Distribution Growth & High Yields Add Up To Opportunity In MLPs
16 November 15 02:18 PM | Brian Dightman
  • During periods of panic asset prices disconnect from fundamentals
  • For patient investors, MLPs may represent a great investment opportunity

Back in 2009 I made an investment for clients at Dightman Capital that turned out to be an excellent return vehicle.  I just made the same investment recently and expect to add to the investment in the future.  I believe this is an example of an asset class being influenced by unrelated fundamentals causing current investors to rush for the exit which has pushed down prices below fair value. 

I am talking about energy infrastructure Master Limited Partnerships (MLP).  MLPs are like freeways and parking lots for energy commodities where the MLP is paid a toll to transport or store energy commodities.  Little evidence exists which suggests there is going to be a significant reduction in the amount of demand for energy products here in the U.S.

Much of the recent MLP price decline has been attributed to selling pressure in underlying energy commodities, like West Texas Intermediate Crude.  This is only the third time since 1975 crude oil prices have fallen by more than 50% in a 6-month period.  A global battle is underway and crude oil is the battle field.  This battle is likely to create some carnage but it may also be depressing the price of MLPs well below fair value.

The slowdown in exploration and drilling in some parts of the country has dampened some MLP opportunities but other opportunities for the industry look promising.  Regional distribution bottlenecks still exist which need to be built out and several new projects that should benefit MLPs are underway.  Big projects in export facilities for natural gas liquids (NGL) are being built specifically to meet NGL demand outside the U.S. and new petro chemical plants that consume NGLs are under construction.

In terms of valuations, the drop in commodity prices, slowdown in drilling, investors not wanting to get in front of The Fed raising interest rates, the global economy and geopolitical uncertainty have all served to create some headwinds for the sector.  June's performance of the  MLP index ($AMZ) was down 33.5% YTD and June was one of the worst monthly declines (down 8%) on record going back 20 years.  Some sector managers thought selling pressure was overdone in late summer and prices have fallen even further since.

The chart above shows an MLPs index ($AMZ) continuing to climb from lows back in 2009 until crude oil ($WTIC) started pulling it down over the last year.

During the summer of 2013, the MLP Enterprise Products (EPD) was trading with a 3.75% yield, a 125 basis point spread over the 10-year Treasury.  Enterprise Products has increased its distribution rate by 6% through the summer of 2015 in line with its target and a spread over the 10-year Treasury of 315 basis points.  Today it's trading with a yield of nearly 6% and a spread over the 10-year of 370 basis points.  Enterprise Products is viewed as having some of the best assets and top management in the MLP space but has not been immune to the recent selling activity which has pushed its yield higher.  There are plenty of other examples where valuations don't seem to make a whole lot of sense.  Or another way to look at is if future distribution cuts due materialize, they may already be priced in.  One thing to keep in mind, like many commodities, MLPs tend to trade with higher volatility.

Investors seem to be concerned about potential cuts to cash distributions even at firms like Enterprise Products and other blue chip MLPs.  This is not surprising but may be over emphasized.  There have been a number of distribution cuts this year from firms like Linn Energy (LINE), Natural Resource Partners (NRP) and Hi Crush (HCLP) and others.  What you need to know is these are not energy infrastructure MLPs.  These companies are non-traditional MLPs that have a materially higher business risk.  Each of these MLPs are more directly exposed to commodity price risk (LINE - Exploration & Production, NRP - Minerals, HCLP - Fracking).  It is not appropriate to compare these MLPs to more traditional MLPs that are focused on the distribution and storage of energy commodities.

There have been some income distribution cuts and pauses in the energy infrastructure space but the majority, especially blue chip MLPs, are very confident about their ability to grow their income stream long-term.

MLPs are capital intensive businesses and the industry could be impacted negatively if borrowing costs increased significantly.  However, a move higher in rates would normally be accompanied by an economy that was firing on all cylinders which usually bring higher energy demands, a net positive for MLPs.  Some funds and companies may have been able to secure intermediate term low-fixed rate credit funding over a number of years limiting their interest rate risk but the potential for a rising rate environment to impact the MLP industry must be considered in the evaluation of the investment opportunity.

There are many ways to invest in the MLP space.  You can own an individual MLP or invest in a fund that provides diversified exposure to the industry.  You will need to research your options carefully; MLPs have a unique tax treatment.   Some MLP investment may not be appropriate for all account types (taxable versus tax deferred/exempt).  Funds that invest in MLPs are also structured in a variety of ways. Some are exchange traded notes, which represent an issuer credit risk.  MLPs can also be purchased in closed-end funds which can trade at a discount or premium to Net Asset Value (NAV).  MLPs are also available as an exchange traded fund.  The structure of the fund will also have an impact on the tax profile of the investment so it is important to understand the differences.

I believe a very nice investment opportunity is being presented in the MLP space and it is well worth the time to research the subject and understand the risk factors in more detail.  If this is something you would like to discuss further, drop me a line: 877-874-1133.

Much of the MLP overview provided in this article came from an presentation by Kayne Anderson Fund Advisors and a short piece on the oil industry by Oil & Energy Insider on Wolf Street.

Credit & The Economy
11 November 15 05:57 AM | Brian Dightman

If you watched the short presentation I suggested a few weeks ago on how the modern economy works you will remember it's primarily based on the availability and use of credit.  In consumption based economies when credit is flowing the economy usually does well and when it stops the economy slows.

This is not good news given total debt in North America has more than doubled since 2007.  Household (student & auto loans), Corporate (share buy-backs & natural resource borrowers), Government (deficit spending & QE) and Financial (leverage used by banks) borrowing has grown considerably since 2007.

Notice in the graph above how interest expense has increased.  Ideally debt is used to fund an investment which generates a return that is greater than the cost of the debt.  We know from economic data growth has been subpar and Q3 earnings continued a slowing trend started in late 2014.

The biggest challenge for lenders going forward may be twofold:  1 - finding qualified borrowers and 2 - managing default risks.

Concerns of high yield (junk) bond defaults in the energy (and natural resource) industry are thought to be the primary driver behind price declines in that market.

