Wednesday, January 26, 2011

US following Britain's lead -- speed bump's ahead?

In the wake of the November elections and the State of the Union speech, the differences in outlooks between the Democrats and the Republicans are clear. With respect to the economy, the Republicans contend reducing government spending will lead to prosperity while the Democrats fear a significant reduction in spending will hurt the economy at a time when it is still fragile.

Republicans and Democrats alike might do well to keep an eye on England. Fourth quarter GDP was just reported by the U.K. and it was surprisingly weak, down 0.5% after expanding 0.7% in the previous quarter. Analysts had been expecting 0.4%.

Factors in play --

Some say the quarter was so bad due to the severe snow storms and cold weather that the U.K. at the end of 2010.  That could be true but it does remind me of how retailers always blame the weather when they have a bad quarter.

Other analysts, politicians and even some members of the Bank of England worry that the decline in GDP is the result the current Conservative government's fiscal policy. Briefly stated, Britain has adopted austerity over stimulus in the bid to rejuvenate the economy. With deep spending cuts being implemented beginning in mid-2010, critics of the government policy are saying "told you so", contending that removing stimulus and cutting spending at a time when the economy was still weak would inevitably harm the nascent recovery.

Those who favor austerity, however, suggest Britain just needs to roll with the punches. The recovery will be choppy and the country should "stay the course." They point to strong business spending and business confidence in recent surveys showing that this quarter might be more of a one-time event in a generally improving economic trend. They also point to government borrowing that turned out to less than expected in the quarter.

After an extended period of low interest rates, Britain is now facing rising inflation that could soon hit 5%. That would likely result in the BOE raising interest rates which could further pressure the economy.

An experiment worth watching --

It seems that Britain's economic recovery has hit a speed bump. As the U.S. appears ready to adopt similar fiscal policies, we should keep an eye on how the "austerity brings prosperity" concept works out for our friends across the pond. The U.K. is at least six months ahead of the U.S. in implementing its policy of reduced spending. Perhaps our politicians and central bankers can learn a thing or two by watching Britain's progress. Hopefully, we can benefit from a few lessons learned in Britain's grand experiment.

Disclosure: none



Thursday, January 20, 2011

BRICs are so yesterday -- get ready for CIVETS

Certain investment themes become so well known that they merit their own acronym. One of those is the BRICs - shorthand for the popular emerging market countries Brazil, Russia, India and China.

There are some investors and analysts, however, who are always looking for the next big thing. As Brazil, China and India become victims of their own success and begin to raise interest rates in order to cool their over-heated, inflation-prone economies, many investors are looking elsewhere to deploy their emerging market portfolio allocations.

So prepare yourself for a new acronym: CIVETS

For those people who are well versed in zoology, you may know that a civet is a nocturnal, cat-like, mostly arboreal mammal native to the tropics of Africa and Asia. But for our purposes, CIVETS stands for a group of countries that some analysts feel represent the next wave of emerging markets. They are: Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa.

The CIVETS owe their acronym to the Economist Intelligence Unit (EIU), which forecasts the countries will grow at an annual rate of 4.5% during the next 20 years. In contrast, developed countries are expected to grow at an annual rate of only 1.8%. The CIVET countries were selected because they have "diverse economies, fast-growing populations, relatively stable political environments and the potential to produce outsized returns in the future".

Knowledge@Wharton/Fleishman-Hillard did a survey on the CIVETS among potential investors. The main concern among those that were interviewed was political stability. In essence, many of these countries could more accurately be termed "frontier markets" which implies much more uncertainty than the "emerging market" category has.

Where the BRIC countries have an emerging middle class and increasing numbers of highly educated citizens, the CIVETS countries, though they have made great strides, still have large segments of society that are poor and not so well educated. The BRIC countries all have huge multi-national companies that carry their respective flags beyond local borders. The CIVETS countries have been able to field companies that are strong regionally but are not quite the equals of some of the flagship companies of the BRICs.

The EIU acknowledges that the CIVETS do not have the economic power to "reshape the global economic order" as much as the BRICs and their combined GDP will only amount to one-fifth the size of the G7 nations' combined GDP by 2030. Instead, the CIVETS are second-tier emerging markets that have relatively sophisticated financial systems and do not face runaway inflation, massive current-account deficits or public debt.

Here is what the Wharton faculty says about these countries:

Colombia: Following years of high-profile drug wars, Colombia remains a small market, but has always been a dynamic economy with some key industries, including fresh flowers, oil and coffee.

Indonesia: The largest of the CIVETS, Indonesia has a huge, sprawling population and has already benefited from investment by the U.S., China and Japan, but political and social stability is never certain.

Vietnam: A low-cost alternative to China for manufacturing, Vietnam has ambitious plans to grow its economy despite a Communist government.

Egypt: Although Egypt has a well-educated, prosperous population in its Nile Valley cities, much of the country remains poor and the country has a high level of debt (80% of GDP). The political future beyond the rule of President Hosni Mubarek is cloudy, and the country could face religious turmoil.

Turkey: Not a destination for manufacturing because costs are already high, Turkey remains a promising regional center which has benefited from relative stability and ties to the West in a volatile part of the world. Membership in the European Union would be a plus, experts note, but religious turmoil might hurt its economic prospects.

South Africa: Although it faces problems with unemployment and HIV/AIDS, South Africa has strong companies, a well-developed business infrastructure and can serve as a gateway to southern Africa.

Here's what the market says about a couple of these countries:

After the political upheaval in Tunisia, the Egyptian stocks plunged. The concern over political stability can still be the Achilles heel for these countries.

