Market Haven Monthly Newsletter - May 2011

8/6/2019 Market Haven Monthly Newsletter - May 2011

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MARKET HAVEN MONTHLYPAGE 1

T he Fed took an unprecedented step inholding the first press conference in modern

history. Weve come a long way from the days of

analyzing photos of Greenspans briefcase in

order to discern the direction of monetary

policy. Indeed, Bernanke said things would bedifferent; and they have been. Gone is the

Greenspan mentality of if

you understood what I

said, I must have

misspoken.

The message the Fed

delivered in the press

conference was nothing

short of unremarkable. It

became apparent to some

that the Bernank was

using his face time with the press to try and talk

up what Fed policy is not going to be able to do

on its own.

Yes, QE2 is planned to end on schedule. But the

Fed has no intention of shrinking the balance

sheet. So, while the Fed may be pausing

directionally, it is still very much maintaining an

accommodative stance with its $3 trillion

balance sheet. It is after all the size of the

balance sheet that matters more than th

direction of Fed policy.

Whats more, according to Bloomberg reports,

QE3 isnt off the table either. The Fed still views

the economy as week and

in need of assistance. The

near-term effect of all of

this is that stocks will likely

continue to rally despite

reaching overvalued levels.

Once the Fed steps away

(or its policies catch up

with us) stocks will take a

hit.

A related concern of ours is

the disparity in exchange rates between the

Asian currencies and the U.S. dollar. The graph

above from x-rates.com shows that the dollar

continues to slide vis--vis the RMB. This will

only continue as China finds it unsustainable to

maintain the currency band while importing our

loose monetary policy.

Market Haven Monthly

2011

M A Y


2/13


Wheres the Va lue?

Stocks

Our Static Model is an easy way to hedge out

much of the market risk in an unemotional way.

Through regular rebalancing and a fairly

conservative asset allocation, the portfolio has

done a good job of dampening volatility risk.

The beta of our long portfolio has historically

been about 1.3 allowing investors to get full

market exposure while leaving some cash on the

sidelines. Net long exposure for the Static Model

is +50%. Our Timing Model, on the other hand,

factors in market valuations and adjusts market

exposure regularly. Net long exposure currently

is -30%.

Strategy StaticModel

TimingModel

Long Exposure +80% 0%

Short Exposure -30% -30%

Net Exposure +50% -30%

At 1363, market p/es are at 17.6x. We continue

to believe that there is limited upside and lots of

downside potential from here. The Feds lowinterest rate policy is the primary factor

levitating the market at these levels.

Earnings are above trend by about +12% and

still rising. We expect this to continue for a few

more quarters, which could contribute to stock

gains. Eventually, that will change. We usually

see earnings reverse direction once they have

exceeded trend earnings by about +25%. A note

here: stock prices dont always coincide with

downturns in earnings.

The rising yield environment is not good for

stocks. But yields have been trending down for

the month of April. Well see if it is enough to

push the signal into bullish territory for stocks.

Corporate spreads are also still in the 80th

percentile, which is not good for stock returns.

We still advise investors to not try to time the

tops. No one can know how long these

conditions could continue. And on average it is

better to be invested fully than to be on the

sideline. That said, we would definitely be

trimming our stock investments at this point.

Sectors

As we mentioned last month, the number o

companies making it through our screen has

diminished significantly making the sector

weights appear a little more dramatic than

usual. For instance, this month no healthcare or

discretionary stocks made it through the screen

to the buy list. Part of the reason for this is that

healthcare stocks have been the best performing


3/13


sector over the last three monthsup +18%,

even more than energy stocks. This has made

the stocks in that sector less attractive.

Relative to the market as a whole, our screens

are showing that the best places to find value are

in materials, technology, financials, and

telecommunications.

The steep yield curve should be fostering a good

environment for financials, however, the

financials continue to suffer as the worst

performing sector-up +5% over the last three

months. We still think there are opportunities in

this space.

Oil continues to run, and with it energy stocks,

as civil unrest spreads throughout the middle-

east. We still like energy longer-term for the

greater secular forces that will play out. For now

the run up in valuations has left energy stocks

too richly valued.

Materials companies have continued to perform

well and still offer attractive valuations even as

commodity prices retreat from higher levels.

Market Cap

Mega cap stocks continue to become cheaper

relative to smaller companies. It is a general rule

of thumb that loose monetary policy benefits

smaller companies and this most recent

experience seems to be consistent with that

thought. Nevertheless, large, stable, profitable,

diversified behemoths are becoming better

values every month. Some of the largest names

are missing earnings expectations which is

sending share prices south for a time. We view

these misses as temporary and short-sighted.