Senior Bank Loans, often used to fund private equity transactions, are also under pricing pressure.

If defaults are expected to rise the price of high-yield and senior bank loans will continue to fall. This is a development worth keeping and eye on especially because it may eventually lead to an investment opportunity.

In terms of finding qualified borrowers, another side effect of low interest rates is thought to be the impact they have on pulling demand forward.  A new cars, house remodel and other spending becomes more "affordable" when interest rates are low.  If the economy picks up and wages rise markets should hold up.  However, those suggesting the "New Normal" of 2% GDP growth in an environment relying on the expansion of cheap credit to drive economic activity may be proposing a very dangerous scenario.

There is always a chance the economy could kick into higher gear before bigger problems in debt markets start to appear but time may be running out.

Market Update 10-2-2015
02 October 15 09:48 AM | Brian Dightman

I know current stock market action has cast a bit of a shadow on the overall investment environment.  You may be having a bigger challenge reconciling what you are experiencing personally versus a stock market and economy that may be running out of gas.  Even though it has taken many years to get here it may turn out to be too little too late to avoid the next business cycle slowdown and market downturn.  While some areas of the economy have seen robust growth the broader picture is less encouraging.

I remain concerned with the level of debt that has been accumulated in the global economy.  Debt is a powerful tool when used properly, but when spending from borrowed money does not produce the return needed to service the debt, defaults happen (in the real world).  In the (we play by other rules) world of the global political class, debt is used to cover-up bad policy decisions and irresponsible spending.

The difficult part for the productive investor class is how much opportunity we see through our hard work and engagements around the world.  We see innovations in healthcare, technology, leisure and other areas of the economy that produce inspiration and encouragement.

After experiencing both the dotcom debacle and the credit crisis markets and economies firsthand, I feel well equipped going forward.  At present I have generated a considerable amount of cash in accounts that participate in my Adaptive Growth strategy.  I haven't become more defensive because the Fed could send markets soaring with a quantitative easing announcement (can you believe that is an investment consideration!).  From a technical perspective, markets are not recovering well and suggest more downside is ahead.  From a fundamental perspective stocks are a tad pricey but a slowdown in sales and earnings growth is the bigger risk factor.  Economically we never fully shifted out of second gear despite all the market intervention.  I also recognize that Q3 earnings may end up stronger than expected and stocks could be near the bottom of the current correction.

Any action by the Fed most likely comes down to how desperate they are to keep markets propped up or how far they will let them fall before they announce a new program.  Investors should expect the market will continue to receive Fed support through the 2016 election cycle so unless a dislocation materializes or the political will for more market intervention vanishes additional downward selling should be orderly.  Of course, the market has a mind of its own so we could see an unpleasant development despite policy.

Over the summer preservation of capital became the focus of my Adaptive Growth strategy.  Investors should prepare for a continuation of this type of environment (there is no indication policy makers are going to learn from their mistakes and these debt levels are going to take a long time to address) by using a multi-strategy approach like my Market Growth Plus and Market Growth Cycle strategies along with my Adaptive Growth strategy.  There is no denying market intervention has increased significantly since the 2008 credit crisis and there is little evidence to suggest it will change anytime soon.  Again, the added complexity this environment creates in protecting and growing wealth has suggests a multi-strategy approach may be one of the better ways to approach this environment.  What makes these three strategies so effective is their construction, management and historical performance.  It is really a simple approach but once you understand how it works, it makes a lot of sense.  Let me know if you would like to learn more.

Market Update 9-12-15
12 September 15 08:53 AM | Brian Dightman

Here's a quick update on how U.S. stocks have recovered since the August 24th flash crash.  Three weeks have passed which is enough time for investors to be able to gage support and resistance levels for major indexes.  In addition, we can take a look at what leading stocks have done in the period to see if they offer any support for the likely near-term direction of stocks.

Before we look at the charts let's add a little context.  Economic data in the U.S. and globally continues to disappoint and has been unable to sustain a recovery in GDP that would normally be associated with an economic recovery from a severe contraction.  Central Bank policy action has been effective at driving asset prices higher.  This is a dangerous combination and why investment decision at this stage may be more complicated.

China's slowdown was starting to pull down that country's stock market earlier this spring and emerging markets in general have been struggling the last few years.  The iShares Emerging Market ETF (EEM) is trading at the same level to day it was trading at in 2010. 

Those countries, both emerging and developed, that rely on natural resources as a major source of exports have also been struggling as prices for commodities have been tumbling.

About the only thing working in the current environment is asset inflation and primarily in the U.S., Japan and somewhat in Europe.

In terms of corporate sales and earnings it appears we may be in the early stages of a contraction.  Third-quarter numbers will be reported in October and should provide more context regarding the direction these numbers have taken the last couple of quarters.

From the July 20th close the S&P 500 and has corrected around 8% as of September 11.  At the depth of the correction stocks were down 12%.  Normally this would be a classic correction but to have the majority of that downward move take place over three trading days is less than ideal especially when you consider other global stresses in financial markets related to commodity prices and currencies.

As you'll see in the charts below we have a pretty good picture of where support and resistance currently sits.  At present I am focuses on upside moves as stocks attempt a recovery.

None of the following commentary is a recommendation to buy or sell.  The information that follows is simply my market observations.

Here is a look at the Dow Jones Industrial Average ($INDU) since June.

Prices established a short-term down trend by early August leading up to the flash cash.  Since then a clear trading range has been establish which should serve as reasonable resistance and support levels.

The strongest of the big U.S. indexes is the Nasdaq ($COMPQ).  Here is a look at that chart.

As you can see, this index has a slight upward bias and is near breaking through short-term resistance.  The Nasdaq's weighting in Information Technology, Consumer Discretionary and Health Care help explain it's stronger performance at present.  Those industry groups are some of the strongest at present.

The S&P 500 ($SPX) looks more like the Dow, trading in the middle of the current range and further away from resistance.

Another area where we may get a clue about the near-term direction of stocks is from the real estate investments.  A recovery in housing has been an important part of this recovery so I have been monitoring a few investments in this market.

