Welcome to FREE The Bull Market Report Monthly. We want to keep you informed on what’s going on in the markets and give you ideas for investments that are designed to outperform the stock market as a whole.
The subscription-based Bull Market Report is produced Weekly with News Flashes on an almost daily basis keeping you up-to-date on the stocks in our four (soon to be five) stock portfolios. We have the following portfolios:
Stocks for Success – stocks you want to hold for the long haul. These are your core holdings. Put them away and outperform the market year after year.
Special Opportunities – stocks that are down 70% and sometimes as much as 90% that have great franchises and thus the chance to turn around and go back up, and that may just be buyout candidates. LinkedIn was one of our stocks and Microsoft offered a 50% premium for the company with the stock moving from $130 to $195 in one day.
High Yield Portfolio – These are stocks that pay from 6 to 15% dividends. The dividends are REAL and are not return of capital. We cover REITs (Real Estate Investment Trusts), BDCs (Business Development Companies), and other types of high yielding stocks. Our favorite company has been paying between 10% and 16% since its founding in 1997 and is currently paying 11%. It’s a stock that trades for just over $10, pays $1.20 a year in dividends; is traded on the New York Stock Exchange; and is worth $10 billion.
Opportunities in Healthcare. We have four stocks in the portfolio and will move to about 10 in the next few months. 10,000 people a day turn 65 in the US and we all will need some type of healthcare in the future. One of ours stocks is a real gem. Worth less than one third of a billion dollars, we think it could be worth $2-3 billion in five years. Do the math on that!
So without further ado, here is the FREE MONTHLY Bull Market Report.
Brexit: Shock and Awe
Two weeks ago in The Bull Market Report entitled Summer Calm, we mention how it would take something really big to move the market. Well Friday, that something happened. British citizens expressed their desire to exit the European Union (EU). Global markets were caught totally off guard. Before the markets around the world even opened Friday morning, S&P 500 futures had dropped nearly 6%. The financial markets around the world collapsed to kick things off and by the close on Friday, all three major US market indices had fallen on the day by more than 3.5%. Every S&P industry sector except Utilities was in the red by the day’s end.
The only clear cut winner on Friday was the US dollar and Gold. The British Pound hit a 40-year low following the Leave victory, falling more than 8%. The rush into the dollar drove fixed yields down. The US 10-Yr. Treasury Note dropped as low as 1.4% during the day, closing at 1.58%. Crude, being priced in dollars was under continuous selling pressure before bouncing off its $47 low for the day.
In all, last week was a five-day rollercoaster ride with early week optimism for a Brexit STAY victory giving way to complete shock and awe at the end. Public opinion polls completely missed it; they weren’t even close.
The Summer Calm Is Officially Over: VIX Rises 50% on Friday
In the last Bull Market Report we noted the exceptionally relaxed state of the market as measured by the VIX. The Volatility Index measures the level of fear in the market. The VIX been has been as low as 11 this year; but spent most of the past three months around the 13-14 level. Well, since the beginning of June the VIX has jumped 80%, the biggest increase in many years.
The average level for the VIX over the last 25 years is about 16. For a good chart on the VIX (^VIX: 23.42) go here:
http://yhoo.it/28XAsNs
Volatility was also evident in the Crude market last week with prices ranging from a Monday high of $49 to a Thursday low of $46 before closing out the week at $48. Total US rig count rose by 9 last week according to Baker Hughes. This is the third week in a row of gains bringing the total count in the US to 337. That is still way below peak levels of 1600, but the very suggestion of rising production was just enough to keep the bulls at bay.
What we said last week in The Bull Market Report about BREXIT:
Brexit: Too Close To Call And That Spells Fear
All eyes are on Britain and this is going to make for a wild ride in global stock prices from financial companies to giant multinationals.
Things “could” get ugly. We don’t know for sure, but with the higher VIX; with the macro uncertainties like China; low Energy prices; deflation worries causing negative interest rates (Could this happen in the US?); we think that one should watch events this week closely. This week could be wildly volatile and negative. Note that the “anticipation” of an event is worse than the actual result. On Friday, after the vote and if they vote to STAY, the markets could rally. So it’s a tough call.