The fundamental investment thesis for Turkey remains relatively intact but the country's stock index has worked its way lower over the last couple of months as growth, though still quite good, has not been quite as robust as expected. This could be a buying opportunity for patient investors.

As an Asian economy, perceptions of Indonesia's stock market can be colored by the happenings in China. Here again, the last two months have shown extended weakness. Since Indonesia is the largest of the CIVETS countries, it has the potential to outperform the other countries in terms of GDP and its ability to give rise to companies that can show strength beyond its borders. Another buying opportunity, perhaps?

There's an ETF for that --

That's right. You may never have thought of investing in one of these countries before but someone else has. There are one or two ETFs for each of the CIVETS countries:
  • Global X/InterBolsa FTSE Colombia 20 ETF (GXG)
  • Market Vectors Indonesia Index (IDX)
  • iShares MSCI Indonesia Investable (EID)
  • Market Vectors Vietnam Index (VNM)
  • Van Eck Market Vectors® Egypt Index (EGPT)
  • iShares MSCI Turkey Investable Market Index Fund (TUR)
  • SPDR S&P Emerging Europe ETF (GUR) - holds some Turkish stocks and is trending strongly bullish
  • iShares MSCI South Africa Index Fund (EZA)
With the typical emerging market plays weakening lately and expected to be going into an inflation-fighting phase, it may be the turn for the CIVETS to shine.

Disclosure: no positions

Hat tip to Knowledge@Wharton for the graphic and some of the information presented in this post



Saturday, January 15, 2011

Not just GARP -- new Growth Stock screen captures some real winners

I have been playing with a new stock screen lately. The objective is to identify reasonably valued stocks with good growth potential. I look for stocks that have solid earnings, high Return-on-Equity, good earnings growth expectations based on PEG and a low Debt-to-Equity ratio.

These characteristics are reminiscent of GARP, growth at a reasonable price. If you are not familiar with it, the GARP strategy is a combination of both value and growth investing: it looks for companies that are somewhat undervalued and that have solid sustainable growth potential.

To get into the details, the screen looks for stocks with PEG less than 1.2, ROE greater than 25, positive cash flow over the trailing four quarters and a very low Debt-to-Equity ratio. A further requirement is that the stock's performance has been no worse than 10% below that of the S&P 500. I put the result on Alert HQ Premium as the Profitable Growth Stock Report. At this point, I'm running the report on a weekly basis.

What's interesting about the report this week is that we have 49 stocks on the report and 42 of them (85%) have managed to beat the S&P 500 over the last 52 weeks. That's not bad for a year when the S&P 500 returned nearly 14%.

How to use this report --

First of all, it seems like this screen does identify stocks with strong performance.

The next question, however, becomes where to focus your attention. Let's break the list down into three segments:
  • The stocks at the top of the list are, at this point, rip roaring momentum stocks and from a relative strength/overbought/mean reversion point of view it would seem that it is late to be buying these stocks. Nevertheless, many have very strong bullish trends and trend-followers might want to take note.
  • The stocks at the bottom of the list have underperformed the S&P 500. That's not the hallmark of a growth stock.
  • The stocks in the middle of the list seem to comprise the sweet spot. Growing strongly but no yet so horribly over-priced. There are a slew of quite interesting stocks that have out-performed the S&P 500 by less than 60% that still seem attractive given their growth prospects. Some, like Lam Research (LRCX), are currently surging while some, like Dollar Tree (DLTR) are in the process of pulling back and becoming potentially more attractive to the value oriented investor. Also included in this segment is Apple (AAPL) which remains a quintessential growth stock.
So if you are looking for growth stocks I encourage you to browse the Profitable Growth Stock Report and look into a few of the stocks on the list. If you have suggestions for improving the criteria for this screen, feedback is always welcome.

Disclosure: no positions in any stocks mentioned in this article though I do have a small position in CBPO which happens to be in the middle of this week's list



Thursday, January 6, 2011

Financials consolidate their position among top trending ETFs

Back on December 11 I wrote that, to my surprise, the financial sector seemed to be staging a real comeback. At that time I pointed out that the ETF Trend Performance Report indicated that a group of financial ETFs had shown the biggest improvement in trend scores for the week. Feeling some skepticism about the financials I was not surprised to see them pull back the very next week.

After running tonight's Alert HQ process, the Thursday ETF Scorecard shows that the financials have not only rallied since then, they have established strong bullish trends. Six of the top 10 are financial ETFs and there is another one at position 19.

The following ETFs have registered the strongest possible trend score (6 out of 6) indicating solid bullish trends in progress:

FAS Direxion Daily Financial Bull 3X Shares
IYG iShares Dow Jones U.S. Financial Services Index Fund
RKH Merrill Lynch Regional Bank HOLDRS
UYG ProShares Ultra Financials ETF
VFH Vanguard Financials ETF
XLF Select Sector SPDR Fund - Financial

Sitting a bit further down the list at position 19 with a trend score of 5.5 out of 6 is the iShares Dow Jones U.S. Financials Index Fund (IYF).

The following chart is typical of the entire group:


If you are one of those who thinks the market can't make further meaningful gains without the participation of the financials, it looks like you can breathe a sigh of relief.

On the other hand, if you are pessimistic on the outlook for the financials, tonight's results are an indication of how extended the market has become with the worst sector finally getting its time in the sun.

In any case, the financials have momentum and now we even have a Republican member of the House planning to sponsor a bill to repeal the Dodd-Frank financial regulatory law that passed a mere six months ago. It's looking like the path of least resistance for the banks is up.

Disclosure: no positions





Disclaimer: This site may include market analysis. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.




 
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