Where To Invest Now?

Jeff Cox of CNBC reports, Investors just pumped the most money ever into stock funds for a single week:
With the market correction barely a month in the rear-view mirror, investors have jumped back into stocks in record numbers.

Stock-focused funds took in $43.3 billion in fresh cash over the past week, a new peak that reverses much of the angst over the past several weeks, according to Bank of America Merrill Lynch.

Resurgent interest in equities came as stock market indexes staged modest gains. The S&P 500 was up about 1.4 percent for the week ended March 14. The Dow industrials were flat during the period.

Investors had pulled $9.4 billion from stock funds the previous week. Bond funds also are looking up, with $2.4 billion of inflows, BofAML reported.

The new money for stock funds amounted to nearly 0.6 percent of total assets, the best since September 2013.

Distribution was widespread, with international funds taking in $53.9 billion and U.S. getting $11.1 billion.

Market sentiment has improved since the major indexes tumbled into correction territory in early February following an inflation scare that generated worries over whether the Federal Reserve would raise interest rates more aggressively than anticipated. A correction is generally defined as a 10 percent or more drop from the most recent high.

Pessimism fell to its lowest level since the first week of 2018, at 21.3 percent a drop of 7.1 percentage points, according to this week's reading from the American Association of Individual Investors Sentiment Survey.

For the year, stock-based ETFs have pulled in $82.7 billion while bond funds have seen $11.7 billion in inflows, according to FactSet.
It was a little over a month ago where I discussed whether it's a correction or something worse. I knew that fears of US wage inflation were overblown and after looking at some weekly charts, I concluded that it looked more like a typical correction that should be bought.

However, hindsight is always a lot easier because I know traders who got scared and sold that correction fearing something worse was ahead, and now they're sitting on losses. Many quantitative hedge funds also took a beating in February.

Most traders don't like buying the big dips (long-term investors like Buffett and pension funds love buying them). Instead, they like buying and trading breakouts, so when markets get hit and volatility spikes, they tend to underperform. That's why a lot of quant funds got clobbered.

So where do we go from here? Sell in April and go away? Tae Kim of CNBC reports that according to Goldman, there's not much upside left for the market here:
With the S&P 500 not far from the firm's 2018 year-end target, Goldman Sachs says there is still an investment strategy that can outperform.

The firm recommended companies with strong prospects for growth at reasonable valuations.

"Secular growth stocks [or] companies with the fastest expected growth offer value relative to history," David Kostin, Goldman's chief U.S. equity strategist, wrote in a report Thursday to clients entitled "Where to Invest Now."

Kostin reiterated his year-end price target of 2,850 for the S&P 500, representing just 3.7 percent upside from Thursday's close.

The strategist screened for companies that grew their sales by 10 percent or more each of the last three years and have strong potential for future growth. He then excluded stocks with high valuation multiples in terms of enterprise value to revenue ratios.

Here are six buy-rated names in the Goldman Sachs "secular growth" stock basket recommended by Kostin.

I would ignore Goldman's secular growth stock basket. Amazon and Google are tech powerhouses but they have been soaring over the last few years. The only Goldman stock recommendation I like  is their upgrade right before the new year on Teva Pharmaceuticals (TEVA) which I bought last quarter after shares plunged.

Teva is one of my core longs (for now) but short sellers have been piling into it ever since Warren Buffett took a position in it last quarter. The stock has sold off recently, part of the "Buffett kiss of death effect" (it happened with IBM, short sellers like shorting Buffett but he's more right than wrong).

But as I explained in my quarterly review of top funds' activity, two other big value investors, David Abrams and Jonathan Jacobson, also owned a huge chunk of Teva shares and they bought before the stock plunged last quarter (Buffett's Berkshire bought the big dip).

I use top funds' activity to gauge where big investors are focusing their attention. For example, looking at the top holdings of David Tepper's Appaloosa, I noticed his fund significantly increased its stake in Micron Technology (MU) last quarter, a bet that paid off hugely this week as shares soared to a new 52-week high:

Now, as I told my followers on my StockTwits account earlier this week, I wouldn't be chasing Micron's stock here, let it fall back to $40 before initiating a new trade. But that's just a potential trade, I'm not bullish on semiconductor shares (SMH) going forward even if they have a beautifully bullish weekly chart (see my reasoning below):

In fact, I wouldn't be surprised if David Tepper's fund sold a big portion of his Micron shares this week and took some profits but we won't know until mid-May when Q1 data on 13-Fs becomes available.

Right now, I'm less concerned with David Tepper and other hedge fund gurus and more concerned about Jonathan Tepper and the inflation disconnect I covered earlier this week.

Importantly, I always worry about macro first and foremost knowing full well that it's the macro environment which can clobber all risk assets very quickly.

Earlier today, I was reading how the yield curve is turning threatening again. Last week at John Mauldin's Strategic Investment Conference 2018, Dr. Lacy Hunt, economist and EVP of Hoisington Investment Management, shared which conditions preceded the last seven recessions and stated the yield curve matters.

