Many investors figure the smartest thing they can do now is nothing.
They’ve raised the cash they need to raise and they don’t feel compelled to sell anything in a hurry. And they certainly don’t feel like there’s any rush to buy anything.
Yep, doing nothing strikes many folks as the right thing to do.
I mostly agree.
The Jubak Picks portfolio is about 35% in cash. (I might raise a little more but nothing huge.) As I wrote last week, I’m waiting for a buying opportunity in China (see my post https://jubakpicks.com/2010/06/03/think-chinas-bear-market-is-a-buying-opportunity-heres-one-way-to-tell-when-to-get-in/ ) but that’s not likely until July or later. The U.S. market is outperforming most of the world’s markets, but that’s not exactly a ringing endorsement considering. Until the growth picture for the U.S. economy gets a lot clearer—You did see the disappointing June 4 jobs number for May, right?– I don’t feel a need to add to my U.S. growth stock core in Jubak’s Picks of stocks such as Cummins (CMI), Whirlpool (WHR), Microsoft (MSFT) and Intel (INTC). The euro debt crisis will end someday but someday looks like a way down the road. And now we’ve got a political crisis in Japan that may or may not be resolved by July’s elections.
Nope, I’m not looking to make much in the way of buys or sell.
But that doesn’t mean I’m doing nothing.
It’s time, in fact, to be hard at work on your watch list (mine is at https://jubakpicks.com/watch-list/ ) if you want to be ready when it is time to buy. Right now you should be pruning that list to make sure you’re not fixated on buying the stocks that did well in the last market for the next market. It’s time to be scouting for new opportunities, stocks that seem especially attuned to the next market’s sweet spots.
In this column I’m going first to take the pruning shears to Jim’s Watch List, and then, second, identify some new growth that’s worth your attention.
Pruning and then replanting a watch list eventually gets very concrete and specific—you do need to name individual stocks for the list—but it starts off general and speculative.
How to begin?
Exactly—or as exactly as you can anyway—describe the kind of market you’re watching for. Put a time period on it. And remember that you’re looking ahead and not back.
Here’s what I’m watching for: sometime in the next six months or so, emerging markets will have resolved the problems that are now worrying investors—at least for a while.
China will have proved that it can raise the capital that its big banks need. The Agricultural Bank of China IPO (initial public offering) will prove that if the $30 billion share offering in Hong Kong and Shanghai goes as scheduled in July. (For more on that IPO as a stock market indicator for China, see my post https://jubakpicks.com/2010/06/03/think-chinas-bear-market-is-a-buying-opportunity-heres-one-way-to-tell-when-to-get-in/ )
Growth in China will have slowed enough so that the Beijing government can stop making threatening noises about ending speculation in the real estate market and clamping down on signs of inflation. Whether or not the dangers created by too much money flowing through China’s economy are truly over, China’s government will declare victory.
Other developing economies will reach the end of a series of interest rate increases designed to slow growth and head off rising inflation. Brazil’s central bank will most likely finish its rate increases by the fall, for example. India is on a similar schedule.
The end of growth fears in China and interest rate increases in developing economies will remove the major internal downward pressure on stock prices in these stock markets.
Europe and Japan won’t have solved their long-range economic problems—growth in those developed economies will continue to lag that of even the United States. But the euro debt crisis will have gone from red hot to a simmer. Investors won’t be worried that every bank in Europe is going to fail.
U.S. economic growth will be strong enough to revive fears of interest rate increases from the Federal Reserve for 2011 but not strong enough to quickly lower unemployment or to give Washington politicians any easy way to reduce the budget deficit. With partisan gridlock increasing with every month we get closer to the 2012 presidential race (especially if the Republicans win a significant number of House and Senate seats this November), overseas financial markets will start worrying about the dollar again. Not enough to reverse the dollar’s climb against the euro but enough to keep the dollar from picking up more ground.
