April Issue Summary...
Update #071 March 9, 2007
I delivered my rough draft of the Superstock Investor April issue to the art and print department late this week and they didn't have time to make it pretty, convert it to a PDF and post to the website. So it should post to the website and mail Monday.
However I didn't want you to wait to get the meat of the issue. So I'm sending you a rough draft "summary" below (all the graphs, Master List, keys and tables will be in the fill issue Monday - plus excuse any typos since it hasn't been proof-read!). I mostly just wanted to get you the scoop on the three new recos without delay.
Watch for the full issue in normal format and hopefully without typos to post and mail Monday. Sorry for any convenience!
Have a great weekend.
- Jeff Manera
As always, email me with any questions or comments: email@example.com
Partial April Superstock Investor issue:
Three New Positions...
Master List Stomps the Market in Sell-off...
Plus, A Tale of 3 sectors...
APRIL BIG PICTURE
What a crazy month we've had! The markets had their biggest sell-off since 9-11 along with a huge spike in volatility, and then kept us on the edge of our seats with some wild swings in both directions. As we go to press the markets have recovered a good chunk from the 5% sell-off. However I believe they remain vulnerable to more volatility.
As you've likely heard or read by now, the sell-off started with an errant comment on February 26 from Chinese officials, who were concerned about their overheated stock market, about raising margin rates and possibly enforcing other capital controls. The Chinese stock market promptly tanked 10%.
The next day, along with an astounding 90% spike in volatility (amplified by former Fed Chief Alan Greenspan's statements that a 2007 US recession is a real possibility), the Dow sunk to a sharp 419 point loss. Big-print headlines and talking heads started yammering in unison about dramatic changes in investors' risk aversion, a flight from risky assets (into primarily a few safe-havens such as US treasuries) and the wave of "risk reduction" trades.
One big subject of discussion has been the "Yen-carry trade" — in which investors, hedge funds and institutions borrow Yen at the almost free Japanese interest rate and then convert and reinvest the funds in higher-yielding assets, such as US stocks or treasuries. Nobody can define the exact magnitude of the Yen-carry, but it's into the $trillions, and could easily amplify volatility in the equity markets and the dollar if it ever unwound suddenly and in large scope.
The unwinding of the "Yen-carry trade has been the subject of increasing speculation, as the major source of the massive amounts of global liquidity that has been fueling stubbornly bullish markets worldwide without any corrections as well as helping to provide the easy money and loose credit which fueled our housing bubble — took the brunt of the blame for the sell-off's suddenness and strength. I agree — I've talked about the Yen carry and the risk it poses to market stability for some time now.
On February 23, the Bank of Japan raised its rate from .25 basis points (1/4%) to .50 basis points, which is the highest level in 10 years. It's still very low compared to US and other rates, but still raised concerns among many used to the free money.
This chart of the US dollar to the Japanese Yen (tracks how many Yen a dollar will buy, so a decline = weaker dollar/stronger Yen) shows the sudden magnitude of the outflows from the dollar into the Yen during the recent market turmoil. The charts of the Yen vs. other major currencies with higher interest rates and strong stock markets look similar. Note the steady flow of dollars into Yen leading up to the correction, which (not coincidentally) closely tracks the US markets.
(USD JPY chart will be here)
Housing has also made its share of headlines in the past month, with several sub-prime mortgage players imploding and/or filing for bankruptcy, and hints that the pain is spreading to the mid-prime lenders as well. And D.R. Horton CEO's widely quoted statement that all 12 months of 2007 will "suck" for housing didn't help matters much!
SECTOR ANALYSIS, SORT OF...
Although many consider the S&P 500 as a monolithic beast that has a single identity, it is actually composed of nine sectors, which can be represented by the ETFs that track them. The chart below shows the percentage change for the SPX (the bar chart) and three of the nine sectors which have behaved differently than the SPX, since the last leg of the bull rally started in July/August of last year. It's interesting when we see a divergence and it usually tells a story.
(Sector Chart will be here)
The XLB (basic materials) had been outperformed as the economic numbers we were getting until recently showed a goldilocks story and suggested a strong economy, but corrected the hardest when the markets sold-off, as economic data began hinting at a slowing economy that would hurt these companies. Basic materials come into play in the growth phases of the economic cycle as companies buy up raw materials to fuel growth and produce finished goods. It still remains the best performing sector, but may be vulnerable to further corrections.
Similar story with the consumer discretionary ETF (XLY). The XLY was easily the strongest sector performer in 2007, as Bernanke painted a happy-happy joy-joy scenario which had everybody tapping into their dwindling home-equity accounts in the hopes the Bernanke housing "soft landing" would cushion their home values and help to support the negative savings rate we've fallen into as a nation. Until the correction and the compounding bad news on sub-prime lenders and housing: The XLY has corrected the hardest in the short term.
Energy (XLE) has been the worse performer in the longer term chart, as traders were shifting out of oil and energy plays near the beginning of the chart to chase other hot investments.
Just some observations to give you a little different insights into what's really happening in the markets and economy...
Three new recommendations:
First, I am adding another Canadian energy trust to the Master List: Enerplus Resources (ERF).
(Enerplus chart will be here)
I recently attended a presentation by Enerplus (ERF) and was especially impressed by the company's proven reserves, high profitability margins and low pay-out ratio. The 10.3% distribution yield doesn't hurt either! Everything I see about this company suggests a long-term solid investment with a nice yield to boot. As you can see by the chart, its way off its highs due to the proposed tax rule change (way off in 2011), as the other Canadian trusts are, so the downside is limited.
Buy 50 shares of Enerplus, paying up to $42.10
Two new non-equity positions, each currency based:
The PowerShares DB G10 Currency Harvest ETF (DBV) is a smart and simple way to diversify into a basket of the healthiest currencies. And I believe it's a smart stand-alone investment in its own right.
Similar in structure to the current Master List non-equity Commodity Index Fund EFT (DBC), the DBV tracks the Deutsche Bank G10 Currency Future Harvest Index. It reflects the a 2 is to 1 leveraged investment in long currency futures positions in certain stable currencies with high yielding interest rates.
Buy 300 shares of the Currency Harvest ETF (DBV) on dips to 25.70
Another new way to participate in currencies is the new family of "currencyshares" ETFs. The one that interests me most is the YEN tracking ETF (FXY).
As discussed earlier in the issue, the Yen has become a large part of the global liquidity story. We've just seen a strong move up in the Yen and as we are going to press, it's weakening again. I want you to jump in if and when it corrects to my target price (as always, don't chase it and pay more.
Buy 60 shares of the YEN tracking ETF (FXY), at 80.5 or better.
As with any position orders, the share and allocation amounts are based on the model Master List portfolio — adjust your order depending on your portfolio specifics (see section on allocations).
All and all, we again kicked the market's butt this month. On the March 2 data date (even before much of the market recovery occurred), the Master List portfolio was up about $2000 — 1.16% - from last month. The S&P was down over that period by more than 3%. That's a 4% + out-performance.
That's the magic of diversifying. We still participate in any upside in the markets, but typically take much less of a hit (or even a gain, as we did this month) in periods of market decline. That's hard to do — the majority of mutual funds out there underperform the S&P over time and would sell their soul to consistently beat the markets with lower risk and volatility like you've been doing...
I will catch up on company-specific news in the next issue...
Westar Energy paid 27 cents a share and Sovereign paid 8 cents per share. $51 in dividend income was added to cash.
I've also added an "accumulated dividends" column to the Master List table, since many of your holdings sport strong dividends and the share price alone doesn't reflect the positions' performance.