Stick With What Works

2/16/14

                  After the S&P fell about 5% over a 2 week period, it’s now spent the last eight days rallying back about 4.5%, and all of a sudden, it’s like nothing ever happened.  So what is behind this 8-day rally and where do we go from here?  Despite retail sales, weekly jobless claims, consumer spending and manufacturing data that all missed expectations, the market still ran off to its strongest week of the year.  Investors seem confident that the weak economic data is a result of terrible weather across the entire country and once Spring hits, economic growth with continue on its way.  While I think the weather is a factor in the weak data, I am not ready to say that the economy is on a strong growth pace.  Instead, I think growth has slowed down, however it IS still growing.  Retail sales were obviously affected by the cold and ice, but online sales, which should have shown improvement in January, also fell.  Inventories are growing but now leavings the shelves, business are becoming reluctant to hire because of rising costs with the new health-care laws, wage increases have barely kept up with inflation and more and more consumers are spending with their savings accounts.  To make matters worse over the next couple months, I expect consumer spending to decrease because of big increases in heating bills due to the recent surge in natural gas prices. 

The weak economic data is being reinforced by the moves in gold and treasuries this year, which move inverse to the stock market.  While stocks were up over 2% for the week, gold rallied 4.1% and treasuries were relatively flat. Both gold and treasuries have significantly outperformed stocks since January 1^st, and I expect that trend to continue into March.  Gold is moving higher on the back of China buying more gold than any other country in the world, which indicates a weakening Chinese economy.  I am looking for gold to continue to rally to $1,350/oz ($131 in GLD) before hitting resistance, so if you have missed out on the gold rally, wait to see if it pulls back further as I reiterate my gold price target of $1,375/oz. 

With China supporting gold prices, a better gauge of the strength or weakness of the U.S. economy is to see what the treasury prices are doing.  Yields on the benchmark 10-year treasury have dropped 0.25% since the beginning of the year after rallying about 1.5% last year.  I am looking for rates to fall another 0.25% to 2.5% before hitting resistance, which if you’re in the TLT trade, that would be a move to about $112/share (5% above Friday’s close).  

As for stocks, I continue to see the market trade flat to lower for the next 6 weeks, and will remain a stock picker’s market.  A few weeks ago, I incorrectly predicted that the momentum stocks of 2013 (Tesla, Facebook, Netflix, Twitter, Pandora, LinkedIn, etc…) would have a rough start to 2014, and with the exception of Twitter and LinkedIn, all have gained at least 20% this year.  Tesla is the only company of the group that has yet to report earnings, but is set to do so Wednesday afternoon.  Tesla has gotten a string of good news all year and given the strength of all the 2013 momentum stocks, I think it rockets higher.  But if it sells off because is misses on lofty expectations, I think you can buy the stock due to it’s increasing popularity, strong consumer reviews and future cheaper models.  There was also an article in the San Francisco Chronicle over the weekend that indicated Apple’s mergers and acquisition’s chief, Adrian Perica met with Tesla’s CEO, Elon Musk last year to discuss a possible combination of the two companies.  Expect a lot of questions to Mr. Musk on Wednesday’s earnings conference call.    

The old momentum names are not the only ones that you should be eyeing.  If you are looking for a long-term, consistently strong portfolio staple, buy Disney, Honeywell, or Union Pacific, which are making new all-time highs on a daily basis.  Buy some Michael Kors to give yourself exposure to retail and a high-risk, high-reward stock.  Gilead Sciences, Celgene, and Amgen are all top biotech stocks that have huge growth potential and are all up for the year.  Also look for stocks that have sold off because of bad earnings, bad guidance, profit taking or a combination of the three, like Boeing, Amazon, Apple, Starbucks, Visa or Mastercard.

My end of the year prediction of the S&P finishing up 17% hasn’t changed.  The large majority of the gains will come in the next three quarters with gold and treasuries outperforming through the rest of the first quarter.  Since most of you are investing for the long haul, use gold and treasuries for a short-term trade only, and use your cash to start building positions in some of the stocks I recommended above.
     

My current positions: Long Ford (F), Toll Brothers (TOL), Gilead Sciences (GILD), SunPower Corporation (SPWR), Starbucks (SBUX), Anadarko Petroleum (APC), Visa (V), Macy’s (M), Southwest Airlines (LUV), Boeing (BA), Apple (AAPL), Gold (GLD), Treasuries (TLT), long CRUDE OIL, long CORN.

