SET Portfolio Update October 2009

October 6, 2009

I can’t believe it’s already October.  It’s finally starting to cool off here in the desert.  And the last few weeks we’ve seen Wall Street cool off too.

The markets have backed off of their highs the last few weeks.  But I’m not worried.  The reality is the market isn’t going to go straight up forever.  Pullbacks are just part of investing (whether we like them or not).

The main catalyst for the pullback is the mixed economic data.  It’s been two steps forward and two steps back… we’re not going anywhere based on the economic data we’re seeing right now.  There’s enough good news to keep the markets from falling off a cliff but also a number of disappointments to keep it from moving higher.

The mixed bag of economic data has prompted some investors to lock in profits ahead of the third quarter earnings.

As usual, Alcoa (AA) will get the earnings season kicked off later this week.  I’ve found this earnings season is tough to get a handle on.

Last quarter we had extremely low earnings estimates.  Companies were able to beat the lowered estimates by slashing costs.  The better than expected earnings caused relieved investors to pour money into the stock market.

Now as we head into Q3 earnings season, estimates are still much lower than Q3 2008. But the benefits of cost cutting won’t be enough to beat the estimates this time around. In order for companies to increase earnings, they’ll need to grow revenue.  And outside of the technology sector, that’s an iffy bet.

As far as the current pullback goes, it’s over (at least until earnings season gets here in a few days).

Right now, the technical indicators show the market’s oversold.  And to top it off, the Dow, S&P 500, and NASDAQ have all pulled back to levels of support.  The market should move higher from here until we get more concrete data from the earnings reports.

Now for the updates…

Position Updates

…. Market Vectors Gaming ETF (BJK) – Buy up to $27

It’s a new age in the gambling mecca of Las Vegas.  The last decade’s characterized by companies borrowing billions of dollars to fund new hotel and casino construction. The old mantra of “if you build it, they will come” is going the way of the dodo bird.

The economic downturn has hit many casinos hard.  The wave of new development transformed their business model.  It changed from purely gambling to include a wider range of entertainment.  The new types of entertainment brought new revenue streams. But the new revenue has proven to be more cyclical than gambling revenues.  It sent more than a few casino operators into bankruptcy.

Now companies are halting plans for future growth.  Instead, they’re looking to increase profit margins.  The renewed focus on earnings over growth should have gaming stocks climbing higher as the new strategy produces more profitable companies.  Go ahead and buy BJK under the buy price if you haven’t already.

…. SPDR S&P Retail (XRT) – Buy up to $34.75

Expectations are low… And that’s a good thing.  Because there’s a lot of room for upside surprises to spur the industry higher.

Right now, analysts are expecting holiday retail sales to be flat or down from last year. Their argument is the increased personal savings rate and high unemployment makes sales growth impossible.  It’s hard to argue with an unemployment rate at 9.8%.  People who’ve lost their job aren’t spending more than they did last year.

On the other hand, the high personal savings rate gives me hope.  People have spent the last year or so being scared of economic collapse and job loss.  They’ve put off purchases and the pent up demand could push sales higher than analysts expect.  I wouldn’t be surprised to see consumers spend some of their savings this holiday season.  And that will be a very good situation for retailers.  We’re still under our buy price.  Buy XRT if you haven’t established a position already.

…. Vanguard Industrials ETF (VIS) – Hold

The industrials took some lumps last week.  The Dallas Fed Manufacturing Activity, ISM Manufacturing, and US Factory Orders all came in weaker than expected.  The news stoked investor fears of a slower than expected economic recovery.

I’m not worried about one month of economic data.  I expect the data to fluctuate as the economy searches for footing in these uncertain times.  As long as the overall trend of improvement doesn’t change, I’ll treat pullbacks as a good buying opportunity.

The next test for the industrials will be Q3 earnings.  If companies are able to deliver modest improvement in revenue and earnings, we should see VIS continue to climb higher. Hold on for bigger gains ahead.

…. iShares S&P North American Technology – Software Index Fund (IGV) – Hold

Technology stocks continue to show strength as the markets pulled back the last few weeks.  That simply means technology stocks held onto more of their gains than other cyclical sectors.

IGV has pulled back to the 50-day moving average.  This level stopped the last pullback in September dead in its tracks.  It looks like IGV will follow the same pattern again.

As long as the economic data continues to point toward recovery, IGV should rally into Q3 earnings season.  If the economy’s beginning to recover, technology companies should be on the leading edge of revenue and earnings growth.  And any improvement should keep IGV moving higher.  Hold on for bigger gains ahead.

…. Market Vectors Agribusiness ETF (MOO) – Buy up to $38.75

MOO has pulled back with the rest of the market the last few weeks.  It’s fallen below our buy up to price.  You can use this opportunity to buy if you didn’t get a chance to earlier.

MOO is being hurt as commodity prices like corn, soybean, and wheat fall.  If prices are low, farmers can’t afford fertilizer or new equipment.  This puts a squeeze on Ag business earnings.

The good news is as the world economy recovers, demand for food will too.  One bright spot could be fertilizer companies like Potash (POT).  China needs lots of food and fertilizer to feed their massive population.  The recent decline in fertilizer prices could trigger stockpiling like we’ve seen with many other commodities.  Figuring out what China is going to buy and buying it first has made investors a small fortune in other commodities… will fertilizers be next?

…. SPDR S&P Metals and Mining ETF (XME) – Hold

It’s the same old story for XME… It’s trading in a wide and volatile path.  The good news is the path is heading higher.  The main reason for the weakness in XME is the strengthening dollar.  As you know, a strong dollar makes commodities more expensive in other currencies.

XME’s fallen back to its 50-day moving average over the last few weeks.  This level has stopped pullbacks three times since July.  Now XME is looking very oversold.  I wouldn’t be surprised to see a rally into the earnings season.  It’s hard for any ETF to stay oversold for long when the overall trend of the market is higher.  Hold tight for now.

…. Energy Select Sector SPDR Fund (XLE) – Hold

Oil’s settled into a range between $65 and $75.  I could see prices staying in this range until we are well into the economic recovery.

Natural gas prices are moving higher.  They’ve rebounded from all time lows.  A cold winter could help burn through the oversupply of Nat gas.  But the best remedy to the oversupply will be economic growth.  As long as the economy continues to get better, we should see energy prices go higher from here.

…. SPDR S&P Semiconductor ETF (XSD) – Hold

I love what I’m seeing in the semi’s right now…

Everyone in the supply chain is trying to refill their depleted inventories.  The massive restocking effort has blue chip Intel (INTC) growing revenue like a start-up.  Revenue grew by 12% from Q1 to Q2.  The last time Intel grew revenue at this pace was 21 years ago and they were about one-tenth the size.  Intel won’t be able to keep up this pace for long, but I think Q3 numbers will be better than expected.  That could be enough to get us our price target.  Hold tight for the next move higher.

…. PowerShares Dynamic Building & Construction Portfolio (PKB) – Hold

PKB’s been turned back just shy of our price target three times in the past few months. It’s been a bit frustrating to say the least.  The culprit’s the slow start to the stimulus fueled infrastructure plans.  We should see more projects get underway over the next few months.  Hold tight for now.

…. iShares S&P N. American Tech – Multimedia Networking Index Fund (IGN) – Hold

IGN has pulled back to support of the 50-day moving average.  This level’s been a strong support level over the last few months.  The sharp pullback has sent shares into oversold territory.  I think we’ll get a quick rebound as we head into the Q3 earnings season.  Hold tight for now.

Action To Take

• Change Market Vectors Agribusiness ETF (MOO) to buy up to $38.75

 

Category: SET Portfolio Updates