Sunday, June 20, 2010

June 20th, 2010 Lookin back, lookin forward


June 20th, 2010 Lookin back, lookin forward

Hopefully you will agree my scorecard was pretty good last week as far as hits or misses. Friday provided me a day to clean up some portfolio positions, and really read about what is important in the next week. I really am struggling to find meaning data.

When that happens to me I just grab one of the 34 investment books on the shelf or in my kindle and read until an idea comes along. Well it’s Sunday and I got a lot of reading done, but the ideas are scarce. Let me pontificate a moment or two about what I think might happen in the weeks, months and yes, years ahead.

The week ahead is very light again in economic and earnings news. Monday will have some typical Federal Bond auctions and there should be no surprises there. All week long we will be at the mercy of European and Asian markets as there is no significant news out of the US. The 10 year note will probably hang around the 3.25% mark making my return target for 12-18 month investments 6.5%.

The fed will have it FOMC (Federal Open Market Committee) meeting on Tuesday and don’t look for anything exciting there. They have hinted that there is a rate change in the wind and last month they were indicating 4th quarter 2010. The mixed economic news last week and the glacial employment recovery (More about my hypotenuse on employment later), will probably have the FOMC moving any rate adjustments to 2011 possibly even mid year.

Tuesday will also show us what is happening with existing home sales. Now this will not be a clean number as we still have a residual float from the home buying stimulus package. The consensus is for 6.2 million homes sold in May. I am thinking that it will be down from that figure but above the 5.7 million we saw in April. I am thinking 5.95 which will shake up the market a bit. Look for the market to be down about 1-1.5% on this news.

Wednesday will see mortgage apps and new home sales. There are no consensus figures on mortgage app numbers but the stimulus is done and there is a very slow recovery underway so I would not expect the number to be glowing. That report will be followed by New Home Sales. The new home tax credit is officially over for now. It applies to contracts closed as late as June, but the contract had to be started in April. 400 thousand units is the spec number. I think it could be close to that as that number has been adjusted down 100 thousand units from April. If it is a lot weaker than the 400, the market could be dragged won a bit.

Durable goods report Thursday morning. The number was up in April mostly do to aerospace related orders. The consensus figure is a -.5% drop. After all the reading I did this weekend and some of the off the radar economic tells, I am a bit more optimistic about this figure. Look for a dead even number. Now that does not sound positive, but if the market is thinking down -.5%, 0 will be a win. Don’t look for a big market reaction unless its way below the minus.5% figure.

Thursday will also see a new jobless claim report. Don’t look for good news. The best guess number is 465,000. I am thinking 470.

This would be a good segway for my thoughts on employment. American companies (and quite a few int’l companies as well) are sitting on gobs of cash. I looked up the meaning of gobs and the fiscal definition of gobs means way many billions. BUT, (Remember that BUT means Behold the Underlying Truth) these companies are not running out and hiring people for the sake of hiring people. These companies are going to deploy this cash in one of three ways. They will pay down long term debt. They will issue dividends. They will make capital improvement or new business acquisitions. Ok they could also buy back shares, but let’s group that with paying down long term debt. All of these actions play well for shareholders. (Keep that in the back of your head when I continue to pontificate about the next 12-24 months).

Regarding employment, let’s focus on the money deployed for capital improvements. Think computers, notebooks, system upgrades, virtualization, cloud computing, smarter networks, better utility utilization, cleaner cheaper energy, automation, and network security. All of these will require money spent on products, outsourcing or staff development. All of that will generate new jobs, but not until mid 2011 and at that, very slow growth with many of those related jobs not being in the US. We as a country need to redefine our base unemployment rate. Prior to 2006, it was assumed our base rate unemployment was in the 4.5-5% range. (Dad used to say when we hit 4% unemployment that we were hiring the dead.) In other words, there is about 5% of the qualified population who does not want to or can’t work. During the crisis of the last 2 plus years, we have extended unemployment payments almost indefinitely, and provided a litany of stimulus relief programs for a host of good or at least reasonable situations. Those result whether we like it or not will have a conditioning effect of the population of qualified employable people. We are conditioning groups of people to not work or at least not look for work so hard. That will raise the base rate of the unemployed to, by my guesses 6.5-7%. So in essence we may never see 5% unemployment ever again. So if you agree with this premise, our unemployment is at 9.7% nationally, we are only about 2.5% away from full employment under this news definition. We could see that kind of unemployment number by the end of 2011 or mid 2012. That is not that far away and in line with historical employment recoveries.

