Big Week Ahead

1/25/15

As I currently write, the S&P futures are down almost 1%, oil is just pennies away from making new 5 year lows, and the euro is down another 100 points to new 11 year lows. What gives, you ask? The answer is Greece. It looks like the Syriza party, which is the primary opposition party to the $269B bailout the country received in 2012. While Greece’s economy has grown out of a recession since that time, the unemployment rate stands at about 25%, leading to extreme poverty. Prior to Greece receiving the bailout, there was a lot of talk about the country pulling out of the euro zone, creating uncertainty, causing the euro to fall and financial markets to drop along with it. If the Syriza party does take control, many people believe they will roll back the bailout and separate themselves from the euro zone. But the reality is that Greece has become a relatively insignificant part of the euro zone and with the recent quantitative easing announcement out of the ECB, markets are currently overreacting. The Greek elections will be completely priced in by the time US markets open on Monday morning.

For now, forget about Greece. What happens in Greece tonight is so unimportant as compared to what this week brings to US equities. So far, earnings season has been pretty lackluster, with many of the big banks, along with Dow heavyweight, McDonalds disappointing. But all isn’t lost, as Starbucks, Honeywell, United Health and Union Pacific, all posted very strong quarters. This week could be the most important week of earnings, with most of the big tech companies reporting. Microsoft reports on Monday afternoon, Apple and Yahoo report on Tuesday, Facebook and Qualcomm report Wednesday, and on Thursday we hear from Google and Amazon. This week also features earnings from Visa, Amgen, Chevron, Boeing and United Technologies. The technology sector has led the market direction seemingly for years, so if some of these names disappoint, then the markets will surely head lower in the short-term. I would not recommend buying any of these stocks prior to earnings because most investors believe that a lot of these names are overvalued. Any miss by any of these companies, could result in big drops, but also good long-term buying opportunities. On any sell off, I would be looking to buy Apple, Facebook, Visa and Chevron.

As if all of those earnings reports weren’t enough to move the market, the Fed will release minutes from its 2 day meeting on Wednesday, where investors expect to get further clarity on when the Fed will begin raising rates, and how much of an affect the strong US Dollar, low oil prices and no sight of inflation will affect their decision. I expect the Fed to say that they are not concerned about any of those factors and will maintain their stance that they will hint at rates rising beginning in the summer. I would not recommend buying anything on Wednesday, until after the Fed minutes are released.

On Friday morning, I bought shares of United Rentals (URI) after they reported a pretty solid beat on both revenues and earnings. The initial reaction on their earnings report was to sell off, and I took full advantage. Although stock rallied almost 3% on Friday, it still has a very long way to go, and is a stock I think you should buy this week. For those who don’t know, United Rentals is the largest equipment rental company in the world, renting to construction, utilities, industrial, and manufacturing companies, as well as the government and homeowners. If you look at a chart of United Rentals, it is a mirror image of energy stocks because investors believe that lower oil prices will have a significant negative impact on the company. However, management cited that energy companies represent a measly 6% of sales, and that just 1% of all of their customers anticipate a slowdown in 2015. I believe that they will greatly benefit from lower oil prices because consumers will spend more, companies will sell more and homeownership will increase. Meanwhile, URI reported Q4 revenues increased 16.4% and earnings rose 37.7%. Full year earnings and revenues also grew 41% and 18% respectively. The company offered revenue and earnings guidance that was in-line with estimates. With URI trading at just 11x next year’s earnings, I am a big buyer of this stock.

As I mentioned in my last letter, I sold half of my long US Dollar position, but kept the other half, which I plan to sell this week as I think it is starting to get too crowded of a trade. I also bought United Rentals on Friday morning.

My current positions: Long Ford (F), Gilead Sciences (GILD), Starbucks (SBUX), Macy’s (M), Google (GOOGL), Facebook (FB), Delta Airlines (DAL), Whole Foods (WFM), Wells Fargo (WFC), General Motors (GM), ConocoPhillips (COP), Kinder Morgan (KMI), Time Warner (TWX), Palo Alto Networks (PANW), Twitter (TWTR), NXP Semiconductors (NXPI), Lockheed Martin (LMT), Darden Restaurants (DRI), Celgene (CELG), Mobileye (MBLY), Jack In The Box (JACK), Under Armour (UA), Masco (MAS), United Rentals (URI), long US DOLLAR, and long HEATING OIL.

