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Good morning,
Markets are called lower this morning. This is what's happening in the markets today:
Minutes released yesterday from the March 13 Fed policy meeting showed it was holding off on increasing monetary accommodation unless the economic expansion faltered or prices rose at a rate slower than its 2% target. The Fed last month affirmed its plan, first announced in January, to hold interest rates near zero through late 2014 as the economy may fail to grow fast enough to continue bringing down the unemployment rate.
Personally it doesn't come as a surprise that the Fed will hold off further quantitative easing at this point in time. Like I've said before elections are coming up in November and it is highly unlikely that the Fed will favor one party over another closer to the election date. The Republicans don't want the Fed to stimulate growth so that they can show that the economy is growing below its long term average. On the other hand Democrats want more stimulus in order to see the economy progress and maintain power of the country.
What did come as a surprise was that Bernanke said that in order for unemployment to continue decreasing and growth to move towards its long term average, there is need of further stimulus in the economy in the form of QE3. So Bernanke said one thing and the Fed as a whole is saying another. Personally I couldn't understand why Bernanke would say such a thing when he knows how sensitive the markets are and they had actually rallied on the news that there is a possibility of further stimulus.
I think the market has become too dependent on central banks and governments. Quantitative easing is like a drug. It gives you satisfaction in the short term though creates complications in the longer term. If the economy can do without further quantitative easing, it is best that the Fed does not interfere with the economy. On the other hand, you can't blame investors for being confused when Bernanke is saying one thing and the Fed as a whole is saying another.
The negativity we have seen in the US session has moved on the Asian markets which are trading lower and European markets are also called lower at the start of trade. I would take days of weakness as an opportunity to get into the markets rather than out of them. Don't forget we have just closed a quarter where the DAX, Nikkel and NASDAQ were all up 20%. It is normal to have a period of consolidation.
Though this is where it becomes tricky. In the first quarter if you were in the market you made money. If you chose the right sectors such as financials and cyclicals, you would have done better than the markets. But even if you chose other industries you would have done well. Though now it becomes more complicated to outperform the market though it is still possible. Now rather than just taking a top-down approach you have to adopt both a top-down and bottom-up approach in order to pick the right industries and the winning stocks in each of these industries which should outperform.
It is my opinion that the sectors that will outperform in Q212 are technology and industrials. From the tech business, I expect to see improved margins despite the slowdown in global growth. When I talk about technology I am referring to the likes of Apple, Intel, Microsoft etc. Industrials on the other hand have not rallied as hard in the first quarter and should play catch up in the second quarter as many stocks are trading on tempting valuations. Check out Schneider, Bombardier, Siemens etc.
Our two top picks remain Priceline and Apple. Despite the negativity in the markets, Priceline was up 3.28% yesterday whereas Apple was up 1.73%. Both stocks are undervalued and this is not only me saying it but the market in general. There is a general consensus that the intrinsic value of Priceline is above $800/share and that of Apple is above $700/share. Results are soon out for both companies and I would strongly suggest that you get exposure to both of these names before the results are out.
The point I would like to make is that despite being in a period of consolidation, there are still stocks which will beat the market. And just because we rallied 20% in Q112 doesn't mean the game is over. The markets will gain further momentum in the second half of the year however in this quarter it is important to pick the right stocks in order to keep on gaining alpha in this market.
Stock to watch: Kinder Morgan (Price $39.73, Price Target $45)
The acquisition of El Paso, by its GP, Kinder Morgan Inc, provides the partnership a significant growth opportunity as well as a minimization of the risk inherent in the KMP CO2 business unit. KMP's relatively high cost of capital from high distribution splits and the scale of the partnership had made organic growth more difficult in a "move the needle" manner. In our opinion, the KMI-EP deal has changed that scenario for the 2012-2015 period. We value EP's pipeline/MLP-able assets at $18bn and expect KMI to gradually drop-down most of them in the next three year or so. The acquisition also provides KMP access to the major shale gas plays where it does not have foothold such as Marcellus and Permian basins. We note EP has $1bn of growth projects on stream in the liquid-rich Marcellus. In organic growth, we believe shale gas projects will add for the growth for KMP in most of the fast growing shale gas plays, including Eagle Ford, Haynesville, Fayetteville and Barnett. We rate KMI buy based on the valuation upside the EP acquisition provides, through synergy with KMP assets and the leverage its offers to the KMP drop-down growth potentials. We value EP's stand-alone pipeline business, excluding EPB, at $18bn based on 13x 2012 EV/EBITDA. Over the next few years, we see KMP and EPB acquiring these assets through drop-down transactions, which would enhance distribution growth at the LP level and the GP offers an attractive leverage. In addition, KMI would benefit from the $3bn NOL available at EP, which can be used fund the taxes requirements arising from E&P assets sales. BUY
For further information on Kinder Morgan or other stocks we follow, contact our offices on 25688688.
Good day and happy trading!
Kristian Camenzuli
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