Thanks to the combination of J.P. Morgan’s $2-billion trade debacle and heightened political uncertainty in Greece, last week was the worst week for global markets in 2012. The Dow ended the week 2.32% lower, and now has dropped 10 out of the last 12 days. The S&P 500 fell 2.42%. Global markets fared even worse with the MSCI Emerging Markets Index dropping 5.12%.
The weakness in the markets was reflected in your Alpha Investor Letter portfolio. All of your positions were down except for The TJX Companies (TJX) — a bet on the U.S. consumer — which gained 2.81% over the previous week. You stopped out of MSCI South Korea Index (EWY), Market Vectors Indonesia Index ETF (IDX) and WisdomTree Japan SmallCap Dividend (DFJ) during the past week’s pullback. Three of your positions — iShares JPMorgan USD Emerg Markets Bond (EMB), Berkshire Hathaway (BRK-B) and Yum! Brands, Inc. (YUM) — fell below their 50-day moving averages and moved to a HOLD.
With the S&P 500 falling through its resistance level of around 1,350, I am less optimistic about the markets than I was last week. What started off as a healthy pullback has now turned into a full-blown correction.
In what seems to be part of an endless saga, markets have again fallen hostage to Greek political dynamics. Leaders in France and Germany continue to affirm that Greece should remain in the euro zone. At the same time, Greeks themselves are less certain, and have withdrawn as much as 700 million euros ($893 million) from the nation’s banks over the course of the last week. A second election will be held in Greece after political gridlock left the nation without a government since elections on May 6. The bottom line? Until the markets see the election results and markets see whether the new government is committed to the euro, stocks will trade erratically at best.
That said, things feel so bad that it could be good. Markets are now as oversold as they have been since late November, which marked the beginning of a strong market run through the end of February. There are a bevy of sentiment and technical indicators that show that the market is due for a strong bounce.
And there are pockets of strength in the markets, particularly in the U.S technology sector. The Nasdaq has not pulled back as much as the other major market averages. And just this morning, Facebook increased the number of shares it is selling in its initial public offering (IPO) by 25%. That means that there is plenty of demand for stocks that investors feel have strong prospects. Perhaps a big pop in the price of Facebook shares on Friday will pull the market out of its funk. To put the size of Facebook’s offering in perspective, its market value on Day One will be about half the size of the entire Greek gross domestic product (GDP) in 2012.
Portfolio Update
Las Vegas Sands Corp. (LVS) fell 6.91% last week. LVS touched the 200-day moving average on Tuesday and may trade at this level for some time as traders search for direction. The Hang Seng Index, the “Dow Jones” of Hong Kong, will add Sands China Ltd. to the index on June 4. Sands China Ltd. is the Hong Kong unit of the Las Vegas Sands Corp. LVS is a HOLD.
MSCI Malaysia Index (EWM) lost 3.31% last week. EWM currently holds a 5-star rating from the Morningstar rating service. This is the highest possible rating. EWM is a HOLD.
iShares JPMorgan USD Emerg Markets Bond (EMB) dipped 2.31%. EMB pulled back along with global markets this week. However, EMB’s recent bullish run, coupled with a 4.7% annual dividend yield, offers a fair level of downside protection. EMB is a HOLD.
Listed Private Equity ETF (PSP) lost 4.72% for the week. PSP has taken some losses lately, even with its significant global diversification. However, several of its largest holdings have done quite well in 2012. Its positions in the Hal Trust and 3i Group have yielded 2012 year-to-date returns of 14.58% and 16.23%, respectively. American Capital Ltd makes up 3.23% of the fund and has gained a whopping 39.97% year-to-date. PSP is a HOLD.
iShares Singapore ETF (EWS) decreased 3.70% over the past five trading days. The decline in EWS stopped short of the 200-day moving average on Monday and managed to hold again Tuesday on higher-than-normal volume. EWS may build support at this level over the coming days. EWS is a HOLD.
Berkshire Hathaway (BRK-B) dipped 2.44%. The significant downward pressure reverberating across all market segments proved too great even for Mr. Buffett. BRK-B was unable to penetrate the $82.50 resistance level put in place in late March. Expect BRK-B to make another run at this 52-week high once the dust settles. BRK-B is a HOLD.
iShares MSCI Hong Kong Index (EWH) lost 4.64% last week. All Asian markets are caught up in global events, as overseas investors avoid risky assets and reduce their overall positions. EWH is a HOLD.
Visa Inc. (V) dipped 1.30% over the week. Despite the market turmoil, Visa has managed to quietly trade sideways just under the 50-day moving average. I expect this position to be among the first to make a comeback when market pressures subside. V pays a $0.22 dividend today, May 16. V is a HOLD.
Yum! Brands, Inc. (YUM) lost 2.85%. YUM is expanding its footprint in Africa. YUM! will add 150 Kentucky Fried Chicken (KFC) restaurants in Africa in 2012. There are over 15,000 KFC outlets in 105 countries and territories around the world. YUM! is a HOLD.
Statoil ASA (STO) gave back 1.45% last week. STO announced healthy 2012 Q1 earnings on May 8, reporting a 14% increase in net operating income to $57.9 billion — the highest quarterly figure it has ever reported. Oil production grew by 11% and STO maintained guidance for the remainder of 2012. Statoil also reported that eight of the 12 “exploration wells” drilled in Q1 were successful — a 67% success rate. STO is a HOLD.
The TJX Companies (TJX) gained 2.81% over the previous week. After taking an opportunistic dip just days before its May 15 earnings report, TJX jumped 6.5% on May 15, after reporting $0.55 earnings per share vs. a $0.54 estimate. Revenues were $5.8 billion vs. expectations of $5.75 billion. TJX guided comparable-store sales growth at 2% – 4% and forecasted strong continuing momentum. TJX also paid a $0.115 dividend on May 8. TJX is a BUY.
Stratasys, Inc. (SSYS) fell 2.41%. Stratasys reported earnings on May 9 and highlighted record Q1 revenue of $45 million — a 30% increase for the same period in 2011. Earnings-per-share was $0.28 vs. a $0.27 estimate, on $45 million in revenue vs. a $43.09 million estimate. SSYS also reported a 61% year-over-year increase in sales of its Fortus 3D product. The Dougherty & Company analyst firm increased its SSYS price target for SSYS to $57 — 15.33% above Tuesday’s close. SSYS is a BUY.
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