At the time of this writing, we still don’t know how the
situation in Greece is going to play out tonight, but I am hopeful they pass a
“no” vote so we end this nonsense once and for all. A vote against continued
austerity measures will likely kick Greece out of the Euro and will allow
markets to go back to normal after a short-term drop that will likely come. If
the Greeks vote “yes,” then we’re likely in for a change in government in
Greece, along with more and more back and forth between them and the IMF, which
will again whiplash stocks back and forth. Either way, one thing to keep in
mind is that I believe the Fed’s decision to raise rates this year will depend
heavily on the outcome in Greece. If Greece gets kicked out of the Euro, I
think that forces the Fed to delay any thought of a rate increase until no
earlier than December. While the US economic data has been strong over the last
month, which is leading to many analysts expecting the first increase to occur
in September, I believe that whether the Fed wants to publicly admit it or not,
they are keeping a close eye on the Greece situation and will act, or not act
for that matter, accordingly.
Turning to the US, earnings season will kick off on
Wednesday, starting with Alcoa (AA). The stock has become relatively
insignificant when it comes to being a gauge of earnings season so I’m not
paying much attention to it. Alcoa hasn’t been considered a bellwether for a
number of years now and with the stock down about 30% YTD, there isn’t a whole
lot to like. Aloca gets a significant chunk of their revenue overseas, and with
the dollar remaining strong last quarter, I would stay away from this one.
On Thursday, PepsiCo (PEP) and Walgreens Boots Alliance
(WBA) will report earnings, and I suggest using those reports to trade off
their competitors. Instead of buying Walgreens, I would focus your attention on
CVS, which comes with a better management team, a newly acquired Target
pharmacy business, and more innovation. As for Pepsi, the entire soft drink
space is challenged and Pepsi, while sporting a roughly 3% dividend, has
underperformed it’s smaller counterpart, Dr. Pepper Snapple (DPS) over the last
year. If I had to choose between the big three, I would choose Dr. Pepper, then
Pepsi, and Coca-Cola last (I do own DPS).
There are such low hopes for earnings this quarter, much
like last quarter when earnings came in much better than expected. Analysts are
expecting a 4.5% drop in EPS AND revenue this quarter, much of which will be
contributed to the strong dollar. As expected, energy is going to carry the
biggest negative weight, so excluding energy; revenue is expected to rise a
meager 1.7%. There’s no question that the dollar will continue to weigh of
revenues of most international companies, but this earnings season could really
separate the strong management teams from the weak. We’ve known for more than 3
months now that the dollar will likely remain strong going into years-end, so
you want to invest in companies that were able to anticipate that and have come
up with a solution to continue strong revenue growth. Companies were given a
pass in Q1 for weak revenues caused by the strong dollar, but I’m not buying
that excuse this time around. So during this earnings season, when you hear a
company blame the dollar for a revenue miss, interpret that excuse as, “our
company isn’t good enough to adjust to a known headwind and you should sell our
stock.”
Lastly, minutes from the Fed’s June meeting will be released
on Wednesday. Investors will be looking for any clues that we didn’t already
hear about as to how close the Fed is to raising rates in September. They have
already said that they are data dependant, but have also alluded to the fact
that they are considering the global economy in their decision. I don’t see the
minutes as being a significant news event this week.
All eyes will be on Greece tonight and into tomorrow. I have
been saying for weeks that a Greek exit from the Euro will lead to a 3% drop,
and last Monday resulted in a 2% drop after Alexis Tsipras announced a Greek
vote after markets closed on June 26. I don’t think that the markets have fully
priced in a “no” vote, so expect more downside if that happens. Over the next
month, I continue to like the TLT as your hedge against the Greek situation.
Recent moves for my portfolio: On Wednesday, I sold off my
entire holding of Lockheed Martin based solely on the technicals. Since last
October, the stock has built a perfect bearish head-and-shoulders formation. I
still like the stock long-term, and will be looking to buy it back at a lower
level. My trade resulted in a 8.2% gain vs. a 7.6% gain for the S&P during
the same time. Also on Wednesday, I bought a full position in Humana, which I
felt sold off way too much for a company that you knew would eventually be
taken over. Based on Thursday night’s news, that will come to fruition.
My current positions: Long
Gilead Sciences (GILD), Starbucks (SBUX), Facebook (FB), Wells Fargo (WFC),
ConocoPhillips (COP), Time Warner (TWX), Twitter (TWTR), NXP Semiconductors
(NXPI), Darden Restaurants (DRI), Celgene (CELG), Mobileye (MBLY), Jack In The
Box (JACK), Under Armour (UA), United Rentals (URI), Regeneron (REGN), Restoration
Hardware (RH), Apple (AAPL), Southwest Airlines (LUV), Dow Chemical (DOW), L
Brands (LB), Dr. Pepper Snapple (DPS), Costco (COST), AMGEN (AMGN), Home Depot
(HD), Allergan (AGN), FireEye (FEYE), and Humana (HUM).
Jeff Lewison
Great letter today Jeff! Spot on.
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