Heinz

Defensive names like H.J. Heinz (HNZ) make a great deal of sense in the currently turbulent market environment.  While the stock market as measured by the S&P 500 is down nearly -7% since early April, Heinz is up over +4% over the same time period.  This is due to the fact that more defensive names like Heinz often outperform during this stage of the cycle as investors have greater confidence in the consistency of operating performance from a company that sells ketchup and beans versus other firms in the market.

Despite these advantages, the opportunity was taken to lock in gains and exit positions in Heinz on Friday (5/11/12) for the following reasons.

First, positions in Heinz were first established at the market lows last summer on August 9, 2011.  And it has generated strong results in the months since, having returned +15%. 

Second, defensive stocks like Heinz as well as those in the Consumer Staples, Health Care and Utilities are beginning to approach the later stages of their own leadership phase in the stock market.  Defensive stocks assumed market leadership back in March, and while they may continue to outperform on a relative basis during the summer, they may begin to struggle in their own right on an absolute basis if the broader market correction continues to accelerate.

Lastly, Heinz is currently trading at the top end of its range, suggesting now is a particularly good time to lock in gains.  In breaking out decisively above $54 per share to reach new highs, it is now overbought with an Relative Strength Index (RSI) over 70.  The last several instances Heinz approached or exceeded an RSI reading of 70, the stock subsequently corrected between -5% to -13%.

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Looking ahead, Heinz continues to represent an ideal core holding for equity portfolios.  Thus, monitoring for potential reentry points on any meaningful pullback is worthwhile.  Ideal points to watch for consideration include the 200-day moving average (red line in chart above) and the 300-day moving average (green line).

Ultra Petroleum

One of the most attractive long-term investment themes is in the natural gas industry.  And Ultra Petroleum (UPL) represents one of the most fundamentally solid and attractively valued stocks in this space.  And while I remain as positive as ever on this long-term theme, I exited positions in UPL during today’s trading for the following reasons.

Short-term forces have had the natural gas thesis under pressure in recent months, as prices remain in secular decline due to oversupply more than offsetting the substitution effect from high oil prices.  This has caused the stock price of natural gas related companies like UPL to underperform.  While increasing substitution and a slowdown in production will eventually shift natural gas prices into a secular rise, we may still be at least a few months away at this point.  And with the global economy weakening and Europe descending toward potential crisis, now is not an attractive time to hold higher beta names like those found in the natural gas space.

 

The decision to exit Ultra Petroleum on Wednesday was driven by the following factors.  Since the beginning of the week, UPL has posted a +17% gain that included a +7.2% advance on Wednesday alone.  And today’s jump came on trading volume that was three times the average daily volume.  Given that short interest in UPL was running in the low double digits heading into the week, the recent sharp advance has the feel of a short squeeze.  This, of course, is not the foundation for a sustained move higher.  Another factor driving the UPL sale was technical resistance.  During the trading day, UPL advanced up to resistance at its 50-day moving average before quickly pulling back.  UPL has risen into resistance at its 50-day moving average on six separate occasions over the past year, and on each past instance it has failed and moved lower.  These factors along with the Relative Strength Index reaching a bearish peak reading at 50 all suggested that the timing was right to step to the sidelines on this position.

I will likely look to reestablish positions in UPL at some point in the future when fundamentals start to show signs of sustainable improvement and the technical picture is more constructive.

One Step Closer To The Edge

We arrived at vital inflection point for investment markets this past weekend.  On Sunday, voters took to the polls in France and Greece and swept new political leadership into power.  This outcome was particularly important for the following reason.  For the first time since the outbreak of the financial crisis, the people have replaced key political leadership supporting austerity and bailouts with those that have an explicit mandate to reject the status quo.

The change may ultimately mark the beginning of the end for the ongoing crisis.  Of course, the path to the end will take time and is likely to be accompanied by periods of extreme turbulence along the way.

Overall, the election results from the past weekend are signaling an increasing general public fatigue with the problems that continue to overhang the global economy.  People either don’t want to face the problem any more (France), or they just want to take the pain and get on with it (Greece).  While renewed deficit spending in France might provide a near-term boost to growth, it also has the dire potential to eventually send French debt costs spiraling and crush their economy.  But the more critical implications are associated with Greece, as the path may now be set for the country to depart from the euro currency.  This has the potential for a variety of chaotic aftershocks.

The European elections have occurred at a critical time for U.S. markets.  At the end of June, the U.S. Federal Reserve’s latest stimulus program known as Operation Twist is set to expire.  This is important because Fed stimulus programs since the beginning of the financial crisis have artificially inflated both the stock and bond markets in a significant way.  And just as staggering stock market declines occurred almost immediately following the end of these past stimulus programs, stocks are primed for another sharp correction once again in the coming months (the outlook for the bond market is mixed due to opposing forces at work).

For these reasons and more, it promises to be another interesting summer for investment markets.  This backdrop has important implications for portfolio strategy and asset allocation.  As a result, a gradual tactical shift in allocations is likely to occur over the coming weeks as we move into the summer.

Fortunately, a variety of strong investment prospects continue to exist in such market environments.  In addition, particularly attractive opportunities can present themselves during periods of market turbulence.

With this perspective in mind, selected core positions are likely to remain in tact.  Others allocations are likely to be more opportunistically traded going forward.  Lastly, a potentially sizable cash and/or cash equivalent positions may be raised at selected points in time.  This may be done in an effort to sidestep periods of heightened volatility while also standing ready to purchase assets that may become extremely oversold during short-term market liquidations.  I have already been in the process of raising cash since the beginning of the second quarter, and this may continue depending on how market conditions unfold in the weeks ahead.

In the coming days and weeks, I will be making regular blog posts detailing portfolio changes and latest portfolio allocation strategies and perspectives.  For those that would rather not visit the blog, I will be sending periodic e-mails (most likely on a weekly basis) to current clients designed to summarize the content of these blog posts.  I will also be posting additional detailed analysis in articles on Seeking Alpha.

In the meantime, the following are the categories that make up the GWM composite asset allocation at the present time.  While each client account is managed with specific objectives and circumstances in mind, listing these categories is designed to provide the general framework of my latest perspectives on investment markets.  I have provided a brief note on each position and will provide more detailed explanations of each in upcoming blog posts.  And as events unfold in the coming months, I will also announce any changes to this category framework along the way.

Agency Mortgage-Backed Securities (MBS) – Focus of future Fed stimulus programs
U.S. Treasury Inflation Protected Securities (TIPS) – Defensive inflation protection
Long-Term U.S. Treasuries – Stock market hedge, yield
Municipal Bonds & Build America Bonds – Stock market hedge, yield
Gold & Silver – Hard asset protection against crisis, stimulus and inflation/deflation
Tactical – Includes positions held opportunistically as select situations present themselves in stocks, preferred stocks, high yield, real estate, commodities, bonds, currencies, volatility and cash

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.

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