SET Monthly Issue March 2013

| March 19, 2013

March 2013


Since the start of the year, the S&P 500 has been on a fast escalator toward a new record high.  Week after week, the large cap index has climbed higher.

Last week the S&P reached a high of 1,563.  It was just a few points away from the previous record of 1,565 it set back in October of 2007.

What’s more, investor confidence was on the rise.  And stocks were being lifted by numerous positive economic reports.

It was clear the US economy was no longer in danger of slipping back into recession. And a resurgent housing market and a stable banking sector were fueling an upswing in growth.

It seemed like a new high was inevitable… then the European financial crisis (Part IV) came back to life.

This time it was the tiny island of Cyprus.  I won’t go into all the details here, but the bottom line is their banking system is failing and they need a bailout from the EU.

It’s not a big enough deal to really have an impact on the global economy.  But the terms of the bailout are still being determined.

In a worst case scenario, the deal could shake the fragile trust between banks and their depositors.  And it could spur a run on banks in Cyprus as well as other European countries that are at risk.

Obviously, it’s never good when anything threatens to destabilize the global financial system.  And those fears have triggered some profit taking over the last few days.

But here’s the thing…

I think these fears are overblown.  There’s no way the US or European leaders will allow this situation to spiral into something that could destabilize the financial system.

Sooner rather than later, a deal will be struck to bailout Cyprus.  The whole thing will soon be forgotten.  And the attention will shift back to economic data.

Once investors get beyond this Cyprus distraction, the S&P will finally set a new record high.  And I’ve got an ETF for you that should be amongst the leaders as the S&P breaks out…


’I’ve written about the strengths underlying the American Agribusiness economy on several occasions.  We’ve also profited from rising stock prices in this industry several times over the last few years as well.

In fact, we harvested a gain of 16% on the Market Vectors Agribusiness ETF (MOO) when it surged above $56.00 in January.

Well, the time has come for us to get back into MOO.  Let’s take a closer look…

Macro/Economic Trend:  Low Interest Rates and Lower Stockpiles

There are a number of reasons why Agribusiness stocks have performed so well over the last few years and why they’ll perform well going forward.  Two of the most important are access to cheap money and high crop prices.

And when you get right down to it, these two variables hold the key to Agribusiness stock prices in the short run.

First off, low interest rates are providing farmers with access to cheap money to expand their businesses.  They’re using it to buy new equipment and farmland.  And it keeps the cost of operating loans they use to buy seeds and fertilizer down.

The cheap money gives farmers every incentive to spend money now.  And it’s fueling an amazing amount of growth at Agribusiness companies across the board.

But no matter how cheap money is, farmers aren’t going to borrow it if they don’t believe they can pay it back.  So it’s important that crop prices don’t come crashing back down.  That’s where the low stockpiles come in…

The USDA recently said they expect corn stockpiles will fall to 632 million bushels before this year’s crop is harvested in the fall.  That’s the lowest since 1996.

Here’s where it gets interesting, corn prices are north of $7.00 per bushel.  Prices are down a bit from the record high of more than $8.00 per bushel last summer.  But corn prices are still high.  And despite the high prices, consumption isn’t slowing down.

As long as grain prices remain high and interest rates remain low, Agribusiness companies are in the sweet spot to generate better than expected revenue and earnings growth.  And that should fuel MOO higher when we get into the spring planting season.

Fundamentals:  A closer look at MOO

MOO holds 68 US and international stocks.  The ETF just began tracking Market Vectors Global Agribusiness Index.  It screens for liquidity and market cap and it will only track companies that generate at least 50% of their revenues from the global agribusiness industry.

The expense ratio is 0.55%.

The top five holdings and percentage weight for MOO are –

Company Name Ticker % Weight
Monsanto MON 8.00%
Syngenta SYNN 7.76%
Deere & Co. DE 7.18%
Potash Corp. POT 6.56%
Archer-Daniels-Midland ADM 6.05%

Technicals:  The charts lead the way

MOO currently trades for $53.95 per share.  It’s up 26% from the 52-week low of $42.63 and it’s recently pulled back 5% from the 52-week high of $56.55.


Since we sold MOO in January, the ETF has gone through a period of consolidation. The consolidation has occurred in a bullish continuation pattern called a pennant.

As you can see, MOO had a large surge from November through January.  This is the flagpole.  And this was followed by a consolidation period with converging trend lines.

We’ll typically see an ETF break out to the upside and continue the initial uptrend.