Let's start with Home Depot (HD).

As the chart illustrates, HD was performing well leading up to the flash crash, one of the few stocks doing so at the time as broad markets were under selling pressure.  Currently HD is holding its ground but not enthusiastically so.

Home builders (ITB) have been another bright spot in the economy and stock market.

So far this this iShares U.S. Home Construction ETF (ITB) is showing the strongest looking recovery, but it has been a very bumpy.

Turning to the commercial real estate sector we see a very different picture.

CBRE Group (CBG), one of the largest publicly traded commercial real estate managers, we see a stock that is trading in the bottom of its correction but is exhibiting some buying and sits at the top of its most recent price range.  CBG was exhibiting strong performance earlier this year so its lack of participation in the flash crash recovery is disappointing.

Another broad look at the real estate investment market can be view in the iShares U.S. Real Estate ETF (IYR).

The date period for IYR has been lengthened to include the start of the year, when many REITs started to price correct.  Obviously IYR is having a difficult time recovering from the current selloff. Given the importance in real estate in the current economic recovery, as well as its sensitivity to inflation, the picture stocks from these markets are showing has become less bullish.  Still, there are signs for optimism and only time will tell if real estate related investments have the ability to help markets recovery from the current correction.

Next week we will hear from the Federal Reserve regarding interest rates.  Markets are likely to be quiet leading up to their announcement.  If they postpone raising rates stocks may get a boost.  How stocks react if the Fed decides to raise rates may be more telling.  We won't have to wait long.

In terms of leading stocks, I am seeing some strength.  I manage a virtual portfolio which I will be sharing more details about in the near future.  The portfolio currently holds the following stocks:

They all had a great week and have recovered well from the flash crash; a few are even moving into new high levels.

My watchlist candidates look fairly promising as well.  Overall, the performance of the leading stocks I follow suggest investors be on the lookout for a continuation to the upside.  As surprising as it may be given all the headwinds stocks face, it looks like they want to make another run higher.

It can all change very quickly and given the influence central banks are having on stock markets, it may be as simple as the Fed postponing their rate hike for stocks to reach new high territory again.  I am definitely preparing to put money to work if stocks rally from here.

Markets Sell-Off, Some Stocks Hold Up
05 September 15 02:38 PM | Brian Dightman


It was another tough week for the stock market.  Major U.S. indexes are having a tough time moving beyond the middle ground from the late August flash crash decline and are at risk of retesting those lows. That would only be another 2% decline for the S&P 500.  The NASDAQ is a little harder to gauge.  It has been a stronger index this year but it was also more volatile during a flash crash.  It's up around 6% from the flash crash low.  Volume levels tapered off last week but they are hard to gauge given the light trading season that is typically experienced prior to the Labor Day holiday.  Next week we should get a much better indication which direction stocks will likely take in coming weeks.  If support holds for the major indexes we may have found the bottom of this correction.  If support is broken we may have bigger downward moves ahead.

There are not too many stocks holding up right now but the presence of some offer hope markets will stabilize at current levels.  Constellation Brands (STZ), Under Armor (UA), Extra Storage Space (EXR), Norwegian Cruise Line Holdings (NCLH), Vantiv Inc. (VNTV) and Incyte Corporation (INCY) are stocks that may be poised to lead the next advance if market conditions improve.  I tweeted about them earlier in the week.  You can follow me on Twitter @DightmanCapital.

I have also been paying close attention to the real estate market.  It is clearly one of the few pillars currently supporting positive economic activity in the U.S.  In terms of residential construction and remodeling Home Depot (HD) is having a tougher time moving higher and remains below its 50 day moving average (dma).  It has been one of the stronger stocks in the group.  In the commercial real estate segment, leader CBRE group Inc (CBG) has come under a great deal of pressure and is trading well below its 200dma. Looking at real estate more broadly the iShares U.S. real estate ETF (IYR) is continuing a downtrend started back at the end of January.  Eventually investments from the real estate market should present excellent entry points once policy makers open up the inflation spigot once again.  The part of the real estate market that may be the most important to watch right now is home construction and so far the iShares U.S. home construction ETF (ITB) is holding up.

We received more economic information that showed slowing growth here in the U.S.  The August payrolls report came in below estimates but the July report was revised up with the addition of 44,000 jobs.  We also saw a rise in jobless claims but they remain low overall.  Manufacturing here and in China continues to falter with both countries reporting numbers below expectations.  The biggest issue for the economy may be psychological.  Economic Optimism took a turn down.  The recent market downturn and concerns about China's economy appear to be weighing on Americans.  46% of Americans and 55% of political independents think America is in a recession.

The balance of September should provide a better indication of the near-term direction of stocks.  If we indexes remain stuck in a trading range through the month, October markets the start of Q3 earnings season so markets will be turning their attention to that information flow.  It is important to remember the stock market looks out around 6 months in terms of gauging corporate earnings so a significant correction or even bear market can develop well before obvious signs are present in the economy or reported earnings.

Their remain many risk factors potentially holding back a new advance so do not be surprised if markets need to do some more selling before the next advance.

The Big Risk Of A Negative Feedback Loop
22 August 15 10:21 AM | Brian Dightman

Last week was the worst week for stocks in years, with major indices closing near lows on a spike in volume on Friday.  In terms of the growth strategy I manage, I'll be looking to take additional defensive action in client accounts if conditions continue to deteriorate.  I started reducing exposure to stocks earlier this summer and my growth strategy is now underweight stocks by approximately one-third.

The nature of this particular correction has increased the odds we are going to see a steeper decline.  There are a few strings still holding markets together but it would not take much for them to break.  The biggest risk for the U.S. is the impact a potential negative feedback loop could create.  The opposite of the wealth effect, where consumers are supposed to increase their consumption based on higher 401k balances, a negative feedback loop is where bad news causes consumers to pull-back their spending which causes economic conditions to deteriorate making things worse.  The possibility of this type of scenario developing is very high given the currently cynical nature of consumers.  Tired of being lied to and told increasingly what they must do and cannot do, the U.S. consumer is in a foul mood.

