this site by clicking here.
Additional Disclaimer: currently long many stocks/ETFs incl HIMX, AUY, XLE, TAN, PFF, PFXF, PGF. Positions may change at any time without notice.

Thursday, October 2, 2014

Equity Market Rout In Context...& Portfolio Implications

On the heels of yesterday’s equity market rout, it’s worth considering the move in context, namely, relative to where the market has been in recent months, and relative to where it’s been over the past couple of years. The charts below reflect both.

The first chart, showing recent months, is particularly troubling, especially the ‘thumbnail’ on the side that highlights the activity in recent days in which the DJIA broke down aggressively below its recent trading range (note: the shaded blue area shows and +/- 2 std. dev. range around the previous 20-day simple moving average of prices).

The second chart shows the past two years’ price history. It’s a healthy reminder of just how far the market has come, and depending on your fundamental outlook, could raise concerns about a major market pullback that would make yesterday seem like a rounding error!! Conversely, what looked like an awful setback yesterday, might really have been only a small move in the larger context, and along those lines (pun intended), one could also note that several times over the past two years, the market ‘corrected’ (not literally, which would be a 10% move, but more figuratively in the form of a major selloff that broke the uptrend at that time), and each time, the 200 dma (white line) was the support from which the market resumed its uptrend.

Which will it be this time????

We’ll see.

But away from the day-to-day gyrations, the underlying global macro view that I shared in recent missives still stands. I think a continued pullback in equities is likely, though I don’t anticipate an ‘Armageddon’! I think the Fed will begin to raise rates in H1 ’15, but only moderately and in slow, measured, well advertised steps. With all kinds of commodity prices having fallen in recent months, most notably in the energy and agricultural space (see charts below of commodity indexes), and with plenty of excess capacity still in manufacturing and labor, there’s no evidence of prices pressures that should force the hand of the Fed to move more aggressively.

I think that when bond markets overreact to anticipated Fed moves and, in turn, the bond market sells off hard, it makes sense to consider adding fixed income for a relatively small portion of the portfolio (as we’ve done last week). On equities, though I am concerned about upcoming earnings meeting expectations and justifying current valuations, I don’t see grotesquely high PEs in general that would cause concern about a broad market ‘correction’ (literally this time, meaning 10%). I don’t see that. With the S&P currently at roughly 18x PE, and with companies generally in ‘lean & mean’ conditions on an operating leverage basis and on a balance sheet debt/equity basis, it’s hard to find too many signs of a bubble, except perhaps in small-cap land, which btw, would explain the recent 10%+ selloff from July highs.

I continue to use cash to selectively buy what appear to be undervalued names in the various themes that drive our strategies, with particular focus on the ‘emerging middle class’ theme keeping our exposure in consumer discretionary and technology quite high. I’m also looking at EM countries where currencies have fallen in value vs the USD on its recent run-up, and where local currency debt and equities have slipped. At some point, when the USD tops, those EM local currency bonds and equities could be compelling.

Will keep you posted.

Best,

Sunday, September 28, 2014

Portfolio Update: Yellen & Putin: Deliberate and calculating in their respective theaters! Refocuses light on fixed income.

http://www.businessinsider.com/r-as-ukraines-debt-tangle-unwinds-russia-holds-key-thread--2014-9

FYI….As we know, the geopolitical and economic worlds are weaved tightly together. The latest example is clearly seen in the above article re Putin’s latest move on Ukraine. Below are some thoughts that I’ve shared in various exchanges w/folks around the world who are monitoring the situation closely.

I’m following it w/great interest, and finding geopolitical analyses more compelling than pure economic. Putin is teeing up as many ducks as he can to in order to counter US led economic sanctions. Putting pressure on Ukraine through these bonds is clever, and could work, but I don’t think Ukraine will repudiate the debt, nor will they default. They have reserves, and IMF support, not to mention Western country support for anything that would counter Putin’s schemes. The market, on the other hand, is not quite that sanguine, as we saw last Thursday, when equity markets tanked on Russia/Ukraine noise. I think the market is more practically realistic and recognizes that even if in the end, Ukraine and Russia work something out in order to push the issues down the road, (as they apparently did late last week w/an agreement on debt repayments in exchange for gas deliveries) nevertheless, the cloud of an expansionist Putin will continue to hang over the markets and will likely flare up from time to time. I remain, as a result, quite defensive on my European exposure, both equity and fixed income. I do think that Draghi will have to accelerate the QE program, largely because the market needs to see something that augurs well for spurring growth. Right now, the economic read is not very inspiring in Europe. And when you compound it with the geopolitical impact of Putin, not to mention terror, and fighting in the Middle East, you get a prospect for the EZ economy that is not that optimistic.

