SET Monthly Issue January 2012

| January 17, 2012

January 2012


We’re just over half way into January trading and already investors are shaking off the excitement of the New Year.

The Dow Jones Industrial Average jumped out of the gates like a thoroughbred racehorse on the path to victory.

The Dow gained more than 300 points, or over 2.5%, in just the first six days of trading.

But now the rapid pace is slowing, and the market is trading sideways.  Investor sentiment continues to be a problem.

Just look at the CFA Institute Global Market Sentiment Survey.

This survey is taken once a year.  They start in early November and compile it over a few weeks.

The survey’s sole purpose is to take the pulse of 2,700 professional money managers and analysts.  This gives us a great read on the mindset of many institutional investors.

So what did we discover?

To no surprise, most professional investors are positive on their own individual niche, sector, or region.  However, they’re less than upbeat on the global economy.

Consider the feedback from Asian investors…

They feel the global economy will struggle more than the US economy.  Could this mindset be driven by fears of China dragging them down?  Slow growth in China could be a huge impact this year.

When you shift gears and look at Europe, it doesn’t get any better.

Sentiment about the European economy was universally negative.  And surprise, surprise, European debt was the redheaded stepchild.

Most institutional investors expect the sovereign debt crisis to WORSEN in 2012.  In fact, less than 20% of those surveyed expect that part of the market to improve.  It doesn’t’ bode well for European markets at all!

But it wasn’t all bad… If you look just right, there’s a glimmer of hope!

What could be good about investors being fearful of China, global growth, and Europe? It means a ton of investor pessimism is “priced into” the market.

If China and Europe perform better than expectations, we should see stocks move higher across the board.  Remember… “The market climbs a wall of worry!”

What’s more, things are improving rapidly in the US.

GDP is up an impressive 5.5% from the recession trough to a record $13.3 trillion.  And noted conservative economist, Ed Yardeni, says the US may be “on the verge of a huge comeback” and could “experience an unusual second recovery over the next three years.”

Here’s the bottom line…

With strong headwinds in Europe and China, US stocks are looking more and more attractive.  The US economy is poised for a “huge comeback” which would certainly help drive the US market to new highs.

In fact, one area stands out from the rest as a great buying opportunity… dividend stocks.  Believe it or not, one common thread across all investors surveyed was their bullish stance on high dividend paying stocks.

It’s an area with a lot of potential, and I’ve got the perfect ETF to capture these juicy payouts.


The survey is in.  Institutional Investors are afraid of almost everything.  They fear China, Europe, bonds, stocks… the list is endless.  Where’s the one glimmer of hope? It’s found in dividends.

It makes a lot of sense.

In times of fear, investors seek out the safest types of investments.  Historically, that meant moving into US Treasuries.  But with easy money policies, ridiculously low interest rates, reckless printing of currency, excessive government spending, and threats of Sovereign default, everyone needs a “Plan B”.

And right now, the best Plan B is US dividend paying stocks.

Remember, dividends are cash on cash returns sent directly to investors.  And while it may be easy to fake financial numbers… it’s really hard to fake a fat dividend.  You either pay it or you don’t.

So where can we find the safest dividends?

Macro/Economic Trend:  We all need to eat and drink

Regardless of what happens in the global economies, Europe, China, or the stock market, we all still need to eat.

Everyday, billions of people around the world head to their local grocery store or market to buy food.  It’s not something you can do once a year or once a month. You’re not going to stop eating because the economy is tough.

And if things get really rough.  Well, we all know what happens… people are going to start stockpiling food.  Just look at what happens when a hurricane or snowstorm approaches a city.

Worried citizens panic and pick store shelves clean.

Nobody wants to go hungry.

No matter how you slice it, one sector’s going to get our business in both good times and bad… and that’s the food and beverage industry.  If you’re making food that’s being consumed every day, you have a nice little business.

And a profitable one at that.