At the beginning of the year, Cornerstone Macro's strategist François Trahan shared his thoughts with my readers in my Outlook 2018: Return to Stability, where he explained why the yield curve is the most important indicator to pay attention to (see his upcoming research comment this week once published on Cornerstone Macro's site; if you don't subscribe to Cornerstone Macro’s research, make sure you do so).

My major macro concerns have not changed since writing my outlook comment earlier this year:
  1. I see a US followed by a global slowdown in the second half of the year. This is the primary reason why I've been recommending investors shift to a more defensive stance and overweight healthcare (XLV), consumer staples (XLP), and utilities (XLU) which are basically low vol stocks (SPLV) and underweight cyclicals like energy (XLE), financials (XLF), and industrials (XLI) as we head into year-end. I've also been bullish on US long bonds (TLT) and think they remain the ultimate diversifier to hedge against potential negative shocks.
  2. Now, admittedly, interest-rate sensitive sectors like utilities (XLU), telecoms (IYZ) and REITs (IYR) got hit as yields backed up in the first two months of the year but since I see a slowdown ahead and believe it's a bond teddy bear market, I would be buying these sectors and other more stable sectors like healthcare (XLV) and consumer staples (XLP) and hedging my equity exposure with a 50% weighting in US long bonds (TLT).
  3. I remain long the US dollar (UUP) even if I see US bond yields heading back down below 2% by year-end because real rate differentials will widen as the rest of the world slows, and I would be overweight US stocks and bonds over foreign stocks and bonds (don't talk to me about cheap valuations, foreign stocks are cheap relative to US for a reason, when I crisis hits, you want to own stocks in the most liquid market in the world).
Interestingly, one of my faithful blog readers, Drew Wells, sent me a comment earlier today making the case for TLT which I thought was superb.

You often hear people tell you "bonds are boring" or "you can't make money on bonds" which is just foolish. If a crisis hits and yields go below 2% on the 10-year US Treasury note, you most certainly can make great risk-adjusted returns on US long bonds (TLT) but more importantly, you won't sustain a 30%+ drubbing like when stocks got slammed in 2008.

Now, I don't want to get all bearish on you. No doubt, it's time to be altert and I've already covered risks of this confounding market. I'm concerned about the second half of the year and think there are legitimate concerns voiced by many investors, including private equity which is bracing for a downturn.

Also, pay attention to credit markets because that's where the first signs of trouble will show up:

But I trade these markets every day and see tons of speculative activity going on, mostly in small cap biotech shares which have been the best performers this year, but also in other sectors which have performed well this year.

For example, on Friday afternoon, a lot of small biotechs on my watch list were up huge (click on image):

Yes, small biotech shares are very volatile, just look at the trading activity this week in Proteostasis Therapeutics (PTI) and Solid Biosciences (SLDB). Or check out activity in small cap agriculture company Arkadia Biosciences (RKDA) which catapulted up over 300% in one day before settling down.

These moves are crazy and no doubt fed by algorithmic trading and big institutions frying small retail investors every chance they get but my point is this, if you really drill down, the market isn't showing me panic, far from it, speculative activity is alive and well!

On this last point, Karl Gauvin of OpenMind Capital told me he looks at the Fed's balance sheet numbers every week (think he said Thursday) from the St-Louis Fed and he sees nothing has changed significantly, only declined as a percentage of GDP (click on image):

As I stated in my recent comment on the Fed's balance of risks, all this talk about the Fed shrinking its balance sheet and its impact on the economy is much ado about nothing.

In fact, if my prediction that the US economy will slow significantly in the second half of the year comes true, I wouldn't be surprised if the Fed pauses its balance sheet reduction or signals a pause.

Karl also notes the following:
The perverse effect of years of quantitative easing is illustrated in the two tables below (click on image). In a nutshell: stocks in the third quartile in terms of Financial Condition Score and first quartile in terms of sales growth (Low Quality Growth Stocks) have outperformed the S&P 500 by 15% in 2017 versus an historical annualized excess returns of -2.25%."

Therefore, if your US Equity manager outpeformed the S&P 500 Index by a lot last years, it may be a red flag!!!!

Institutional and high net worth investors looking for an emerging alpha fund whose managers have years of experience and are very focused on risk-adjusted returns and proper alignment of interests should take a closer look at OpenMind Capital. They're extremely sharp and very good at understanding vol regimes and how to add excess returns in difficult markets.

Anyway, I've covered a lot, hope you all enjoyed this comment. I tend to ramble on but I love stocks and markets so forgive my ranting.

Also, please remember, this blog is free but it takes a considerable amount of time and work to write these daily comments. I'm alone, need to trade to make a living and really appreciate those of you who take the time to support this blog by donating via PayPal on the top right-hand side under my picture (where an image literally says "Keep Calm and Please Donate").

Please take the time to support this blog and help me help you navigate these difficult and challenging markets.

Below, an interesting discussion from earlier today where former Treasury Secretary Jack Lew reflects on the 2008 financial crisis and weighs in on the current political landscape.