Summarizing, by the end of 2010, I’ll want to own more emerging market stocks than I do now and more of the commodity-related stocks that rally when worries about growth in China, India, Brazil and the rest of the gang disappear. I won’t turn up my nose at a bargain in a European or Japanese stock but these markets are likely to face strong headwinds. The best buys in Europe, the biggest bargains, will be bank stocks because they’re so depressed now. U.S. companies that can take advantage of the return of optimism to developing economies will do well. Purely domestic U.S. companies are likely to be less attractive as the U.S. stock market loses its distinction as the best performing stock market, relatively, in the world. U.S. bank stocks are likely to outperform the U.S. stock market as a whole as fears from the euro debt crisis recede and as investors know exactly how far Congress will go in restricting the banking industry.
At least that’s the way global stock markets look to me now.
So let’s prune my watch list with that in mind.
First whack, let’s get rid of the safe emerging market stocks. These were attractive when I was looking for safer picks in these markets—safer because of dividends or a history of steady cash flows—but now that I’m planning buys that will take off as worries about interest rates and economic growth recede I want less safety and more risk. I think some of these are still good choices for my dividend income portfolio, especially because emerging market stocks are starting to show surprisingly high dividends (see my post https://jubakpicks.com/2010/04/13/asian-stocks-beat-u-s-equities-on-dividends-who-knew/ ), but for investors looking for gains from capital appreciation, I think riskier commodity, bank, and export growth plays offer more upside.
So out with Jim’s Watch List entries that are safer dividend plays such as telecom companies Philippine Long Distance (PHI), Turkcell Iletisim (TKC), and Telkom Indonesia (TLK). Out with China dividend play Jiangsu Expressway (JEXYY).
Out with U.S. domestic companies such as retailer Wal-Mart (WMT).
Out with long-term growth or relatively safe financial plays such as MetLife (MET), Standard Chartered (SCBFF), and Standard Bank Group (SBGOY). The bank stocks that will bounce back fastest once the euro debt crisis has turned into the euro debt simmering worry are those that have been crushed most—without going under—in the worst days of the crisis.
And finally out with those ideas that just don’t work anymore—and perhaps never did. In that group I’d put Prudential (PUK), which I added to the list because I liked its acquisition of American International Group’s Asia business—but the acquisition was never completed. I’d include ITC Holdings (ITC), a pure play on the need for more and better electric transmission lines, which just doesn’t look like it will play out in the current thinking about an energy bill. It doesn’t look like a good time to be trying to add oil company Apache (APA) to the portfolio. China Medical Technology (CMED) has underperformed even considering the bear market for Chinese stocks in general. And finally I’d include Polypore International (PPO) on valuation. While I’ve been waiting for a good time to buy, the stock has gone up 80%.
And what would I add given my view on the future of global markets over the next 12 to 18 months?
I’d add bank stocks such as JPMorgan Chase (JPM) and Banco Santander (STD) that have been crushed in the selloff of bank stocks but that are fundamentally sound and stand to pick up share from competitors. (See my post on U.S. bank stocks for more on JPMorgan Chase https://jubakpicks.com/2010/06/02/want-to-tag-along-as-the-smart-money-buys-bank-shares-here-are-three-stocks-stocks-that-fit-the-strategy/ and see my recent update on my Dividend Income Portfolio for more on Banco Santander https://jubakpicks.com/2010/05/28/4084/ )
I’d add a Brazilian stock such as sugar cane to ethanol powerhouse Cosan (CZZ) on the end of 2010 end to interest rates increases in Brazil.
Among global commodity stocks I’d add Freeport McMoRan Copper & Gold (FCX) because copper prices track economic growth, especially economic growth in China, so closely, and mining equipment maker Joy Global (JOYG).
And I’d add Chinese stocks such as Mindray Medical International (MR) and solar cell producer Suntech Power Holdings (STP). (For more on solar stocks see my post https://jubakpicks.com/2010/06/04/the-gulf-oil-spill-is-so-bad-that-maybe-just-maybe-energy-legislation-is-alive-again/ )
This isn’t the end of my watch list planting for new growth. I’m going to stop here with this list of stocks to add to the watch list. After a market correction, watch lists have a tendency to include just those stocks that an investor thought to buy before the correction but that were too expensive then.
