The White Hurricane by Jeff Saut of Raymond James
“Unseasonably mild and clearing” was the weather forecast going into the Ides of March back in the year of 1888. And it was true, as temperatures hovered in the 40s and 50s along the East Coast. However, torrential rains began falling, and on March 12th, the rain changed to heavy snow, temperatures plunged, and sustained winds of more than 50 miles per hour blew. The “Great White Hurricane” had begun! In the next 36 hours, some 50 inches of snow would blanket New York City, and the winds would whip that snow into 40- to 50-foot snowdrifts. Telegraph and telephone lines were snapped, fire stations were immobilized, New Yorkers could not get out of their homes, 200 ships were blown aground, and 400 people would die before the storm was over. The resulting transportation crisis led to the construction of New York’s subway system.
“Make it STOP” … was a phone call I got last week from a particularly frozen Midwesterner. It was one of many such calls I have received over the past few months. The phone call onslaught actually began in December, but seemed to hit its zenith the first week of January when more than 50 major cities recorded record low temperatures. Regrettably, there is yet another winter storm cranking up, which has lit up my phone with requests from my northern friends asking if they can “come on down and visit.” The coldest U.S. winter in more than a decade has elicited mounting screams of “climate change!” So, before I get accused of not being an environmentalist, let me state that everyone is an environmentalist, but to differing degrees. For example, take Southern California where I was recently shocked to see the aqueducts completely dry and the lakes/reservoirs down 20+ feet. The situation is being blamed on “climate change,” and at the margin there is likely some truth to that, but the drought has been exacerbated by extreme environmentalists bent on saving a fish. The fish, no bigger than a minnow, is called a “smelt” and was deemed by U.S. District Judge Oliver Wanger more important than food and water for humans. Using the Endangered Species Act, Judge Wanger ordered pumps watering the San Joaquin Valley from the Sacramento River turned off, lest the Delta smelt be disturbed, thus impacting 25 million people. But, I digress.
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Partners Group Private Equity gained in May. The net asset value for Class I rose 3.5%, while the net asset value for Class A grew 3.4%. The total fund size increased to $5.6 billion. For the first five months of the year, Class A is down 4.4%, while Class I is down 4.2%. Q1 2020 Read More
Speaking to the weird weather, extreme weather is fast becoming the “new normal” and there is scientific evidence we should expect this trend to continue. Indeed, the past few years have been record years for extreme weather (2014 may also be) with weather causing $170 billion in damages, yet many companies have not adapted their business strategies for this tectonic change. Tectonic change because by 2030 global food demand is estimated to increase by 50%, likewise energy use, and water usage by nearly that much. Given the interconnection of those assets, major decisions will have to be made on resource allocations and new business models will need to be adopted. A number of publicly traded companies that stand to benefit from these trends. A few of the names from Raymond James’ research universe that are favorably rated by our fundamental analysts and screen positively on my proprietary algorithms are: salesforce.com, inc. (NYSE:CRM) (CRM/$63.59/Strong Buy); Pattern Energy (PEGI/$26.56/Outperform/covered by Raymond James Ltd.); and VMware, Inc. (NYSE:VMW) (VMW/$96.41/Strong Buy). Three more names that are favorably rated by our research correspondents are: BorgWarner Inc. (NYSE:BWA) (BWA/$61.16); NextEra Energy, Inc. (NYSE:NEE) (NEE/$92.56); and Sunedison Inc (NYSE:SUNE) (SUNE/$16.54). I suggest you put these names on your watch list.