More important to us than a companys abilitymeet guidance is its ability to generate free cash

flow. The most short opportunities continue to

exist at the lower capitalization ranges.


4/13


Volatility

We are glad to have provided readers with the

table last month of our targeted price targets

and weightings to volatility. April was another

interesting month that saw volatility begin

above 17 and dip below 15. If you followed the

table below you would have added to volatility,

bringing your exposure to 100% of your targeted

allocation. At levels below 15, volatility seems

like a very high probability bet given our current

uncertain environment.

VIX Weighting

35.0 0%

Commodities

Wow. We must have a lot of market participants

following us. We mentioned that silver and

gold were both buys and look what happened.

SLV jumped +27% during the month of April

while GLD advanced +10%.

That seems too fast for SLV. Expect some kind

of a pullback near term. But GLD still looks

solid. Of course, as we have mentioned before

SLV is a more volatile investment anyway and

would recommend extreme caution in the metal.

The reason we continue to recommend GLD has

to do with the increasing global currency

imbalances. We believe GLD is a great place to

be long term and would continue to add to the

position. The Asian currencies are anywhere

between -35% and -70% undervalued agains

the dollar. At some point, that difference will be

corrected. In PIMCOs vernacular, we have a

two-speed world economy. The fixed exchangerate system that connects the emerging and

developed worlds must break at some point. In

our opinion, until another currency (or

currencies) shows itself to be a viable

replacement for the dollar, gold is the next most

widely accepted currency replacementove

silver. We are long commodities.


5/13


Some Investment Ideas

Here are a few names that have shown up

recently as potential investment ideas on our

screens. Some of these may appear in the

portfolios. Some may not simply because the

names currently in the portfolio havent worked

their way yet.

Diversification is an important part of our

investment process. We like to have north of 30

names in the long portfolio and 60 or more inour short portfolio. We let the ideas that are

working continue to run. Conversely, the ideas

that are not working become a smaller

proportion of the portfolio simply by the

diminishing market cap they exhibit. This also

lends to the comfort we have taking chances on

stocks that may have headline or operational

risk from time to time.

Dont forget to do your own homework. Were

not your financial advisor so we do not know

your specific financial situation and what

makes sense for you individually. Dont take

anything we talk about as financial advice.

Power-One Inc . (PWER) - long

PWER is a $900 million company that makes

power supplies for various industries. Its OEM

customers include the likes of Cisco, Nortel, and

Teradyne. The company is in a strong industry,

but is sputtering a bit. As it tries to augment

revenues, the balance sheet is solid enough and

the price cheap enough that the company should

have time to find its stride. Its p/e is less than

7.0 and p/b is less than 1.0. We would take a

chance on the stock at this valuation.

Banco Mac ro S.A. (BMA) - long

BMA is a financial institution based in

Argentina offering traditional banking products

and services. It has a market cap of $2 billion

and a nice yield of 5.6%. There is some risk in

this stock, but we believe it is priced cheaply

enough to compensate investors for the risk.

Innophos Holdings (IPHS) - long

IPHS is only a $1 billion company, but it is the

largest manufacturer of specialty phosphates in

North America for consumer, pharmaceutical,

and industrial applications. Mexico provides

20% of revenues alone. The stock has an

earnings yield of 15%, p/e of 11x, and a dividend

yield of 2.2%.

TIM Partic ipacoes S.A. (TSU) - long

Were keeping with a bit of an internationa

theme with TSU. But this one is larger. At $11

billion, TSU is the third largest wireless provider

in Brazil. It is the sole player with nationwide


6/13


coverage. Sure, there is a lot of political risk in

Brazil, but as it is turning out, there is quite a bit

of political risk in the U.S. as well. The p/e is a

little higher at 18x, but the earnings yield is

about 10%. Investors get a decent 2.7% dividend

yield and are only paying 1.5x sales.

Lam Research (LRCX) - long

LRCX is a $6 billion company that makes

equipment used to make semiconductor devices.

More specifically it is the largest manufacturer

of machines that etch away portions of films to

create integrated circuits. Over 90% of LRCXs

business comes from overseas. Major customers

include Samsung and Toshiba. The company

has ROE of 29% and a p/e of 8x. There is no

dividend, but the company has grown its cash

flows in excess of maintenance capital at a rate

of 9% over the last seven years.


7/13


Portfolio Changes Last Month

It was not a big month for trades. In the long

portfolio we bought one stock and replaced it

with another one.

There were no trades in the short portfolio.

Previously Mentioned Ideas

Below are the investment ideas that we have

highlighted in past issues. Additionally, we have

updated the current model recommendation for

each stock.