Let's start with what is working, U.S. real estate.  As I have mentioned to clients and in public commentary recently, the recovery in U.S. real estate is one of the few bright spots in the U.S. economy.  While the current market sell-off put a dent in some of the investments I have been following in this industry, Home Depot (HD), C B R E Group (CBG), and more broadly the iShares Real Estate ETF (IYR) are trying to hold on.  HD is the strongest of the group and remains just below a recent all-time high breakout earlier this month.  CBG is also trading near an all-time high it hit earlier this year but has move to the bottom of a trading range.  A move lower by this commercial real estate leader would be a bearish development for this market segment.  More broadly, IYR has yet to reach its all-time high back in 2007.  It has a small loss year-to-day and is trading in the lower half of a base it started in February.  Home builders have been doing well in 2015 and Lennar Corp (LEN) remains near the breakout it established earlier this month.  As long as real estate related stocks hold at current levels there is a reasonable chance markets will settle down for a more shallow correction.  Additional weakness in real estate related investments could spell trouble for the broader economy and stock market.

The other factor I am watching closely based on the positive impact it is having on the market right now is good-old innovation, despite the continuous attack on American exceptionalism.  The current IPO market, while not as strong as other cycles, has witnessed many new companies achieve an IPO from technology, healthcare, consumer and many other industries.  The First Trust IPOX 100 EFT (FPX) fell below its 200 day moving average on Friday so ideally this fund can trade back above that level on the way to new all-time highs, something it achieved earlier this year on a history going back to 2006.

In terms of economic growth it remains a mixed picture.  In the U.S. New Jobless Claims continue to come in a bit higher, perhaps marking a bottom.  Housing activity continues to ramp up with existing-home sales up for the 3rd consecutive month.  Internationally, China's manufacturing activity hit a 6-year low and Greece's Prime Minster Alexis Tsipras resigned complicating their ongoing bailout program.

Given the swift and steep selloff in stocks the likelihood of a Fed rate hike in September has fallen.  Expect a full slate of appearances over the coming days designed to bring stability to the markets.  The Fed could find itself in a real bind if markets don't stabilize soon.

With a current forward P/E of 16.5 for the S&P 500, stocks appear only slightly overpriced based on historical measures.  If stocks correct based on a mediocre economy not justifying an above mean forward P/E, a 15% correction would take the market down to a forward P/E of 14.  After last week we are about half there.  This assumes nothing changes with EPS estimates currently at $127.40 according to FactSet.  Any rumblings from corporate America about weaker forward guidance would be very difficult for the market to handle at this juncture.

When you add it all up we find the U.S. stock market and economy in a very precarious position, one were many remain unemployed or under employed. Despite the stats, participation rates are way down and wages have stagnated.  Additional market declines could cause consumers to tighten the purse strings which would crimp corporate sales and earnings; that is when things could get much worse.

While some suggest the sell-off of 2008 was a once in a lifetime event, investors concerned it could happen again should be prepared to take action now.  I successfully navigated the 2008 market with very small declines and have composite performance data to back it up.  I have already generated a good portion of cash in my growth strategy and I will be looking to move more defensively depending on how things unfold going forward.  If this sounds interesting to you drop me a line.  Better days should return but in the meantime it looks like policy makers need to do a much better job of addressing secular changes in our economy if they want to avoid asset bubbles and create a more sustainable recovery.

Crazy Asset-Market Moves
01 August 15 11:00 AM | Brian Dightman

Last week I mentioned August performance may provide some clues to how investors are going to position themselves for the end of the year.  After looking at July returns I raised an eyebrow.  The month served-up many large moves, both up and down; some you would not expect.  Others make you shake your head.  Outside of U.S. stocks there continues to be few good investment opportunities based on current price action.

Readers know when I evaluate the health of the U.S. stock market I place a lot of emphasis on the performance of leading stocks.  Leading stocks are those companies with strong sales and earnings growth along with other fundamentals.  When investors are willing to bid up the prices of this category of stocks there is an element of risk taking in the market that tends to be healthy for the market overall.  Right now leading stocks are one of the few categories of stocks performing well and with many coming from the Nasdaq 100 (QQQ) we understand why the index delivered an amazing 4.5% return in July!  Impressive right?

Consider this, 20+ year treasuries (TLT) also had a strong month, up 4.5% too.  This on the verge of a rate-hike cycle kick-off!  Regarding short-term bonds (SHY), they held firm, essentially flat for the month.  The bond market was hardly concerned about rising rates or inflation in July.  To have the Nasdaq 100 and Long Treasuries deliver such strong performance during the same period is well, odd especially in light of other factors.

Real estate (IYR), after getting hammered earlier this year also rallied in July, up 5%!  Real estate, along with other interest-rate sensitive equities (like utilities), have been under pressure most of this year as result of possible higher borrowing costs in the near future.  It is interesting as we approach the actual rate hike event (not!) real estate and utilities rally.  Maybe they over corrected earlier this year but all of these moves during the same period as other events are unfolding has caught my attention.   

One the downside, we have the following in July:

Oil (USO), down -21.5% and commodities (DBC) in general, down -12.6%.  Gold (GLD) fell another -6.6%.  Those are very big ONE MONTH moves!  Perhaps it will mark the final chapter in the multi-year bear market for commodities and the vibrant demand engine policy makers have so diligently tried to create is ready to roar but we are not seeing it in the economic data that is for sure.

Chinese stocks (FXI) listed on U.S. exchanges declined -12.2%, emerging market stocks (EEM) fell -6.3%.

How do we make sense of a bond rally on the verge of rate hikes when stocks are also in rally mode and commodities continue to get crushed?  Some of the bond buying can be attributed to money that has to find its way into that asset class as an investment mandate. There is so much money in the world right now long-bonds appear to be the lucky recipient of money flows by pension managers, insurance companies and the well healed.  Outside of asset inflation there is very little concern about broad consumer-price inflation right now.  However, this could change quickly and when the Chinese start to liquidate their estimated $1.6 Trillion in U.S. Treasuries we could see a divergence between the primary and secondary markets prices/yields for U.S. treasuries.  Let's hope that doesn't actually happen.  For more on the drivers in this area check the article on the following: balance of payments, exchange reserves, current account, etc..

