The State of the Markets

We’re gonna do something a little different today…

Usually, I write a standard article: It has an introduction designed to pique your interest. Then it flows into the meat, where I state my case and offer corroborating evidence and anecdotes. And then the conclusion, which offers some kind of actionable advice.

But here’s the thing: I can be a bit flaky at times. And so the standard article format doesn’t always play to my strengths.

So for today, I’m pitching that format. Instead, I’m going to go with a list of observations, thoughts, and (hopefully) valuable insights…

• The 2015 results of the Fed’s stress tests for banks will be released on March 5. Banks submit their capital allocation plans for the year and are either approved or denied. Last year, Bank of America (NYSE: BAC) was approved to raise its annual dividend from $0.04 to $0.20 and also buy back a few billion worth of stock. BofA is in better shape this year, and I expect it to seek another dividend hike to at least the $0.30-a-year level. This is a very important catalyst for the stock and should push shares to near $20 over the next few months.

• Dogs of the Dow: You can’t really call Boeing a dog, but the share price was basically range-bound between $120 and $130 for all of 2014. The pessimist would say this was because investors didn’t believe Boeing could execute its aggressive plans for the new Dreamliners in a cost-effective way. The optimist would say it was simply a yearlong consolidation as the stock built a nice base. Optimists win: Boeing has broken out above $150 over the last month, and Goldman Sachs raised its price target to $195 (Boeing has been in The Wealth Advisory portfolio since $60 a share).

• Investors are dong a great job of keeping the Greece situation in perspective. Yes, it will be disruptive if Greece leaves the EU — but not a disaster. Greece has a $250 billion economy, fer crying out loud. Apple could buy Greece for cash. There’s no reason the Dow should sell off 500 points because of Greece like it did back in 2011.

• Speaking of the EU, its structural problems are being exposed… again. In a union like marriage, it is for better or worse, till death do us part. Not so in Europe. Germany is playing hardball, while the rest of the Union is looking to find a way for Greece to get its, um, act together. As the biggest economy in Europe, Germany has the most liability towards the Greek bailout. But that’s what a union is all about. 

• I was wrong about Twitter (NYSE: TWTR). I use it for work purposes, but I don’t like it. Too much self-promotion. And it seems like the business model is too easy to copy. BUT I realize that as media goes online even more, we need a place to find everything that’s happening. Sort of a Reader’s Digest or TV Guide for the Internet. Twitter might be the service that does this. I don’t know if that is worth Twitter’s $30 billion valuation, but I had been operating on the assumption that Twitter would fail. I don’t think that anymore. 

• Changing one’s mind is an important aspect of successful investing. It’s rare that we get all the information we need to make good decisions all at once. So we must continue to be open to new information, even (and especially) when that information challenges what we think we know. Never get so stuck in your biases that you can’t change your mind.

• Recent super-hot IPO Shake Shack (NYSE: SHAK) is not all that. I went last week and was not impressed. The burger was good, but you can’t build your own burger like you can at Five Guys. Yeah, Shake Shack only has 63 stores. There’s a lot of room for expansion. But the $500 million valuation works out to about $8 million per store. Shake Shack has to add at least 180 stores to make that valuation reasonable. And did you see Noodles & Company last week? It was a $45 stock after its IPO. On Friday, it got whacked by 30% in a day and now trades around $19. You can’t just short Shake Shack. New IPOs have a lot of deep-pocket institutional support, and they will mow you down. That’s the IPO game. It might take a year, but this stock will go lower. 

• What happens when the Fed raises interest rates? Investors pretty much know this is going to happen this year, so we can’t say they are simply ignoring the inevitable. I say this will likely lead to a ~10% correction, which should be bought — aggressively. Rates can’t rise until the economy is strong enough, and a strong U.S. economy can motor on, despite rates at 0.75% (vs. 0% now). REITs will likely get hit the hardest, and that’s where I’d look because that’s where the hand wringing will be the worst. Fact is, REITs have spent the last couple of years raising money and investing it — I know because I have several in The Wealth Advisory portfolio. And while I don’t want to lose 10% across the board, higher interest rates alone aren’t enough reason to sell. 

• If you haven’t noticed, tech stocks have been on a tear so far this year. That will continue. Why? Two reasons: One, because tech is where corporations invest first to streamline operations and become more efficient. (Just look at corporate-tech-spending benchmark Cisco (NASDAQ: CSCO). The stock is up 26% since October and just posted great Q4 earnings.) And two, because the trend toward indexing has kept all valuations in line. There is no premium for companies that grow revenue and earnings faster. That’s why Apple (NASDAQ: AAPL) is cheaper on a P/E basis than Johnson & Johnson. And that’s why I’ve added two nice tech stocks that pay dividends to The Wealth Advisory portfolio this year. 

• Solar stocks are breaking away from oil. It’s one of those correlations that don’t really make sense — that expensive oil makes solar energy more attractive. That’s why solar stocks fell when oil prices did. But that’s changing, and it should. Solar stocks look like they made important lows in January, and now they are moving higher. First Solar (NASDAQ: FSLR) is up 20% since January 20. 

• I’m worried about Putin and ISIS. And I lump them together because they are both kind of crazy, and they’ve both embarked on a path that is very difficult to retrace and that is likely to end in destruction. Both are fanning the flames of hate to their followers, and it’s hard to see how either situation ends well. 

• My target for the S&P 500 this year is 2,275. I base that estimate on combined earnings per share of $127 for the companies in the S&P 500. Yeah, that’s a pretty bullish forecast. And I’ll admit, I’m a bit surprised that the S&P 500 has been so strong this early in the year as it hits new highs above 2,100. But fourth quarter earnings were much better than expected. Investors have pushed their expectations from June to November for the first rate hikes. And employment gains now seem locked in at +200K a month. All of this bodes well for solid earnings and gives stock prices some room to run higher. 

Ok, there ya go… a list of what’s on my mind right now. If you like this type of format, let me know, and I’ll add it to the repertoire: customerservice@angelpub.com

Until next time,

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.