April 2011

Vale S.A. (VALE) buy

Rio Tinto Plc (RIO) buy

ON Semiconductor (ONNN) buy

IBM (IBM) buy

Par Pharmaceuticals (PRX) buy

March 2011

CNOOC Limited (CEO) buy

Credicorp Limited (BAP) buy

Abbott Laboratories (ABT) buy

Newmont Mining Corp (NEM) buy

Harris Corp (HRS) buy

February 2011

LHC Group (LHCG) buy

Compania Cervecerias Unidas SA (CCU) hold

NetEase.com Inc (NTES) hold

Aflac Inc. (AFL) buy

Microsoft Corp. (MSFT) buy

January 2011

Amedisys (AMED) hold

Warnaco Group (WRC) hold

Alliance Resource Parnters LP (ARLP) buy

BHP Billiton ADR (BHP) hold

Dec ember 2010

Harbin Electric (HRBN) buy

Trina Solar (TSL) hold

Best Buy (BBY) buy

MasterCard (MA) buy

Cliffs Natural Resources (CLF) hold


8/13


November 2010

Global Payments (GPN) - hold

Research In Motion (RIMM) -buy

Cash America International (CSH) -buy

Telecom Argentina (TEO) -buy

Cephalon (CEPH) - hold

Oc tober 2010

Alpha Natural Resources (ANR) - hold

True Religion Apparel (TRLG) - hold

St. Jude Medical (STJ) - hold

General Dynamics (GD) -buy

Kraft Foods (KFT) -buy


9/13


Newsletter Portfolio Performanc e


10/13


Newsletter Portfolio Performanc e


11/13

MARKET HAVEN MONTHL

Symbol Name Price

Portion Of

Fund Shares Held Value

Current

Rating

NOV National Oilwell Varco Inc $76.69 5.6% 800.00 $61,352.00 HoldWDC WESTERN DIGITAL $39.80 5.1% 1,400.00 $55,720.00 HoldDECK DECKERS OUTDOOR $84.86 4.2% 540.00 $45,824.40 Hold

JOYG Joy Global Inc $100.95 4.2% 450.00 $45,427.50 HoldCOH COACH INC $59.81 3.8% 690.00 $41,268.90 HoldINT WORLD FUEL SERVICES $39.58 3.2% 880.00 $34,830.40 HoldHLF Herbalife, Limited $89.78 3.2% 390.00 $35,014.20 HoldESV Ensco PLC $59.57 3.1% 560.00 $33,359.20 HoldFCX FREEPT-MCMO COPPER & GOLD CL B $55.02 3.1% 620.00 $34,112.40 HoldNEM Newmont Mining Corp Holding Co $58.61 2.8% 520.00 $30,477.20 HoldABT ABBOTT LABORATORIES $52.04 2.7% 560.00 $29,142.40 HoldMUR MURPHY OIL $77.48 2.6% 360.00 $27,892.80 HoldAFL AFLAC INC $56.19 2.6% 500.00 $28,095.00 BuyNTRI NUTRI/SYSTEM INC $15.04 2.5% 1,820.00 $27,372.80 HoldMIDD MIDDLEBY CORP $89.67 2.5% 300.00 $26,901.00 HoldMA Mastercard Inc $275.89 2.5% 100.00 $27,589.00 BuyPCP PRECISION CASTPARTS $154.52 2.4% 170.00 $26,268.40 HoldARLP ALLIANCE RESOURCE PARTNERS LP $82.36 2.4% 320.00 $26,355.20 HoldRIO RIO TINTOPLC ADS $73.21 2.3% 350.00 $25,623.47 BuyHRS HARRIS CORP $53.13 2.3% 470.00 $24,971.10 BuyMSFT MICROSOFT CORP $25.92 2.3% 970.00 $25,142.40 BuyGPN Global Payments Inc $53.24 2.2% 460.00 $24,490.40 HoldBHP BHP Billiton Ltd $101.24 2.2% 240.00 $24,297.60 HoldBAP CREDICORP LTD $96.52 2.2% 250.00 $24,130.00 BuyKCI Kinetic Concepts,Inc. $59.03 2.1% 380.00 $22,431.40 HoldTPC Tutor Perini Corp $26.66 2.0% 830.00 $22,127.80 HoldGD GENERAL DYNAMICS $72.82 2.0% 300.00 $21,845.97 BuyANR Alpha Natural Resources Inc $58.17 2.0% 370.00 $21,522.90 HoldBYI Bally Technologies Inc $38.99 1.9% 540.00 $21,054.60 HoldCEPH CEPHALON INC $77.02 1.9% 270.00 $20,795.40 HoldFRX FOREST LABORATORIES INC $33.16 1.8% 580.00 $19,232.74 HoldJCOM J2 GLOBAL COMMUNICATIONS NEW $29.46 1.8% 650.00 $19,149.00 Hold