To avoid that trap, you need to wipe the slate clean and go looking for new stock ideas, not simply those stocks that are cheaper now than they were then.
In my June 11 post I’ll show you one way that I use to generate new ideas and add three blank state, new ideas to my watch list.
Full disclosure: I own shares of Banco Santander, Mindray Medical, Standard Chartered, Suntech Power, and Telkom Indonesia in my personal portfolio.
Thank you to everyone who commented on RIG. Part of DD involves weighing the pros and cons of every trade and this has served as a great way to get all of the perspectives. I agree with southof8 that more discussions should be like this.
BTW: Salazar calls the drilling moratorium just a “pause”, BP boosts their oil collection ability, and several rig workers testified that BP cut corners on safety and pulled rank on the RIG employees to pump seawater into the well rather than the heavy mud which would keep the oil pressure in check.
Result: RIG sets a new 52 week low.
Interesting comments on RIG, but I’m staying away. As has been stated there are others in the same game that don’t have unknown skeletons in the closet. Try NE or DO (Full disclosure, I own DO). I would be concerned about RIG getting hauled into court by BP or any or all of the gulf states that are impacted. For me the risk far outweighs any potential gain. Maybe my riding C down to 5/share has jaded me, but don’t think it can’t keep sinking. Plus if BP files for bankruptcy (to cut off its exposure), the lawsuits look for the next deep pocket.
Marcroix–Great idea. RIG LEAPS are too expensive for my liking, but I’m not an options person. Even with the price tag I think it’s a great idea to consider. @ $7+ I think time value is where you’ll make the money. My thinking is don’t hold these to expiration if RIG pops to $55 or so, as $72 is still a long ways off, and profit only comes north of that.
Jim – I agree on adding beta to your (future) turn-around portfolio, onboard with STD and CZZ looks interesting. I’d stay away from solars like STP though – their future is too governmentally/politically influenced.
Marcroix – I agree entirely with your analysis and view on RIG (like your Leap Call idea, too.) IMO $90 isn’t far off when the market turns.
One question I have on RIG: What kind of agreements does it have with BP? Specifically, does BP have any recourse to RIG if the rig fails? (and I’d call what happened a big failure, although it is still a question of whether it was user error or equipment failure)
Don’t be surprised if BP ends up hauling RIG into court.
mdplatt et al.
The average main street investors have essentially stayed out of the market for the last two years. More than 80% of volume is institutional; 60% of all transactions is program-trading. So, when certain conditions in the models are met, (often large) sell orders automatically kick in.
Most comments & proposals made by govenrment officials are politically motivated. Offshore drilling will not only continue, but increase over the years. Most alternative sources of energy are still in the embryonic stage and thus insignificant, almost irrelevant. Several alternatives are considered way too costly, especially for emerging markets.
Proposals for new rules & regulations made by the U.S. Govt. will greatly benefit one specific sector: oil services companies (Bloomberg).
RIG is a well-managed, highly profitable company and will remain so. In terms of deep-water drilling RIG is “the only game in town”. The exact level of blame & responsibility is still unclear & undetermined. RIG is a Swiss company not an American one, which may pose constraints in terms of liabilities.
So yes, load up on RIG. It’s an absolute steal at less than $50. You may even consider LEAPS (e.g. RIG JAN 2012 65 CALLS). Remember, people have short memories. Exxon bounced back quickly after Exxon Valdez.
The exchange on RIG is a model for future posts.
Ryan, I think your concerns are valid to a point. I’m more concerned about the government trying to impose liability than BP trying.
I’ve read BP has the liability burden contractually, which makes sense. When you rent a car, the rental company imposes potential liability on you in the contract. IF the car blows up through no fault of yours, you probably have a decent argument that you should not have to pay. But you probably have the burden to show the damage was the car company’s fault. If some thug breaks into the car, it’s not your fault, but you’re still liable. That’s the nature of an indemnity agreement, and indemnity agreements are generally enforceable, even if in hindsight they seem unfair. Rig’s argument will be simple- we agreed BP pays if the thing blows up, and had we not agreed that BP alone would be liable for just this kind of disaster, we’d have charged it a lot more for the rental.
