Stocks are trading down heavily this morning with the Dow currently down 330. Despite this we’re not having a bad day as our hedges remain in parabolic mode with rumors of a potential European bank failure.
GLD a new all time high of $174 corresponding to $1800 Gold. Laggard hedge SLV trading higher up $1.65 to $38 and the Swiss Franc ETF FXF trading dow $1.21 to $135 after hitting $140 yesterday.
We remain steadfast in holding a great deal of cash as I used yesterday’s bounce to trim more equity holdings. I have yet to deploy cash in any meaningful way towards equities, the timing just isn’t right yet.
If we had seen a strong opening in the US I likely would have added Inverse Exchanged Traded Funds “SDS”, but the weak opening does not make that a smart trade. Hence a better opportunity to play the downside will present itself eventually.
Market bottoms tend to be a process, not a specific point in time. Stocks will fall to a meaningful low then stage a significant bounce that could recapture 30% or 40% of the decline before selling off once more to retest the previous low. This process can repeat itself several times, in successful bottoming action each selloff has less and less intensity.
Buying the retest is a much better option than trying to be the hero and pick the bottom. Early rallies fail almost every time and its devastating to the psyche to think you may have bought the low only to find that a month or two later you’re right back where you started. In 2008 the climactic low was in November but the best investable low came months later in March 2009.
Brad
Long GLD, SLV and FXF
The first quarter of 2011 may have ended within a tight and sleepy trading range but for accounts fully invested at the start of the year you might have thought we were running on Red Bull. For the first quarter of 2011 fully invested Growth accounts returned an average +15.13% while Moderate Growth returned +11.9% net of all fees and expenses while the S&P 500 returned +5.9%.
Performance momentum and values peaked in mid February. Since that time accounts have been in a range of plus or minus 5% as it appears the markets are in a period of digestion after the substantial Fall- February rally. A pause such as what we’re experiencing is entirely normal.
The global bull market remains intact with the U.S. markets now being the primary leader in developed markets. Contrary to the last two years, Emerging Markets have been lagging and this lack of performance accounts for the large bias to U.S. stocks in our equity models. In January I mentioned the possibility of a market top in August based on Presidential and 10-year cycles. Anticipation of future events is always precarious and at present there is no serious fundamental data point validating an August top. If this were August rather than May, I’d have to give the markets the benefit of the doubt since earnings remain strong and interest rates have receded in line with the selloff in commodities. In addition, lending and money supply growth have accelerated which points to a healthier economy and monetary environment.
As long as earnings growth continues I believe the odds are quite high that our portfolios are merely treading sideways till the next leg up due to the increasing strength in corporate earnings growth – see chart.
Major winning holdings included (return percentages are approximations):
Travel Centers of America 147%
Town Sports International 78%
Sunrise Senior Living 74%
Material Sciences 61%
Five Star Quality Care 63%
Oscar Wilde: “Experience is the name everyone gives to their mistakes”
Multiband Corp. -35%
YRC Worldwide -23%
Bon-Ton Stores -19%
TAM S.A. -15%
Fundamentals for growth still look good: Be it Libya, the tragic tsunami and earthquake in Japan, federal debt limits or stagnant housing and employment, this isn’t the Perils of Pauline it’s the modern day world of investment management. There are always numerous intelligent reasons to build a bunker and hide out in the wilderness. Investors wonder why the U.S. markets can continue to rise but I would suggest the market is pinned to earnings growth which has been strong and continues to be so. Making money with investing is never easy, too often it seems like climbing Kilimanjaro but you have to keep your eye on what markets are responding to and realize that most market and economic talk is just blather.
Earnings growth remains strong with year to year growth approaching 18% and if you exclude Financial stocks which are dealing with their particular issues, the rate of growth is 20%, which is pretty good. In addition, the full year 2011 estimate for S&P 500 earnings is approaching $98 and if this figure is maintained or exceeded then eventually investors will have to take this into account. At present with the S&P 500 valued at 1337, it’s selling for just 13.6 times 2011 earnings of $98 below the average of 14.7 times earnings. It would appear that we could see further gains before year end and that market high of 2008 of 1400 will be breached, fulfilling what may likely be the most vicious whip-saw in our lifetime. Before I move on, it should be stated that the Russell 2000 index which is dominated by small stocks has already reached 2008 levels.
Reinforcing the view that the markets are not overstretched at this point: From Bespoke Investment Group – Of the 25 prior S&P 500 bull market rallies since 1928 our gain of just over 101% with a duration of 781 days the current rally is 11th in terms of duration and 9th in terms of return. In fact, the average return since 1928 excluding the present rally is 101.6% over 890 days, so all in all we’re very average to this point.
There are many ways to gauge investor sentiment which is valuable since major market bottoms and tops generally see investor extremes. At present the public has yet to embrace this rally despite its longevity. Mutual fund cash inflows continue to show almost a 6-1 tilt in favor of bonds over equity mutual funds. We would expect to see a radical reversal of these figures at a major top when investors would be abandoning bonds and betting the house on equities. While that may never happen during this market cycle, the potential for major cash inflows into equities from the sale of bonds and money markets (as investors realize that 3-4% yields will not achieve their retirement goals) represents a major source of buying power potential.