Let’s play that out. We would have a very slow, but stable improvement in unemployment figures; you would have companies with plenty of cash, low interest rates for at least mid 2011 and apparent stable but slow economic growth. All of that bodes well for the next 12-18 months. Then, the prevailing wisdom says we need to increase interest rates because our current debt level cannot be supported at the current interest rates. The fed will eventually going to have to bump rates because we do not have the fiscal fortitude to do what is proper and slash the hell put of federal and State budgets. Guitner, Bernanke, Dodd, Franks, Buffet, and host of other in the last 3 moths have all uttered the same comment. The current level of debt in the US balance sheet is unsustainable in the long term.

When we move to fix things via an interest rate bump and some fiscal sobriety, we will see a probably collapse of the recovery. A cataclysmic collapse could be in the cards, but not at least 18-24 months. Wow, I wrote that I am depressed. Then I realized I get a lot of stuff wrong so don’t worry. Just in case, what can we do between now and then to make and protect our investments.

I go back to lot’s of homework or put your money in places that don’t require you to do homework. Think index funds, ETFs or bonds.

If you are wiling and able to do the homework, look for the linkage. Sometimes you don’t need to do hours of homework to come up with the linkage. Just watching Bloomberg or even my Buddy Jim Cramer can trigger some linkage plays. If you watched Friday’s Mad Money he gave a couple of linkage plays in his plan for the week ahead. He mentioned that Adobe and RIMM are reporting next week. They will be saying some good stuff about their companies and the state of their industries. They will have to acknowledge AAPL in their comments and will probably be trying to take the willy out of AAPL. If they do a good job, you might find a dip in AAPL worth buying into. I will be watching.

Another thing you can do between now and the Cronin Crash of 2013, is look for stocks you like but that are throwing a nice yield. In this week’s AAII Journal (American Association of Individual Investors) they show some great stock screens for high yielders. There are plenty of great stock screen out there so go ahead and use them a look for growing dividend yields over the last 5-7 years. Then decide if that is a company that you want to own.

Also look at your holdings now and make sure you know when you want to get out of a stock. All successful investors eventually master all three elements of investing or trading. They are buying, holding and selling. Most of us, myself included focus on buying. Know when to get out is actually more important then know when to get in. Our ego and our emotions will usually cause us to hold on to a stock well beyond its useful life. Kate Stalter of IBD did a great article in the AAII Journal about know when to sell. She is a writer and content editor for Investor’s Business Daily. If you have never read an issue of IBD, I suggest you pick one up. Very informative and they teach a lot about investing. IBD has a strict rule of thumb that has helped me over the years and that is to sell on a 7% downside regardless of the situation. I use an 8% downside and put my stops in accordingly. That has saved me and made me some nice money over the years.

In looking at the earnings releases next week, there seems to be no earth movers there. These are the tail end of the first quarter reports, Alcoa will kick off second quarter earnings in a couple of weeks. (July 12 to be exact) I have it market as I am doubting they will hit the 17 cents a share forecasted. I am going to listen to the report indicating again I have no life.

Monday this week we have Miller Herman. If you don’t know they one of the largest makers of modular office furniture. They are expecting 18 cents a share profit. My guess is they will disappoint. Look for 15 which would be a sizable miss. Palm report tomorrow as well. Who cares. Tuesday Walgreens reports and they should hit the 57 cents a share they are hoping for. No news there. Jabil, an electronics manufacturer will do well and will beat the 34 cents expectations. Look for 36 cents a share. Carnival will beat as well. Look for 34 cents a share versus the 30 expected. Fuel and food is in check, people are looking for the good value in cruises and people have been traveling a tad more. As I mentioned Adobe is reporting Tuesday. I do not have a guess on how they are going to do. They are expecting 42 cents a share and I can find no compelling argument either way, so 42 sounds good to me. Nike is a good economic tell about the retail sector ands they report on Wednesday. Look for some accounting mumbo jumbo to cloud up the results, but I think they will beat. I am guessing 1.03 compared to a consensus of .99 a share. Bed Bath and Beyond reports first quarter numbers and is a good tell for the retail sector. I am thinking they will be up, but not above the 48 cent estimate. Look for 45 cents a share and cautious forward looking statements from management. Conagra reports on Thursday and I am thinking that they will do well. All of their cost were down for the trailing quarter, prices are flat and even slightly up so margins should be better than expected. 40 cents a share is the number to beat. Look for 43 cents a share.

I will leave you with a great book tip. This was one of the books I dusted off my shelf this weekend and it has some timeless advice. The book is “Winning the Loser’s Game”, 4th edition (@2001). It is a great investment book about defensive strategies, watching your bottoms, knowing when to sell, index funds and how to put it all together. Charles Ellis the author writes in an easy style, but pacls a bunch of knowledge into each chapter. It is almost all practical examples and ideas. Kindle User’s, NOT. There are a lot of useful charts and tables the do not format well on the kindle. Here is a promise, get the book and if you don’t learning something about making money from the book let me know and I will buy it off of you. It is that good.

Salve Lucrum


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