PowerTrend Brief: No Answers on Greece and Further Slowing in May Drive Market Volatility

The turbulence that began as we entered the current quarter turned into a relatively steep drop in the first half of May amid uncertainty in Greece and economic slowing. That situation continued during the last week with the S&P on track to fall 3% as the key issues in the last few weeks — Greece exiting the euro zone or not; slowing global growth; and rising concern over U.S. debt, spending and the pending fiscal cliff at year’s end — remained at the forefront of the news flow.

The latest readings on the European and China economy from Markit Economics were released just yesterday and those purchasing managers indices (PMI) both fell in May. More specifically, the Flash euro zone manufacturing PMI fell to 45.0, down from 45.9 in April to mark a 35-month low. While much talk has been in the press about Greece, Spain and Italy, the May data shows Germany posted a marginal fall in manufacturing and services output, the first such contraction since last November, and only the second in 34 months. Turning to China, the HSBC Purchasing Managers’ Index showed manufacturing dipped in May to a two-month low, with a reading of 48.7. As with all PMI, a reading below 50 indicates a contraction, while a reading above 50 implies an expansion — obviously the higher above or below 50, the stronger the contraction/expansion. Back at home, the Congressional Budget Office, the official budget and economic analyst for lawmakers, sounded the alarm bells on the fiscal cliff this week when it reported that the U.S. economy would contract at an annual rate of 1.3% for the first half of 2013 if lawmakers take no action to prevent the looming tax hikes and spending cuts.

Add to this situation that a number of companies reported weaker-than-expected results or pared back their outlooks this week. They include Dell (DELL), Lowe’s Companies (LOW), storage and data management company NetApp (NTAP), and American Eagle (AEO), among others. Now layer in the disastrous initial public offering for Facebook (FB), as well as some fresh headcount reduction announcements from the likes of Hewlett-Packard (HPQ), General Mills (GIS) and Google (GOOG), especially as the latter company lays off up to 30% of workers at newly acquired Motorola Mobility (MMI), and it’s easy to see why some investors are discouraged.

Despite the pressures weighing on the market, there are well positioned companies that are executing and delivering. The silver lining to the market pullback of 7.5% since early April is the chance to buy shares in these companies at more favorable valuations.

How do we identify these companies?

Each week, I offer the latest confirming data points for my Great 8 PowerTrends — the more confirmation we have, the better we can sleep at night. Here are several of those data points from this past week:

Living Longer Lives – The World Health Organization (WHO) recently released its annual World Health Statistics, which showed about 500 million people are obese. In the Americas, the world’s fattest region, roughly 26% percent of adults are obese, compared with 3% of adults in Southeast Asia.

The Rise and Fall of the Middle Class – As part of the Guilty Pleasure aspect of this PowerTrend, Juniper Research predicts that social gambling could be a US$100-billion industry by 2017. The research firm reported that the surge in social gambling activity is being driven, at least in part, by the introduction of intrastate casino and lottery services in the United States. At the moment, social gambling is dominated by sports betting, although that looks set to be overhauled by casino gaming within five years. Juniper Research also reckons that mobile will become an increasingly important platform for gambling, particularly with the emergence of mobile wallets.

We continue to see signs that The Cash Strapped Consumer aspect of The Rise and Fall of the Middle Class is alive and well — according to surveys released this week — with Americans remaining fiscally cautious about their summer travel plans. In a new PhoCusWright poll of more than 2,000 U.S. travelers, nearly four in 10 Americans (38%) didn’t buy a vacation trip within the past year. Particularly hard hit were early boomers (ages 45-54) whose average trip expenditure dropped by more than 10%. In a separate TripAdvisor survey of more than 1,200 Americans, 86% of respondents said recently declining gas prices, which have fallen 5% in the last month, won’t have an effect on leisure travel plans this summer.

Cashless Consumption – On Track Innovations reported it has received an order for 30,000 of its NFC and contactless payment readers for deployment in the United States during 2012. The company’s plug and play NFC readers are certified by the world’s major credit card organizations, including MasterCard, Visa, American Express and Discover, for their contactless programs.

Always On, Always Connected – It took 12 years for GSM wireless technology to reach one billion connections, and WCDMA took 11 years. But LTE will hit the same mark in just seven years of existence, according to a new report by Strategy Analytics. Strategy Analytics expects more than 90 million LTE connections to be activated before the end of 2012, and that figure should reach the 1 billion mark by 2017. This is far and away the fastest implementation of new wireless technology to date.

Better, Smarter America – Two-thirds of big U.S. manufacturers have moved factories in the past two years, with the most popular destination being the United States, according to a survey by Accenture. The report provides some of the first industry-wide empirical evidence of “reshoring,” the trend of jobs once outsourced to low-cost emerging economies being brought back to the United States.

Safety & Security – In the first three months of the year, malware circulating in cyberspace reached a four-year high and is on a pace to reach 100 million samples by year’s end, according to the latest quarterly threat report from cyber security software maker McAfee. Mobile malware continues to grow, McAfee reported, with more than 7,000 Android threats being collected and identified during the quarter. That’s more than a 1,200% increase from the previous quarter.

Each week, PowerTrend Profits subscribers get more of these confirming signs, as well as how we can profit from them in companies that offer favorable, if not compelling, risk-to-reward ratios in their respective shares.

Sincerely,

Chris Versace
Editor, PowerTrend Brief

P.S. Starting June 4, I’ll distribute PowerTrend Brief to you on a Monday schedule to bring you the latest PowerTrend developments earlier in the week. Even with this change, I’ll continue to map out the key data points for the week ahead to help you prepare for the near-term investing environment. As always, I will be on watch for market making or breaking announcements that relate to PowerTrends. So, look for your next issue to arrive on June 4.

Next Week

Many of you will be giving thanks for the long weekend ahead of us, just as many will be looking forward to the shortened work week. While that may be the case, next week will be chock full of economic data, particularly as we exit the week. Given the May readings on the European and Chinese economies mentioned above, many, including myself, will focus on the May Employment Report, as well as the latest snapshot on Personal Income & Spending looking for tell-tale signs as to the health of our recovery. Here’s a greater look at what to expect next week:

Monday, May 28
Stock market closed in observance of Memorial Day

Tuesday, May 29
Case-Shiller 20-city Index (March)
Consumer Confidence (May)
DryShips Inc. (DRYS)

Wednesday, May 30
MBA Mortgage Index (Weekly)
Pending Home Sales (April)
Coldwater Creek, inc. (CWTR)
Fresh Market, Inc. (TFM)
Lions Gate Entertainment Corp. (LGF)
TiVo Inc. (TIVO)
Vera Bradley Inc. (VRA)

Thursday, May 31
Initial & Continuing Jobless Claims (Weekly)
Challenger Job Cuts (May)
ADP Employment Change (May)
Chicago PMI (May)
Ciena Corp. (CIEN)
Esterline Technologies (ESL)
Joy Global Inc. (JOY)

Friday, June 1
Employment Report (May)
Personal Income & Spending (April)
ISM Index (May)
Construction Spending (April)
Auto & Truck Sales (May)
Thermon Group Holdings (THR)