December 5, 2014
The November Employment indicated that 321,000 new jobs were created, the strongest gain in years and providing evidence that the economic growth is broadening. The strength was also much stronger than expected by about 100,000 jobs. While it would not be a surprise to see the strong figure reduced in subsequent reports as the initial is revised, but the trend remains upward. The implications for the financial markets is that possibility of the Federal Reserve raising short term interest rates increases while equity markets will benefit from stronger corporate earnings. Within the equity market, the shift from defensive stocks to economically sensitive sectors may gain momentum.
– November has 321,000 new jobs which is 100,000 better than projected
– Maybe revised down due to errors in seasonal adjustment
– Solid evidence that economic growth is broadening and problems in Europe/Russia are not invading the U.S.
– Investors may shift focus back to economic sensitive stocks (1st half of the year favorites) and out of risk adverse holdings (2nd half of year favorites).
Brief Look at Macro Investment Strategy
With a degree of calmness reaching the financial markets, I wanted to update on our macro investment outlook.
Currencies, Commodities, and Geo-Politics
Much of the excitement in the stock and bond markets commenced from the rapid rise in the U.S. Dollar. The rise in the U.S. Dollar has led to a decline in commodities, especially oil. The decline in the price of oil is perceived by some investors that think the economy is weak. This trend has helped stocks like Walmart, Coke, and Proctor & Gamble that investors prefer when risk is on the rise. With evidence indicating economic strength is building, a shift in the equity markets back to economically sensitive stocks maybe starting.
The outlook for oil has to include both political and economic issues. Saudi Arabia has been losing business to domestic production. Also Russian bad behavior is being punished by lower oil prices since Russia’s most important exports are Vodka, Hockey Players, and Oil. The price of oil is expected stabilize over the next three months as new drilling programs are cancelled that are not economically viable. Offshore and projects in remote areas will be the first to be halted. Kiplinger’s projects the price of oil to average $80 – $85 next year. Separately, natural gas is about even with prices since last December and is trending with limited impact from the fall in oil.
So far this year the focus on “medium grade” bonds has a near perfect match between capturing a reasonable yield and not reaching too far into higher risk securities that have performed poorly recently. We plan on continuing with our strategy of laddering maturities which makes a bond portfolio well prepared from whatever happens to interest rates.
After very strong results in the first half of the year, the second half of the year has been a challenge, but more recently, the winds have begun to favor some of our core holdings. Today’s very strong employment report could motivate investors from the defensive holdings which fail to meet our investment criteria back to economically sensitive stocks (like Ford). We remain focused on companies with industry leadership, revenue and earnings growth, limited debt, and a product or service that is of value to society. Many of our core holdings have not fully participated in the overall stock market gains but currently offer above market potential returns. Below are a few positions to highlight a few significant positions held in most client accounts.
Highlighted equity holdings
– Gilead Sciences ($104); The leader in HIV drugs is rapidly growing its Hepatitis C drug portfolio. Investors have recently been concerned about competition from Abbvie’s Hepatitis C drug expected to be approved by the FDA on December 21st, but there appears to be plenty of business to share with over 3 million people in the US caring the disease. Presently, Gilead sells at only a price to earnings multiple of 11, a significant discount to other biotech stocks and the overall stock market. Price target $150.
– Apple ($115); Apple’s new iPhone 6 is a big hit and several other new products and the ability to share information between Apple products is making customers purchase more Apple devices. Apple’s shares still trade a discount to the overall market despite strong growth potential for a huge business. Price Target: $150.
– Ford ($15.70); Investors are recently taking interest in Ford’s stock with a recent gain over 10%. 2014 was a write off for Ford with expenses associated 23 new models highlighted by the new, lighter, stronger, and more efficient F150. Price Target: $20.
– Ecolab ($109); Ecolab is one of the most stable companies in the SP500 as sales, earnings, and dividends increased for years. Recently, Ecolab shares were unfairly punished with energy stocks that provided the opportunity to the purchase additional shares. This week, the dividend was increased 20%. Price Target: $125.
– Comment on Energy holdings—Helmerich & Payne and EOG; the exposure to the energy sector has been reduced after the recent OPEC (Saudi Arabia) decision not to cut production. Our two primary energy holdings are widely viewed the best in their sector and positioned to take market share when weaker competitors fail to strive in a lower price environment. Much like waterfront property in Naples, Florida, sticking industry leaders limits declines during downturns and they are often the first to recover, a sign of confidence. Subsequent to the OPEC motivated sell off in energy stocks, insiders have reported buying shares of both Helmerich and EOG this week.
On Other Issues
Our firm recently signed a contract to upgrade our client portfolio management software. The new system, Black Diamond, is a cloud based service offering better reports, easier use, and a client portal. More details to come on our new software which is anticipated to be a big favorite with clients.
Information sources used to prepare this report include Argus Research, Value Line Investment Survey, Zacks, Barron’s, Kiplinger’s, Fidelity, and Decision Economics. Founded in 2010, Andrew Hill Investment Advisors, Inc. is registered as an investment advisor with the state of Florida and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Andrew Hill and clients of AHIA hold positions in the investments mentioned in this report. Please contact Andrew Hill Investment Advisors, Inc. if there are any changes in your financial situation or investment objectives, or if you wish to impose, add or modify any reasonable restrictions to the management of your account. Our current disclosure statement is set forth in Part II of Form ADV and is available for your review upon request. Tax and estate planning advice is general in nature and the firm is not engaged in the practice of law.