Jeff Lewison

No Jobs…No Problem

2/9/14

                  Despite the fact that the economy created a spellbinding 113,000 jobs in January when about 185,000 were expected, the S&P had it’s best day of the year, rising 1.33% and closing higher for the week.  While the number was a major disappointment, it wasn’t all bad.  Higher paying construction and manufacturing payrolls increased 48,000 and 21,000, respectively, making up for the drop in those sectors in December.  The size of the labor force in January grew by 500,000 as more people got jobs and started looking for work again.  But even with those positives, the non-farm payrolls data should have sent stocks to new lows for the year.  But, there were a couple other factors in play this week, which led stocks to rally back after hitting new lows on Wednesday.  The lack of job creation is leading economists and investors to believe that the Fed will re-evaluate its pace of reducing its bond purchases, especially with mortgage-backed securities.  I’m not under that opinion.  I think the Fed will continue to pull back $10B at a time, because overall, the data isn’t that bad.  The weather has had a major impact on consumer spending and corporate earnings are still coming in stronger than expected.  Just look at companies like Michael Kors, Amazon, Macy’s, and Chipotle and you can see that consumers are still spending away.  The economy is still expanding, inventories are up, inflation is low and mortgage rates are still near historic lows.  This week’s rally was nothing more than the markets rebounding off of key technical levels (which I will discuss later) after being significantly oversold.

                  More important than the fundamental data is the strength of the charts.  Wednesday’s low of 1738 was a new low for the year, a level not seen since last October, and was exactly a 6.5% sell off from all-time highs made just 3 weeks ago.  However, the most important thing to note is that the S&P traded all the way down to a key uptrend line connecting the 52-week low (1485 from 2/26/13) to the pullback on June 24 (1560) and the low on October 9 (1647).  If you draw a line connecting all of those points, the S&P came within spitting distance of hitting that key support level.  To prove the move even further, Wednesday’s move created a hammer (a bullish technical formation when a stock opens, trades sharply lower, only to rally back, thereby wiping out all the sellers).  From there, the S&P rallied 2.5% Thursday and Friday.  And just to hammer (no pun intended) home the strength of last week’s turnaround, Thursday’s close of 1773 was above the 78.6% Fibonacci retracement, and Friday gapped higher to close at its highest level all month.  Also, look at the Nasdaq, which has been the strongest market of the three.  On Wednesday, the Nasdaq traded down to the 78.6% Fibonacci retracement and the previous November all-time high, where it rallied back 3.8% by Friday’s close.

                  Just looking at the stock market this week, closing higher, all indications are that stocks should rally back towards new all-time highs.  However, you can’t just look at the stock market though.  Gold and US treasuries both traded higher for the week, which ordinarily trade inverse to stock prices.  Gold has been higher 6 of the last 7 weeks and treasuries have closed higher every week this year.  The old adage is the treasuries never lie but stock prices do.  I still believe that gold and treasuries are the place to be for the next couple weeks, as they will continue to outperform stocks.  I continue to reiterate that until the S&P closes above 1825, it is difficult to be bullish the stock market.  However, with that being said, at the beginning of the year I said this year will be a stock picker’s market, and there are still stocks that have and will hold up during this pullback.  You need to have a shopping list ready for those stocks that have sold off because of profit taking or because they are misunderstood.  This past week, I bought Boeing, Macy’s and Southwest Airlines.  Boeing fell into bear market territory on Wednesday, falling 22% from an all-time high of $144.57.  Although the stock is up 6.7% from Wednesday’s low, it’s still a “strong buy” because of its long-term prospects and the fact that every pullback in the stock has been a screaming buy opportunity.  Macy’s corrected 13.3% from all-time highs because other retailers are reporting weak numbers.  Macy’s, Michael Kors and Amazon are the best of the best and should not be treated the same as the likes of Target, Walmart, or Coach.  I want you in Macy’s and Boeing on Monday. 

                  This market isn’t broken like a lot of people think it is.  Stocks became oversold, very quickly, which led to great bargains in the market.  I still believe you will have a chance to buy stocks lower as I see the market re-testing the uptrend line and Wednesday’s lows, but I recommend starting to build positions now and buy additional shares on pullbacks.  If you are still in the gold or treasury trade, stick with it, as both still have more upside.         

