SET Monthly Issue September 2013

| September 17, 2013

September 2013


US stocks weathered a rough August and are on the upswing once again…

The S&P 500 reached an all-time high of 1,709 on August 2nd.  Then over the rest of the month, it shed 4.5%.

But since the calendar flipped to September, the bulls are back action.  So far this month the S&P has shot up 4% to put the large cap index within a few points of the all-time high.

But we’re not out of the woods… yet.  There are still several hurdles for the market to clear.

First up is the Fed.  The FOMC statement and projections on Wednesday is the first hurdle.

The vast majority of analysts and prognosticators are expecting Fed Chairman Bernanke to announce a reduction of the Fed’s $85 billion per month asset purchase program.

As helicopter Ben nears the end of his reign as Fed Chairman, it’s all but certain he will lay out the path for the Fed to end their unprecedented stimulus program.

The size of the taper and any commentary about how quickly the Fed anticipates winding down their stimulus program could swing the markets.

And that’s not the only hurdle the Fed presents…

The appointment of the next Fed Chair looms large.  Larry Summers is out of the running and Vice Chair Janet Yellen is now the front runner to replace Bernanke.

This could be good news for stocks.  As a current member of the Fed, she has supported the Fed’s stimulus program.  And she will likely continue to support it if she is named Chairwoman.

And don’t forget about the conflict in Syria.  It’s still a hot bed of violence.  However, a deal struck over the weekend will prevent a US military strike… if (and it’s a big if) Syria dismantles their stockpile of chemical weapons and allows international inspectors into the country by November.

Obviously, these world events will have an impact on the markets.  The Syrian deal and the likely appointment of Janet Yellen to the Fed’s top post are good signs.

But there’s no denying the market will continue to take its cues from economic data.

The US economy is plodding ahead.  But the lack of job growth and income gains is a major concern.

Much of the increase in spending over the last several years has been fueled by debt. It often gets swept under the rug but the median US annual household income is 6.1% or $3,400 less than when than what it was in December of 2007.

Consumers are starting to feel the sting of higher rates on pocketbooks.  They simply don’t have as much to spend on everything else if they’re paying more in interest payments.

Or they may simply choose not to buy big ticket items like cars and homes because they can’t afford the higher interest payments.  Needless to say, it would be a huge step in the right direction to see personal income growth gain momentum.

But right now the most important thing is earnings.  The good news is earnings growth per share is strong (thanks to massive stock buybacks).  And the resurgence of the Chinese and European economies should drive earnings growth estimates higher.

The return of global growth has shifted investor sentiment.  They’re no longer looking for better yields from consumer staples and other defensive sectors.  Now they’re moving into cyclical stocks that benefit the most from global growth.

I’ve got two ETFs that stand to benefit from global growth and strong earnings growth in the weeks ahead…


Transportation companies hold a vital role in the global economy.

The speed and efficiency we can move people and freight from point A to point B is the glue that holds our global economy together.  Without it, we could never truly be a global economy.

The recent revival of economic growth in China and Europe bodes well for transportation companies.  Obviously, the more economic activity there is, the more people travel and the more stuff that needs to be moved.

Macro/Economic Trend:  Riding The Rails

One indicator I track closely for signs of economic activity is rail traffic.

Simply put, the more carloads being towed across the country’s railways the better. And it’s important to note whether the overall trend of rail traffic is increasing or decreasing.

That’s why when I saw the latest rail traffic report from Association of American Railroads, I knew it was time to add transports into the mix.

You see, rail traffic is trending higher.  The latest data show total traffic increased 4.2% over the same time last year.  And it has surpassed the peaks from earlier this year and 2011.

There have been strong increases in just about every economically sensitive material hauled by rail this year.

Motor vehicles and parts carloads are up 3.5%, oil and petroleum product carloads are up 39.3%, forest product carloads are up 2.6%, nonmetallic minerals are up 7.1%, and intermodal carloads are up 3.6%.

In fact, about the only thing that hasn’t increased are farm products that have been hurt by the weak harvest last year and the recent drop in prices earlier this year.

In short, this is a clear indication of accelerating economic activity.  And it’s the reason I’m recommending iShares Transportation ETF (IYT).

Fundamentals:  A closer look at IYT

IYT holds 21 US transportation stocks.