Real estate may also be the lucky recipient of money looking for a home or evidence of inflation hedging long-term.  While the economy continues to underwhelm and talk of debt restructuring abounds, real estate rallies.  In real estate, especially in high demand markets we do have some evidence of inflation where rents and prices have climbed.  Cities with strong economic growth versus those stagnating (urban versus suburban, etc.) are seeing the lion's share of gains.   We also clearly have evidence of money chasing assets (check out this article on Chinese buyers).  Don't get too excited, the asset class (IYR) is still down -6% over the last 6 months.  Whether the recent bounce represents a new leg up for the asset class remains to be seen but the technical picture looks pretty good and on the verge of a breakout.

Deflation continues to be an issue as evidenced by the persistent decline in commodity prices.  Some of the lower prices are the result of supply (energy markets) but that simply cannot be the case for ALL commodities and there are simply very few, if any, commodities where prices are being bid up.  This must be driving central bankers crazy as they desperately try and inflate the global economy.

Taken as a whole, the combination of asset price direction is not very encouraging.  Commodities have been in a multi-year bear market yet to find a bottom.  Emerging market stocks continue to struggle despite an improved U.S. economy and recovery attempts in Europe and Japan.  Bonds are clearly not concerned about rising rates at this point and why should they be.  The Rate normalization the Fed is looking to accomplish can't even lift off so the likelihood of a big-move in short-term rates appears low.  More troubling is the risk-off trade bonds may be signaling.  Long-bond price action could be the result of moving down too far too fast.  If anything you would have expected the bond market to stabilize and maybe move up slightly, not deliver a strong rally.

Here's a list of several leading stocks that are performing well (not recommendations) in the current environment Disney (DIS), Under Armor (UA), Ulta Cosmetics and Fragrance (ULTA), Intrexon Corporation (XON), and Manhattan Associates (MANH).  These are all stocks I have been tracking since they broke-out earlier this year.

As long as we have decent action with leading stocks I will maintain my exposure to Nasdaq and S&P 500 stocks.  Once this part of the market breaks down the likelihood we will enter into a longer-term correction will increase, in my opinion.  All of which should represent a buying opportunity as policy makers cook up another batch of QE/stimulus to reflate once again.  Then again, there is so much money sloshing around in the global economy every time we get a 5% correction money flows in to take advantage of the lower prices.  It has been laugh at by just maybe we will see Dow 30,000 before the next bear market materializes.  In a policy driven market investors have to be prepared for just about anything.

Technical Update on Global Asset Classes, Q2 Earnings Season
27 July 15 12:44 PM | Brian Dightman

There's been a lot of saw tooth chart patterns created recently in many asset classes.  However, we may be in the early stages of some telltale signs on how investors are positioning themselves.

In terms of U.S. stocks, the Nasdaq 100 (QQQ) has clearly diverged to the upside but remains under pressure since topping out on the 21st.  The Dow Jones Industrial Average (DIA), on the other hand, has fallen below support levels but it's the smallcaps that have caught my attention.  The Russel 2000 (IWM) is right at $120 support and a move lower would be a divergence from how the index has corrected since October.  On the whole we are seeing mild divergences and continued weakness in U.S. stocks.

I would watch real estate here.  The iShares Real Estate (IYR) fund is trying to rally after selling off since the start of the year but continues to turn tail and fall further.  Home Depot (HD) continues to hold its ground and even trend slightly to the upside.  CBRE Group (CBG) is also holding up.  Real estate activity in the U.S. is one of the few areas where activity is self-evident so weakness in this asset class could spell trouble ahead.

The selloff in high yield, senior loan and convertible bond market may be picking up steam.  Predictably, high-yield bonds (HYG) seem to be taking the biggest hit so far.

Probably the most interesting look in bonds comes from investment grade long-maturity bonds like the iShares 20+ Year Treasury Fund (TLT).   After selling off most of the year it looks like itmay have found support the last couple of months and be on the verge of a break out.  A continued rally in this asset class could end up being one of the more bearish developments for stocks.

Commodities continue to get crushed, evidence of a global economy performing well below potential.  Sure, some commodity supply dynamics are at play especially in energy markets, but across the board demand appears to be down.  The entire commodity complex (DBA) and the decline in gold (GLD) in particular ring of deflation despite ongoing money printing and stimulus efforts by central bankers.  On the positive, some corporate earnings have definitely been the beneficiary of lower input costs.

In terms of leading stocks, Monday's aggressive sell-off is not the way you want to start a new week.  Stock market trouble in China seemed to carry into other countries so near term it may be policy action out of China that provides direction to stocks globally.  International developed country (EFA) stocks have not recovered well from the Greece sell-off and are close to breaking down technically.  Emerging market (EEM) stocks have already reached  new lows going back 18 months.

Earnings season has turned out mixed so far, with around 40% of companies reporting.  However, the negative influence from the energy sector is significant and may explain why U.S. stocks are trying to hold on to gains amid timid forward guidance overall.  The slowdown in corporate earnings is expected to continue through Q315 and sales through Q415.  The bigger issue is the fewer number of companies beating on sales estimates.  Whether this turns out to be a mid-cycle slowdown or a trend reversal will take more time to reveal. 

Despite Declines, Leading Stock Hold, Top Stories - July 25th 2015
25 July 15 05:59 AM | Brian Dightman

U.S. stocks came under pressure again as selling increased despite a mostly positive week of quarterly earnings reports.  A strong report form Apple was muted by soft forward guidance while Amazon turned in a surprise profit.

Greece banks are open again with strict capital controls but the stock market remained closed.  Talk of a future debt write-down continued a possible longer-term solution.

Starbucks and Chipotle shares responded favorably to their quarterly reports.

