Popping The Bubble

Client Talking Points

Goodbye, Gold

Practically overnight, gold fell nearly $100 to $1400/oz. What's the catalyst? A stronger US dollar that has kept appreciating in value over the last three months has helped pop the great commodity bubble brought on by Federal Reserve Chairman Ben Bernanke. We had a 40-year low in the US dollar and 40-year high in gold (read: top) in 2011 that was simply unsustainable. Gold prices are crashing and the metal is going down in flames. Further downside pressure will be exacerbated as fund managers and the retail crowd all flee the crowded theater in an effort to escape, which will drive the ask price lower and lower. 

Consumption = Growth

As commodity prices head lower across the board, consumption in the US has increased which in turn has driven growth. It's really not that complicated when you think about how the downturn in commodities has helped drive growth. When people encounter lower gas prices at the pump and cheaper food at the grocery store, they tend to consume more. 

If you look at the complexion of the S&P 500’s Sector returns for April to-date, it’s the same story (Consumption vs Commodities):

 

  1. US Healthcare Stocks (XLV) = +4.18% for APR to date
  2. US Consumer Discretionary (XLY) = +2.66% for APR to date
  3. Basic Materials (XLB) and Energy (XLE) = -1.65% and -1.12% for APR to date, respectively

 

 

 

The pundits who have been marketing gold under the guise that the end of the world is coming can no longer play that card when the S&P 500 is up +11.5% year-to-date.

Asset Allocation

CASH 31% US EQUITIES 20%
INTL EQUITIES 15% COMMODITIES 0%
FIXED INCOME 6% INTL CURRENCIES 28%

Top Long Ideas

Company Ticker Sector Duration
IGT

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

"Commodity margin clerks will be ordering lunch in today, big opportunity for Seamless Web." -@ReformedBroker

QUOTE OF THE DAY

"The trouble with normal is it always gets worse." -Bruce Cockburn

STAT OF THE DAY

China's economy grew 7.7% in the first quarter of 2013, missing estimates.