Trade Alert

Buy:  Market Vectors Agribusiness ETF (MOO) up to $55.00
Recent Price:  $53.95
Price Target:  $62.00
Stop Loss:  $52.00

Remember:  Soaring corn prices are a great indication of future demand for Agribusiness products.  And MOO is in a strong uptrend off the June lows.  Grab your shares of MOO today for an opportunity to pocket some quick profits.

Consumer Discretionary (+3.2%)

Consumer discretionary stocks are on the upswing.  Last month retail sales came in higher than expected.  Analysts were expecting sales to grow 0.5% but sales actually rose 1.1%.  That’s a big beat to the upside.  US consumers are clearly in the mood to spend money.

It has helped fuel a strong surge in our First Trust Internet Index Fund (FDN).  FDN hit a new high of $44.18.  But it’s pulled back a bit as investors booked some profits over the last week.  But there’s no reason to panic.  FDN is up 12% from where we recommended it and the uptrend is still firmly in place.

What’s more, consumers are taking advantage of low interest rates to buy houses. OutiShares US Home Construction ETF (ITB) is up more than 8% and should continue to do well as the pace of new home construction accelerates.

Consumer Staples (+2.3%)

Consumer staples turned in another solid month.  But the 2.3% gain lagged behind the 3.2% gain in consumer discretionary stocks.  This is a clear indication investors are taking on more risk to generate bigger returns.  And the rising tide is lifting defensive sectors like consumer staples as well more cyclical sectors of the stock market.  At this point, the more cyclical sectors of the market offer better rewards.

Energy (+1.5%)

Energy stocks have been a big reason why the stock has had such a great run so far this year.  But the pace of the advance has slowed recently.  And there are signs that oil services activity in North America will be weaker than expected this quarter.

And with WTIC oil prices hovering in the mid-$90s, the sector could be in for a period of underperformance compared to other cyclical sectors.

Financials (+3.9%)

Financials advanced 3.9% over the last month and continued their impressive run to the upside.  Over the last few days, concerns over the EU bailout in the tiny European island of Cyprus and its banks isn’t helping.  But it should only be a short term disruption.  The US economy is just too strong to let concerns over some tiny Russian gangster loving, money laundering little country derail the bull market.

Our SPDR S&P Bank ETF (KBE) is now up around 15% to $26.92.  Don’t forget we increased our price target to $29.00.  Continue holding for bigger gains ahead.

Healthcare (+3.0%)

Healthcare stocks logged a very solid 3% gain over the last month.  And investors continue to pour money into healthcare ETFs as the sector rises.  Our First Trust NYSE Arca Biotechnology Index Fund (FBT) hit a new high of $54.05.  It’s quickly closing in on our $55 price target.  Keep an eye on FBT and be ready to take your profits.

Industrials (+2.2%)

Industrial stocks had a solid month after we recommended them in February.  It continues to be one of the best performing sectors.  And with a large increase in capex spending projected this year, our iShares US Industrials ETF (IYJ) should continue to lead in the weeks and months ahead.

Technology (+1.4%)

Technology stocks are another area I’m expecting to get a lift from the increase in capex spending this year.  In fact, we’re already starting to see analysts increase their revenue estimates.  That’s good news for tech stocks that typically respond well to revenue growth estimate increases.

Our iShares Semiconductor ETF (SOXX) had a nice pop after our recommendation. But it has given back most of those gains the last few days.  Don’t worry – as we get further into the cycle, this pullback will look like nothing more than a blip on the radar. Chip stocks have a tremendous amount of upside from these levels.  Grab you shares of SOXX up to $60.25.

Materials (+1.3%)

The materials sector logged a small gain over the last month.  But our iShares Basic Materials ETF (IYM) has been on a bumpy ride over the last month.  It fell from around $72 to as low as $67.50 before bouncing back to around $72.

One of the strongest industries within the materials sector has been timber.  It’s benefiting from the upswing in new home construction.  The Guggenheim Timber ETF (CUT) hit a new high of $22.82.  That’s nearly a 15% gain… continue holding for bigger gains ahead.

Another industry in the materials sector ready to surge is Agribusiness stocks.  I believe they have a tremendous amount of upside as we enter into the spring planting season.  I’m recommending the Market Vectors Agribusiness ETF (MOO) this month… see the trade alert for more details.

Utilities (+3.8%)

Utilities have strung together two solid months in a row.  I was clearly wrong about the sector over the last few months.  I undervalued how many income investors would be pulled into the sector in search of yield.  Unfortunately, I think we’ve missed the boat on upside in utilities for now.  I’ll look to get back into them after they’ve cooled off a bit.

Portfolio Changes

  • This month we’re buying MOO.
  • Move IYJ to hold.

Category: SET Monthly Issues

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