The expense ratio is 0.46%. Its current dividend yield is 0.98%.

The top five holdings and percentage weight for IYT are –

Company Name Ticker % Weight
Union Pacific UNP 12.69%
Kansas City Southern KSU 8.59%
FedEx FDX 7.86%
United Parcel Service UPS 7.14%
Alaska Air Group ALK 5.86%

Technicals:  The charts lead the way

IYT is currently trading for $118.09.  It’s outperforming the S&P 500 with a 25% year-to-date gain.  And it’s just under the 52-week high of $119.45.


As you can see, IYT is in a strong uptrend.  It has set a series of higher highs and higher lows this year.  This pattern should continue to fuel more upside in IYT in the weeks ahead.

Trade Alert

Buy:  iShares Transportation ETF (IYT) up to $120.00
Recent Price:  $118.09
Price Target:  $145.00
Stop Loss:  $109.75

Remember:  IYT is trending higher because of strength in the US economy.  Now that economic growth is accelerating in China and Europe, it should kick into high gear.


What do Berkshire Hathaway’s (BRK.B) Warren Buffett, Amazon’s (AMZN) Jeff Bezos, and hedge fund manager & Boston Red Sox Owner John Henry have in common?

First off, they’re all very successful businessmen and filthy stinking rich.  But that’s not all…

They’ve all recently dove into the print media industry with the purchase of newspapers.  And who said print media was dead?

Buffett was the first to act.  In his 2012 shareholder letter, he revealed he had spent $344 million purchasing 28 newspapers with a focus on small local newspapers.

Then earlier this year, Henry and Bezos joined him within a few days of each other. Henry bought the New York Times for $70 million and Bezos bought the Washington Post Newspaper segment for $250 million.

Needless to say, when billionaires start buying a beaten down industry like print media, it’s time to take notice.

Macro/Economic Trend:  Cashing In On New Media

Print media is the true value play in the industry and pet project of billionaires.  But digital media and television is where the growth is at.

Companies like Google (GOOG), Yahoo! (YHOO) and LinkedIn (LNKD) have reshaped the advertising industry.

We’re still in the early innings of the shift to online advertising.  And the onset of mobile advertising over the last few years has created an entirely new platform for companies to advertise on.

Last year alone, online ad spending in the US grew 15% to $36.6 billion.  And mobile advertising shot up 111% to $3.4 billion.  And the total amount spent on online ads surged to $102 billion worldwide.

And digital media is projected to grow at a double digit pace for at least the next few years.  That’s an amazing growth opportunity for new media that find the right formula for companies to reach customers.

What’s more, the conditions are ripe for M&A activity among cable and satellite operators.

We’ve already seen feuds between content providers like CBS (CBS) and AMC and distributors like Time Warner Cable (TWC) and Dish Network (DISH) erupt over how much they should pay for content.

In order to strengthen their negotiating power with content providers, we could see companies merge into a handful of giant companies.

M&A activity is typically good for valuations in the industry because buyout offers are priced at a premium to the current share price.

The PowerShares Dynamic Media Portfolio (PBS) is a great way to play the digital advertising and television M&A in a single ETF.

Fundamentals:  A closer look at PBS

PBS holds 30 US media stocks.  The Intellidex Index is designed to provide capital appreciation by evaluating companies based on price momentum, earnings momentum, quality, management action, and value.

The expense ratio is 0.60%.  Its current dividend yield is 0.61%.

The top five holdings and percentage weight for PBS are –

Company Name Ticker % Weight
CBS CBS 5.17%
Yahoo! YHOO 5.16%
Google GOOG 4.95%
Time Warner Cable TWC 4.95%
Dish Network DISH 4.93%

Technicals:  The charts lead the way

PBS is currently trading for $22.83.  It’s up 37% year-to-date and right at the 52-week high.  It has been one of the top performing industry ETFs this year.

As you can see, PBS is in a strong uptrend.  It’s moving up and to the right.  The green line represents a support zone at the line connecting the previous lows.


Needless to say, this is one ETF with a lot of bullish momentum.  A breakout above $23.00 should send PBS surging higher.

Trade Alert

Buy:  PowerShares Dynamic Media Portfolio (PBS) up to $23.75
Recent Price:  $22.86
Price Target:  $30.00
Stop Loss:  $21.25

Remember:  PBS is on a roll this year.  It’s one of the top performing industry ETFs this year.  And it should continue to outperform as growth in digital advertising and M&A activity among cable and satellite providers drive valuations higher.


