Trading the stock market can be a frustrating process: Back in March and April every market pundit was jumping on CNBC, Bloomberg, Twitter, etc and screaming “BUY EVERY PULLBACK!” Two months later, these same folks are freaking out and calling for a double dip recession or worse, a global depression.
It just so happens the stock market followed the same exact playbook as it did last summer, selling off in May. This selloff was attributed due to the uncertainty with the Greek elections and a banking crisis in Spain. Less than two months later, its safe to say that for now both issues have been resolved.
However, market pundits are preaching caution even though the S&P 500 looks to be flashing a buy signal after it completed a follow through day Monday and a pause day on Tuesday. I could see the market potential moving up to the S&P 1400 area again before the wheels fall off. Todays sell off can be attributed to the Federal Reserve staying on hold yesterday. For some reason, the market was obvious pricing in QE 3. On Twitter today Goldman Sachs is getting credit for the sell off. As the investment bank is out with a note recommending short positions because of the lack of QE and the weak Philadelphia Fed number.
This smells like a shake out. Remember back in April Goldman said to buy stocks (wrong call), then just this week the bank was calling for the Federal Reserve to implement a new QE program (wrong call) and now today they are recommending clients get short the market. To these eyes, it looks like Goldman wanted to cover some shorts.
After big scary shakeouts like the one we just had and are having today, I like to focus my attention on stocks that haven’t gone down too much (or actually have gone up) and have good sales and EPS growth (+20% or more). Typically, this easy formula is a good way to spot the next bull cycles winners.
I ran a screen searching for those three traits above and below are some of the names I hand picked to buy for the next Bull Run.
3D Systems (DDD) – The maker of 3D printing, prototyping and manufacturing systems. This company is the leading public company in the fast growing innovative 3D printing industry. It is my favorite stock in the market right now and I would love to buy it under $30. Sales are growing at 63% and EPS is growing at 47%.
Tripadvisor (TRIP)- If you aren’t familiar with this company, it creates online travel related content and trip reviews. If you are going on a vacation, this site is a must read. It’s sales are growing at 32% with a 43% profit margin!
Zillow (Z)- If you are looking to purchase a house, you better be using Zillow. The company provides online real estate data, connects buyers with sellers and helps connect buyers with mortgage professionals. Currently sales are growing at 92% and EPS at 180%! This could be the next great growth stock.
Sourcefire (FIRE)- Sourcefire provides businesses with network security and hardware. Their products are said to be next generation and superior competition. The company is growing sales at 50% and EPS at 175%.
Coinstar (CSTR)- This company operates the Redbox DVD rental kiosks, coin counting machines and soon to be Starbucks vending machines. Its 3-year sales growth is 34% and 3 year EPS growth is 74%. Full Disclosure: I own shares in CSTR.
I would use this list as a guide. I always like to buy stocks low and sell high. So today’s sell off is welcome. If we get a couple of more days like today, I would consider adding small positions in one or two of these names. As always, just do your own research.
Editors Note: The Investing Oracle believes all investment picks should be tracked and we intend to do so.
Matthew Theal holds a position in CSTR.
Socgen is out with a research note this evening with trading ideas if Bernanke announces a new QE program at tomorrow’s FOMC meeting. The banks number one idea is long gold. (That also happens to be the number one macro trading idea of TheInvestingOracle site and has been since 2008).
Socgen sees Gold closing the gap with the monetary base (see chart below) increases since 2007. If that happens, it sees the price of gold at $1900/oz. Lastly, if gold catches up to the monetary base from the 1920’s we are looking at…drum roll please….. $8500/oz.
Today started the Federal Open Market Committee’s (FOMC) two day meeting on monetary policy. The meeting will conclude tomorrow afternoon with a decision on interest rates (unchanged), which will be followed by a statement of text (look for changes) and after that, the great Chairman himself, Ben Bernanke will give a press conference.
If you have followed my work from my time at Minyanville Media where I wrote the Active Investor, you know that for six months I have been predicting some sort of Quantative Easing to happen this summer.
