Market Call for Tuesday, March 21, 2017
David Dietze, founder, president and chief investment strategist of Point View Wealth Management, Inc.
Focus: U.S. equities
A VERY CAUTIOUS BULL
- Markets have had a terrific run since the U.S. election, and indeed since March 2009, so valuations are an issue
- Renewed optimism from a contrarian perspective is not helpful
- Federal Reserve increasing interest rates is never a positive for valuations
- Great expectations on the fiscal front, including tax cuts, infrastructure spending, and regulatory reform, but what and when, and to what extent, already discounted in stock prices
- More dovish than expected, with call for just two more hikes versus feared three more
- While economy is improving, generally unwilling to speculate on economic stimulus from Trump policies
- Weakness overseas, and concern over rising dollar, are additional reasons for not accelerating hikes
- Inflation still quiet, and wage growth less than optimal
- Historically, Janet Yellen has been a dove, and last week was true to form
WHAT’S DRIVING THE MARKET RIGHT NOW
- Very light news week as there’s little in the way of earnings announcements until April and since the Fed’s move last week
- All eyes on Washington, particularly with regard to progress on health care and Gorsuch hearings
- Implication of dropping explicit free-trade plank from G20?
CHEVRON (CVX.N) – Price $107.66 on March 20, 2017
Chevron is one of the largest integrated energy concerns in the world. Poised to increase cash flow due to cost cutting, greater production, and rising energy prices. Sports second-highest dividend on the Dow (four per cent), so you are paid to wait. Stock 20 per cent off all time high of around $130 in 2014.
GLAXOSMITHKLINE (GSK.N) – Price $42.32 on March 20, 2017
GSK is one of the largest pharma companies by market capitalization. It boasts multiple therapeutic classes, including respiratory and antiviral, as well as vaccines and health-care-related consumer products.
Patents, economies of scale, and a powerful distribution network support GlaxoSmithKline’s wide moat. Glaxo's patent-protected drugs carry strong pricing power, which enables the firm to generate returns on invested capital in excess of its cost of capital. 15.7 PE, three times sales, 5.1 per cent dividend. Dividend has grown about 6.5 per cent annually over last decade.
AMERICAN INTERNATIONAL GROUP (AIG.N) – Price $62.37 on March 20, 2017
AIG is one of largest insurance companies in the world. Like all financial services firms, it is hampered by the low interest rate environment. Company quite cheap at just 80 per cent of book value. Activist Carl Icahn now involved and pressuring company to break up to unlock value.
PAST PICKS: JANUARY 17, 2017
TEVA PHARMACEUTICALS (TEVA.N)
- Then: $33.75
- Now: $33.04
- Return: -2.10%
- TR: -1.15%
EXXON MOBIL (XOM.N)
- Then: $87.36
- Now: $81.73
- Return: -6.44%
- TR: -5.58%
- Then: $41.61
- Now: $50.35
- Return: +21%
- TR: +21.99%
TOTAL RETURN AVERAGE: +5.08%