Saturday, August 20, 2016

TLH Weekly Review

Boring. That's what this market continues to be.  Even with the FOMC minutes released this week we only saw a 0.6%(15 points) move for the day, and S&P finished flat for the week.  In different times we might have seen 1-2% moves.

Some will attribute it to the "Summer Market", and all the big boys are out on vacation.  That has a little truth to it, but it doesn't account for all the low volatility.  The S&P 500 has just not been that volatile of late, which is a great thing!

Look at how the daily changes in the S&P have continued to drop all year, with the exception of the Brexit vote.  Frankly there just isn't much to worry about now and I think that was evidenced by the barely large moves we've been seeing even on Fed and ECB meeting days.

Yet that is totally fine with me.  I like boring.  In fact most of our stocks are "boring".  Boring means things change little on a daily basis, but over time continue to rise as the money rolls in. It has been tough though to find really good deals in this market. The majority of high quality names even have low yields as judged by NOBL, the ETF loaded with dividend aristocrats barely yields above 2%. Although we have plenty of high quality on our list yielding above 3%(DEO, BUD, CMI, RAI, PG, PM, VGR, HCP, MO, BTI, EMR).

We had the FOMC minutes released this week, and there really wasn't much of a reaction overall Don't confuse no rate hikes as good, and rate hikes as bad.  While the initial market reaction can be in either direction, history has shown in general equities trend up with rising interest rates.

Then we started to see some disagreement behind the scenes from two Fed Presidents. William Dudley, and John Williams both came out recently stating they felt rates needed to be raised. Either way the market is finally starting to think rates might go up this year. In fact futures traders now foresee a 53% probability of rates getting hiked by December.  This meeting wasn't the most clear on direction, and I think that's a very calculated message.  Some took the notes as "dovish", but I think the Fed is really starting to wonder about which month they'll raise rates. 

Inflation data was flat this week showing a 0.08% increase excluding food and energy.  While on the whole this is running beneath the Fed's target rate, it continues to inch up for the most part. While the strong dollar and low energy prices have been able to keep a lid on prices, it doesn't mean everything is gloomy. 

We saw Industrial Production increased at a healthy pace.  The 0.7% increase was one of the largest since November 2014, and a lot of that weakness was attributed to the dollars rise during that time. With the dollar trending flat this year manufacturers have been able to handle currency pressures much better.  We've seen some pretty income numbers recently, and eventually higher wages and production will work it's way into the economy.

Not so boring week for a some portfolio members

Hain Celestial dropped a bombshell on us. I ended up selling part of the shares as a result.  The company noted they had accounting revenue recognition issues. You never like to see accounting issues when you own a stock.  The company did note it would not affect the amount of revenues, but the timing. No matter what, what worries investors is if they find out who actually knew of the problem and if it was not accidental. The company played it off that it wasn't, but I'm always skeptical.

The bigger issue is they announced they'll miss earnings. Considering just last quarter they issued no warning, things have changed quite a bit over the summer.  I think this earnings miss will be big.  If it wasn't they would have announced a new EPS range changed maybe 5 cents from prior guidance. That's what concerns investors.  Competition is getting stiff, and when the company started trading higher on buyout valuations(due to WWAV) you get the perfect storm for a multiple contractions.  I'm expecting the stock to start trading at a P/E under 20 for the foreseeable future.

Emerson Electric announced they'll be buying Pentair Plc valve and control unit.  The market didn't like the news and initially sent the stock down more than 5%.  The shares recovered a bit, and ended the day down around 3%.  I'm not sure what the margins are in this business, but I hope they are good.  Considering the company has been selling low margin divisions to re-invest into higher margin areas it better fit the bill.  I'll have to take some time to research.  The company has just shed about $5 billion in assets, and has now spent more than half of it with this $3 billion purchase.

In more cross border transaction news our recent pick Praxair(PX) announced they are in merger discussions with European counterpart Linde AG.  This combination would create the worlds largest industrial gas company worth nearly $60 billion.  Shares of PX popped higher on the news so it appears investors like the idea. I'm considering adding more shares if they fall back down a bit with this news as a nice tailwind.

That's all for now. Have a great weekend!

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