Interview on BFM Malaysia 2011 Jan 16

Last night (EST) I was invited to provide some market commentary for BFM: The Business Radio Station.  The interviewer called from Selangor, Malaysia. To hear the interview, go to BFM: The Business Radio Station.

or listen to the broadcast here:

For the first time, I was asked about the possibility of a limited default by the US or loss of its AAA credit rating.  While financially we are flirting with this possibility (how long can we as a nation spend $1.50 for every $1.00 we make?), time is on our side as our economy continues to regain its former strength.  And numerous variations of political compromise between a limited increase in our debt ceiling and limited agreement on spending cuts remain within the political arena.

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Stock Picking more important than Market Timing

The market, as a whole, continues to look upward and constructive despite its beyond-overbought condition.  We still see no indications of a major market top developing. Within the market, however, new favorite stocks continue to replace former winners.  Stock picking will be more important than market timing for investment performance.

The majority of companies that have already reported their fourth quarter results early in this earnings season have done well.  This bodes well for the rest of the season: we expect negative surprises to be limited in number.  We also expect negative market reaction to be limited to specific companies and sectors rather than the market as a whole.

Given our stage of economic recovery, we expect companies will experience double digit bottom line earnings growth for 2011 with single digit top line revenue growth.  We will transition out of this phase as sales growth becomes more reliable and companies begin to rehire and rebuild inventories.

Longer term — no change: no signs of significant market deterioration.

Intermediate term — no change: constructive, with stock selection more important than market timing.

Short term — The market is now beyond overbought.  In terms of the technical strength, overbought is a sign of strength and not weakness.  In order to indicate the market is ready for a trading pullback (i.e. a pullback that will create a buying opportunity): watch for the following levels:

  • S&P 500 cash: a break below 1,275
  • Dow Jones Industrials: a break below 11,673
  • NASDAQ Composite: a break below 2,222
  • Russell 2000: a break below 794

For a more meaningful correction to occur, watch for the following levels:

  • S&P 500 cash: a close below 1,260
  • Dow Jones Industrials: a close below 11,573
  • NASDAQ Composite: a close below 2,660
  • Russell 2000: a break below 777

These levels are basically the same as last week.

STRATEGY: Do a bit of “trimming” (profit-taking is not necessarily bad) in former outperforming stocks in former leading sectors such as Restaurants, Retail and Steel.  Your amount of selling should depend on the amount of profit and size of position in your portfolio.  At the same time, focus new buys in sectors that are recently leading the market such as Banks, Health Care, Homebuilders, Oil-related, and Technology (particularly Semiconductors).


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Market Commentary — The Return of Sector Rotation

In preparation for investment decisions for our clients and for my market commentary broadcast on CNBC, I like to prepare a market opinion.  Publicizing puts me on record for my opinion  and helps me keep the discipline necessary to make appropriate decisions.  I prefer  weekly posts, especially Sunday evenings in preparation for the following week as I have found Mondays to produce the most profitable opportunities of the week.

Here is a sample of what I would post for this week:

  1. From the longer term perspective (i.e. 6 months – 1 year), I remain bullish and am seeing no sign of significant deterioration.  The Dow Jones Industrials, Transportation, and Utility Averages, as well as the S & P 500,  NASDAQ Composite, NASDAQ 100, Russell 2000 Indices are all trading above their respective longer-term levels of investor support. Of this group, only the Dow Jones Industrials is returning to a level that attracted selling pressure in the past.
  2. More important than the market as a whole is to focus on the sector rotation I am beginning to observe. For example, while many of prior winners in the commodity-based sector (Gold, for example) are experiencing profit-taking corrections, many stocks in the formerly laggard financial sector are now assuming leadership activity.  Many former winners in the restaurant sector are losing upward momentum and rolling over, and they are being replaced in market leadership by homebuilding and health care stocks.  Selectivity in investments (ie stock picking) will be more crucial than market timing.
  3. From the intermediate term perspective (i.e. 1 month – 6 months), also remains constructive although selectivity remains more important than market timing.
  4. From the shorter term perspective (less than 1 month), also continues to remain constructive.  However, the tape is becoming increasingly selective and rotational.  I have seen many stocks both outperforming and underperforming the overall market within the same industry.  While retail remains favorable as a sector, you will find an increasing number of stocks pulling back with profit-taking and now underperforming.

