Kevin’s April Stock Market Commentary: AAPL, M, SPG, WMT, GDX, FAZ and More!
Over the last month, the markets have rallied from the lows over 20%. If you timed the bottom correctly, you made some quick, easy money. If you missed the bounce, don’t feel compelled to chase it as most that do will end up getting hurt in my opinion. Let’s take a look at where we are today and at some specific stocks.
The Rally: Bear Rally Or Start Of A Bull?
This is the question everyone wants answered. Unfortunately, it’s tough to say, but I have my money on being a bear market rally. Bear market rallies often are quick and fierce, and this rally definitely has those characteristics. More importantly, what were the catalysts?
Well, the rally got a kick start when a few of the banks mentioned they were profitable for the first two months of the year. Should this signal a bottom? The banks were profitable mainly because they didn’t mark down any assets during that time span. Does that mean the banks are healthy? Not necessarily. Also, it’s worth noting that Bear Stearns said they were profitable right before they imploded. Today, Wells Fargo announced huge profits for the first quarter and the market rallied. At the same time, I’m reading reports that the Fed/Treasury is nervous about releasing stress test results because of the market reaction. I’m not buying the bottom in financials. More blood to come in my opinion.
If you think financials will go lower, wait for a huge rally (like today), and maybe take out a position in FAZ, the 3X Financial Short ETF.
The Real Issue At Hand
I am in the camp that says a lack of lending in our economy is NOT the problem. I firmly believe we are in this mess because of the over leveraged state of every level of our country from the individual up to the corporation. The recession is the cure or the unwinding of this excess debt. Trying to encourage people to borrow more money is not the solution.
With that said, I think eventually the banks will become healthy because the government will eventually just assume all of the bad debt and the losses that these banks incurred. So, with healthy banks, we should be fine right? No, because the banks aren’t the growth driver of our economy. Sure, credit helps businesses expand and all that; but, our economy is tied to one thing and one thing only: consumption.
Our GDP has been about 70% consumption. This means that any hiccup in consumption results in a recession. Trust me, we’re going to experience way more than a hiccup in consumption. Consumption levels over the last few years were insane. They were fueled by pulling cash out of overvalued homes and running up credit cards. Both sources are gone. Add to that rising unemployment and consumption is going down and down hard. When the banks finally do get healthy, don’t expect them to immediately start lending money to anybody like they did in recent years, they have learned their lesson (to an extent). Easy money to fuel consumption is gone. The bottom line is a healthy banking system is vital to a growing economy, but it does not guarantee growth. Until we actually increase production instead of consumption, I see stagnant growth for a while.
Consumption and Retail
If you buy into the fact that consumption is going to be nowhere near previous levels (which I do), then retail will be a likely casualty. Many retail chains implemented expansion plans based on continuous increases in consumer spending. We are way over built with way too many malls and stores. Stores closings are gauranteed, and more major chains going under is a possibility.
Interestingly, one of the chains thought to be immune to a slowdown, Wal-Mart (WMT) announced weaker sales numbers than expected. If Wal-Mart struggles moving forward, look out.
Two stocks that I have played over the last few months is Macy’s (M) and Simon Property Group (SPG). SPG is a commercial REIT that owns a bunch of malls all over the country. For example, Premium Outlets is owned by them. SPG has a ton of debt, and can get hit hard by any decrease in vacancies at their malls. Macy’s is one of their major tenants. Macy’s also has a bunch of debt and is suffering from the economic slowdown. Today, Macy’s announced that same-stores sales dropped 9.2% in March. I look for this trend to continue. I am currently short both stocks and will add to the positions on any rallies.
Update: 10 minutes before the market close, I shorted more shares of SPG above $42.50 per share. The stock is up 15% today so a great time to short in my opinion.
Tech stocks such as Apple (AAPL) and Amazon (AMZN) have had a huge run in recent weeks, because many believe that when the market turns around, tech will help lead us upwards. Also, most the tech companies have solid balance sheets and benefit from an upbeat economy. If you hold these stocks, I recommend taking some profits. I sold the remaining shares of Apple that I held around $110 a few weeks ago.
With regards to Apple, the company is fundamentally in great shape. I want to be an owner of Apple, I just think that I will be able to buy shares at a much lower price than current levels. I may be wrong, and if I am then it is my loss. Taking profits after a quick 30% run though is usually not a bad move.
I have been trying to short Amazon since I think it is way over valued but it has continued higher and is now approaching $80.00 a share. There is no way it can hold this valuation but it can be easy to underestimate how high these things can run.
I believe that we are going to get a serious movement downward in the broad stock market very soon. It may be a month or it may be six months, but the key is to be patient. One of the biggest rules in investing is to remain patient for the right opportunity. I don’t recommend chasing tech stocks as they shoot higher in this current rally. If the stock has already gone up 30% in a few weeks, you missed the chance for easy money.
For the most part, I am adding to short positions slightly, and waiting with a big chunk of cash for a serious capitulation in the markets. When that occurs, I will buy amazing companies on the cheap. Some of the companies I like at lower levels: Philip Morris Int’l (PM), McDonald’s (MCD), and some of the Asia ETFs. For more recommendations, check out the model portfolio I posted a few weeks ago.
If you don’t have any gold or gold mining stocks yet, now is a great time to buy. I recommend the Gold Miners ETF (GDX). The big upside for these positions may not occur for several years, but when it does happen, it will be huge in my opinion. I am still heavily weighted in gold/gold stocks. Trust me, at some point, all of the inflationary practices will have a negative impact on our economy which will shoot gold higher. I like oil and agriculture as well.
That’s it for now. I’m going to be doing a monthly stock market commentary from here on out. It will be interesting to see if this rally continues for the next month, or if we head back down toward the lows. The key is to stick to your game plan either way!