What to do now that we know what Brexit has done to stocks around the world? We do like our portfolio of stocks in the High Yield Portfolio and these companies are much more stable than ordinary equities. So if you have funds in stocks that in your mind are marginal and you’ve thought of selling them, a swap out of them and into some stocks like Digital Realty Trust (DLR: $103, 3.4% yield) or Government Properties Income Trust (GOV: $21.10, 8.6% yield) might not be a bad idea. We like Annaly (NLY: $11.02, 11% yield) too. A lot. Of course, Warren Buffett will do nothing, as the way he looks at things is that there’s a huge world out there and it will all work out, and he’s in it for the long haul, so why worry and make big changes.
Meanwhile Back At Home
Let’s take a breath and look at the immediate implication for what happened in Europe Friday for the US markets. Gold and the dollar are in high demand as safe havens. The US offers a positive yielding bond market and economic strength. Plus, Brexit puts any doubt to rest about future US monetary policy: There is zero likelihood of an interest rate increase this year. We have suggested repeatedly how global forces, not the FOMC are in charge of policy. Last Friday showed us a perfect example.
All this means that money flows still favor US stocks. But not all stocks. Strength of the dollar for multinational companies translates into lower foreign earnings. A higher valued dollar raises the cost of Crude, cutting into global economic growth. Finally, foreign trade outcomes are going to depend on Europe but we can’t forget about Chinese monetary policy either. If Beijing does not realign currencies, US exports will get hammered. The higher dollar is great for US inflation but not for the trade deficit.
Invest In The USA
So a picture emerges that favors US companies with either a major domestic concentration in businesses like services (Healthcare, Real Estate, etc.), or those that import manufactured components or finished products (Technology). Uncertainty creates demand for precious metals and the Brexit vote supplies plenty of this. Companies with little debt and great cash flow characteristics are more valuable now than ever. A quick look at fixed income yields will get us up to date.
In the aftermath of the Brexit vote, 10-year US Treasury note yields reached the lowest level since 1962 of 1.42%. This makes high cash flow, dividend paying companies the obvious choice of investors seeking income. It also shines a special light on certain financials like REITs where payouts are well above the average S&P 500 dividend yield of 2.1%. (See table below: Superior Dividend Yields)
STOCKS WE LIKE at The Bull Market Report:
Barrick Gold (ABX: $21, up 1.8% on the week and up 3% today) When in doubt, buy Gold. Not just the metal, buy Barrick. Here is why. We added the stock to our Special Opportunities List in February at $11.69. Since then it has added 75% in value. For the record, buying Gold (the metal) over the same period would have resulted in a gain of 18%. So give yourself high fives, you made a good decision and we hope we helped you in that process.
Barrick is doing better than most because it is hunkering down, ridding itself on non-core assets ($3 billion so far), getting a good handle on operating costs and making some overly conservative assumptions on the price of gold ($1,000 – it’s over $1300 now).
No wonder Wall Street expectations have been rising over the past 60 days. Consensus earnings for 2016 is $0.56 per share, nearly double the $0.30 earned last year. As for 2017, EPS are estimated as high as $1.20. Barrick Gold is delivering riches to investors and there is more to come.
Equity Residential (EQR: $66, up 2%) Last week we added the residential REIT, Equity Residential to our favored group of Stocks for Success. When you put your money to work here, you are investing with the Real Estate Legend Sam Zell. They own or have investments in 315 properties consisting of 85,000 apartment units located primarily in Boston, New York, Washington DC, Seattle, San Francisco and Southern California. Occupancy rates typically run 95% or better. These markets are where the most high paying jobs are being created and where job growth is likely to remain the strongest.
These are white-hot markets where property values are well above Mr. Zell’s cost. So he has been selectively selling certain locations - $6 billion worth most recently. This has been great for investors.
Lately the price of Equity Residential has been under loads of pressure. The big springtime apartment-hunting season has been a bit cool. The company announced it expects occupancy to dip from 95% to 94.9%. As they say on the streets of New York, what’s the big deal? As we point out in our report, this is a temporary condition. Investors overreact all the time and we want to take advantage and start investing with the real estate genius Sam Zell.
Whole Foods Market (WFM: $31, down 11%) The stock got hit big time last week as news got out about an FDA inspection of the company’s North Atlantic Kitchen that found food that was “prepared, packed or held under insanitary condition whereby they may have been contaminated with filth or rendered injurious to health.” Obviously, this is never good news and especially not for a company with a reputation as pristine as Whole Foods.