Consumer Discretionary (+4.1%)

Consumer discretionary stocks enjoyed a solid 4.1% gain over the last month.  The gains came despite the fact that retail sales increased at their slowest pace since April last month.  Cars, electronics, and home-furnishings are leading the growth of retail sales.

The good news is consumer discretionary stocks are expected to have strong earnings growth in the 3rd and 4th quarters.

Our iShares US Home Construction ETF (ITB) has started to rebound after a rough few months.  It shouldn’t come as a surprise – the selloff triggered by rising mortgage interest rates was clearly overdone.  Today’s homebuilder confidence shows builders are optimistic about sales trends.  Grab your shares of ITB up to $23.00.

This month we’re rolling out another ETF recommendation in this sector. PowerShares Dynamic Media Portfolio (PBS) has tremendous upside… see Trade Alert #2 for more details.

Consumer Staples (+2.0%)

Consumer and defensive stocks are on the backburner.  Investor sentiment has clearly shifted away from this sector in favor of more economically sensitive opportunities.  I’m steering clear of this sector for now.

Energy (+3.3%)

Energy stocks’ 18% gain this year is lagging behind the S&P 500’s 20% gain this year. It’s hard to believe given the fact that WTIC oil prices have been between $100 and $110 per barrel since July.

However, our mid-stream energy MLP ETF MLPY continues to shell out a high dividend.

What’s more, alternative energy stocks remain red hot.  Our First Trust Global Wind Energy ETF (FAN) is just under the 52-week high.  Grab you shares of FAN up to $11.00.

Financials (+2.0%)

Financials have erased part of their August losses in the first few weeks of September.  But they’re not showing the same level of leadership they had during the first half of the year.

Financials are expected to have the strongest 3rd and 4th quarter earnings growth of any sector.  So, there’s a good chance financials will reclaim their leadership position in short order.

Our First Trust NASDAQ ABA Community Bank Index Fund (QABA) is trending higher along the support of an uptrend created by a series of higher lows.  The way I see it, it’s only a matter of time until QABA surges to the upside again.

Healthcare (+4.6%)

Healthcare stocks 4.6% gain last month was tied with materials for the top performance.  Our Health Care Select Sector SPDR (XLV) just hit a new high of $51.84.  Continue holding for bigger gains ahead.

Industrials (+4.1%)

Industrial stocks are surging to the upside as global economic growth has begun to accelerate.  According to the latest report from the Fed, US industrial production rose 0.4% in August.

What’s more, earnings growth among industrial stocks is expected to lag only Financials in the 3rd and 4th quarters.

Our iShares Dow Jones US Industrial ETF (IYJ) recently surged past our $90.00 price target.  Go ahead and sell IYJ for a solid gain if you haven’t already.

But this isn’t the end for gains in the industrial sector.  This month we’re recommending the iShares Transportation ETF (IYT) to drill down to the industry with the most upside in the sector… see Trade Alert #1 for more details.

Technology (+1.2%)

Tech stocks are performing well despite a lack of leadership from two industry heavyweights – Apple (AAPL) and Microsoft (MSFT).

The good news is the two technology ETFs – SOXX and RYT – we recommended are outperforming the sector.  In fact, they both recently set new highs.  SOXX is currently up 15% and RYT is up 10%.

The semiconductor industry and equal weight methodology of RYT are clearly the way to play the tech space right now.  Continue holding…

Materials (+4.6%)

Materials stocks are on the upswing.  This is a clear indication that investors are expecting global economic growth to accelerate.

Our Guggenheim Timber ETF (CUT) recently hit a high of $24.58.  Be ready to capture your profits on CUT as it nears our $25.50 price target.

Utilities (-0.6%)

Utilities were the only sector that failed to post a gain since our August issue of Sector ETF Trader came out.  This sector is clearly feeling some pain from the recent rise in interest rates.  Don’t forget, many investors gravitated to utilities during the ultra low interest rate environment over the last few years.  But now that interest rates are on the upswing, this sector has lost its most powerful catalyst.

Portfolio Changes

  • This month we’re buying IYT and PBS.
  • Sold IYJ for a gain of 13.4%.


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