My current positions: Long Ford (F), Toll Brothers (TOL), Gilead Sciences (GILD), SunPower Corporation (SPWR), Starbucks (SBUX), Anadarko Petroleum (APC), Visa (V), Macy’s (M), Southwest Airlines (LUV), Boeing (BA), Apple (AAPL), Gold (GLD), long 10-YEAR TREASURIES, long CRUDE OIL.

Jeff Lewison

Worst Month Since May 2012

2/1/14

                  It’s been said that as January goes, so goes the stock market.  A majority of the time, that January ends lower, the market will end the year lower as well.  I say forget that because this isn’t a typical January.  So let’s make that the end of that useless statistic.  It’s no secret that it has been a rough start to the year for stocks, but it was to be expected given the 30% gains we had last year without a single 5% pullback.  Back on January 5^th, I said that I am looking for a pullback in the S&P to the 1765, and on January 29^th, the market pulled back to 1770, only to rally 24 points on Thursday, and then fall 12 points on Friday.  In a week where the market was moving up and down 1% or 2% almost on a daily basis, the S&P closed relatively flat, down just 0.45%.  That was a really strong week which came in the face of Fed easing (announcing another round of $10B reduction in bond buying on Wednesday), currency disasters in Europe, and worse than expected economic data in the US and China. 

This coming week could be a critical point for the market as it has been flirting with that key support area of 1770 almost daily, each time rallying off that level.  The last time the S&P closed below 1770 was on November 12, and has since tested that level 12 different days, each time leading to a rally.  If we break through that support, the next stop will be around 1711, which is the 61.8% Fibonacci retracement.  While long-term I remain very bullish stocks, and I maintain my S&P price target of 2163, I have to caution on the short-term until the S&P can close above 1815.  If you look at a daily chart, it looks very top-heavy and has built a strong bearish head-and-shoulders formation at all-time highs.  Consistently closing above 1815 would nullify the formation and should lead to more buying by technical traders.  That’s how the chart tells it, but what do I think is going to happen?  I still maintain my near-term bullish stance on gold and treasuries and remain neutral on stocks.  I think the market will continue to trade flat to lower and I am eyeing that 1711 level to turn bearish treasuries and bullish stocks.  In the meantime, I still see this as being a “stock picker’s market,” where the stocks that can surround themselves with positive news and strong earnings will continue to outperform, no matter where the broader market goes.  In the meantime, I would stick with gold (GLD) and treasuries (TLT), which have outperformed the S&P by 5% and 10%, respectively.  The momentum is in those two markets, especially with treasuries, which had their biggest monthly gain since May 2012, which just so happens to coincide with stocks having their WORST month since May 2012.

                  As for which individual stocks you should keep your eyes on, look at the companies that have outperformed in the first month of the year AND have reported strong quarterly results.  In technology, I like Google around $1,060, Qualcomm around $72, and Microsoft around $35.50.  If you have to be in a retailer, I still like Macy’s at $49.50, Amazon if it falls to $340 and Michael Kors at $77.50.  Look at the airline stocks like Southwest Airlines, United-Continental and Delta Airlines, which can all be bought on Monday.  Union Pacific reported a great quarter and is trading near all-time highs, and Gilead Sciences hasn’t reported yet, but is up almost 10% this year.  While long-term, I like Boeing, Ford, Home Depot, Goldman Sachs and Apple, they have all (except Home Depot) reported bad quarters and/or offered weak guidance, so in this market, these are stocks you should stay away from as there is still more downside in these names. 

                  Treasuries and gold have been the place to be in 2014, and I see that continuing for the next couple weeks.  If you are a long-term investor, there is no need to sell your whole portfolio just because of a temporary pullback, unless you think the company behind your stock is broken.  I am still in the camp that thinks the market will be much higher at the end of the year and you just need to sit through this current profit taking. 

My current positions: Long Ford (F), Toll Brothers (TOL), Gilead Sciences (GILD), SunPower Corporation (SPWR), Starbucks (SBUX), Anadarko Petroleum (APC), Visa (V), Apple (AAPL) short SUGAR, long GOLD, long 10-YEAR TREASURIES.

