There are two major macro trends that seem to impact decision making at this point of time – food inflation and the rising popularity of smart phones/tablets and any technology related to them.As Howard Lindzon eloquently pointed out at the beginning of the week:
“I was in Paris. I had a $50 club sandwich. At some point this year, we might have a $5 smart phone. If you can figure out how to invest to take advantage of those two trends – the $50 sandwich and the $5 smart phone, that’s the easiest way to make money in the next two years.”
I don’t know about the $5 smart phone, but the number of their users is certainly rising and companies that benefit from that growth have been on fire for the past few months. Last week we specifically underlined the high probability of price appreciation in the smart phones/tablet plays. MIPS, AT ML, ENTR, APKT – all of them up more than 10% for the week. ATHR was also up more than 10%, before it sold off.
The U.S. Dollar Index ($UUP) had the strongest week since mid August, breaking long-term trends in commodities. The worst performing stock in the St50 last week was the only gold miner on the list – $NGD, impacted by almost 4% drop in gold.
The fast growing food inflation in the emerging markets is destroying the purchasing power of the local population and as a result the stock of any company, which growth is strongly dependent on emerging markets’ growth, is getting severe selling pressure (for example, look at $MCD). Inflation can play itself in two ways -rising prices for the same quantity and quality or the same price for smaller quantity and lower quality. In which camp, do you thing USA currently is. The guys from Systematic Relative Strength had a nice missive on the subject: “Shrinking the product while maintaining the price is just a hidden price increase.”
There is always a way to play certain macro trend on a micro level. Over the past few weeks, we saw fertiliser stocks to significantly outperform their peers. New addition to the St50 is $CF, which produces agricultural chemicals. The role of financial markets as a forward looking mechanism is well described by Andy Kessler in his WSJ piece:
The economy is not going to create wealth just because we print dollars, build fast trains, put up windmills, or even assemble military supercomputers. (For the record, Google has the largest and fastest supercomputer, spread over dozens of data centres.) Even China will someday learn that wealth only comes from productivity. That’s found in a different place every cycle—and the stock market will find it first and fund its expansion. So where is it now? It’s staring us in the face and amusing us to a better life.
After underperforming most sectors in 2010, financial stocks started the year on a positive note. Most people were afraid to get involved with them, but sentiment is slowly changing. It is hard to measure something that you don’t understand, given the magical accounting methods in the banking industry. The point is that you can’t measure the fair value of any asset. You could say if it is overpriced or underpriced in relation to other assets, but you can’t really say by how much. The steepening yield curve and expected consolidations in the sector are trumping so far the headline risk of weakening home prices and exposure to sovereign debt. Perception plays a huge role in supply and demand.
For the week, the equal weighted St50 index appreciated by 2.37%, outperforming the S & P 500 by 127 basis point and the Nasdaq Composite by 47bp. At some point on Thursday there were 10 St50 stocks that were up more than 10% for the week, three were up more than 15%. We advised to take partial profits and raise stops. At the close on Friday there were only 5 stocks that finished the week up more than 10%.
ST50 is a powerful equity selection tool. Equity selection is a necessary, but insufficient condition for consistent market success. Disciplined risk management is needed for the latter. Patiently wait for the highest probability setups in the strongest stocks to develop before you commit any capital.
See the complete list for this week here