Market Observations for 2017 and company recommendations.

Disclaimer:  Note that we have different financial profiles so my actions may be prudent for me but not for others.  So it is important that you understand your position – whether you are a short/long term investor, value, growth, vs fixed income oriented, liquidity needs, etc.  Also, the views below are solely my own and based on my own assessment and research.  Before investing, please make sure you still do your own independent research, be careful not to put a chunk of your money in one stock (invest in increments), and only invest money you will not need for the next 5 years or so. So, buyer beware.

GLOBAL

The overall economics of the US, EU, and other major economies are being overshadowed by political news.  Social media like Facebook, Instagram, Whatsapp are filling the airwaves and accordingly divert people’s attention away from the real economic reporting.

Bottom line is this:

• US still commands a lot of financial influence globally due to its political stability and perceived healthier economic condition.
• China and SE Asian countries will lead worldwide growth.
• Japan is not growing, neutral.
• Europe is still struggling to keep their economies from collapsing.
• UK may have some upside as Sterling is cheap and the rest of EU still wants UK business in my view.
• Rest are also growing, but lots of risks associated with the growth.

USA 

Positives

• Unemployment rate is at its lowest and is good.  The last 4 years have seen more hiring both temp and permanent, but the majority came from temp hiring.

• Major banks are well capitalized and have good balance sheets/financial positions.
• Political atmosphere is favorable for businesses given Trump’s indication of lowering tax rates.  This will trickle down to earnings, higher earnings for companies.  Hence, more investments, share buyback, and dividends.
• Energy is decently priced, both oil and natural gas.  Hence utility and transportation costs will add more margin to the US corporate incomes.
• Average income has seen a slight improvement indicating that there’s growth seen in salaries and wages.

Negatives / Risks

• Low Savings Rate:  It has gone down again.
• High Debt Burden. It is continually going higher, but the current administration is working on a plan to at least balance the budget this year and the next four years.
• The government wants to grow for the sake of growth; hence, they keep on borrowing (it’s like I want a big house, but I don’t have money, so I borrow more so I could get the bigger house.  The prudent person however will say, I don’t have a lot of money, but I can afford a small house.  That way I don’t have to borrow a lot of money).
• There is a slight bubble right now in the stock market, not too much. This usually happens when Republicans are in office. So, keep watch in three to four years’ time. If you see the market going up like a rocket ship, that’s the time to exit the market.

 

I expect to see the US’s growth rate to be better than most of the developed countries’.

Having said this about the US, I believe the following industries will have a higher probability to outperform.  Please be advised that if you are going to take long (buy) positions on the individual names I am about to recommend, note that there will be a lot of volatility, especially for tech companies like FB, Amazon, and Neftlix.  If you can’t stomach the volatility, stick with the ETFs and Funds of Vanguard or S&P.

Discretionary Spending – People will be shopping more.  More people will shop at Amazon, go to Disney, buy more houses, etc.  To take advantage of this buy, Vanguard’s Index is VIEIX (Vanguard Extended Market Index). Or if you are buying it from another account (Scottrade), get the S&P’s Index, XLY.  These are the discretionary funds.  For individual names, I recommend AMZN (Amazon).  It is a juggernaut and it is definitely the Walmart of Internet Shopping.  Anytime you ask someone to get something, people say “check Amazon.”   NFLX is another one.  It is a disrupter of linear TV.  The Netflix originals and international expansion is also growing rapidly and it is showing strong signs of liking.  Risk here is that Amazon is now doing their own originals and may eat away from Netflix’s turf.

Health Care — Despite Trump saying he will repeal health care, it will be hard for him to do so as there are many things the Republican Congress and Presidency like in the bill (pre-existing conditions, 26 years old cap for kids being in parent’s insurance.   Vanguard’s ETF:  VHT.  SP500:  XLV, and Enanta (Ticker:  Enta). Enta may be a really long bet as they are a small company but very financially healthy.  They are developing a lot of high end drugs and are run by solid management and professionals.

Energy —  It is still undervalued.  I still like Chevron or (Ticker: CVX),  VTTI Energy Partners (Ticker: VTTI), and Vanguard’s VENAX.  The Alerian MLP (AMLP) is also a good bet for oil pipelines . It gives about ~7% dividend at current prices.  FSLR or First Solar is really undervalued given that Trump is not a big supporter of alternative energy.  While this may take a longer time to go up again, I believe that the stock is undervalued and has a good credit quality.  If you like direct exposure to Oil, buy USO, which is the oil ETF.

Technology —  This one might cause some raised eyebrows from me as I don’t normally invest in Tech, but I do think Facebook (FB) is still undervalued. No matter what others say, it is now a media company.  According to my pricing, if you keep it for the next two to three years it should appreciate from $135/share to $210/share.    The risks for FB is and has always been security and if a number of people start putting junk there that no one can start filtering.  Remember myspace.com?  Yes, that is what I mean.

The below are my current observations that may stay as is for the next 6 to 12 months.  However, the current presidency can easily change policies that may substantially impact outcomes in certain industries leading to a different set of results.