It looks like that prediction will be correct as it seems some sort of QE will happen this summer.
Goldman Sachs believes that tomorrow the fed will announce some sort of new QE program. The investment bank, sees the possibility of the Fed buying MBS or just extended the Operation Twist.
The thesis is based on a June 6th speech on criteria needed for more QE by Vice Chairwoman Janet Yellen:
“[i]f the Committee were to judge that the recovery is unlikely to proceed at a satisfactory pace (for example, that the forecast entails little or no improvement in the labor market over the next few years), or that the downside risks to the outlook had become sufficiently great, or that inflation appeared to be in danger of declining notably below its 2 percent objective…”
It looks like all three criterions are close to being met, though not quite there yet. If Bernanke wants to stay ahead of the curve, it would make sense to announce some sort of intent to perform QE, at the next meeting (August I presume) if conditions continue to deteriorate.
If that’s the case, what will the new easing program be? .
What I think will happen is the fed may announce a perpetual easing program. By that, I mean the fed will announce it will purchase treasuries, MBS, etc. at a clip of $50 bln to $75 bln per month. This is known, as a “flow” of purchases and it will allow the fed to react flexibly to quickly changing economic events. It also does away with the idea of QE 3-4-5, etc. As Apple CEO Tim Cook said, iPad 20 doesn’t sound that great. I would almost think of QE, like the fed’s ability to move short-term interest rates, as just another tool in the box.
Trading wise, if that happens, I would buy gold and lots of it. That said, I always like to see what the stock market is doing heading into the Fed and currently it has rallied for four straight days. This tells me that Mr. Market is expecting some sort of QE announcement tomorrow.
While the stock market is saying QE, the fixed income market is pricing in a operation twist expansion/extension. If this is the Fed’s plan, I expect a large sell off in the stock market.
This weekend is setting up to be pretty dramatic as the Greeks return to the polls to try and produce a government. Recall during the first week of May, the Greeks held elections that failed to produce a government and has thus lead to the latest market fears over Greece and the Eurozone as a whole.
The fine folks at UBS are out with a research note today with ten frequently asked questions about the Greek elections. Below are the questions and my answers.
1) Who’s winning?
No one. According to two different polls from the first week of June its almost dead even. New Democracy has a slight lead (26%) over Syriza (23%) and Pasok (9%) is taking up the rear. The important thing to know: 75% of Greeks want to remain on the Euro. Don’t expect a radical change in government.
2) Is the election a vote on Greece’s euro membership?
No. All three parties are saying they will not leave the euro. However, they are telling voters they plan to renegotiate the memorandum or understanding with troika.
3) Can Greece be out of the Eurozone as early as next week?
Yes, but this is a black swan event. Here’s what happens: Syriza must win the election, then its leader Mr. Tsipras must refuse to honor external debt and then it declares total default.
4) Will the election remove uncertainty about Greece?
What’s your best guess? Has anything Europe has done over the past three years “removed uncertainty?” Short-term performance aside an election won’t solve Greece’s problems.
5) What is the ideal election result-from an investment perspective?
It’s hard to say. Its possible that whatever party wins will likely try to renegotiate the MOU. This could spoke the markets into a sell off.
6) Will they [EU, ECB, IMF] pull the plug?
This is highly unlikely. If any of those organizations wanted Greece out of the euro, it would be gone by now. Stay rational.
7) Can Greece survive once its primary balance is zero?
The thought by many pundits here is that if Greece votes an anti-troika government, it will default on all debt and leave the euro. If it defaults, it will be no big deal because its government budget without interesting (aka Primary budget) will drop to zero.
8) Would Greece be better off without the euro?
Most likely yes. Economists argue that a weak currency will make Greek exports more competitive. However, the biggest drawback is Greece cost for imports on energy and food will go up.
9) What if there is another post-election deadlock?
With polls so close, this a likely scenario. According to UBS, if no government is formed by June 26th there will most likely be a national unity government that is supported by all three major parties.