To sum it up: Despite the slight downward drift in equities since the February I’m not losing any sleep. Downward drifts in the midst of major bull markets are as common as overcast weather in May for Colorado. The major market direction remains higher propelled by rapid earnings growth but S&P 500 target of 1400-1425 probably has a likelier chance later this year in the 4th quarter. Markets are typically choppy in the May to October, a period full of sound and fury but little progress. Should earnings growth sustain itself into the 4th quarter, the present day period will likely be the pause that refreshes.
All the best,
Brad Pappas
At the time of this article RMHI was long the following securities: CLUB, SRZ and FVE.
Past performance is no guarantee of future results. Investing in sectors may involve a greater degree of risk than investments with broader diversification. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks. The information contained herein is obtained from sources believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation or a recommendation that any particular investor should purchase or sell any particular security. Rocky Mountain Humane Investing, Corp. does not assess the suitability or the potential value of any particular investment. All expressions of opinions are subject to change without notice
“Don’t want to be an American idiot
Don’t want a nation under the new media
And can you hear the sound of hysteria?”
Green Day “American Idiot”
Investing has always been a process that included controlling your emotions. When you have them under control not only do you tend to make better decisions, they also tend to be much more profitable. Investors love the chorus of “buy low and sell high” but when emotions take over, the reverse is generally what happens. Its always hard to buy at the bottom, if it was so easy then we’d be a nation of very successful investors but the undisciplined investor is far from successful.
Consider the plight of the investor who took his lumps in the crash of 2008 only to give up on equities and turn to bonds as a means to sooth their nerves. Bonds could never be considered an option as the primary means of replacing what was lost in ’08 but the consistent drumbeat of downbeat news bordering on the hysterical and unfounded has been consistent in both the conservative and liberal media.
Despite the extremely strong run in equities since the Spring of ’09 investors have continually been pulling out of Domestic Equity funds and their primary landing spot has been bond funds. Investors (likely based on the media) continue to believe that the another crash is just around the corner. Just last week on Fox a commentator strongly suggested that the market would crash again should the tax extensions not be granted by Congress. Last week individual investors pulled out $1.8 billion from domestic equity funds bringing total net 2010 redemptions to $81 billion, despite equity returns being resoundingly double digit for many classes! In contrast, taxable bond fund deposits have totaled $245 billion despite Treasury yields at rock bottom.
Its been our belief for months that the 30 year bull market in bonds was peaking and that a new bear market in bonds would commence, it appears we were on target. Pity the poor investor who was persuaded by the hysteria this summer to buy bonds only to see close to three years of yield evaporate.
We completely understand that investors are concerned with potential losses but solutions to losses should not come at the expense of return. Hence, the RMHI Hedging feature which we’ll be writing about at length shortly.
Be Careful Out There
Brad
Overnight Chevron has made a bid for Atlas Energy which to my way of thinking confirms that natural gas has real potential to be a bridge fuel, a transition away from gasoline for the nations trucks and autos. While it has been believed by many that our President was loathe to get behind natural gas and is a supporter of the fuel of Dickens, coal. This purchase of Atlas may indicate that natural gas and not coal could come to the forefront if the US intends to wean itself off gasoline.
Green Investors should understand that the weaning process away from petro based gasoline fuels will be a piecemeal process, sometimes moving glacially slow and very dependent upon political support. The purchase of Atlas by Chevron marks the second major purchase in recent years followed by Exxon’s purchase of XTO Energy. Do we see a trend emerging?
RMHI has had a substantial position in Atlas subsidiary Atlas Pipeline Holdings for several months. While the search for more glamorous alternative energy investments can be enticing for green investors, we’ve preferred a more conservative position with investing the eventual transition from gasoline fuels to natural gas to ??.
Long AHD
Brad
Catching my eye today is Spain’s Iberdrola SA which is the worlds largest clean energy utility symbol IBDRY and the second largest utility in Spain. It is also the worlds largest provider of Wind Power. Iberdrola stated in 1998 they intended to invest over $8 billion dollars in clean energy, primarily wind power in the United States, regardless of what Congress may or may not do with tax incentives.
IBDRY plans on building a 30 megawatt wind farm on US forest service land in Vermont and will be called Deerfield Wind Power. Vermont Public Service plans to buy 20 megawatts of power from Deerfield at an undisclosed price with a contract for nine years. Iberdrola will have the option to sell the remaining 10 megawatts at market prices. The project will have 15 wind turbines.
Iberdrola SA is an interesting company in which we have no position in but will commence doing our homework on. In 2008 the company was the potential target of a takeover attempt by France’s state owned Électricité de France and Germany’s E.ON.
Shares of IBDRY are trading at just under $30 a share with an estimated Book Value of $29.73 with a dividend of just over 5.8%. Cash on hand is $6 a share which subtracting from the Book Value and using last years $2.68 in earnings creates an Earnings Yield of 13%, pretty good.
Based upon valuation relative to growth I believe IBDRY deserves further attention. IBDRY meets our standards for Green Investing in that IBDRY is not a speculative company dependent upon a make or break product. IBDRY could make sense for most investors who seek a long term investment in Alternative Energy.
No Position
Brad
