Target Poor Environment

Try as we may we can find few stocks to take aim at for trading or investing going forward.  Stocks with PE's lower than say 12 or stocks at value prices are just not out there anymore.  Our trading portfolio is down to 10 selections and two of those are at the extreme top end of our trading price range. This market is in our opinion is a good bit overvalued.  Overvalued not only from historical standpoints, but adding the fact that we see a slowing the economy now and heading into the second half of the year. 

Corporations have rung out much of the value they can from cutting costs, cutting employees, and levering low cost debt.  Natural gas using companies have begun to takeout a good bit of the value of lower cost energy from the huge supply here in the US. Stocks with good value such as CSCO are hard to come by.  Contrarian buys such as BP are slowly getting recognized for their value and moving up in price.  

As we move forward we will reign in more and more of our investing asset base as we just can not see comfort in the risk.  We expect much of this strong market move upward is three factors.  One the inflow of funds of current retirees looking for yield that can not be found in traditional saving accounts or CD and of course US Treasuries.   Savers are becoming investors in stocks like Realty Income, symbol O, and pushing up the price to what we consider too high at around $50.  If this market breaks these johnny come lately investors are going to get burned. 

The second factor pushing up the market is the continuing $85 billion dollar monthly purchases of US government debt by the Federal Reserve.  This unprecedented buying is keeping interest rates down and helping Obama keep spending with little of no interest costs.  It is keeping mortgage interest rates down as well, but the home buying market is weakening as well as noted by the sub 3.5% 30 year mortgages.  All this money is like a sugar high since it is not real and will either end when the Fed stops buying or the markets realize that stocks and bonds which appear to be as money good but not good money.  This bond buying has no choice but to end badly and when the Fed announces a start to the ending one can expect the stock market to take a dive.  The question is when they will do it and can one be so good at timing to be out when it happens.  $85 billion in new free money each month and after awhile you are talking about real money. 

Finally many corporations are buying back stock at a pace never seen before. Even Apple joined this game last month.  All these buy backs are reducing the number of available shares and pushing up the prices of those stocks significantly.  The result is also pushing down of stock dividend yields. 

In a future posting we will take a closer look at some of the few value opportunities out there.