Stocks logged a solid performance this week, breaking a 4-week losing streak after Fed Chairman Ben Bernanke reinforced the central bank’s commitment to support the economy.
There had been plenty of speculation on the Street about how the Fed would respond to the recent bout of weakness that had been showing up in the economic data. That includes a disappointing read on Q2 GDP and multi-month contractions in both services and manufacturing. And when you throw in an 18% decline in stocks from a high-water mark in late April, hopes ran high that the Fed would throw the market a bone and announce another round of stimulative measures.
But the event played out a little differently than expected.
Instead of announcing any specific plans to stimulate, Bernanke merely stated that the Fed would be ready to act on any further deterioration. It wasn’t exactly what the market was looking for, but none the less, it was a very important development because it answers the question of whether the Fed has the will or capacity to continue supporting growth. It also means that the “don’t fight the Fed” trade is back in play, supporting higher growth assets as investors look to align their portfolios with the most powerful central bank in the world.
So for the time being, the Fed has removed uncertainty about its path forward, and it definitely had its intended affect on the market, lifting stocks well into the green on Friday and helping the averages break a tough month-long losing streak.
Looking forward, we’ve got a big jobs report set to hit the wire on Friday that will give us an important update on the employment situation. Jobs have been one of the weakest areas of the recovery of the last two years, so any sign of improvement would be a big boost for the market and sentiment.
Updates:
Deere & Co (DE) posted a solid gain in the up market, adding 10% on the week. DE is now up $10 from its short-term low at $66. But shares still have a lot of value in this area, trading with a forward PEG ratio (PE/Growth) of less than 1, the traditional benchmark for value. Although Deere has warned about head winds related to material costs, if you believe in the long-term trend in agriculture this is a very good way to play it.
Kansas City Southern (KSU) was also on the upswing, adding 10% as well as growth oriented, cyclical stocks moved back into favor with the market on hope from the Fed. With KSU trading 20% off the 52-week high of $62.78 shares still have some work to do, but this week was a step in the right direction.
CF Industry Holdings (CF) has been a powerhouse in the weak market, adding 9% on the week for a new 52-week high above $180. This is a great example of the value of buying undervalued stocks, because while higher valuation names have taken a beating in the weak market, CF has continued to charge higher and buck the trend.
EZCorp (EZPW) was also at the top of the charts, adding 10% as consumers continue to struggle with unemployment and short-term liquidity. We’ve got a really great valuation here too, with a PEG ratio below 1 as well, which implies more upside for a stocks that benefits from a weak consumer environment.
Amerigroup Corp (AGP) continues to rebound from the beat down it suffered in late July after bumping into some accounting issues, now trading 20% above its short-term low of $40. I read something this weekend that affected my perception of this stock. A famous investor says that, “there is never just one cockroach,” which in the world of stocks means that if you have one problem, it is frequently followed by more. AGP pumped out some serious gains early in the year and is highly leveraged against the expansion in Medicare and Medicaid, which speaks of more upside. But we’ll be looking to stay nimble here and continue to explore other opportunities in healthcare and healthcare services if we need to shift gears.
Double Gold (DGP) fell 2.6% while Market Vectors Junior Miners (GDXJ) added 2% in a fairly wild week for the precious metals. The big headlines all talked about how gold was engulfed in a huge sell off, with prices trading a whopping (sarcasm) 7% off the 10-year high. But the big sell off lasted for about 36 hours, with prices rebounding aggressively by Friday and moving back within $90 of the all-time high at $1,920. The long-term trend in gold is still extremely bullish, so a little pullback and some short-term profit taking is perfectly normal.
And finally, we have Apple, Inc. (AAPL), adding 8% on the week in spite of news that legendary and iconic CEO Steve Jobs was resigning due to his further health issues. There is no question that Jobs is the spiritual leader of the company, but with dominant position in multiple growing markets, AAPL is still the top choice out of technology.
That’s all for this week, but until next time, here is a good article discussing the impact of Jobs leaving Apple. Enjoy.
Jobs Departure No Reason to Ditch Apple
Your Investment Partner,
Mike