Several merger & acquisition deals were announced including deals between Lockheed Martin & United Technologies helicopter unit (Sikorsky), SunEdison & solar panel installer Vivint Solar, St. Jude & Thorac, and Home Depot & Interline Brands.

Visa turned in a solid quarterly report and hopes to complete a deal with Visa Europe by October.

Several airlines reported an increase in passenger capacity led by Spirit with a 30% jump in Q2.  Both United Airlines and American Airlines disclosed share buybacks.  Southwest and Alaska Air both announced expansion plans.

Overall not much changed during the week and leading stocks continue to hold their ground.   For the week the Nasdaq declined -2.3%, the S&P 500  was down -2.2% and fell below its 50-day moving average.  The Leading Stock IBD 50 Index only declined -0.6%.

Performance Of Cash Triggers Caution
11 July 15 05:33 AM | Brian Dightman

It was a wild week for stock investors as markets around the globe were rattled by a default in Greece and a viscous stock market correction in China. 

As the largest economy in the world China is an important player on the global scene.  Policy maker there have already implemented several rule changes and how their stock market resolves over the coming days and weeks will be an important test.  Government intervention currently being enforced put the brakes on falling stock prices for now but whether markets will stabilize on their own remains to be seen.  The situation certainly argues for investing caution in the entire region.

Thursday stock market recovery attempt was disappointing as the market gave back most of the day's gains by the close. Friday's action was much stronger on more news Greece was ready to accept some bailout conditions but volume remained light.

Broad U.S. stock index have fallen to around their 200 moving average except the Nasdaq which continues to show a bit more strength.  How indexes recover from here may give us a much better idea of how the second half of the year will go.  Mutual funds have pulled back on the amount of money they are putting to work according to a report from Investor's Business Daily so a big part of market participation may be starting to wane.

Despite broad market selling pressure leading stocks have held up.  Only a few of the high-quality stocks I follow have hit exit prices.  Take a look at ULTA, DIS, NKE, MAHN, NCLH, & EPAM for examples of leading stocks that are holding up and performing well in the current environment.

HD and CBG were two stocks I mentioned back in May due to their close ties with real estate activity, one area in the economy where we have seen a pick-up recently.  Both stocks remain in a base pattern with a slight downward bias, a development I will keep an eye on.

Economic data continues to be a mixed bag.  The economy had a better go of it in Q2 than Q1 but it remains to be seen how well activity during the period translated into corporate sales and earnings growth.  Next week a variety of S&P 500 companies are schedule to deliver earnings.

The number one factor working against stock and the economy may be confidence.  It appears central planners remain in command for now but a level of tension is building and a break in confidence could have widespread implications for stocks and the economy as a whole.  The stock market looks head 6 months and right now it may be concerned the economy has not actually kicked into a stronger growth trend.  Just last week the IMF lowered their 2015 growth forecast for the U.S.

As a result of weakness internationally, in late June cash (3-month T-Bills) started to outperform international stocks in my model and as of yesterday's close cash is outperforming U.S. stocks as well.  I reduced exposure to international stocks in my Global Growth strategy back on July 2nd and then again on July 10th on the recovery bounce.  The performance of cash versus other asset classes is only one of my risk-management tools; I also use a moving average trigger and so far it has not suggested a bigger defensive move.  But, when cash becomes the #1 performing asset class out of ten, I start looking to hold more in my strategy.

As I recently told clients, how stocks recover can often tell us more about the near-term direction of stocks then the initial selling pressure.  Investors concerned about the level of risk in their investment accounts may be well served to pay a bit more attention to stock market performance as we move further into the summer, or consider my services to do it for them.

Home Depot, CBRE Group & Strength of U.S. Economy
23 May 15 10:53 AM | Brian Dightman

It is no secret that real estate activity, both commercial and residential, is one of the few bright spots in the current economic recovery.  Activity in the real estate market, especially new construction and remodeling projects, has wide ranging impacts on material, transportation, labor and finance industries.

As we enter another year with subpar, almost dismal economic activity, we might be able to discern future economic direction by watching the price performance of stocks that have been performing well in the current environment with strong ties to real estate activity.

Home Depot (HD) has broad exposure to construction markets.  The company reported earnings last week and turned in sales growth of 6% and earnings growth of 21% according to Marketsmith.  The stock has delivered an impressive recovery from 2008 levels.  HD has been consolidating gains over the last 12 weeks following a 7 month rally.

Ideally HD can move back above its 50-day moving average (blue line) on its way back into new high territory.  Recent high-volume selling is of some concern.

CBRE Group Inc. (CBG) provides commercial property investment management, loan servicing and origination, and leasing advice with 370 offices worldwide.  CBRE Group Inc. stock was crushed during the 2008-09 Great Recession.  It's most recent rally started in 2011 and the stock is on the verge of firmly moving into new high territory, something it has not done since 2007.  In their most recent earnings report the company delivered sales growth of 10% and earnings growth of 28% according the Marketsmith.

A recent pullback to the 50-day moving average has provided a support level and big volume on higher prices is an encouraging sign.

While broad indexes like the S&P 500 and Nasdaq continue to hold up and repeatedly touch new high territory, "The second most important indicator of a primary change in market direction", according to Investor's Business Daily founder Bill O'Neil, "is the way leading stocks are acting." from his bestselling How to Make Money in Stocks (4th Edition).

As a discounting mechanism of future earnings the stock market and leading stocks look out 6 months in advance to determine current price levels.  The last few years have been pretty smooth sailing for stocks.  Eventually this cycle will come to an end and leading stocks can offer an excellent early warning indicator to those trained to interpret their behavior.

For those interested in monitoring another encouraging area of the current economic recovery and stock market rally check out charts for NXPI, SWKS, and AMBA.  There has been a bit of a renaissance for chip makers and these three companies have been leading the charge.


