John Burke, CEO and chief investment officer, Burke Financial Strategies
FOCUS: U.S. Equities
It appears to us that since the beginning of February, the market is anticipating a worldwide pickup in economic activity. We are going toneed a pickup in economic activity for earnings to start to recover. First quarter earnings were down yet again and that leaves stocks priced not at bubble prices, but higher than historic averages. In order to advance, earnings can’t continue to go down.
There are signs that economic activity is picking up and there are signs that it is not picking up. The latest manufacturing PMIs, these are surveys, look better. World trade activity looks worse. Car sales and home sales continue to be strong. The last labor figure was a little disappointing.
We think that economic activity will pick up because there is ample credit, consumers are in good shape, and central bankers are still in accommodative mode. We think that the weakness in the U.S. dollar so far in 2016 is good news for many countries for two reasons. 1) If their debt service is in dollars, it makes repayment easier or 2) commodity prices are generally dollar based and a declining dollar makes commodities cheaper. We also think that the increasing price of energy helps exporters and bankers who have made loans to energy companies.
It is for these reasons that we continue to advise our clients to stay the course. The dollar went up last week, if it turns around and starts to go up again like it did from 2013 to 2015, we will get much more negative on stocks.
China has become the second most important global economy after the U.S. Chinese state owned companies (SOEs) are loaded with debt even though the government has no debt, in fact owns trillions of U.S Treasurys in reserve. If the Chinese show a willingness to start winding down the debt in these SOEs, it might be a tailwind this year but good for the long run. If the Chinese ignore the SOE debt, they will likely contribute to worldwide growth this year but that likely becomes the biggest threat to the world economy in the coming years.
Top Investing Ideas:
Time Warner (TWX.N)
Time Warner split into two companies, Time Warner and Time Warner Cable. The former is the media company that we like. There are three divisions: HBO, Turner and Warner Brothers. HBO has the least revenue but the most profits. Turner is a competitor to the major broadcast companies and Warner Brothers, the biggest segment by revenue, makes movies. The stock is still off 13 percent since the beginning of 2015, lagging the market. In general, the media companies have lagged because of the Netflix threat. We think the Netflix threat, as a new mode of entertainment delivery, is more threatening to the cable companies than the content providers. We think the content providers will find a way to get paid no matter how it is delivered and the stock is cheap, trading 14 times earnings, well below the market. We think profits will increase by over 20 percent over the next two years and if so, we can buy a growth company at a discount.
Occidental Petroleum (OXY.N)
Occidental has the best drilling sites in the U.S., mostly in the Permian Basin in west Texas. This area has multiple layers of oil per drill site, which makes it possible to drill into different oil plays from one drill pad. And oil is mostly what Occidental produces. We don’t see the light for natural gas but we think oil continues to rebound because drilling activity is still going down. It will take many months to turn around production in the U.S. and Canada and the price of oil has not yet gone high enough to spur new drilling. Even assuming the fires are put out in the Canadian oil sands region, production is still trending down. There are plenty of examples of declining production throughout the world but only one, Iran, that is increasing production yet many want to focus on Iran as a reason why energy prices will not go higher.
Ameriprise Financial (AMP.N)
Due to a 28 percent decline in price since the beginning of last year, Ameriprise stock is cheap. It trades at less than 10 times earnings, yet should grow both its top and bottom lines. Ameriprise provide financial advice through more than 10,000 financial advisors. Financial advice stocks are cheap in the U.S. for two reasons. 1) They are not making any money on short term investments because of low rates and 2) New regulations from the U.S. Department of Labor now mean that the industry is regulated by 3 regulators: the DOL, FINRA and the SEC. We think regulations may in fact help companies like Ameriprise as small firms may look to join larger firms because of the increased regulation. Further, the baby boomers are retiring and as they retire, they need financial advice.