That’s a pretty good argument, legally and morally.
What makes me most concerned about RIG, and most eager to buy it at the same time, is the breakdown in price is not unique to it. Look at DO’s or NE’s charts. They have no exposure to the Horizon disaster, its cleanup costs, etc. And they have not fared too much better than Rig.
So there are some big traders dumping/shorting drilling stocks by the boatload and where and when they stop. . . Did anyone think BOA would trade at 5 bucks a share, or Am Ex at 10 (and Am Ex had no toxic loans hidden in its rafters)? Relative to its historical price to book value, RIG is outrageously cheap. From 2.5 to 1 to under 1.
There’s a reason they call it risk capital, and as others have said, there’s not a lot of choices for where we’re going to get the oil to put gas in our cars.
So I bought more today at 45. I’m patient. I agree RIG is a much better buy than the dogsh*t bank stocks that rely on government largesse to survive- not tarp money but .25% interest rates and the alphabet soup of garbage the Fed has created in order to let banks offload toxic DS until “things get better.”
Ryan,
I already own TOT and Potash. And yes, certainly the liability is in no way quantifiable. Similiar to Toyota’s current situation. Or Goldmans a month ago. But at half of one % of my net worth, I’m a happy buyer. Even if the stock sees a 2 handle.
Lastly, I’m with you on the gold and shorts (in particular) as cash. Yikes!
Interesting thread regarding RIG. I have two thoughts on the matter. One, is it not possible that RIG will end up with a larger liability than you might currently think for the Gulf spill? It was their rig after all and I suspect BP will do what it can to recover it’s losses from wherever they can. Just today the news suggested that RIG may have undermanned the platform. What other news might come out?
Second, why get stuck on RIG when there are currently so many other good opportunities out there for your investment dollars? It isn’t like the market is at a peak and RIG is the only stock that looks like a bargain. I know that feeling very well, but experience has taught me to “just let it go” and move on.
Jim’s dividend pick Total, (TOT) trading at or near a five year low and paying a dividend north of 6% is an example.. Hold onto that one and get well paid while you wait for oil prices to go up again. Moratoriums on drilling can only help push prices up. Canadian oil sands producers are relatively cheap and carry little drilling or political risk. Think CNQ or Suncor. Potash..yes Jim, is cheap. That is just a few if you like commodities.
To the fellow who is considering gold and his “shorts” as part of his cash, consider rethinking. Both of those positions are very volatile and in no way resemble cash. They may be good ideas, but they are most definitely not a substitute for cash.
I don’t pretend to have a big brain, but I’m a RIG buyer tomorrow and I HATE the outlook on the entire market through the rest of the year. With all due respect to Jim, I can’t bring myself to own a (in my opinion) insolvent large US bank, no matter how “relatively” better than the rest they are (Chase/USB). Conversly, I’m pretty darn sure some kind of gas will be going in my car for at least the next 10 years and I’ll be a buyer of distressed assets in that arena.
Not all distressed assets are created equal.
Ed,
Congress’s “Goldman Sachs treatment” is going to be reserved solely for BP and Mr. Tony “I want my life back” Hayward.
Ed,
I don’t see the “macro situation” as adversely affecting RIG to the extent that it justifies a 50% hit to the stock price. Despite some likely near-term volatility, that makes it a “buy” in my book.
As far as a prolonged moratorium on drilling, I just don’t see it happening. Trust in the avarice of your politicians and in the short-term attention span of the American public. Once the Deepwater well is fully capped (mid-August, if not sooner) and the Gulf clean-up seems to be making headway, your elected officials will start to fret over the fact that “the other guys” (India, Angola, Nigeria, Brazil, etc.) are still drilling in deep-water. They might even be inclined to lift the drilling ban once the oil companies “assure them that they have adequate safety measures in place to prevent another spill on the scale of the Deepwater Horizon disaster”. (I’m not a Congressional speech-writer but I’m sure when they write it the words “freedom” and “energy independence” will end up in there somewhere…)
marr.bo
There are plenty of things which are considered for cooking (5-10 years from now), but there is absolutely nothing that is ready to ride now. There is no big wave coming yet, and I do not see it in a pipeline for the next couple years.
