THE FINAL NUMBERS
NEWS: Early morning losses turned into a strong day for Wall Street. The Dow closed the session up 55 points or 0.4%. The S&P 500 rallied 10 points or 0.8% and the NASDAQ also jumped 0.8% or 19 points. Gold and oil were also on the rise today.
THE BOTTOMLINE: After early weakness on an oil report by Goldman Sachs and dismal earnings from Fannie Mae (symbol: FNM), the market turned around to close higher. FNM, which reported a loss of over $2 billion last quarter, was down as much as $2 before reversing course to close up $2 for the session. A report from Goldman Sachs highlighting the possibility of $200 oil might have caused a chuckle on Wall Street in the past, but today it was taken on a serious note. Last year when Goldman wrote a similar report predicting oil could hit $100, most thought they were out of their minds and looked the other way. With oil hitting $122/barrel today, now who is laughing?
As the day went on the record oil price was forgotten and investors were willing to forget about the recession fears and continued to buy equities. The S&P 500 traded below the 1400 support level today before rallying back to close well off the low. The other indices joined in the late day surge that has now confirmed the breakout of last week and I am going on record of becoming more bullish. The short-term neutral stance has been shifted to bullish to join the intermediate-term and long-term views. I will look to put more of our Portfolio Management Clients’ cash to work in the coming days on pullbacks in individual stocks and ETFs.
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McCALL’S CALL - WE ARE IN A RECESSION
NEWS: That is what most of Americans believe. According to a national study by CNN/Opinion Research Corp, 79% of the respondents believe the US economy is currently in a recession. In March the number was 74%, in February 66%, and 46% six months ago.
THE BOTTOMLINE: According to the official definition of a recession, the GDP must be negative for two consecutive quarters. With the first quarter preliminary number at 0.6% and the economy strengthening so far in the second quarter, it appears a recession is a wild dream of the bears. Sure I am one sided because I have been preaching for months that the US would not fall into a recession. However, it is irrelevant what I believe or the numbers say if the masses believe we are in a recession. What could happen is that the panic of the masses brought on by the media and the fact many Americans are naïve will result in a self-fulfilling prophecy. The numbers may not show a recession, but for most it will feel like a recession and therefore they will act as if it is a recession. The vacations may become less often and shorter, going out to dinner will not be as frequent, the new car purchase will be put off, etc. If this becomes reality due to the self-fulfilling prophecy, it could be a major issue that investors must recognize. I do not believe we are at the point of a self-fulfilling recession, but it does not mean it cannot happen this summer with gas and food prices expected to continue rising. From an investment opportunity viewpoint, I would look at commodity stocks and ETFs as a hedging strategy against such an event.
DAILY ETF BULLETIN - BREAKOUT IN AFRICA
NEWS: The two ETFs that have large exposure to Africa both broke out to new multi-month highs. The iShares South Africa ETF (symbol: EZA) and the SPDR S&P Emerging Middle East & Africa ETF (symbol: GAF) had solid a solid day, gaining over 2%.
THE BOTTOMLINE: EZA is trading just below the best level of 2008 and has been helped by strength in its top three holdings: Sasol (symbol: SSL), an energy play; MTN Group (symbol: MTNOY), a telecom stocks; Impala Platinum (symbol: IMPUY), the second largest platinum producer in the world. The top 10 holdings also include a couple of gold and financial stocks. From a technical perspective today was a buy signal and the fundamental story is also solid.
Despite the name, GAF is heavily weighted in South Africa (60% of the assets). Israel is second with 21%, followed by Egypt (7%) and Morocco (6%). MTN Group, Sasol, and Impala Platinum are in the top 5 holdings with the number one holding, Teva Pharmaceuticals (symbol: TEVA). TEVA is an Israeli generic drug maker with operations around the globe; the stock has done really well recently, but is my least favorite of the four. The advantage of GAF is that it does not put all of its eggs in one basket, but on the other hand EZA has solid core holdings. Both ETFs move in similar fashion and could be considered interchangeable.
Have a great night,
Matt McCall
www.pennfinancialgroup.com