Fed Tips Hand, Gold Hits New High

The Fed took center stage this week, with the most powerful Central Bank in the world saying it is prepared to stimulate the economy on any major signs of weakness.

That’s a huge deal for the market, resolving uncertainty about the Fed’s involvement in the economy after the expiration of QE2, it’s bond buying program of the last six months that has helped keep interest rates low.

But it came with a caveat. The Fed won’t move unless things get ugly, which means the private sector is being asked to stand on its own for now. But in terms of sentiment, the impact is substantial, because it means the one thing everyone is scared to death about, double dip recession/economic collapse, will be aggressively attacked by the Fed.

The news helped buoy the averages in what was an otherwise tough week where stocks continued to battle weakness in the EU and uncertainty on the debt ceiling. We also saw a terrible reading on consumer confidence, a sudden shift after last week’s June retail sales came in at their best level since 1999. The word on the Street is that uncertainty over the debt is weighing on spending. The debt ceiling is making people nervous. Some clarity on that front would remove a lot of uncertainty from the market.

But it’s not all doom and gloom, there’s reason for optimism. Earnings are once again looking great, with JP Morgan (JPM) and Google (GOOG) both coming in ahead of expectations. Another good quarter puts the S&P 500 back to peak earnings from 2007. Earnings have been the bright spot of the recovery, and even though the pace of growth is slowing against tougher comps, the trend is still higher.

So as it stands, the averages are doing a pretty good job of holding their recent gains in the face of some serious challenges. If we get some clarity on the debt ceiling and earnings stay strong, it could provide a nice dose of confidence for the market.

Updates:

Commodities were definitely in play this week.

Gold traded to a new all-time high on the big news that the def was open to further stimulation. That weakened the Dollar, and when the greenback sinks, gold catches a bid.

That lifted Double Gold (DGP) to a 6.4% gain while the Vector Junior Gold Miners (GDXJ) added 4.45%. Using these two instruments together is a great way to play gold, because one is linked to the physical price of gold while the other represents equity in a group of junior gold and silver miners. The junior miners have higher upside, but there also gonna be more volatile.

Energy stocks also traded strong on news that global mining giant BHP Billiton (BHP) was buying natural gas heavyweight Petrohawk (HK) for $12 billion. There are a lot of big names in energy making very big bets and plays on natural gas. At the top of the list is Exxon’s (XOM) $40 billion acquisition of XTO Energy last year that immediately made it the largest player in domestic natural gas. In this case, BHP offered a 65% premium to Petrohawk’s current share price, sending a very big message to the market about their view on business. It sent a huge bid into energy stocks all across the board, with service provider Baker Hughes (BHI) gaining 2.57% on Friday to move into the green for the week and exploration and production company Cimarex (XEC) posting an impressive 4.57% gain to end the week. Energy stocks have been a bit out of favor with the market lately, bit a little sector consolidation and strong earnings could change that very quickly.

Shifting into a laggard, we’ve been seeing some weakness from shipping container stock TAL International (TAL) lately. As a highly cyclical stock, that probably has to do with the recent round of downward revisions in GDP and global economic growth. When TAL originally came into the portfolio most economists were looking for 3%+ GDP growth in the back half of the year. But now with growth trending around 2%, an early to mid cycle stock like TAL will fall out of favor with the market.

The removal of TAL gives us a chance to shift into a better long-term idea.

Banco De Chile (BCH) is an international bank out of Chile that is benefitting from economic growth in South America. With a market cap of $12.4 billion, it’s an established name and brand with a 100 year history.

We like value and we see it here. BCH is trading at just 14.2X forward earnings, a discount to the market and its peers. Analysts are looking for 12% earnings growth next year. The company also pays a solid 3.1% dividend, which is a big score when interest rates barely exist.

TAL was a cyclical play, BCH is a longer-term idea that we want to hang onto for a long time. As a leading bank and financial institution, BCH looks like a good way to capitalize on the South American growth story.

Other than that we’re starting to see some solid movement from Apple, Inc (AAPL), outpacing the market with a 1.45% gain. A lot of people have been discounting Apple this year because the company hasn’t been banging out a hot new product every 6 months. I consider Apple a sleeping giant. It might be cooling its heels a bit right now, but this is not a company or culture you want to bet against. Apple is the undisputed rock star of technology and people go ga-ga for their products.

Looking forward, the company is expected to release a new version of iPhone this fall, continues to grow its cloud services and has plans to get more involved in content delivery with fully integrated Apple TV’s. And in the meantime, iPhone and ipad sales continue to shoot through the roof. Apple is just a great place to play multiple trends in consumer technology with a company that pretty much defines the space.

That’s all for this week, but until next time, here is some more flavor on Apple, discussing how the company is positioning itself for a strong second half. Enjoy.

Apple expected to set up strong second half

Your Investment Partner,

Mike

ABOUT THE AUTHOR

Michael Vodicka

Michael Vodicka is the president and founder of the Vodicka Group Inc., a licensed investment advisor (Series 65) and a financial journalist.