STRATEGY:  Expect sideways action for the major market averages (without a convincing move either to the upside or downside) and remain constructive on the market as a whole unless the following levels are all broken:

  • S&P 500 Cash:                    1,260
  • Dow Jones Industrials:     11,575
  • NASDAQ Composite:          2,660
  • Russell 2000                            777

Favorable Sectors:

  • Computer Hardware, Storage & Peripherals
  • Fertilizers and Agricultural Products
  • Retail-Hone Furnishings and Internet
  • Vulnerable Sectors:   Education Services
  • Retail-Computers & Electronics

Note to readers:  I think a weekly commentary (like this) would be a useful addition to this blog.  While I wrote the first draft of this on Sunday, for the past couple of days I have been exploring changes in the format.  So the actual posting is on Wednesday.  In the weeks to come I will try to post this sooner.


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Market Commentary Interview on BFM Malaysia — 2011 Jan 10

Last night (EST) I was invited to provide some market commentary for BFM: The Business Radio Station.  The interviewer called from Selangor, Malaysia. To hear the interview, go to BFM: The Business Radio Station.

or listen to it here.

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CNBC Interview Tuesday, January 11th

Squawk Box MugI have been invited for another interview on CNBC Asia Squawk Box.  Unless there is a last minute change, I’m scheduled for 6:10 AM Wednesday morning Singapore time (5:10 – 5:30 PM EST Tuesday evening, January 11th).  I plan to be there.


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Inverse Stagflation Revisited

The first I heard of inverse stagflation was a Barron’s interview this past September of Renee Haugerud, CIO and Founder of the $1 billion Galtere International Master Fund. Inverse stagflation provides an interesting solution to the current ongoing debate on whether inflation or deflation will be the winner in the current economic environment, with the Federal Reserve and other central banks flooding the financial system with so much money with so little economic results. Renee’s view is that inflation and deflation can coexist: traditional paper assets such as stocks and bonds will achieve moderate economic growth and underperform, while commodity prices, real asset values, agricultural commodities and farmland will soar.

Equities of companies dealing directly with commodities or the delivery of commodities will represent a rather unique investment opportunity for longer term strategic investors as well as, if not more for, those who can actively manage their positions to take advantage of shorter term volatility within the longer term uptrend.  The longer term trend will result from a rather unfamiliar global theme, inverse stagflation.  The shorter term volatility will result from the equities in the commodity sector being driven by moves in the underlying asset more familiar to traders in the commodity and futures pits.  A combination of this sort has been traditionally the bailiwick of the hedge fund arena, but it can fit very well with active management by those who have survived the volatility the equity markets have recently passed through.

As noted in the Barron’s interview, inverse stagflation will cause a structural shift away from the outperformance of paper assets, which have reigned over the past 30 years.  Those of you who remember the stagflation of the 1970’s (Nixon, wage freeze, high interest rates) may be concerned with the potential for high interest rates, but the Federal Reserve will not be facing the same pressure as then, in fact the pressure will be to the reverse.

I agree with Renee’s conclusions at the macro level:

commodity-based, resource-rich economies should prosper, particularly if they fiscally responsible: Brazil, Canada, Turkey and Southeast Asian nations like Indonesia.

Supply shocks could also send agricultural prices skyrocketing.

Emerging economies (China, India, and parts of Latin America) will “consume” rather than export.

Political [and economic power and capital will move not only from West to East, but also from North to South.

We should watch the next 12 -to-18 months to see if these trends begin.  In the meantime, I am looking for longer term moves to the upside in agricultural products and those companies who help cultivate and deliver the product.  We are also watching steel, coal, gold and silver.  Our strategy will be to have a long bias longer term but to use shorter term weakness to take profits are initiate short positions for trading the volatility.

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