In the meantime, in recent weeks, I’ve made some changes to our portfolio positions to reflect the views above, and the latest information that came from Janet Yellen following the last FOMC meeting. The bond market remains on edge, focusing on when the Fed will make its first move on interest rates to higher levels. Yellen’s message, on the other hand, seemed to go out of its way to emphasize that though the QE program is winding down, and the Fed has its eyes on employment and inflation as the metrics for raising rates, when the day comes that rates start to go up, the flight path towards higher rates is likely to be slow, calculated, deliberate, and frankly, any other similar word that is the antonym to ‘ratcheting rates higher quickly’!

As such, pullbacks in bond prices, especially in the short and intermediate maturities and in higher credit quality debt, appears to me to warrant a closer look as an alternative to cash, which, as equities climb higher, should still be readily available to ‘bottom fish’ on equity market pullbacks. As such, I’ve taken initial positions in several ETFs that allow for a diversified presence in fixed income, primarily investment grade bonds, while providing liquidity (and little-to-no premium to NAV), such as CSJ, LQD and BSV.

I also continue to look for equities that have fallen to seemingly good valuations and that fit in with our global macro investment themes, most notably, the burgeoning middle class (read: growing discretionary-and staple-spenders) in many EM countries, and the ongoing tech evolution including cybersecurity. For example, I’ve recently added UN and SIX, and am looking closely at SYMC.

As always, please email/call if you would like to discuss in more detail.

Will continue to keep you posted.

Best,

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).
Disclaimer: Please read and consider important information related to all communication made by Soos Global on this site by clicking here.
Additional Disclaimer: currently long many stocks/ETFs, including UN, SIX, CSJ, LQD, BSV. Positions may change at any time without notice.

Wednesday, September 10, 2014

McDonalds (MCD)....Getting 'Pounded'!! But May Be A Value Meal.....

With the summer fading into the rearview mirror, and with 9/11 tomorrow and recent beheadings serving as perhaps the most stark reminders of how heinous terrorism has become in our day and age, the fact that the US equity market has recently continued to hit new historic highs is some combination of perplexing and troubling. In the face of growing global geopolitical conflagrations (eg: ISIS, Syria, Iraq, Russia/Ukraine), it's hard to argue that corporate earnings will not face meaningful headwinds to growth. If that's the case, then what would be propelling equity levels to higher and higher valuations? Could it be that US equities have become the 'flight to quality' asset, pushing aside gold and US Treasuries? Or is it that investors, US in particular, are somewhat sanguine to the global landscape of troubles and instead are more driven by what's becoming a cliché: "where else will I go with my money"?!

You might have noticed (I hope) that I've written far less frequently in recent weeks, which, more than anything else, is reflective of my overall global macro views not changing much from missives that I've written earlier in the summer, namely, that I remain quite concerned that equity markets are in fact being driven more by the latter hypothesis above, than by the former. With bond yields so low, and with recent economic data suggesting that any rate hikes by the Fed won't be until mid/late '15, and even then, in only very deliberate, small increments, investors are increasingly seeing equities as the 'only place to make money'.

That kind of rationale for investing is likely to lead to mispricings and, in particular, the creation of 'bubbles', where stocks are priced too rich relative to their actual earnings potential. That said, given the limited choices of compelling investments away from equities currently, even with a defensive view on the overall market, there are times when individual stocks appear to be 'priced right' for future growth (emphasis on 'appear to be'!) Many quality companies with strong balance sheets and global footprints are paying reasonable dividends, and would seem likely to weather the current sluggish global economic growth challenges. Where these kind of companies have valuations that represent a 'cautious optimism' about earnings growth, then owning them could make sense. And even more so, when companies like these find themselves disenamored by the market due to an earnings miss, then they ought to be evaluated for whether the new lower valuations are overdone.

By way of example, we see one of our long held holdings, McDonalds (MCD), getting pounded in recent trading, primarily on lower same-store-sales, a tough competitive environment and 'event risk' issues such as Russia's closing of several of MCD's stores and the meat-supplier issue in China. The market has responded aggressively, selling the stock off from levels of over $100 only a few months ago, to roughly $91 currently. I added to our position here as I believe that MCD will play well into one of our primary global macro investment themes: the emerging growth of middle class consumers around the world. (please continue reading below this chart)

So while our cash positions are still quite high in historical terms, which reflects my concern that equities overall are being driven to 'emotionally' higher levels, unsupported by economic underpinnings, I am nonetheless looking to put some of it to work when I assess that a value proposition presents itself. But owing to my broader concerns about the overall level of equities in the face of the troubled global state of affairs, I'm holding off on other purchases that are teed up on my 'shopping list'.

More on the 'shopping list' in coming days…...

Will keep you posted.

Best,

Please continue to visit Soos Global Market Musings for updates.

(Sign up to "Follow by Email"! And share with others!)

(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).
Disclaimer: Please read and consider important information related to all communication made by Soos Global on this site by clicking here.
Additional Disclaimer: currently long many stocks/ETFs, including MCD. Positions may change at any time without notice.