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.
The profit margins of the oil exploration/recovery are getting skinnier by the day. Think of new regulatory hurdles simply to get a new permit, the cost of complying, think of insurance rates, think of increased cost of oil services.
Don’t fixate on historical data…this Gulf (and Timor Sea) spill is a game changer.
sigli and southof8,
How much do you think deflation could impact RIG? I understand the cost of building a new advanced rig would fall for competitors but, as you mention, it would take several years to assemble a fleet which even comes close to competing with RIG.
In the short term I have to agree with hailog in that “necessity will trump politics” – after all, the need for new sources of oil is what drove us to deep-water drilling in the first place.
Ed,
Past earnings are no guarantee of future results unless all of your rigs are currently under long-term contract. However, even if RIG does take a huge 10-20% hit to earnings (highly unlikely) as a result of the new drilling moratorium it still has a P/E of 6!
Ogowan…
As of May 28, I’m adding these shares to the Jubak Dividend Income portfolio.
Full disclosure: I own shares of Banco Santander in my personal portfolio.
Per Jim’s post on his BUY Banco Santander…is this just a typo below under full disclosure??
Ed & folks,
I am finding it hard to resist not to buy RIG. Last time it was trading at this level was at the peak of 2008 crisis…and before that…well we have to look as far back as end of 2004 to find RIG trading at this price. Is the situation so dire for RIG that it may go down further? Sure..we all thought the same when it went down to the high 50s…could repeat again for sure…but how much lower can it get? Won’t necessity trump politics as far as deepwater drilling goes?
I am tempted but also afraid since ALL the stocks in my portfolio are down in double digits.
Thanks for the heads up md. I haven’t looked into RIG much, but remember the PBR contracts to be very long and for some serious change. If that’s enough to keep them going then maybe you’ll find a gem. I may look for a trade when the market puts them at that disgustingly cheap price, but I don’t know what that is yet.
Yeah, viwi, it looks like it’s finally time to pay the piper. No BIG innovation on the horizon to save us from our debt folly. But who knows… and who’s to say that’s bad anyway.
mdplatt,
The most dangerous thing to do right now is to look at ANY stock based on last quarter’s numbers. The old cliche about past earnings not being an indicator of future results applies now more than ever.
Look also at NE, which is primarily not a deep water driller, but a shallow and medium water driller, and has watched its value get butchered. It has exposure to the Gulf and will be impacted by a drilling moratorium, but it has no exposure to the Horizon disaster and is down nonetheless. Must be deflation fears.
I agree it’s a buy at 45. I thought it was a buy at 55 so what do I know…
Sigli is right on with the deflation fears comment. The drillers are like commodities- it costs a fortune and several years to build one rig. In addition to a potential crash in day rates, if deflation is upon us, it will be cheaper to build a rig in five years than it was or is now, so any company with a stable of fixed cost assets is going to get whacked. Rig has a large stable of fixed-cost assets, as you note.
But if deflation wins out in the end, we’re all hosed, so I’ll nibble more on RIG knowing if I go over the cliff, I was on the gas and not the brakes…
vivi,
There are plenty of big things cooking, if you knew about them before everyone else did, then you’d be a successful venture capitalist wouldn’t you?
Never forget that out of every $5 spent worldwide in venture capital, $3 is spent in the state of California. Want to find out whats next? Just take a trip to The Bay.
mdplatt: If you are looking at a time frame of over 10 years, RIG is an incredible buy right now. Over the next 1-2 years, it will go up and down like crazy.
southof8, sigli, and wb.3355
Thanks for your comments. That’s the extent of the news I had heard but it still doesn’t make any sense: RIG isn’t ONLY a deepwater drilling company. They have 91 mid- to shallow-water rigs, 5 harsh environment rigs operating nowhere near the GoM, and it’s my understanding that the moratorium applies to NEW U.S. drilling permits – most of RIG’s rigs are currently pumping. Also RIG had a huge contract backlog before the disaster. Why won’t any idled GoM rig just be moved offshore of Brazil, Nigeria, etc.?
Here’s an analysis from 2 weeks ago which says that “Transocean’s value is at least 35% to 55% higher than its current stock price of $58.58”:
http://www.chainbridgeinvesting.com/2010/05/27/analysis-of-transocean-rig-and-its-backlog-looks-very-favorable/
Seems like a serious buy to me at $44 with a P/E <5. Any disagreement?
I didn’t look at my investment portfolio for almost 3 weeks. Well, those 3 weeks were rather discouraging (lost about 30% of its value), so I sold some of the shares to minimize the tax liability for this year and make a room for European financial companies, which seemed to be under-appreciated in this market.
I do not quite understand why … Most of those companies (STD is just another fine example) perform rather solidly, and there is no way (!!!) European governments will allow those companies to fail. Everything else? I do not know …
I am quite skeptical about recovery. Here are my thoughts. I do not believe in Obama. He does not know how to solve problems, and what we are facing is one huge problem: how to ride ourselves out of the situation where we are now. There should be something BIG, something REALLY BIG to be able to create a wave strong enough. Examples? There were computers LONG time ago, there was internet long time ago, there was wireless some time ago … However, there is nothing (and I say, absolutely nothing!) BIG cooking right now. Is it cooking somewhere else? NO! Not in Europe, which is focused on solving (?) its own internal problems, or in Asia, which really is not a capable leader (they know nothing about where to go and just simply follow the US and Europe).
