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My 10 Stocks for Your Core Portfolio–with the “whys” for each pick
I think a well-constructed portfolio should resemble an onion. (Yes, to continue the analogy, it may make you cry in the short term, but the end result after cooking time is yummy.) At the center of that onion is a core built of stocks with extremely high, risk-adjusted potential rates of return. These stocks won’t deliver the kind of huge gains you can reap from investing in a risky bet–if everything turns out right for that company and its stock. But neither are they likely to crash and burn because something goes wrong at the company. These core portfolio stocks will drop if the market as a whole heads south, but they will drop less and recover faster. These aren’t buy-and-forget, or hold-forever stocks. They can soar to unreasonable valuations at times and an active investor should take profits at some point of overvaluation. (I did a YouTube video recently (you can find it on any of my sites) on when to sell a very overvalued Nvidia, for example.) And they can trade at big discounts to fair value (which is, of course, when the steely-eyed among us will buy) because management has made a mistake or between the industry in which they do business is slumping, or because the market for the company’s goods and services has taken an unexpected direction. At that point, you’ll need to consider selling or adding to your positions depending on your analysis of how long the damage might last and how bad it is. But the point of this core to your stock portfolio is that these are companies that will deliver index-beating results with relatively small risks. Which will enable you, the investor, to plan how to achieve your financial goals with relatively less worry and uncertainty. So, without further ado, here’s my list of 10 stocks for a core portfolio–with the very important “whys” for each pick.
The Fed’ s political problem just about guarantees a pause to interest rate increases tomorrow
They call it the “headline CPI” for a reason. Today all the headlines I’ve seen tout the drop in headline inflation, the all-items Consumer Price Index, in May to an annual inflation rate of 4.0%. In April the annual inflation rate was 4.9%. The month-to-month rate dropped to an increase of 0.1% from April from 0.4% in April. This is undoubtedly good news on inflation. But, beyond the headline number, the inflation picture wasn’t nearly as rosy. The core CPI, which doesn’t include changes in the prices of food and energy, rose 0.4% in May from April. The annual core inflation rate was 5.3% in May. Economists had expected a 5.2% annual core inflation rate.
Saturday Night Quarterback says, For the week ahead expect…
This week brings potentially market-moving doses of news on inflation and interest rates. First up, inflation. On Tuesday, June 13, the market will get the report on CPI (Consumer Price Index) inflation for May. Economists project that, because of falling gasoline prices in the month, all-items headline CPI will show just a 0.2% increase in month-to-month inflation in May and just a 4.1% year-over-year inflation rate. That would be the lowest annual inflation rate since March 2021. The core rate, however, is expected to climb at an annual 5.3%. And then on Wednesday, the Fed meets on interest rates.
New claims for unemployment rise: jobs market may finally be softening
Initial jobless claims rose by 28,000 to 261,000 in the week ended June 3, which included the Memorial Day holiday, according to the Labor Department, Thursday, June 8. The increase was the biggest since July 2021 and exceeded all forecasts in Bloomberg’s survey of economists. The total number of new applications was the highest since October 2021, suggesting mounting layoff announcements may be starting to translate into job cuts.
Schedule for Treasury sales flood gets a little clearer–buy at July peak of issuance?
A flood of Treasury bill, note, and bond sales will drive yields over the next few months as the U.S. Treasury rebuilds a cash account drawn down to the splinters at the bottom of the barrel during the debt ceiling crisis. On Tuesday, the U.S. Treasury clarified the schedule for auctions designed to refill those coffers. The timing, in my opinion, points to a July peak in Treasury yields. (And don’t forget that the Federal Reserve meets on July 26. Today, June 8, the financial markets are saying that there’s a 75.8% chance of either 25 or 50 basis points of interest rate increases at the conclusion of that meeting (some combination of rate increases at the June 14 and July 26 meetings) with odds at 49.9% of just 25 basis points of increased to the Fed’s benchmark rate, now at 5.00% to 5.25%, as a result of the two meetings. I’ve suggested buying the 2-year Treasury on that July peak.
Please Watch My New YouTube Video: Trend of the Week Should You Sell Nvidia?
Today’s Trend of the Week is Should You Sell Nvidia? Nvidia (NVDA) has had a great run. Recently, post-earnings, the stock shot up even higher It’s up 44% in the last month, 67% in the last three months, and 166% year to date. The PE on trailing earnings is 203. (The average market PE for a well-liked growth stock is closer to 25-28.) That makes this an making this extraordinarily high-priced stock. However, the forward PE is “just” 84 times projected earnings per share over the next 12 months. That’s below very hefty projected earnings growth. The current growth projection for the second quarter is at 302%; the following quarter is 286%; and for the year as a whole, 132%. So at 84 times projected earnings this isn’t extraordinarily expensive–as long as those projections come through. It’s very hard for a company, even Nvidia, to maintain this kind of growth for very long. Growth in 2024 is only projected at 34%. If we get down to 50% or 30% growth, the market is likely to wake up one day and feel this is a really expensive stock. So keep an eye on guidance for 2024 as we get closer to 2024. (A rule of thumb is that Wall Street analysts tend to look about 6 months ahead in their buy/sell/hol calls on a stock. For now, hold on. Until you see growth projections start to drop below 100%. At that point, even if a stock growing by 50% a year is an amazing future story, a door might be a good thing to find.