Jeff Lewison

ECB Thursday

1/18/15

We’re just a few weeks into the New Year, and already the markets are more volatile than just about any point last year except for during the Ebola scare in October. But despite that volatility, the S&P has shown its resiliency and is only down 2% since January 1, while oil is down 8.9%, gold is up 8.2% and the yield on the 10-year Treasure Note has dropped 33 basis points to 1.84%. US equities have also been hit with weak bank earnings for JPMorganChase, Citibank and Bank of America, relatively unimpressive retail sales figures, declined global GDP forecasts and most recently the disaster in the currency markets led by the Swiss National Bank. Also becoming a major concern for investors are much-anticipated layoffs out of most oil and gas companies, who have to cut production because of rapidly falling oil prices. I said weeks ago that this bull market cannot continue to consistently move higher until oil finds a bottom and stabilizes. While oil finally had a positive week, I still don’t see any evidence that a bottom is in. $33.20 was the lowest price that oil has traded at in the last 10 years, and it really wouldn’t surprise me one bit to see it trade there again. For me, I need to see oil trade back above $60/barrel, which represents a 23% gain from Friday’s close, and while that would be a big gain, is only a level oil traded at just 4 weeks ago. What’s the point you ask? Get used to the volatility until oil claws back, and don’t expect any major rallies until that happens.

Having said all of that, you probably think that I am bearish this stock market…well, I’m not.  I’m still a market bull and feel that a lot of stocks are fairly valued and have a lot of room to the upside. Remember, I am writing this with a long-term time horizon in mind. However, in the short-term, you should know there are a lot of possible headwinds that could negatively impact equities. On Thursday, the ECB is widely expected to begin it’s own round of quantitative easing, a move that could certainly rock the markets if they say the wrong thing. The big question on investor’s minds is how large the easing will be. Anything above one trillion euros will be a positive for equities, but if they announce a figure lower than that, I expect stocks to sell off and the euro to rally sharply simply because it wouldn’t be enough to improve the European economies. Thursday’s ECB decision will likely be the biggest market mover so far in 2015 so I would not advise buying or selling until after their meeting. The one thing I will say is that sometimes other markets can foreshadow what will happen. Gold, which usually moves higher when equities move lower, meaning when owning equities becomes to risky, has actually rallied sharply since the Swiss National Bank decided to remove the cap on the franc. When I look at that move in gold, it seems to be telling me that the ECB will not ease as much as they should and that the reaction in equities will be negative.

In addition to the ECB meeting on Thursday, earnings season continues this week will feature reports from a few companies that I think you need to pay attention to. After a pretty good report out of Schlumberger (SLB) last week, I am watching Halliburton (HAL) on Tuesday to find out if the drop in oil is really as bad for US companies as it seems. Halliburton is more exposed to the drop in prices than Schlumberger, but if they say things are better than analysts expect, I would look for oil stocks to continue to climb. Halliburton seems to have put in a short-term double bottom around $37, so use that level to buy against, if you want to be in the name. IBM also reports after the close on Tuesday if anybody even cares anymore. I think the last time IBM reported a strong quarter was when I was 10 years old. The company has been the worst performer in the Dow over the last 2 years, and I see no signs that it won’t continue. However, I’m going to go out on a limb and say that expectations are so low, that IBM could actually beat this quarter, and you could see the stock rally. Even so, I would stay away. The only other report that I am watching closely this week is from United Health (UNH) on Wednesday because they will be the ultimate tell on the direction healthcare stocks head in 2015. United Health has absolutely exploded since the beginning of last year along with many other healthcare stocks, and I don’t see any reason that won’t continue. If you get a pullback in UNH, I would be a buyer.

While earnings are important this week, everything is going to rely on what the ECB does on Thursday.  If they decide to finally do the right thing and hit that 1 trillion euro mark, it will be risk on again and I would expect equities and oil to rally. Anything smaller than that, and it could be another downdraft in the markets. Prior to the meeting, pay attention to the gold market because it could end up signaling what the decision will be.

Since my last writing, I did close out my long calls in Solar City which was a loss, as well as my short crude oil position. At the same time, I am long the US Dollar, but will be taking half of that position off prior to the ECB meeting, and long March heating oil.    

My current positions: Long Ford (F), Gilead Sciences (GILD), Starbucks (SBUX), Macy’s (M), Google (GOOGL), Facebook (FB), Delta Airlines (DAL), Whole Foods (WFM), Wells Fargo (WFC), General Motors (GM), ConocoPhillips (COP), Kinder Morgan (KMI), Time Warner (TWX), Palo Alto Networks (PANW), Twitter (TWTR), NXP Semiconductors (NXPI), Lockheed Martin (LMT), Darden Restaurants (DRI), Celgene (CELG), Mobileye (MBLY), Jack In The Box (JACK), Under Armour (UA), Masco (MAS), long US DOLLAR, and LONG HEATING OIL. 

Jeff Lewison