Last week, however, investors were not focused on the weather, but whether the various indices could break out to new reaction highs. Most of the indices I follow failed to make new highs, although the Advance/Decline Line suggests they will in the weeks ahead. To be sure, the 10-day A/D Line moved up to its highest level since 1990, implying that while things may be overbought in the short-run, longer-term the primary trend of the stock market remains “up.” That does not mean if we get an “upside failure” to make new highs there will not be another downside attempt. Manifestly, the D-J Industrials (INDU/16103.30) have valiantly attempted to cross back above their 50-day moving average (@16109.60); but as of yet have failed to do so, just like they have failed to make new reaction highs. Ditto the S&P 500 (SPX/1836.25) remains trapped in “no man’s” land between 1813 and 1851. Meanwhile, the D-J Transportation Average (TRAN/73308.60) has given a bearish stochastic crossover signal, and may be tracing out a head-and-shoulders “top” formation, as identified by our technical analyst David Hydrick. Additionally, ALL of the indexes I monitor remain overbought in the short-term and are at/approaching major overhead resistance levels. Therefore, while none of the data is indicating extreme danger in 2014, like the fallacious 1929 comparison chart going viral on the internet, the weight of the evidence continues to counsel for caution in the near-term. That does not mean I am not willing to commit the cash raised in January to select situations because over the longer-term equities are undervalued with 6.6% forward earnings yield bases on the S&P’s bottom up, operating, earnings estimate of ~$121. As well, I continue to think we are involved in a secular bull market that has years left to run.
Turning to commodities, we have been very underweight commodities save gold, natural gas, and crude oil. Last summer we stated natural gas was “washed out” and was likely to move higher. While that “call” was premature, it has certainly played in spades in the wicked winter of 2013/2014. Similarly, crude oil has moved higher, but not with as much gusto as natural gas. Unless there is an incident in the Middle East, both oil and natural gas are pretty extended, and except for special situations, I would be selective here. It is worth mentioning that likely due to the drought the PowerShares DB Multi-Sector Commodity Trust Agriculture Fund (DBA/$26.24) “gapped” significantly higher last week (see chart 1). Turning to gold, gold was recommended last December by me, as well as Andrew Adams, in various Morning Tacks. Hereto, that “call” was somewhat premature, but has proved profitable on a trading basis. Recently, gold crossed above its 200-DMA, raising “calls” the economy, equity markets, bond market, currency markets, et all, are in trouble. In my view, nothing is further from the truth. More to the point, earnings continue to come in better than estimated with 62% of reporting companies beating estimates and 64% bettering revenue expectations. As for profits, they have inked at roughly a +9% rate for 4Q13. It is worth mentioning that forward earnings/revenue guidance has been noticeably reduced, but I believe this is largely a function of the weather. On a sector basis, Information Technology had the highest “beat rate” with 70%, while the negative nabobs were shocked by the Consumer Discretionary’ s beat rate of 64.5% (see chart 2) amid cries that the U.S. consumer is “tapped out.”
The call for this week: Late last year I wrote about the Sun’s impending “Polarity Flip,” where the Sun’s vast magnetic fields actually “flip.” According to Todd Hoeksema of Stanford University, “This change will have ripple effects throughout the solar system.” At the time certain seers suggested it could even affect the psychology of investors. Sticking with the “polarity” theme I subsequently discussed the Polar Vortex, which isn’t a short-term phenomenon that causes a blast of cold air. It is a permanent condition circling the North Pole. It is the shape of the air flow, and position, that determines how much Arctic air moves away from the North Pole. This year’s vortex is one of the coldest and potentially implies more to come in the years ahead. All of this is compounded by the shift in the Hadley Cell Winds, which is why extreme weather is fast becoming the “new normal” and there is scientific evidence we should expect this trend to continue. That’s why companies need to change their business models to adapt for the weather, as well as why I mentioned some of the companies’ that could help do just that in this report. There were also some weird occurrences on the Street of Dreams last week as the S&P 500 Equal Weighted Index, the S&P 400 Index, the NASDAQ Composite, the NASDAQ 100, the Advance/Decline Line, and others broke to new all-time highs on February 21st. So far, the S&P 500 (SPX/1836.25), the INDU, the TRAN, and others have not. Either they will follow the others to new all-time highs, or we will have a giant upside non-confirmation, setting the stage for another downside test. Therefore, as long as the SPX resides in “no man’s land” between 1813 and 1851 I remain cautious, but still willing to buy select stocks like Williams Company (WMB/$42.06/Outperform) based on our fundamental energy team’s recommendation. This week also ushers in some potentially market moving events with a number of Federal Reserve folks speaking punctuated by Janet Yellen’s appearance at the Senate on Thursday, the 4Q estimate of GDP gets released, as does consumer confidence and sentiment figures, new homes sales are on tap, core PCE, and the Chicago PMI.