Speaking of GS and RIG, it looks like RIG is about to get Congress’s “Goldman Sachs treatment”:
http://online.wsj.com/article/SB10001424052748703302604575294670738866384.html?mod=WSJ_hpp_LEFTTopStories
Market prices are not always rationally, they’re based on educated predictions of how current events will affect future events; and don’t forget GS is a master at manipulating the market so RIG’s downgrade maybe to work a short play on RIG now, planning to buy shares cheap for a bigger profit down the road. My problem is I can’t call a bottom for RIG’s price so I’ll build a position, over time, although it’s price is obscenely cheap now.
MD,
I don’t think new rig price deflation will hurt RIG too much. They depreciate these things pretty quickly (something like 3-4 years if I remember correctly). Then it’s all cash coming in for the work they do. You can’t buy a new rig for less than one owned outright (meaning it now costs zero). Advantage: RIG.
Also on deflation–RIG is selling for around book value. That gives some margin of safety against write down. If it gets far enough below book then they can chop some of the rigs up and scrap ’em, and you’d still come out ahead.
Ed et. al are the reason the stock is going to keep going down into “yummy!” territory. Let them have their day. Tomorrow will be yours and mine.
Do you think Brazil is going to shut off the cash cow and China is going to quit throwing billions (literally) at deep water oil? Drill they will.
mdplatt,
I agree a drop in price is not a reason not to buy a stock, unless it’s indicative of something else. And usually you have to ask what that something else is. In the case of RIG, it’s a macro situation that could impact the company’s bottom line.
I also agree a permanent moratorium on deep water drilling won’t happen. But what about a temporary one? A moratorium that is just long enough to last until the oil prices go up is not beyond the realm of limited thinking our politicians are known for.
Should RIG be down 50%? Of course not. It’s totally illogical. But no one ever said the markets worked on logic.
The omission of Santander from the disclosure was just an omission. My error. I still own the stock. I’ve corrected the disclosure now. Thanks for the catch.
Ed,
I wouldn’t use the drop of $4 as a reason not to buy. In fact, when a stock drops for no valid reason that’s a buying opportunity. That’s why I was seeing if anyone here with a bigger brain than I knew of a valid reason for RIG to take such a hammering.
As far as a global moratorium on drilling, do you think that’s even a possibility? Until my car can run on good intentions I’m going to be filling up at a gasoline station. That gas will come from an oil company that has drilled in deep-water not because they relish the challenge but because they have already depleted their easily accessible resources. It may be politically expedient to bash deep-water drilling right now, but are there realistic alternatives?
Like you said in your comment to Jim’s post on the Gulf Spill and Norwegian Politics, investing in an oil ETF might avoid some of the near-term volatility associated with the spill, but I still don’t see a valid reason for RIG to be down 50% from it’s April highs.
Imagine this: the heads of oil exploration regulatory agencies around the world have called emegency meetings, at which the agency head looks at all of his department heads and says “Read my lips, there will be NO MORE permits issued on my watch unless I am personally satisfied that this Gulf and Timor Sea disaster won’t happen again.”
The pendulum has reversed its swing, ladies and gents, and now we get to watch the opposite extreme.
Thanks for sharing your thoughts Ed. I’ll remember that.
mdplatt,
And what if most of the world’s country’s decide to put in offshore drilling moratoriums? (I probably spelled that wrong but I ain’t looking it up!)
Where exactly will RIG get future growth? If that happens, a P/E of 1 would be fair value, not 6.
hailog,
Necessity won’t trump politics until gas prices go up. No voter pain, no political gain. Until then, the politicians will happily cut off our own noses to spite our faces.
You want some reasons not to buy RIG? Ok…
The ROI of 9% is ok, but nothing exceptional. The insider ownership is only 0.1% (the people who run the company don’t own much of it). It’s dropped over $4/share today, so what’s to stop it from doing that again tomorrow? Finally, read Jim’s last post about how the Gulf Oil Spill is now affecting the oil drilling politics around the world.