U.S. Equity markets have been in a correction mode for better part of 6 weeks and this coincides with the 9 month cycle lows. Its been said that market cycles are more of an art than science but I’ve followed many of them for years and have come to the conclusion that while I may not understand exactly how they work, they’re worth paying attention to.
Within the next few weeks or so we have several cycles that are converging between now and June. It appears that any market trough developing soon will not be considered a major market low but a normal run of the mill trough. However, the matter of significance is the post-cycle trough which could be a major move higher, probably to 1500 on the S&P 500 or 11% by the end of the year.
The explanation for the trough and rally will, at present be open to interpretation. For those that fear Europe being our market’s downfall, the odds are quite low that Europe will derail the U.S. since its extremely rare that a major issue be discounted in stock prices more than once. One other issue that made news over the weekend is China lowering reserve requirements. China has been attempting to slow economic growth for close to two years and they may have finally seen enough slowdown to take their foot off the economic brake.
As the chart reveals the 9 month cycle typically is a counter move to the primary trend. In other words, if markets are in rally move (as they are at present) the 9 month trough is a very nice entry point whereby the rally eventually resumes. In a bearish trend, the reverse is true. The 9 month cycle is usually not The tipping point for a change in the primary trend.
Overall, all of our models and timing systems remain positive. So far our present pullback resembles a garden variety pullback seen once or twice a year. Unless the character of the retreat changes in character for the worse I’d view this as an opportunity to add new funds or increase equity exposure.
Brad Pappas
No Positions mentioned
First quarter 2012 returns are in as follows:
While the S&P 500 returned 12.6% (total return)
RMHI Growth accounts returned 18.31%
RMHI Moderate Growth returned 16.76%
RMHI returns are net of all fee’s and expenses.
Quick comment: While I’m very pleased with these returns the RMHI model performance exceeded our client returns due to accounts having diversified positions in Gold and in some cases a higher level of cash than normal. Portfolios diversified from equities lagged in performance due to the lack of upward price momentum in gold and bonds. Realizing that the government may not be in support of QE 3, we’ve sold our gold positions and would prefer to own cash in lieu of metals or bonds.
All market models remain in Bullish mode where any form of market weakness is being fought by aggressive buyers. While we do see some signs of incoming economic weakness (today’s poor job creation stats for example) the weakness has not translated to declining equity prices.
Just when you think the American Factory Food industry can’t get any worse:
Arsenic in our chicken NY Times
Speaking of food and the opening day of baseball one of our largest holdings is a food stock: John B. Sanfilippo and Son symbol JBSS. JBSS sells raw and processed nuts including peanuts. Before you speak up, yes peanuts are a legume and not a nut.
Unquestionably the stock is cheap as book value is $18 and the shares sell for $12.88. The stock is also very close to being a classic Graham “net net” but only if you don’t deduct 50% off the value of their inventory of nuts. If you take into effect that the price of nuts is strong and only deduct 25% off the value of their inventory it could qualify.
JBSS ranks at the very top of our proprietary ranking system and we own the shares for our clients. I own them as well.
Investing in Solar and other alternative energies has been a hazardous experience for investors for several reasons:
- Too much competition which results in price cutting and profit margin pressure which results in volatile earnings and significant stock volatility.
- Reliance on government subsidies in an era of budget restraints.
But these issues are the primary problems associated with investing in solar cell manufacturers.
What about investing in Solar Farms that have their infrastructure in place and long term selling agreements with credible utilities? This is an entirely different enterprise than just selling solar panels since this is really an issue of cash flow.
Warren Buffett’s MidAmerican Energy Holdings Co. agreed to buy the Topaz Solar Farm in California from First Solar Inc. on Dec. 7. The project’s development budget is estimated at $2.4 billion and it may generate a 16.3 percent return on investment by selling power to PG&E Corp. at about $150 a megawatt-hour, through a 25-year contract, according to New Energy Finance calculations.
“After tax, you’re looking at returns in the 10 percent to 15 percent range” for solar projects, said Dan Reicher, executive director of Stanford University’s center for energy policy and finance in California. “The beauty of solar is once you make the capital investment, you’ve got free fuel and very low operating costs.”
With Treasury yields in the 2% to 3% range solar farms offer a viable alternative to bonds. In my opinion its only a matter of time before solar farms are offered in either a REIT or MLP structure to the public, where the cash flow generated is passed on to shareholders with special tax considerations. Best of all, the cash flow comes without the risks and headaches of solar panel manufacturing and sales.
Now we’re finally getting somewhere.
Brad
No positions
US equity markets have been invigorated and we’re selling off our hedges into today’s upward move. What I perceived two weeks ago as a market rolling over, did indeed roll over…but only for a day. Most of our indicators are still pointing to a higher market so I prefer to take a two point loss on the TWM and let this market run its course.
Smaller cap stocks have showed renewed strength this week as I get the sense that investors are starting to finally believe in the economy. Notice the renewed weakness in the ten year Treasury bond. For investors holding the bulk of their assets in bonds or interest rate sensitive securities with the belief that risk is minimal, please think again:
Frequently I’m asked about new holdings: JBSS John B Sanfilippo is ranked at the top in our model. JBSS is a processor of nuts and owner of the Fisher Nuts brand. The stock sells below book value of $18. Price to sales is a staggering .22%. We’ve been buying in the $10 to $11 range.
Long JBSS
Markets have risen sharply since December and while the economy continues to improve there are several issues that have me concerned about the near term market direction:
Investors have become increasingly and probably extremely bullish. Market sentiment back in November and December was as dismal as any time in recent years but investors have turned around and bullish levels are nearing extremes.
Republicans continue to spread a confusing and often times a medieval message (who’d ever think the Crusades would have been a talking point?) as talking head topics have shifted from economic solutions to social issues. A Romney victory in November would likely have been viewed as a significant positive for equities but his primary message has not materialized. The longer the tug of war continues between Newt, Romney, Paul and Santorum the odds grow for an Obama victory. The Presidents poll numbers continue to improve along with the economy which favor an incumbent win.
Broadening turmoil in the Mideast and the price of oil which just reached $105.
Market cycle projections show market weakness beginning soon and lasting into early Summer before a significant rally materializes.
For these reasons I have begun culling dead-money stocks from our portfolios. While there is little evidence to suggest a market correction is imminent, the ingredients for a future pullback are beginning to materialize. But in the meantime investors remain very bullish, hence we’re taking a more cautious approach.
