Downbeat U.S. data has weighed on cyclical stocks during the past week. With the exception of the labor market data, most data has been consistently soft. U.S. economic data have been falling short of expectations by the largest margin since 2009. The latest reports to disappoint were Durable Goods for February, down 1.4% versus a consensus projected gain of 0.4%. And the Commerce Department reduced its third and final revision for fourth quarter gross domestic product (GDP) to 2.2%, worse than consensus expectations of 2.4%.
Since energy prices were sharply lower in Q4, it seems clear that the domestic economy is struggling to get real upside traction in the wake of the Fed ending its quantitative easing (QE), which induces wage inflation and core pricing inflation for most industries. The bond market has cast its vote, with the benchmark 10-year Treasury trading higher and its yield falling to 1.96% on the prospect that the Fed may talk up normalizing rates sometime mid-year. But it’s just not going to happen under current conditions.
GDP growth and earnings for the S&P are being revised lower for the first quarter even as energy prices remain weak. The S&P 500 was in the red for the week as geopolitical tensions in Yemen weighed on U.S. stocks. Yemen, really? If WTI crude can’t hold above $50 when the Middle East is in turmoil, then we have an over-supply problem, Houston. And that type of issue isn’t minimized in just a few weeks or a couple of months.
Uncertainty is currently ruling market sentiment and the market itself. Ongoing mergers and acquisitions (M&A) activity is the true bright spot for market bulls. The 3G Capital Partners’ Kraft (KRFT) deal in the last week, which combined it with Heinz, is valued at $70 billion. The union is a huge marriage of household brand names. And this won’t be the last mega-deal of the year in my view. The urge to merge when capital is super cheap and markets are so liquid could produce a string of history-making takeovers in 2015.
Aside from potential deal flow, investors are caught in what is now a neutral trading range, getting whipsawed by headlines and high frequency trading (HFT) buy-and-sell programs that dominate daily volume. So where are retail investors finding comfort and safety to dodge the wild swings in the hot sectors that suddenly go cold? Selected dividend and income-bearing assets are not trading all over the map, but instead have been exhibiting stability in an anything-but-stable market landscape.
With all of the deal-making, massive capital flows into equities and creative buying of global assets that are heavily discounted, how does an income investor get in on the action? One way is to acquire a position in the largest private equity firm that is publicly traded. That would be Blackstone Group LP (BX). With a market cap approaching $23 billion, the company manages roughly $290 billion in assets focused in private equity transactions, real estate, hedge fund solutions, non-investment-grade credit and financial advisory services involving strategic planning and restructurings.
For the fourth quarter of 2014, the company posted earnings of $1.25 per share against estimates calling for $0.93 per share, a 34% upside surprise with no fewer than 16 Wall Street analysts covering the company. The boost in the bottom line was passed on to shareholders in the form of a hike in the distribution rate by almost 50% to $0.78 per share, or $3.12 per share on an annualized basis, which translates to a current yield of 8.27%.
Shares of Blackstone now have enjoyed a high-volume upside technical breakout under the influence of bullish money flow. The stock is on a strong trajectory for considerably higher price action in the months ahead. It also is in one of the best positions to benefit from M&A, interest rates, European real estate and equity income that far exceeds conventional blue chip stocks in the form of pure yield.
The latest pullback for the major averages is a gift for those investors seeking to initiate positions in market leaders like Blackstone. While investors maintain their incessant focus on if and when the Fed will raise rates, companies like Blackstone aren’t in the waiting game. Rather, they are in the “making things happen” game and arguably the most proactive alternative asset manager one can invest in by buying its shares.
As the latest addition to the Cash Machine model portfolio, Blackstone is poised to have a banner 2015 in terms of profits, stock appreciation and income distribution. My buy under price of $39 is likely a short-term window of opportunity. When Mr. Market provides a chance to jump in alongside some of the smartest guys in the room, you jump.
In case you missed it, I encourage you to read my e-letter column from last week about the impact of the latest Fed policy statement. I also invite you to comment in the space provided below my commentary.
I invite you to join me at the MoneyShow Las Vegas, May 12-14, 2015. With stock picking taking on renewed importance as the market shows signs of volatility, this event offers an opportunity to hear from a number of experts, including my Eagle Financial Publications colleagues Mark Skousen, Doug Fabian and Chris Versace.
Be a guest of Eagle Financial Publications and register for FREE by using priority code 038657 and calling 800-970-4355 (toll free in the United States and Canada) or signing up online.