It was nothing but another action packed week of Euro zone madness, with stocks falling into the red as investors continue to fret over rising bond yields. For the week, the Dow fell 3% while the S&P 500 and NASDAQ both shed close to 4%.
I am starting to wonder how many different ways I can say that the market is being driven by the Euro zone. This story first emerged in February of 2010 with the market figuring out that Greece was teetering on the brink of insolvency. And here we are, almost two years later, with Greece still blowing in the wind while other Euro nations follow its path to financial Armageddon on unsustainable deficits and too much debt of their own.
The countries in question are Italy, Spain and Portugal, which collectively are about 20X the size of Greece. So clearly the impact of further insolvency in the Euro zone is going to have a profound effect on the market.
And in the meantime, let’s get a little more bearish, because on the domestic front, the Congressional super committee announced just this morning that they have failed in their bid to cut $1.2 trillion out of the Federal budget over the next 10 years. That means the US could possibly be getting teed up for another credit downgrade. If that happens, the market will not be happy. And the real sad part of this conversation is that $1.2 trillion is a drop in the bucket for a federal government that will spend between $40 and $50 trillion over the next ten years.
So as you can see the outlook isn’t very pretty right now. The Euro zone continues to deteriorate while the U.S.’s own financial problems begin to move back into the spotlight. And that is a pretty solid recipe for further volatility.
So if you are feeling vulnerable, there’s nothing wrong with making a few moves in your portfolio to get a little more defensive. Which as we pointed out last week could mean trimming down on growth stocks, buying bonds, moving into cash or going after dividends.
If you have any questions or want to discuss strategy, don’t hesitate to contact me: mike@vodickagroup.com
Let’s get into our updates.
Updates:
In spite of all the volatility and uncertainty in the market, crude has been amazingly resilient, breaking the $100 mark this week for the first time since June. But after topping off above $103 on Wednesday, the story quickly turned bearish, with crude pulling back sharply and closing the week at $98. Moving forward, if sentiment continues to deteriorate and stocks come under pressure, crude will be very vulnerable.
That has me thinking about exiting PowerShares Long Oil (DBO), which has rallied more than 30% in the last six weeks on a great October for stocks. So this could be a good place to exit while prices have rebounded sharply. Moving forward, if crude traded back in the $70’s, I’d be looking to reinitiate. But with the market looking weak and sentiment turning bearish, crude is looking exceptionally vulnerable after a big run up.
With investors filing redemptions in the weak market, money managers were forced to sell stocks to raise cash. And the stocks money managers like to sell are the big winners. That hit CF Industry Holdings (CF), falling 12% on the week after posting very big gains in 2011. Although it’s a short-term setback, this company is still expected to make $22 a share this year. And with shares trading at $150, this stock offers some serious value with a forward P/E of just 7X.
Market Vectors Junior Gold Miners (GDXJ) also had a tough week, falling 10% as gold traded lower on a stronger Dollar. The junior gold miners have incredible up side, but that potential also comes with volatility, which is what we are seeing right now. Long term, if gold continues to rally, gold stocks should produce huge gains. So if you believe in the gold trade, this is a great place to look for diversified exposure to the group.
But it wasn’t all bad news; there were more than a few stocks that fought managed to find green in the week market. Like VeriFone Systems, Inc. (PAY), with the maker of electronic payment systems adding 5% on the week after jumping 10% in one day on news of an acquisition in Europe.
Kansas City Southern (KSU) was also strong, adding 1% on the week as higher crude pushed energy effective rail stocks into favor.
We also saw some relative strength from our dividend stocks, with Buckeye Partners (BPL) beating the market with a 1.24% decline and McDonald’s Corp (MCD) doing the same with after falling 2%.
Apple, Inc (AAPL) also held up well, down just 2.5% on the week as consumers continue to prioritize iPhones and iPads over discretionary things like health and dental insurance. But really, why would anyone pay for stuff like that when you can get it free from the government? But I digress. Moving forward, the holidays should be good to Apple, a cyclically strong season for the company. So even though shares have been a bit weak lately, this is still the best company and best valued stock in all of technology.
That’s it for this week. Until next time, here is some more insight into the debt problems that are plaguing the Euro zone and US. Enjoy!
Investors Fixed on EU and US Debt Deal
Your Investment Partner,
Mike