10) What’s the medium-term perspective?
Greece’s euro membership will still be a speculation of uncertainty.
To conclude, Sunday’s election results and its aftermath is a toss up. Anyone claiming to have knowledge about the outcome is blowing smoke up your ass.
Ill have two predictions. The first is I think whoever is elected will try to renegotiate the MOU. Second, I think Greece will eventually exit the Eurozone. Getting the timing right will be the hard part.
Ireland, Portugal, Greece, Spain, Cyprus have all need some sort of bailout from the European Central Bank and Germany. The next country requiring a bailout will be Italy.
According to Bloomberg Briefs, Italy will surpass the IMF’s definition of solvency once the average cost of its debt surpasses 680 basis points. Currently the Italian 7-year sovereign yield has increased from 538 basis points to 589 basis points.
If Italian yields keep moving like they’ve been, the country will require a bailout.
The reason being is simple: spiking funding costs will make the liabilities of Italy start to look like Greece. Italy already has debt as large as Spain and it could become worse with the path its economy is currently on.
The latest IMF predictions for the Italian economy call for a contraction at a rate of 1.9 percent for 2012. I find this incredibly optimistic considering Output declined 0.8 percent QoQ during the first quarter of the year.
Moreover, PMI data in Italy has been getting worse: January 46.8, February 47.8,
March 47.9, April 43.8, May 44.8. I would venture to guess that June’s reading would come in below 43. These readings suggest that Q2 Output will be far worse than Q1.
Finally, the research of Carmen Reinhart and Kenneth Rogoff shows that when sovereign debt surpasses 90% economic growth becomes hindered. Currently Italy’s Debt/GDP ratio is at 126 percent.
If yields continue to rise at the current pace, Italy has less than one month.
“España no es Uganda.”
Translated in English, the statement says, “Spain is not Uganda.” According to El Mundo Spanish Prime Minister Mariano Rajoy sent that text message to European leaders just hours before the now Spanish bailout went down.
Spain is certainly not Uganda but it is Greece and it will no be the last European country that requires a bailout.
On Sunday evening there is still speculative information about the details of the 100 billion Euro bailout. What we do know is: there will be no condition on fiscal policy or structural reforms and the loan will sit on Spain’s balance sheet. This brings up an interesting push/pull; the loan needs to be big enough to convince the market the Spain’s banking issue is addressed while not being so large to jeopardize Spain’s public debt.
This bailout looks like a much bigger version of TARP. As TARP was 5% of US GDP while this bailout is 10% of Spanish GDP.
Below are the main questions:
1) Where will the money come from?
The cash will from the ESM and/or EFSF. Which leads to the main worry: does the EFSF have enough cash to cover the bailout costs? The world’s largest hedge fund, Bridgewater, believes that once it’s time to bailout Italy its game over.
2) Where does the money go?
The bailout cash will go to the FROB, also known as Fund for Orderly Bank Restructuring. Which is a fund-to-fund insolvent banks. It would seem that the FROB looks like a weaker version of the FDIC.
3) What happens to Spanish sovereign debt?
Spanish bondholders are basically getting their first taste of subordination. After watching what happened to holders of Greek Government Bonds, holders of Spanish debt should run for cover. For more on subordination check out this excellent piece by Zero Hedge.
4) What does this mean for Europe?
This is a giant step for Europe as it is now clear that the bad risks will make there way to the public sector. Moreover, it looks like European officials may have bought a little time. How much time? I’m not sure, maybe a few hours, maybe a month or two.
During the next few weeks keep a close eye on Spanish sovereign bonds because once the short-term painkillers wear off, the market will understand another bailout is most likely needed.
Lastly, the next euro-nation to watch is Italy, as it will require a bailout next. As for the next big European event, the Greek election next week should rile the markets.
- Eurogroup Statement
- FROB FAQhttp://www.scribd.com/embeds/96543288/content?start_page=1&view_mode=list