The only place in the world where there is no inflation is at the Fed. That was the joke this week as the Central Bank reaffirmed its commitment to keeping interest rates low in spite of mounting evidence that inflation is on the rise.
Like gold hitting a new high and staring cross eyed at $1500.
Crude getting boisterous and closing a breath short of $110 a barrel.
China CPI (consumer price index) coming in very hot-again. The country followed it up up by saying it will execute anyone who leaks inflation data.
The European Union raises interest rates in spite of ongoing economic fragility.
The Dollar continues to plummet.
So with very clear signs of inflation popping up all over the world creating uncertainty about how the Fed would respond, it was time for the boys at the Central Bank to sound off
And they didn’t disappoint.
“We see no signs of inflation and have no plans to raise interest rates in the near future.”
Say what you want about this being bad monetary and fiscal policy, it’s exactly what the market wanted to hear. The Fed is signaling to the private sector that it’s prepared to stay the course and support the cause.
And in this case, the cause is economic growth. Like GDP, manufacturing, and most importantly, jobs. The Fed is one of the only Central Banks in the world that has a dual mandate. Most are singularly tasked with price stability, but not so in the United States. Uncle Ben and his Fed-squad cronies are responsible for price stability and full employment. Good luck on the “full employment” front competing in a global labor market, but it most definitely gives the Fed the flexibility it needs to call its own shots and play even deeper into what is already very deep hand.
We also saw Q1 earnings season kick off this week, a big event every quarter but even more so this time around because of the recent jump in oil. Even though it’s still very early in the season, the results were a bit mixed.
Out of technology we heard from Google, Inc. (GOOG), falling $1 short of expectations at $7.14 per share. Although Google’s share price took a hit on the news, the social networking and Internet space is incredibly competitive and extremely dynamic, so the miss is most likely a product of one company losing market share as opposed to weakness across an entire industry.
But the most closely watched results came out of financial services, with JP Morgan (JPM) looking solid on reduced credit losses and Bank of America (BAC) missing badly on mortgage problems. Keep in mind, the banks led the economy into the crisis and they also led out. So there are more than a few analysts and portfolio managers watching the financials very closely for clues about the overall strength of the economy and consumers.
If we see good results from some of the bellwethers like IBM and Intel it could be a real shot of confidence for the market and the catalyst stocks need to mount another challenging leg higher.
Let’s talk about the portfolio.
We saw some peculiar movement in commodity stocks this week, with gold and energy stocks trading lower in spite of some bullish movement in the cash markets.
Some people think it has to do with a report that was “leaked” out of Goldman telling its clients not to invest in commodities because the group was at the top of a short-term cycle. Call it a conspiracy theory if you want, but the fact of the matter is that when Goldman speaks, people listen. And that includes its clients, who control gobs of personal and institutional money. So in spite of crude rebounding late in the week and gold hitting a new all-time high, some of our energy and gold stocks were a bit weak. Let’s take a closer look.
That dynamic weighed on Cimarex Energy (XEC) and Transocean Ltd (RIG), falling 8% and 5% respectively on the week on a 3% decline in crude. The movement in Cimarex wasn’t unusual for an E&P (exploration/production), which tend to be more volatile. But the movement in Transocean came on news that a few of its rigs were coming off of contracts and that three more were being put on the sidelines to idle. For a company like Transocean, they want to have every drilling rig or platform they own rented out as much as possible; that’s called a utilization rate. And make no doubt about it, these oil drilling platforms are expensive to rent, with high-specification floaters getting as much as 500K/day. So when a few come off contract and a few others get rolled into the bone yard, it hurts revenue and earnings. For the time being it doesn’t change our outlook on Transocean, but if we see additional weakness in the company or the industry it could be a signal to trim our exposure.
We also saw that peculiar divergence pattern show up in Market Vectors Junior Gold Miners (GDXJ), which fell 4% in spite of gold hitting a new all-time high. Although the 4% decline was a bit disappointing, it reinforces our use of a basket of stocks to invest in gold because some of the individual names fell even more. But as long as gold is strong, gold stocks should be just fine. And gold is most definitely strong right now as the world continues to worry about inflation.
But as always, there were also a few things to feel about. We saw Check Point Software Technologies (CHKP) step up and deliver a great quarter, beating expectations and sending shares to a new multi-year high. Check Point is looking like a real powerhouse right here. Internet and Network security is becoming more important every day, the company has $10 billion in cash on its balance sheet, its operating profit margin is 40% and insiders seem to think they are ripe for a takeover. A $10 billion valuation isn’t exactly chump change, but when you are talking about a big-tech industry that is sitting on massive piles of cash and very little creative inertia, sinking a few billion into the a leading security company makes a lot of sense.
We also saw some nice movement from TAL International (TAL), adding 3.66% on the week as shares continue to trade directly below the recent high. As a shipping containers company, this isn’t exactly a stock that’s going to burn up the charts, but that’s exactly why we own it. TAL is a stock that will give us solid general exposure to broad economic growth, as shipping demand and services have a strong correlation to global economic activity. And with a very solid 5% dividend yield, we are getting paid to own this stock. That’s a winning combination by any standard.
And finally, I thought we’d take a second to talk about Apple, Inc (AAPL), the stock that everyone loves to hate. Share of AAPL have been stuck in a highly uncharacteristic bout of weakness for most of the year, currently trading at $337 after topping off at $364 in mid February. That short-term trend could be related to a number of things like supply chains issues out of Japan or delays in the iPhone 5. But on a longer-term basis, this stock has more than a few tricks up its sleeve, particularly its valuation, trading at just 11X forward earnings when stripping out its massive $60 billion cash position. To put that into perspective, the NASDAQ 100 is currently trading at 17X. But how many of those companies are growing earnings by 75% per year while pretty much defining what is cool in consumer electronics? Apple sits in a throne all by itself, it has no peers. Its lofty reputation and strong earnings profile should provide plenty of support down the line.
That’s it for this week, until next time; here are a few articles you might enjoy.
Both are related to inflation, with the first covering how the University of Texas endowment just took a $1 billion delivery of physical gold and the second discussing how the ECB is fighting early signs of inflation with its recent rate hike. Enjoy.
Your Investment Partner,