Weekly Update-May 25, 2012

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Weekly Update-May 25, 2012

By: Michael Vodicka

“But now, instead of just having to deal with small-member country Greece, the EU is confronted with the same issues with Spain, Italy and Portugal. The problems are pretty simply to understand; way too much debt, huge deficits and no real will to cut spending and entitlements.”

Stocks finally emerged from a nasty 3-week losing streak, closing last week with a small gain on glimmers of hope that Europe will find a solution for its growing financial problems. For the week, the Dow Jones added .6% on the week, the S&P 500 gained 1.7% while the NASDAQ trailed with a .1% loss.

The weeks slightly bullish tone didn’t really come on any specific news, just more hope that Europe will somehow find a way to tackle its crippling financial issues. The funny thing is, we’ve been playing this silly little game with Europe for over two years now. Actually more like two and a half. And nothing has worked.

But now, instead of just having to deal with small-member country Greece, the EU is confronted with the same issues with Spain, Italy and Portugal. The problems are pretty simply to understand; way too much debt, huge deficits and no real will to cut spending and entitlements. But these countries are much bigger than Greece. So bigger picture, as they follow Greece’s footsteps, it’s pretty hard not to be bearish on Europe and the market in general.

Looking forward, we’ve got some critical events on tap this week. As always, Europe will be calling the shots, every day and all day. But beyond Europe, we’ve got;

  • Tuesday-Consumer Confidence
  • Wednesday-Pending Home Sales
  • Thursday-GDP
  • Friday-Jobs Report

A little further out, we have two HUGE events that everyone needs to be aware of. The first is the Fed’s June 8 meeting, where the market is crackling with anticipation of how the Fed will respond to the latest round of equity weakness.

The second is the Greek elections, where Greece must vote for parties that are either for or against more bailouts. The first Greek election showed that the Greeks are largely opposed to these bailouts. So if that sticks, and the citizens choose to reject financial assistance, it could set the foundation for a Greek exit from the Euro zone. And if that happens, everybody better buckle their seat belts and hold on tight because we will almost certainly see a “disorderly” market.

Let’s go ahead and talk about some of our favorite stocks.

Updates:

Apple, Inc. (AAPL) was at the top of the charts, adding 6% on the week as technology stood out as a leading sector. There has been a lot of talk about Apple’s “massive” pullback from $650 to $550, which for anyone counting is 15%. But let’s please keep in mind that shares were up more than 60% on the year before that. Apple is still in a massive bull run and until that changes let the trend be your friend.

We saw some interesting movement in gold this week, with Double Gold (DGP) falling 2.6% while the Junior Gold Miners (GDXJ) tacked on an impressive 7%. The gold trade has been a bit rough lately. All in, gold is down about 25% from it’s all-time high last year above $1,900. But the action in the gold miners has been down right brutal, with GDXJ now trading down more than 50% from it’s high at $40 to a current price around $20. The miners have been seriously lagging gold for the last year, and that has weighed pretty heavily on the group. But bigger picture, these stocks are beaten into the ground pretty hard, so that bullish movement in GDXJ on lower gold prices could be the market taking notice that spreads between gold and gold miners are at historic highs. Either way, you have to have a high threshold for volatility be in gold and particularly the gold miners.

Shifting into a laggard, Verifone Systems, Inc. (PAY) was throttled on Friday after the company beat on Q2 earnings but disappointing the Street with weaker than expected guidance. That delivered a serious body blow to PAY, falling 16% going into the weekend. This is another good example of the market having very high expectations for a growth company in a growth industry. Overall, PAY still looks very solid as a leading name in electronic financial transactions. But that short-term money was looking for a blowout quarter and guidance, and when it didn’t happen, we saw a pretty sharp outflow. But longer term PAY is still a leader in its space with strong earnings, so those in it for the long haul should focus on the big picture.

And finally, to end on a good note, CF Industry Holdings (CF), a fertilizer company and general play on agriculture, posted a solid 6% gain to close at $166. The 52-week high is just above $203, but even though shares have recently pulled back a bit, CF is still up big on the year. And that’s because this company is just raking in the dough right now, projected to make close to $25 this year. That makes CF a great value stock in spite of its higher nominal price.

That’s all for this week, but until next time, here is a quick update on Europe. The latest is that one of Spain’s largest banks needed a $24 billion bailout on Friday, which is what caused stocks to weaken into the close. That’s a very big deal and a troubling sign. If that’s the direction Spain and these other larger EU countries are headed, it spells a lot of trouble for everyone and everything. Enjoy!

Spain Pressured on Bank Bailout

Your Investment Partner,

Mike

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