Everybody Is Selling So Get Ready
Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Following the Federal Reserve announcement both bond and stock investors are selling their positions heavily. Cash is the most valued asset class right now because no one is certain of whether or not stocks can sustain a rally after already having a phenomenal year. Then you have the bond market. This is a melting pot because longer-dated bond securities are likely to experience coupon depreciation in a rising interest rate environment.
Investments in bonds and stocks are perceived to be risky. Wall Street believes that there is a bubble in both.
Key macro indicators
The economy is definitely on a strengthening trend. From the looks of the Federal Reserve's policy statement, it's going to cut its open market purchases based on the strength of the economy. Now if the economy is able to report figures that beat estimates, that’s a clear indicator that bond investors will sell out of bonds. This is because it implies that the Federal Reserve will end open market operations that much sooner. If that happens, then the bubble in bonds will have to pop that much faster.
On the plus side, strong economic data is good for US corporations. In a study published by PricewaterhouseCoopers, 41% of CEOs believe that domestic economic growth will be the primary growth driver. If that is the case than investors should look to invest into companies that benefit heavily from a strong economic environment, companies that benefit the most from cyclical bull-markets are the automotives, technology, real estate and financial services.
Over the past three months, the SPDR S&P 500 ETF (NYSEMKT: SPY) has been able to gain in value by around 3.19%. Over the same period, the bond market has lost a significant amount of money. This can be represented by the 7.58% decline in the value of the iShares Barclays TIPS Bond Fund (NYSEMKT: TIP). The reasoning for this divergent behavior is that deflationary monetary policy (rising rates, or end of open market operations) will decrease the demand for interest bearing securities and will cause interest rate to trend higher. This hurts bond investors who bought bonds because rising interest rates will cause a decline in the coupon value of bond securities.
Going forward investors would do well to have a diversified ETF like the SPDR S&P 500 ETF in their investment portfolio. After all, 85% of actively managed funds under-perform index-tracking ETFs. So it would make sense to have some exposure to this ETF because at least you’ll do better than the other 85% who invest in mutual funds.
Where to Put Your Money
Investors should buy Apple (NASDAQ: AAPL). The company’s product strategy is extremely solid right now, and while Microsoft has been poking fun at the loyalty that consumers have to the Apple and Android ecosystem. There’s no denying the fact that Apple is the most profitable company in the technology space. The company is eventually planning to release a phone in emerging markets priced at a bit of a discount. This may help to address the decline in global market share. For now, Apple has some of the highest gross margins in consumer electronics, in the world.
Part of the difficulty with selling Apple products in emerging market economies is that there will always be that person who will fly over to a market where iPhones are sold cheaper, purchase them, bring them back to the United States, sell it at a lower price than retail, and earn a profit from it. Currently that is Apple’s biggest problem when it comes to selling products at different prices in different markets. but in response to this Apple has released software that will prevent this type of dumping activity from happening. This is probably why iOS 7 took so long to launch.
The new iOS 7 comes with activation lock (it’s a new feature). The new feature turns a lost or stolen iPhone worthless, unless the user has an Apple ID. Also, iPhones can no longer be jail-broken within the United States after hauling them in from mainland China, or India. This could be fantastic news, because now the company will be able to release the new iPhone at cheaper prices in different markets and lock in the maximum amount of profit that each market is able to attain.
Apple’s Activation Lock could be the key that allows Apple to unlock the emerging middle class. Proctor & Gamble (NYSE: PG) projects that the middle class will grow by 1.4 billion people between the years 2010 and 2020. 98% of this growth will come from emerging markets, so it imperative for Apple to be able to capture the wallets of those 1.4 billion who will be shopping for smartphones, and are hoping to snag a much better deal than $600.
Proctor & Gamble cost-cutting coming to fruition
I included Proctor & Gamble to the discussion because it’s a globally diversified non-cyclical stock. The company believes that broader macro headwinds will support the growth of this company over the next 5-years. Investors are hoping for some really big surprises in the coming years as the stock is priced at a 19.9 earnings multiple.
The high earnings multiple is driven by cost-cutting efforts. The company believes that it can drive an extra $10 billion to the bottom line through cost-cutting by 2016. Currently the company generates around $10.7 billion in net income. So if the company were to figure out a way to add the extra $10 billion to net income through a mix of cutting costs, growing sales in emerging markets, and developing new products, it could double in value by 2016.
This Motley Fool blogger says that Bill Ackman (activist fund manager) is increasing his stake to $2.2 billion from $1.9 billion in Proctor & Gamble. Bill Ackman is known for helping companies re-organize, examples of this include Canadian Pacific Railway.
I am willing to speculate that Proctor & Gamble’s recent price-cutting strategy was driven by Bill Ackman. With institutional investors like Ackman hoping for greater efficiency from business operations, the probability of Proctor & Gamble meeting its $10 billion in savings is high. The stock could grow earnings by 25% per year, and it will pay a 3.05% dividend yield along the way. The stock is downright cheap relative to its future earnings growth potential.
Investors should stick with stocks, and perhaps consider a position in two of the most lucrative investment opportunities in the mega-cap space, Apple and Proctor & Gamble.
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Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Apple and Procter & Gamble. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!