ENDP ENDO PHARMACEUTICALS HLDS INC $39.16 1.7% 460.00 $18,013.55 HoldACN Accenture Plc $57.13 1.7% 320.00 $18,281.60 HoldWMT WAL-MART STORES $54.98 1.4% 280.00 $15,394.40 HoldAMED AMEDISYS INC $33.32 1.3% 420.00 $13,994.40 HoldALGT Allegiant Travel Company $44.87 1.2% 280.00 $12,563.60 HoldLHCG LHC Group, LLC $29.62 1.2% 460.00 $13,625.20 HoldMDT MEDTRONIC INC $41.75 1.1% 290.00 $12,107.50 HoldESLT ELBIT SYSTEMS $55.92 1.0% 200.00 $11,184.00 HoldBBY BEST BUY CO INC $31.22 0.8% 290.00 $9,053.80 Hold

Long Portfolio


12/13

MARKET HAVEN MONTHL

Symbol Name Price

Portion Of

Fund Shares Held Value

Current

Rating

WY WEYERHAEUSER CO $23.01 4.1% -3,541.00 ($81,478.41) ShortARMH ARM HOLDINGS ADS $31.46 3.8% -2,410.00 ($75,818.60) ShortMF MF Global Holdings Ltd $8.41 2.8% -6,670.00 ($56,094.70) Short

PEGA PEGASYSTEMS INC $37.12 1.9% -1,030.00 ($38,233.60) HoldPTIE PAIN THERAPEUTICS $9.51 1.9% -4,020.00 ($38,230.20) HoldDNDN DENDREON CORP $43.43 1.9% -860.00 ($37,349.80) ShortNATI NATL INSTRUMENTS $30.32 1.9% -1,215.00 ($36,838.80) HoldPXD PIONEER NATURAL RES $102.23 1.8% -350.00 ($35,780.50) ShortMNTA Momenta Pharmaceuticals Inc $18.86 1.8% -1,850.00 ($34,891.00) ShortREV REVLON INC'A' $17.22 1.7% -2,010.00 ($34,612.20) ShortOCN OCWEN FINANCIAL $11.97 1.7% -2,850.00 ($34,114.50) ShortCPTS CONCEPTUS INC $15.43 1.7% -2,170.00 ($33,483.10) ShortQDEL QUIDEL CORP $13.27 1.7% -2,510.00 ($33,307.70) ShortCOG CABOT OIL & GAS 'A' $56.28 1.7% -590.00 ($33,205.20) ShortDXCM DexCom, Incorporated $16.65 1.7% -1,990.00 ($33,133.50) ShortFL Foot Locker Inc $21.52 1.7% -1,530.00 ($32,925.60) HoldFXEN FX ENERGY INC $8.21 1.7% -4,010.00 ($32,922.10) HoldMCHP MICROCHIP TECHNOLOGY $41.04 1.6% -790.00 ($32,421.60) HoldLTD Limited Brands $41.16 1.6% -770.00 ($31,693.12) HoldEXEL EXELIXIS INC $12.26 1.6% -2,570.00 ($31,508.20) ShortHOT STARWOOD HOTELS&RESWORLDWIDE $59.57 1.6% -520.00 ($30,976.40) ShortEVR Evercore Partners Inc $34.89 1.6% -880.00 ($30,703.20) ShortGDOT Green Dot Corp $43.16 1.5% -710.00 ($30,643.53) ShortRDEA Ardea Biosciences Inc $28.35 1.5% -1,080.00 ($30,618.00) ShortLEN LENNAR CORP $18.99 1.5% -1,550.00 ($29,434.35) ShortTLM TALISMAN ENERGY $24.10 1.5% -1,210.00 ($29,161.00) ShortCMO CAPSTEAD MORTGAGE(NEW) $13.24 1.5% -2,190.00 ($28,995.60) HoldCDXS Codexis Inc $10.49 1.4% -2,720.00 ($28,532.80) ShortTIF TIFFANY & CO $69.44 1.4% -410.00 ($28,470.40) HoldFICO Fair Isaac Inc $29.88 1.4% -910.00 ($27,190.80) ShortSRSL SRS LABS $8.15 1.4% -3,330.00 ($27,139.50) ShortFO FORTUNE BRANDS $65.08 1.3% -410.00 ($26,682.80) Short