News organizations jumped on the story comparing this to the disaster that hit Chipotle. That drove investors to reach for their computer mouse and click on the SELL box. As typically happens, the emotion of fear overwhelms everything else.
We will try to be more objective. To begin, the problem is correctable and the bad publicity is containable. The FDA did not order a shutdown of the facility, which it certainly would have if the problem was truly serious. But with that said, once you get the FDA on your back, you can be guaranteed there will be more inspections. Knowing the management mindset at Whole Foods, the alarm bells are going off in every regional food kitchen in the entire system. That should provide you with comfort. We don’t believe one issue like this will do lasting harm to the Whole Foods brand. These days, all major corporations have crisis management plans.
We have always preached the gospel that profits are the easiest to be made when stocks are driven by emotion. Whole Foods is an example of this. In the past, the stock has commanded a super premium multiple. But at the present time the stock is at the same level as the market in general, creating a buying opportunity. Whole Foods’ earnings prospects are better than average and that spells value. We are buyers of Whole Foods.
APPLE CORNER
Apple (AAPL: $92, down 3.5% for the week, and down 1.5% today) Get this: A certain Beijing regulator is trying to bar Apple from selling iPhone 6 and 6 Plus models claiming “patent infringement” against a local Chinese company. In the copycat capital of the world, the Chinese government is suddenly enforcing its patent laws. CNBC conducted an exhaustive search for the company that is supposed to be the patent holder only to find a tiny company with sales of less than $5 million.
This is pure politics and it suggests that Apple needs to improve the way they play ball in China as China is a big part of the future for the iPhone. Apple announced it will appeal the ruling and the order has been put on hold pending the appeal. In the heyday of Steve Jobs, Apple grew stubborn and inflexible. Now things must change.
China is too important a market for Apple to turn its back on.
BMR Take: They will find a solution and the stock will recover.
BANK OF AMERICA (BAC: $12.16, down 3% for the week and down 6% today) [Note: We said this in our newsletter before the debacle on Friday with Brexit.] We’ve been thinking about Bank of America and we think the risk outweighs the reward at the moment. We added the stock in February at $13.16 and it’s gone mostly up, hitting $15 in late April, but lately has come down. It’s down 7% in the last two weeks. We’re worried. We love the bank. They are huge; they have a great leader in Brian Moynihan; and the company is moving into online banking heavily, as we all know bricks and mortar are doomed. But the one thing the bank can’t fight is the interest rate market. With negative rates in Japan and Germany, can this happen here? WOW. Good question, Todd! This is a big discussion for another day, and we will have it in the coming weeks, but for now, the possibility exists. They didn’t think it could happen in Germany but it did. People are saying it can’t happen here, but it could. Now with Brexit upon us and the disruption that that could cause, we think it prudent to exit Bank of America. We hereby remove it from our portfolio at $13.40.
We will revisit the stock and those of JP Morgan Chase (JPM: $58). We LOVE Jamie Dimon, but he too is subject to the MARKET. We’re going to watch and wait.
Tesla Update
Today, Apple is the largest company in the world by market cap. But Tesla Motors (TSLA: $198, up 3% today) could rocket so high in the next 10 or 15 years that the current $32 billion market cap could exceed even Apple’s $540 billion.
This is according to Ron Baron, CEO of Baron Capital, who went on CNBC recently to rave about Tesla. He has a $300 million position in the company and he thinks the stock could grow up to 20 times its size in the next 10-15 years to the $650 billion level. He expects to make $6-7 billion off of that position as Tesla becomes one of the biggest companies in the entire world.
He says: “The competition is nowhere. They could have caught Elon Musk four or five years ago, but they can’t catch him now. He’s too far ahead.”
Why? Well, for starters, all the things we have been saying about the company. Like the billions of dollars they’ve invested in its Gigafactory, which is nearing completion in Nevada and will be responsible for supplying batteries to the millions of Tesla Model 3s it produces once the car hits the streets in 2018.
Baron sees the ability to mass-produce batteries at such a massive scale as an absolute necessity for anyone hoping to compete with Tesla head-on in electric vehicles. The Gigafactory, according Musk, will have the largest footprint of any building in the world - the Gigafactory will be the largest building by area on the planet earth.
BMR Take: What can we say? We agree!
That’s all for this month. If you would like to write me directly, go here: Info@BullMarket.com or call 800.687.3401 if you have questions.
Good Investing,
Todd Shaver, Editor in Chief
The Bull Market Report