Chances Rise for 10% Market Drop

Chances Rise for 10% Market Drop
By Douglas A. McIntyre January 30, 2014 6:55 am EST
Original Article

The S&P 500 has dropped more than 5% in 2014, and virtually of all that has come in the past week. Much of the blame has been put on financial risks in emerging markets. Interest rates in some of these have risen as their economies have stalled. Additionally, the drop in the Federal Reserve’s bond buying has raised the fear that cheap money will be hard to come by.

However, at the heart of the drop is something that is hard to combat. Earnings reports from many large companies have been weak, forecasts have often been poor and the stocks of these firms have plummeted.

First among the companies that disappointed is Apple Inc. (NASDAQ: AAPL), which missed Wall Street’s best expectations for iPhone sales and posted a gloomy forecast. Another major component of the S&P 500 — International Business Machines Corp. (NYSE: IBM) — did almost as badly. No one was impressed with General Electric Co.’s (NYSE: GE) numbers. Figures released by the major financial firms were mostly lackluster. Citigroup Inc.’s (NYSE: C) shares are off 6% in the past five trading days, and shares of Goldman Sachs Group Inc. (NYSE: GS) are down 4%. Also among the major components of the S&P 500, Procter & Gamble Co. (NYSE: PG) disappointed as its razor customers stopped shaving.

These earnings leave only a few large companies that might report strong number to turn the perception of the earnings collapse around. Chevron Corp.’s (NYSE: CVX) earnings are expect to be less than stellar, if trading in its shares over the past week are any indication. This, in turn, leaves Wal-Mart Stores Inc. (NYSE: WMT), Amazon.com Inc. (NASDAQ: AMZN) and Exxon Mobil Corp. (NYSE: XOM).

The two large oil companies will have trouble. Exploration spending has stayed high, oil prices relatively low and there are appropriate concerns that refinery margins will not make up for these problems. Barron’s recently quoted Barclays’ reasons for a poor earnings report, and it said the run up in Exxon’s shares was over. Many of the same troubles plague its immediate rivals.

Finally, that isolates America’s two retail giants to pull the market out of the mud. Walmart probably will have earnings hampered by what was a disappointing holiday sales season. And, because its share of the U.S. retail market is so large, it cannot do much better than that market. As for Amazon, expectations for revenue have been set as high as $26 billion for the most recent quarter. Even a tiny miss would throw shares off. An outperformance will only show that Amazon continues to create unprecedented opportunities for itself, the scope of which cannot be duplicated by other companies.

Looking over all the reasons for a 10% market sell-off creates the strong impression that the sell-off will continue, and probably accelerate.

2014 Market Ideas

After a very solid 2013 which saw market returns of 26.5% in the DJIA, 29.6% for the S&P500, and a huge 38.3% for the NASDAQ many analysts are wondering if the market runs are over. There was some encouraging news from J.P. Morgan who thinks there is still 25% of the market that is undervalued.

After a strong 2013 where the S&P 500 was up almost 30%, you would think that most stocks would be close to being fully priced. That’s not what Thomas Lee, the chief equity strategist at J.P. Morgan thinks. In a new research report, the J.P. Morgan team remains confident that U.S. economic momentum is strengthening, and they continue to expect incoming data over the next few months to validate that trend. They also think that investors remain positive on equities in general, but point out that retail ownership of stocks is still low.

While margin debt levels are raising some eyebrows on Wall Street, the J.P. Morgan analysts are not concerned. They are focused on the quartile of stocks that are forecasting earnings growth of 11% or greater and have a median price-to-earnings (P/E) ratio of only 11.8. This compares with the broad market, which is trading at 16.5 times earnings, which is near historical highs.

http://247wallst.com/investing/2014/01/16/j-p-morgan-strategist-says-one-quarter-of-all-stocks-are-still-cheap/

The question becomes how best to leverage your mutual funds and/or ETF’s to access those undervalued stocks. This year I plan to focus more of my long-term investing strategies on picking ETF’s over stocks. I’ll continue to focus on fixed income investing through preferred shares rather than bonds.

A look at the returns in the European markets show that the FTSE was up 14.4% last year and the CAC was up 18%, while the DAX was up 25.5%. All three of these major EU indexes trailed the DJIA return of 26.5%. This may be an indication that there is more growth available in the UK, France, and potentially the EU as a whole. Certainly European funds will be an area I research in more depth (FTSE Europe ETF - VGK).

Other areas I will look to focus on include Healthcare (Vanguard – VHT) which returned north of 40% as a sector last year, and Energy (Vanguard – VDE) which lagged the markets last year. Information Technology (Vanguard – VGT) also seems to be on a uptrend while only trailing the S&P slightly on the 1yr and 3yr trend.

Renewed Focus for 2014

I come into 2014 with renewed focus on my investments, and my strategies. 2013 was a very good year for my retirement accounts as well as my trading accounts. I finished the year with some "house keeping" that sees me rollover a net loss from a tax perspective. I also come into the year with a plan to realize some gains that are on the cusp of long-term.

I will put together a second post with details about my fixed income, ETF, and general retirement strategy later this week. For now, the early stock moves of 2014

From an individual stock prescriptive I used proceeds from my loss sales of 2013 to purchase American Airlines Group Inc. (AAL) at below book value. The airline industry has been hot, and started out 2014 even hotter. In a short week I already have +6% in gains on this long-term purchase. I intend to hold this stock through the integration of US Airways.

Holders of United Continental Holdings Inc (UAL) have been rewarded handsomely, to the tune of +71% gain over the past year (and +144% over the past 2yrs) as United completed its merger with Continental Airlines.

Clearly there is no guarantee that the economy or industry will do as well over the next two years, but as a frequent traveller it is not hard to see how these airlines are making their money. I believe this was a good buy, and even a value play in a high flying (pardon the pun) sector. Any stock trading below book value, even a forward book value, is either a bargain or on their way to bankruptcy. American is just emerging from bankruptcy and I don't believe creditors would have accepted a deal that would put them right back into it.

I am also stepping into an area that has never really been a success for me, retail. For the most part I have gotten out of every retail stock I have picked within a matter of months, and almost always for a loss. So far this looks like no exception.

Coming off a poor showing at the end of 2013, and lots of public gaffes, I took a stab at Lululemon Athletica (LULU). The stock hovered up for a day or two, before promptly rewarding me with a -16% drop today. I did not have a stop-loss in at 15% (which I sometimes do for these more risky plays), as I expected some fluctuation. I also only bought about 1/3 to 1/2 of what I would like my total stake to be. I do not plan to use this drop as an opportunity to buy the rest of my stake, as I would like to see how (if) it recovers from this latest news. If it shows an ability to recover over the next 10 days to two weeks, then I will consider doubling up on my stake (with a stop-loss order in place).

Other stocks squarely on my radar include tech stocks, many of which I already own. Atop that list would be Google (GOOG), Intel Corporation (INTC), and Apple (AAPL), all of which I have stakes in already. Also on that list would be Amazon.com (AMZN), QUALCOMM (QCOM), and Juniper Networks (JNPR). I would be looking to sell my remaining stake in Cisco Systems (CSCO) at or above $25. I will hold, but not add to, SolarWinds (SWI) which took a beating last year despite a great product.

For details on my preferred share plays, and other dividend stocks for 2014, catch my next post