Stocks Deliver a Timid Recovery
28 March 15 06:45 AM | Brian Dightman

Stocks spent most of last week under pressure but a late in the day rally Friday produced a positive close for global stocks.  For the week markets delivered the following:

Major Markets Friday For The Week
U.S. Stocks (SPY) 0.23% -2.22%
International Stocks (EFA) 0.26% -0.79%
Emerging Market Stocks (EEM) 0.28% -1.55%
U.S. Bonds (AGG) 0.14% -0.12%
Gold (GLD) -0.36% 1.31%
Oil (USO) -5.88% 4.32%
U.S. Dollar (UUP) 0.08% -0.62%
Data provided by StockCharts.com

In terms of the Dightman Capital Long-Term portfolio, YTD it has returned 2%.  This portfolio is a long-term buy and hold representation of global investments in a roughly 65% stock, 35% bond mix.

YTD Since Inception
DCG LT Portfolio 2.0% 145.6%
S&P 500 0.5% 153.7%
Data provided by ETFReplay.com
Since inception October 1, 2003
Rebalanced annually

Some whispers about a weak Q1 earnings season have started to circulate but analysts are busy adjusting their forecasts so if this quarter is anything like past reporting periods we should be able to get through it without much damage.  Stocks also receive some good (bad news) after the close on Friday.  Fed Chair Yellen suggested the U.S. economy is not strong enough to stand on its own and therefore the timing of a rate hike is not certain.

This is a very important development.  I have long felt the secular trends driving productivity up and prices down are very difficult to reverse, especially without a well thought out and multi-pronged fiscal policy aimed at addressing them.  The age of low interest rates has no end in sight.  Eventually the passage of time has the potential to play a role as labor participants' age but that can take decades, as we are witnessing.  I am not suggesting rates will not tick up in the next year.  Sure, we could rise a bit from current levels but are likely to remain below the long-term averages for a considerable period unless something dramatic changes in our labor markets.

With a new administration leading economic policy in a couple of years we might see the introduction of policy aimed at addressing this area but given the state of our political climate I am not holding out much hope.  No, more likely we are going to continue to experience an economy with many bright prospects aimed at making our lives better but providing fewer employment opportunities.  For those trying to determine how to cope with an this type of labor market I suggest improving your creative skills, problem solving skills, people skills and challenging yourself with difficult subject matter in an effort to demonstrate your cerebral capability.  Do all those things within a strong personal network and you should be just fine.

Stock investors must also concern themselves with the world's leading economy in a near stall-speed growth rate.  It will not take much for the economy to slow dramatically which would likely impact corporate earnings in a way that even analyst can't adjust for, impacting prices negatively.  Right now it appears there is enough momentum to keep the economy and markets afloat near-term but the longer were progress down this underwhelming economic road the closer we may be coming to the opposite of what we have been expecting.  Instead of a liftoff we get a nosedive.

Right now stocks that you would expect to be most vulnerable to a severe pullback are holding up well.  Perhaps the stock market correction continues next week especially in light of recent developments in the middle east (what a mess) but as you can tell from the data below top performing stocks and mutual funds are off to a great start in 2015!

Investors' Business Daily Indexes Friday For The Week YTD
IBD BigCap 20 0.9% -3.4% 10.3%
IBD 50 Index 1.2% -3.6% 10.9%
IBD 85/85 Index 1.2% -2.1% 6.2%
IBD New America 6 Months 1.0% -2.5% 7.6%
IBD Mutual Fund Index 0.6% -2.4% 3.1%
Data provided by William O'Neill & Company

Despite Friday's timid volume level (NASDAQ trading was down 16% from Thursday and the NYSE saw trading decline 14%) price action for IBD indexes was strong relative to the NASDAQ return of 0.57% and the S&P advance of 0.23%.  That type of price action lends support for a continued advance, especially when you consider many of the stocks covered in the IBD indexes are not only performing well, but they tend to be new and innovative companies, a very bright spot in the American economy.

Out Of Money, Again
06 March 15 08:39 AM | Brian Dightman

It's tax season and the U.S. Federal Government is running out of money again - six years from the abyss of the 2008-09 Great Recession.  It has been a difficult recovery and challenges remain but economic growth continues as confirmed this morning by a stronger than expected Jobs Report.  295,000 new nonfarm payrolls were added last month, well ahead of the 238,000 expected by economists.

Economic data throughout this recovery has been inconsistent and underwhelming but it has been improving.  The graph below of Federal Government current tax receipts through Q3 of 2014 may summarize this fact as well as any.

It is clear Federal Government tax receipts have surpassed previous highs hit just before the Great Recession.  I chose to start my look at this data with 1970 because that is just before the U.S. Government removed the gold standard from the U.S. Dollar in 1971.  Once the gold standard was removed Federal budget constraints were removed and new debt could be issued on demand to cover revenue shortfalls of an expanding government.

These charts may tell us more about the future than we realize.  Note the gray vertical lines in the charts.  The shaded areas represents periods where the U.S economy was in a recessions.  The recession in the mid-70's dropped tax receipts by approximately 22.5% (199.6 to 155.9), in the early 80's by approximately 10% (418.6 to 379.4), and mid-90's a paltry 3% (650.9 to 631.4) as shown in the chart below.  Everything was going pretty well up to this point.

Contrast those tax receipt contractions with the first two recessions of the 21st century.

The scale on this graph has been changed to remove the dramatic visual drops of recent recessions compared to those later in the 20th century.  The 2000 recession resulted in an 18.22% decline (1,309.6 to 1,071.0) to be followed by the 2008 recession decline of 28.9% (1,637.1 to 1,163.7).  Two significant contractions don't make a trend but it is worth noting the most recent recessions have resulted in deep tax receipt contractions.

It is important to remember we are early in the U.S Dollar decoupling from the gold standard.  Certainly a great deal of economic expansion has materialize since the dollar left the gold standard and a more "flexible" monetary  environment likely contributed to the expansion we have experienced since the event.  What investors have to be mindful of is how a lack of monetary discipline may ultimately lead to a very negative outcome, perhaps more so than what we experiences in the Great Recession.

Tax receipts have dramatically improved over the last six years surpassing the previous high mark back in 2007.  The economy is improving and the stock market roaring.  Yet, next Friday Treasury Sectretary Jack Lew is expected to deliver a letter to House Speaker John Boehner warning of a potential government shutdown and the need to invoke special measures until Congress increases the debt ceiling. 

