I'm not leaving on the same type of jet plane that Mary Travis of Peter, Paul and Mary fame left on in the 1960's ("Leaving on a jet plane. Don't know when I'll be back again. Oh Babe, I hate to go...") Nothing that romantic. I'm just on the shuttle coming back from Boston having spent the day visiting clients. I find it so helpful to have a day being questioned about my views by very smart people. It makes you think and come away more sure of opinions or, as often, get some additional insight as to other viewpoints. One of the topics we discussed at almost every meeting was the possibility of inflation down the road when all the Bernanke stimulus takes effect.
I believe that will be an issue but not soon.
As we have written about before, with capacity utilization at about 67% and unemployment high and rising, it's hard to see inflation as a threat in the very near term. Additional news releases Tuesday reinforce that view. Retail sales took a surprise slide down being off 1.1% when the consensus was for a slight gain. But with unemployment at 8.5% and looking to go higher perhaps a softening of retail sales shouldn't have been a surprise. It hasn't helped that there was a report that found 42% of those surveyed said they had their credit card limits lowered and that 51% claim the interest rate charged by their card has been increased. Slowdown in retail sales does call into question the recent strength in the retail stock sector however.
The last economic report for Tuesday was that business inventories fell 1.39%. While damaging to the GDP report for the quarter such a decline occurs in, it does set the table for stronger growth later this year as depleted inventories will sooner or later be met by rising demand and the situation will be reversed and there will be a production catch-up.
The Producer Price Index also fell by 1.2%which puts it -3.5% when compared to a year ago. If anything, these reports have a deflationary hint to them although the PPI was driven lower by energy and oil is up since that surveys time span. And the Obama tax relief is just now hitting paychecks. The point is there is still a threat of deflation and fears about inflation can be tabled for a bit. But not ignored since when the velocity of money picks up, there will be a lot of money flowing through the system which will create an inflationary worry.
The investment stance I feel most comfortable with right now and which I suggested at the Boston meetings is four fold. I like BAA corporate bonds yielding about 8.5%. They are way off their usual spread to Treasuries which is one way of judging these things. There is over $9 trillion of retail money in bank deposits and money market funds that will soon tire of earning virtually no interest. I think the first place this money will go to will be further out the risk spectrum on the yield curve and these rates won't be there forever. And if they are, I have a hard time seeing the stock market do well. To my knowledge there is no pure BAA ETF but with our COO, Rick Rubin's help, we have identified four ETF's that have a healthy representation in the BAA space. This list is available from your salesman at Soleil (I'm trying to drum up some business if you haven't guessed !)
With the help of my young colleague, Ab Nandi, we have compiled a list of 13 of the S&P "50" that have raised their dividends in the last six months (the list is available from your Soleil rep. as well). A dividend increase in this environment is quite a statement and the median multiple of earnings for this group of stocks is only about 12 times. Considering the median trough multiple for all the bear markets since 1929 is 13.9 times makes this list interesting.
I also like large cap tech. We don't have research coverage on many of these names but my thought is we are entering into a "delevered" economy and growth will be hard to come by, but growth will be rewarded disproportionally if achieved. Layering on additional productivity enhancing technology will be the best alternative to improving margins and growing earnings. And some of the bigger names, like Intel, even have dividend yield support.
Lastly I like the oil patch. It's not an inflationary play (yet) but the large cap oil stocks are trading as though the price of oil is around $40-45. I think that over the year as the U.S. economy improves, the price will drift to at least the marginal cost of production which is around $60 and these stocks will do well. I like the largest cap since they have the best balance sheets (like the Exxon's of the world) but I'm warming up to the domestic gas stocks since the price of natural gas has plunged and brought the stock prices down as well.
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