Frustrated? Sure. I am also frustrated, because I always thought that recession is an opportunity to find something new, to discover a new direction, or something like that. Nothing is happening. A year ago people were talking about solar energy (it could be BIG), but not any more. Well, that is it … I call it a “lost decade” for the whole world.
On the bright side, since nothing BIG is going to happen, it is a safe bet that stocks will fluctuate more and speculations (not investment) will bring the most profit over the next years to come.
I never post anything, but greatly appreciate both – Jim’s work and post discussions. Jim’s decission to drop PPO made me want to contribute to the board my humble suggestion. I’ve been watching HEV that is “a global manufacturer of large-format lithium-ion battery systems for automotive and utility grid applications”. Does anybody have a thought about it? thank you all for great work you do.
Rich..wfc-PL looks to have some coversion feature in 2013..the preferreds i invest in only have a call feature as of a certain date….at 25 par value…the reason i like the wfc-pj is its not callable for another 7 yrs…theres a site called quantom that has a long list of preferreds with alot of details…if you dont have that on your favorites list and you are a divy investor..you should…craig
mdplatt,
Goldman Sachs downgraded oil drilling firms to neutral from buy and issued bearish comments on the effects of the oil spill in the Gulf of Mexico. “We believe that the Macondo oil spill is likely to have a long lasting impact on the industry and most negatively impact the deep water drillers,” Goldman Sachs said in a note to clients. “We think that the current six month moratorium on deep water drilling in the U.S. could be extended and now assume that it lasts 12 months with limited activity until 2012; deep water dayrates are likely to face pressure.”
STL,
STD is in Dividend Portfolio.
Thanks Ed,
I hear you on the shorts.
shavdog,
What about wfc-pL ? 7.5%. Trading somewhere around 920 so yield is 8.2%.
drevil,
I currently have my cash parked in a money market account. While it’s only a 1% annual yield, it beats the negative yield most of the markets are generating.
BTW, I wouldn’t treat shorts as cash. They are still an investment.
Here’s my best guess on the RIG story as seen by the industry:
Drilling rigs are a commodity. If you cut out the entire US demand then you’ll send a glut of rigs onto the market. Drilling contracts in Brazil and elsewhere were getting pretty long, but new contracts could go the way of the Baltic Index. Supply-demand curves aren’t linear. Drop demand but increase supply spells pricing disaster.
If you can put some good numbers on US drilling activity and foreign growth then maybe you can find an edge on RIG. Or maybe you’ll see what the market is right now.
On rig, goldman put out a negative note on drillers, speculating the off shore drilling ban would stretch to 12 months.
To the oil industry experts- my ubderstanding is bp as the lessor of the drillship bears the liability and rig is not exposed to claims by third parties, 75 million liability cap or not. Anyone have a contrary understanding?
While you’re waiting for the market to bottom, simply sharpen your darts. Those and a recent copy of the WSJ will be all you’ll need to pick stocks…any stock still being traded will be very cheap.
Of course, you can make a little money on the way down, too.
Jim…
I noticed that you didn’t list STD as being in your personal portfolio at the end of this post but it was listed in your post “Buy Banco Santander”…did you sell the stock??
Thanks!
The S&P is getting very close to 1045 Jim has brought up before.
For Dividend Players…earlier Jim had mentioned jpm-i (preferred stock) as a way to gain some income and possible capital appreciation…I found one that I think is more attractive because of its call feature….wfc-j isnt callable until 12/15/17…thats 7 yrs from now and the coupon is 8% with a current yield of 7.6…for income investors this might work…craig
Any reason for the 10% drop in RIG today? Also, why has the stock price for RIG dropped further than for BP? I understand the moratorium on off-shore drilling will have an effect on RIG but does this warrant a 50% drop in stock price? My car still runs on gasoline (not natgas which I am constantly reminded the US has plenty of) and didn’t we start deep-water drilling because the easy to access oil (land-based and shallow-water) was getting harder and harder to find?
Someone brought this us a couple of weeks ago, but I am in a quandary as to where to park the cash (in Jim’s case 36%) while waiting to pull the trigger. Treasuries holding periods are too long. I have been parking it in a Pimco fund but was curious what you guys are doing (Ed in particular, but Jim as well if he wants to respond.) I got my Gold and shorts as well that I am treating as cash.
I’ve always wondered why you like JOYG over BUCY. Is there something significant to it? The TEX unit BUCY bought always seemed to be a great business for TEX, and held up reasonably well in the recession. The production, marketing, and distribution system synergies should add nicely to profit margins. IMO BUCY’s management is very shareholder friendly as well.
I’ve also been waiting for Freeport to enter the discussion again. It’s been on a very nice slide and I’m going to start digging.
Thanks for the update Jim. I really like MR