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