And that’s why the PowerShares Dynamic Food & Beverage (PBJ) caught my eye. Not only do they have a nice dividend – it’s just over 5% annually – the companies in this ETF provide a consumer necessity, food and beverages.  In good times and bad, these companies should thrive.

Fundamentals:  A closer look at PBJ

PBJ holds 30 of the top dividend paying companies in the food and beverage industry.

The expense ratio is 0.71%.

The top five holdings and percentage weights for PBJ are:

Company Name Ticker % Weight
Kraft Foods KFT 5.14%
Hershey HSY 5.14%
McDonald’s MCD 5.04%
Kroger KR 4.99%
General Mills GM 4.91%

Technicals:  The charts lead the way

PBJ is in a nice uptrend…

Since early October, PBJ has been setting higher highs and higher lows… the very definition of an uptrend.  In fact, the ETF is up over 12% from the October lows.

What’s more, the trend should continue for some time.

You see, the 20-day moving average trading above the 50-day moving average is one bullish sign.  Another is the 50-day providing strong support for the recent upward move.  And finally, both the 20-day and 50-day moving averages are threatening to make a bullish cross-over of the all important 200-day moving average.


Trade Alert

Buy:  PowerShares Dynamic Food & Beverage (PBJ) up to $19.25
Recent Price:  $19.02
Price Target:  $25.00
Stop Loss:  $18.20

Remember:  PBJ is in a bullish uptrend. Intuitional investors are overly pessimistic, and as a result, they’re likely to seek safety in dividend paying stocks.  Regardless of how the global economy fares, food and beverage companies will continue to outperform.  And don’t forget, our technical indicators are also flashing bullish signals for PBJ.  It all points to this ETF moving higher in the coming months.


Consumer Discretionary (+6.5%)

Consumer discretionary spending ended the 2011 holiday season on a down note. While retail spending was up over 2010 levels, spending declined in each of the last three months of the year.

In fact, the year over year increase was due mostly to retailers slashing prices to the bone.  The deep discounts were the only way to get rid of excess inventory… but it hurt profit margins at many retailers.

The bright spot was online sales.

Amazingly, six individual days surpassed the billion dollar threshold for holiday purchases.  The trend was led by Cyber Monday spending which hit $1.25 billion.

So, what’s the future for consumer discretionary?

The economic recovery is weak at best, and unemployment remains high.  As a result, any hiccup could have a big impact on spending.  Continue monitoring this sector closely.

Consumer Staples (+2.1%)

The U.S. job market welcomed another month of unemployment below 9% in December… and about 160,000 new jobs were created during the month.  Good signs the economy continues to improve.

However, concerns about lower earnings at many retailers during the all important holiday season are weighing on the market.  This bodes ill for consumer discretionary stocks.  But consumer staples should continue providing a port in the storm if numbers are bad.

This month we’re adding a new ETF to the industry – PowerShares Dynamic Food & Beverage (PBJ).  And our Consumer Staples Select Sector SPDR Fund (XLP) is holding steady.

Energy (+5.0%)

Oil prices remain at high levels.  Since bottoming in early October around $77 a barrel, prices have done nothing but climb.  We traded well over $100 for most of the New Year, only recently falling to $99.

High oil prices are a threat to the economic recovery.

But, energy companies will make a mint in the near future.  Once economic activity starts picking up, this will be one of the big areas to benefit.  But now’s not the time to jump into these stocks… not yet anyway.

I’m watching them closely, and I’ll let you know when we see a good buying opportunity.

Financials (+10.2%)

It’s no secret that I’m no fan of the banks.

Real estate mortgages and bad loans continue to be problematic – four years after the collapse of real estate.  Add to that their exposure to the banking problems in Europe and you’ve got nothing but continued heartache.

Despite my aversion to the industry, it’s important to keep one eye on these companies.  Any hint of stabilization in the sector could inspire a rally in financial stocks.