Jeff Lewison

Coach

2/1/14     

             This week I was asked what I thought about the high-end retailer, Coach (COH).  This was as stock that I wrote about and liked a couple years ago, but a lot has changed since then, not just in the economy, but also with the company and the stock.  Before I look into the fundamentals of any stock, I want to look at the chart and see how the technicals look.  As I’ve said many times before, I believe in strong technicals much more than I do strong fundamentals, but let’s start with the numbers first.  On January 22, Coach reported it’s second straight quarterly miss, with earnings of $1.06/share ($1.11/share was estimated) to $297.4M, a 14% drop YoY.  Revenues also fell 5.6% to $1.42B ($1.48B was expected).  Coach also suffered its second straight quarterly sales decline, with total North American sales dropping 9% to $983M (same-store sales fell 13.6% and direct sales dropped 8%).  Coach cited a slow down in sales for women’s handbag and accessories, due to weaker store traffic and online offers.  Gross margins also declined 300 basis points to 69.2%.  While the quarter was pretty bad on all accounts, there were a couple bright spots.  International sales, which make up about 30% of overall sales, rose 2% to $425M, led by China, which rose 25%. 

Management seems to have acknowledged the fact that they are no longer the dominant player in handbag sales, since Michael Kors has really taken over that title in the last few years, so they have begun the early stages of diversifying by moving more into accessories and clothing, and boosting their exposure to the male population.  But I think that’s where the good news really stops.  They are paying a 2.82% dividend, but even with that yield, Coach has been flat over the last 52 weeks, underperforming the broader market by about 28%.  Looking at recent US economic data (lower consumer spending, weak guidance from top retailers like Macy’s, Amazon, Tiffany’s, etc, and a higher unsold inventory build up), it is not the best time to own retailers that have been underperforming, no matter what you think of the long-term outlook.  With the only sales bright spot coming from Europe last quarter, there will be more hard times to come for Coach.  Emerging markets were a mess in January and will likely remain that way for the short-term, and data out of China in the last 30 days has been anything but stellar. 

                  The fundamentals do not point to Coach being a stock that’s going higher, but what does the chart say?  Whether you look at this stock on a daily, weekly or monthly basis, the chart looks disastrous.  Coach closed Friday at $47.89, just $2.12 (5%) above a 4-year low.  Last earnings report created a 2.5% gap down between $49.88-$52.01, which will certainly act as resistance on the way back up.  Coach is down about 15% YTD on higher than average volume, 3X lower than the Dow.  But the $47.50 level is the one to keep a close eye on.  The last two times Coach traded that low, it rallied 50% and 20% before falling back down.  I don’t think it does the same thing this time.  Those rallies came in 2011 (beginning of this bull market) and the first few months of 2013, when everything rallied 20%.  Since mid July, Coach has been range bound, trading between $45-$60.  If the stock breaks down below the $45 level, the next area of support is around $43, which would be about a 12% drop from Friday’s close.  The path of least resistance for Coach is to head lower, which is where I think the stock is headed.  The momentum is to the downside, with the stock trading lower 4 straight weeks.  While, if you buy the stock on Monday, using the 4-year low as your stop loss, you’re only risking 5%, I don’t see a reason the stock will trade much higher than $50.  That gives you a risk/reward of 5% both way, which isn’t worth it.  I like to say that the stock wouldn’t be down here if it were any good, and I believe that.  There are better places in retail to put your money to work, including Coach’s red-hot competitor, Michael Kors, which is trading just about 5% off all-time highs, and has consistently blown away analyst expectations.  While not in the high-end category, my favorite retailers are still Macy’s and even Amazon, despite it’s recent earnings miss. 

                  The bottom line is that Coach can be bought with a real tight stop, but the upside potential isn’t bright enough for me to take the risk.  The retail sector has been the worst performer in January dropping 10%, more than 3X the S&P 500.  The absolute best trades are ones where market tone, fundamentals and technicals are all pointing in the same direction.  In the case of Coach, all three are pointing lower.  I think you stay away from Coach until it can trade above $52 (the level it traded at before it’s last earnings call), and if you want to be in a retail name, stick with Macy’s.     

My current positions: Long Ford (F), Toll Brothers (TOL), Gilead Sciences (GILD), SunPower Corporation (SPWR), Starbucks (SBUX), Anadarko Petroleum (APC), Visa (V), Apple (AAPL), short SUGAR, long GOLD, long 10-YEAR TREASURIES.

Jeff Lewison