Leaving the gold standard in 1970 provided the U.S. government more financial flexibility.  It also provided them the ability to spend without constraint.  Despite the fact that Government revenues are at all-time highs it's not enough money for our government to operate in a fiscally sound manner.  We should all be concerned about the acceleration of this trend. 

As the U.S. economy appears to be on the verge of a long anticipated pick-up in growth be mindful of the next downturn and how it might place the U.S. government in an even more precarious financial position.  Imagine the pressure on the Federal budget with a 25% reduction in tax receipts.  But don't worry too much, another five or ten trillion in debt ought to get us through the bind.  That, my friends, is the world we find ourselves in and should be prepared to address. 

The culmination of these developments has elevated the demands on savers, investors and financial advisors. There are strategies to consider and I would be more than happy to share a few ideas with you.  Balancing the possibility innovation and ingenuity of the American worker will grow the U.S. economy to the point of a sustainable financial position with the risk the Federal government may push the budget conditions of the country too far is a good place to start.  Let me know if I can help.

Is Productivity Responsible For Drop In Commodity Prices?
13 February 15 10:01 AM | Brian Dightman

One of the more perplexing developments in the economic recovery from the Great Recession is the collapsing prices of commodities. During an economic expansion demand for commodities typically rises, sending prices higher. That has not been the case in this recovery.

Metals, agriculture, energy, livestock and cotton - all of these commodities are trading at prices well below levels at the start of 2012.

The economic growth rate coming out of the Great Recession has been uneven, inconsistent and underwhelming. But the economy is growing. We only need to look at the recovery in corporate sales and earnings for hard evidence. Why then are prices for commodities essentially collapsing?

Could it be productivity is also reducing the amount of materials we consume, much like it has structurally changed the employment market? After all, we have gone from mobile phones the size and weight of a brick to those of a paper weight. Are products lasting longer, extending the replacement cycle?

One exception in the general commodity price behavior of this recovery can be found in timber prices.


Timber has seen a rise in price and it is one of the few renewable resources, so what gives? Paper production is one of the primary uses for timber. What is one of the primary areas paper is used? That’s right, packaging. This might explain why timber has been able to see prices rise and would also confirm part of the growth in corporate sales. Could it be companies are selling products which require more packaging material than product material?

An examination of the entire supply chain may shed more light on developments in commodity markets that have led to a reduction in prices. Could it be the process of extracting, refining, and shipping raw materials has gone through a revolution similar to fracking in the energy industry?

I ask this question as the Nasdaq is on the verge of breaching its all-time high, 15 years later. There have been periods during the recovery from the Great Recession where it seemed unlikely the S&P 500 would be able to make that mark. We now look back on that accomplishment.

Central bank policy and its influence most definitely complicates analysis in this economic recovery.  But as innovation advances along with the prices of stocks it is reasonable to suggest fundamental changes in productivity may have played a role in the price declines experienced in those markets at a time of economic expansion.

I will leave readers with one more thought to ponder. An industry very closely related to all of the commodity markets has done very well during the recovery. If you have not looked yet the chart below is from the Chemical industry.


Could it be their advancements have contributed to the price pressures of commodities markets? After all, there are a lot of chemicals used to bring commodities to market.

There are many factors driving the supply and demand of each commodity market. Some are related, others are unique. Despite these differences a large portion of the commodities complex is under pricing pressure at a time where the U.S. and much of the world economy is growing. If the price declines are primarily based on weak demand we can eventually expect a recession to arrive.  And if commodity price declines are any indication of what is in store, look out below. If something else is at work, perhaps this recovery will last a bit longer than some might expect.  Commodities look to be attempting a bottom here and could turn out to be the story that shapes 2015.

Oil and the U.S. Economy
17 January 15 07:52 AM | Brian Dightman

With the price of gasoline at the pump falling some investors are confused about how that could be bad for the U.S. economy.  The topic of lower prices or more broadly, deflation, is complex.  As much as monetary policy makers consider deflation to the equivalent of kryptonite to Superman, the fact of the matter is many prices have continuously fallen and industry still thrives (think televisions).  Intuitively it is reasonable to believe less money spent on energy costs by consumers would lead to spending in other areas.  However, you have to take into account the impact lower oil prices might have on the energy industry as a whole.

The energy sector in the U.S. represents approximately 8% of the U.S. economy.  The shale and fracking exploration booms have increased employment (many are high paying jobs) and capital expenditures in the industry.  Some economists attribute the boom in the energy industry as a major contributor to the U.S. economic recovery since the 2008 recession; it may be playing a more important economic role than many realize.

The price of oil must maintain a minimum level to justify the costs of drilling.  Back in 2008 it was estimated that the equilibrium for oil exploration in the U.S. was around $70 a barrel.  It is believe to be higher today due to the more challenging drilling techniques being deployed (horizontal fracking).

If oil falls below the equilibrium cost to drill explorers shut down production and cancel capital expenditures, both of which are happening as the price of oil falls.

While lower prices at the pump are welcome by consumers, the weak consumer spending in December suggests any saving at the pump is not necessarily being spent.

The more perplexing challenge is trying to determine if the decline in oil is based on increases in supply or decreases in demand.  Generally speaking you don't want to see a decrease in demand.  That would suggest a slowing economy.  In the U.S demand is somewhat flat as a function of better MPG, migration to cities, and telecommuting (the inconsistent economic recovery may also be responsible for lighter energy demand in the U.S.).  Normally energy use would be increasing during an economic growth cycle but technology and structural changes are at play.  Globally we would expect countries like China and India to see a big demand increase based on their large populations and modernizing economies.  However, other explorers are now using the same techniques pioneered in the U.S. to increase oil extraction globally so supply issues are certainly at play.  Over the longer-term low-cost energy should be a plus for the global economy.

In terms of economic growth, for the balance of this decade it will be important for the price of oil to find equilibrium  Ideally that equilibrium will allow the energy industry in the U.S. to continue expanding exploration and the capital expenditures and jobs that come with it.

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