Despite the sector’s headwinds, our iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ) has posted some great gains… REITs are clearly the best way to profit from the continued flow of people into rental housing.  Keep holding REZ for even bigger gains ahead.

Healthcare (+6.0%)

Healthcare has seen tremendous volatility over the last few months.  A handful of major drug companies have had a nice run off the Thanksgiving lows.  Eli Lilly (LLY) and Bristol-Myers (BMY) are both trading well above their earlier 2011 highs.

But it looks like the party may be nearing an end.

Many top performers in this group have become overextended recently.  And we’re expecting a pullback as the sector challenges all time highs.

With the 2012 election season gaining steam, you can bet healthcare will be a hot potato.  This is reason enough to tread lightly around this sector.

The one bright spot is the biotech industry.  We’ve seen M&A activity pick up to start the year.  This bodes well for biotechs putting up strong gains in 2012.

Industrials (+8.7%)

Industrials have rallied a bit with the overall market to start the year.  However, it’s a little too soon to tell if the rally will hold.

Remember, this industry is very closely tied to global growth projections.  With all the economic problems happening in Europe, China, and the US, this sector could reverse course on dime.

However, if the US economic recovery takes off this year, Industrials will be a great place to make money.  I’ll be keeping a close eye on this sector over the next few weeks.

Technology (+4.4%)

I believe Technology is one of the best sectors to invest in for 2012.  The space offers some of the highest growth rates in the market.  And it’s coming off a flat year in 2011.

This has been a recipe for outperformance many times in the past.  And so far, the trend is repeating itself in 2012. Tech stocks are up a solid 2.5%.

Plus, there’s plenty of potential to build on this good momentum.

Remember, in the third quarter of 2011, two-thirds of all tech stocks beat earnings estimates.  And more than 7% of them raised guidance.  This bodes well for tech stocks as we move into 2012.

Now, our SPDR S&P Semiconductor ETF (XSD) has slipped from $49.00 to $46.40 recently.  A few chip makers lowered 2012 earnings guidance.  But these companies do this every so often to reset investor expectations.

I suspect they’re using the current lull in global economic growth to reset expectations to a more reasonable level.

This is great news for us.  Lowered expectations help create upside surprises in future quarters.  No question about it, chip stocks will lead the way as the Technology sector keeps expanding.  So hang on tight.

The iShares S&P NA Technology-Software Index Fund (IGV) has also slipped a bit over the past few trading sessions.  Despite the pullback, the earnings outlook for software companies remains strong.  Keep holding tight to this one.

Materials (+11.0%)

Gold futures set a fresh two-week high of $1,641.40 a few days ago.

The precious yellow metal has rebounded by more than $100 an ounce from the December 29th lows.  It’s obvious the gold market bulls are starting out 2012 with fresh momentum.  We may have seen the market low being set.

From a fundamental standpoint, gold continues to be viewed as a safe-haven investment asset.

So it’s got the best of both worlds.

As economic recovery appears, we’ll see it move higher along with the rest of the raw commodity market.  And when news is bad and times look tough, it will garner big demand as a safe-haven play.

Looks like the gold bulls can have their cake and eat it too.

However, we’ve seen a recent disconnect.  The miners are no longer tracking prices for the physical metal.  For this reason, we’re going to go ahead and recommend sellingMarket Vectors Gold Miners ETF (GDX).

Utilities (+1.0%)

Utility stocks are continuing to run… and I don’t think they’re done.  The problem is their high yields have fallen because of stock-price appreciation.  This becomes a little harder to make a case for buying new shares now.

Lucky for us we have a nice gain, and we’ve collected several robust dividend payments!

Continue holding the Utilities Select Sector SPDR Fund (XLU).  XLU has managed to outperform the S&P over the last twelve months.  And it continues to provide us with a nice defensive position for our portfolio.

Portfolio Changes

  • Move XHB and FBT from Buy to Hold
  • Sell GDX


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