LUX LUXOTTICA GROUP ADS $33.19 1.3% -780.00 ($25,888.20) ShortNOVL NOVELL INC $6.10 1.3% -4,220.00 ($25,737.78) ShortRIGL RIGEL PHARMACEUTICALS $9.11 1.3% -2,800.00 ($25,508.00) HoldMSCC MICROSEMI CORP $23.60 1.3% -1,080.00 ($25,488.00) ShortEQT EQT Corp $52.62 1.3% -480.00 ($25,257.60) ShortMAN ManpowerGroup $66.25 1.3% -380.00 ($25,175.00) ShortSTEI STEWART ENTERPRISES INC CL A $8.11 1.3% -3,080.00 ($24,978.80) ShortKW Kennedy-Wilson Holdings Inc $11.45 1.3% -2,180.00 ($24,961.00) HoldACXM ACXIOM CORP $14.56 1.3% -1,710.00 ($24,897.60) HoldFDX FEDEX CORP $95.67 1.3% -260.00 ($24,874.20) HoldNSM NATL SEMICONDUCTOR $24.12 1.3% -1,030.00 ($24,843.60) ShortLGF LIONS GATE ENTERTAINMENT $6.34 1.2% -3,860.00 ($24,472.40) HoldEXP Eagle Materials Inc $29.09 1.2% -830.00 ($24,144.70) ShortGKSR G & K SERVICES CL'A' $33.10 1.2% -710.00 ($23,501.00) HoldALE Allete Inc $40.49 1.2% -580.00 ($23,484.20) HoldBMS BEMIS CO $31.34 1.1% -720.00 ($22,564.80) HoldPFS Provident Financial $14.52 1.1% -1,510.00 ($21,925.20) HoldCFR CULLEN/FROST BANKERS $59.24 1.1% -360.00 ($21,326.40) HoldCADX Cadence Pharmaceuticals, Incorporated $8.48 1.1% -2,510.00 ($21,284.80) HoldCBSH COMMERCE BANCSHARES $42.56 1.1% -497.00 ($21,152.32) HoldWTR Aqua America Inc $22.55 1.1% -930.00 ($20,971.50) HoldHTLD HEARTLAND EXPRESS $17.25 1.0% -1,200.00 ($20,700.00) HoldNVEC NVE Corporation $58.96 1.0% -350.00 ($20,636.00) HoldTXI TEXAS INDUS $42.17 1.0% -480.00 ($20,241.60) HoldMYGN MYRIAD GENETICS $21.44 1.0% -920.00 ($19,724.80) HoldPC Panasonic Corp $12.29 1.0% -1,590.00 ($19,540.94) HoldCYN CITY NATIONAL $57.11 0.9% -320.00 ($18,275.20) HoldAA ALCOA INC $17.00 0.9% -1,060.00 ($18,020.00) HoldCMA COMERICA INC $37.93 0.9% -470.00 ($17,827.10) Hold

Short Portfolio


13/13

MARKET HAVEN MONTHL

XXIA IXIA $16.34 0.9% -1,090.00 ($17,810.60) ShortLM LEGG MASON INC $37.15 0.9% -460.00 ($17,089.00) HoldCVC CABLEVISION SYS'A' $35.23 0.9% -480.00 ($16,910.35) HoldCWT CALIF WATER SVC GRP DELAWARE $37.72 0.7% -350.00 ($13,202.00) HoldCNW Con-way Inc $38.92 0.6% -330.00 ($12,843.60) HoldMLM MARTIN MARIETTA MATERIALS $91.19 0.6% -140.00 ($12,766.60) ShortONB OLD NATL BANCORP(IND) $10.35 0.6% -1,130.00 ($11,695.50) ShortOMX OfficeMax Inc $9.96 0.6% -1,150.00 ($11,454.00) HoldCGA China Green Agriculture Inc $7.04 0.5% -1,510.00 ($10,630.40) Hold

JNY The Jones Group Inc $13.63 0.5% -770.00 ($10,495.10) HoldPBCT PEOPLE'S BANK $13.70 0.5% -660.00 ($9,038.70) HoldBXS BANCORPSOUTH $13.55 0.4% -640.00 ($8,672.00) ShortFTR Frontier Communications Corp $8.27 0.4% -1,040.00 ($8,600.80) HoldBKS BARNES & NOBLE $10.99 0.3% -600.00 ($6,594.00) HoldHQS HQ Sustainable Maritime Indust $2.78 0.3% -2,290.00 ($6,365.97) Hold

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Market Haven Monthly Newsletter - May 2011