Russia looks to be cheating on its oil production cuts
The Russian government insists that the country has cut oil output as promised. But all the available numbers day that Russian crude oil is flowing at above levels agreed with OPEC. Of course, it’s hard to tell because Russia has stopped reporting key export figures. Russia restricted oil-output data last year due to its “sensitive” nature. And Russia’s Federal Statistics Service stopped publication of crude and condensate output earlier this year until April 2024, following a government decree. That has left oil industry analysts seeking to extrapolate Russia’s crude exports from data such as seaborne shipments. From that indicator it looks like Russian crude flows to international markets are more than 1.4 million barrels a day higher than they were at the end of last year.
Global recession? World Bank says No, but does see global growth slowing
Today, Tuesday, the World Bank said on Tuesday that the global economy would slow this year and next as rising interest rates take a global toll. In its latest Global Economic Prospects report the World Bank projected that global growth would slow to 2.1% this year from 3.1% in 2022. That is slightly stronger than its forecast of 1.7% in January. But that good news is tempered by a forecast that calls for growth at a slower 2.4% rate instead of the bank’s January prediction of 2.7% growth.
Please Watch My New YouTube Video: Quick Pick 2-year Treasuries
Today’s Quick Pick is 2 Year Treasuries. Ten-year Treasuries with a 5% yield may still be a long way out, but Two-year Treasuries now have a yield of 4.5%. Rates may continue to go up in the short-term and the Fed is likely going to raise interest rates again in June or July, but this is a good place to start a position in these Treasuries. You can, of course, get a CD with a 5% yield, but the CD won’t earn you capital appreciation. If rates go down when the Fed stops raising rates, treasury yields may go down, but the bond may go up. We’ll likely see a peak in rates in the third quarter, so at the moment, I think Two-year Treasuries are a good buy.
Even Saudi Arabia’s solo production cut can’t stem decline in oil prices
U.S. oil benchmark West Texas Intermediate fell 0.57% today to $71.74 a barrel and international benchmark Brent crude lost 0.46% to $76.31 a barrel. In spite of a big cut in production announced this weekend by Saud Arabia. The voluntary cut of an extra 1 million barrels a day in July will take Saudi production to its lowest level in years.
My choice for overseas ETF exposure: South Korea ETF (EWY)
Deciding to sell the iShares China Large Cap ETF (FXI) out of my Perfect 5 ETF Portfolio wasn’t an especially tough decision. (See my post on May 31 “China’s economy continues to slow–and the problems don’t look temporary–so I’m selling my China ETF out of my Perfect 5 ETF Portfolio.” But that decision left me with a quandary and a hole in the portfolio. The iShares China ETF was, despite its sad performance, filling an important diversification function in the portfolio. So what asset should I add to give the portfolio the “required” non-U.S. exposure. That’s not an easy slot to fill at the moment. China’s economy is struggling and many emerging markets are carrying the big burden of falling commodity prices.
Saturday Night Quarterback (on a Sunday) says, For the week ahead expect…
Maybe “expect” is the wrong word. Maybe I really mean “look for” as in “look for an opportunity” to buy Treasuries at a short-term peak in yields. With a debt filing extension in effect and default off the table, the U.S. Treasury can now turn to the task of rebuilding its cash buffer. That means selling lots of Treasury bills, notes, and bonds. How many? Well, at least $500 billion with. And some Wall Street estimates put the selling spree at $1 trillion by the end of the third quarter of 2023. The selling begins with the auction of $170 billion in Treasury bills on Monday, June 5. I expect two consequences.
Please Watch My New YouTube Video: How Long Can a Dangerously Narrow Market Run?
How Long Can a Dangerously Narrow Market Run? Certainly not forever. But longer than you might imagine. The Nasdaq 100 and S&P 500 have increasingly diverged. The week before last, the NASDAQ 100 (which includes the largest technology companies), was up 3.15% and the S&P was up only .28%. Over the last three months, the NASDAQ 100 was up 18.88% and the S&P was up 6.14%. For 2023 to date through May 29, the NASDAQ was up 31%, and the S&P was up 10%. NASDAQ tech stocks, like Nvidia (NVDA), are driving the index up and that is pulling the rest of the market with it. The remainder of the market, however, is weighed down by warnings of a tough retail economy, companies reporting negative growth, and inflation problems. At the moment, investors are betting on technology’s big growth to avoid problems from a slowing economy, prolonged high inflation, and the Fed’s rate hikes. The result is a very narrow market, with a small number of specific stocks propping it up. History says, that eventually, the market rally will either expand, with more stocks participating, or it will fail because you can’t sustain an upward trend with fewer and fewer stocks. Narrow markets can run for longer than you might think. But it’s not too early to locate the exits.
Palo Alto Networks pops–and Why?
Shares of Palo Alto Networks (PANW) rose by 5.59% in after-hours trading on Friday. The reason? News that the stock will be added to the Standard & Poor’s 500 index before the market open on June 20. Managers of portfolios that follow the index have to buy shares of Palo Alto to keep up with the change. The move to membership in the index increases ownership of the shares just as the stock is exhibiting extraordinary upward momentum. Shares of the cyber-security company are up 55.68% for 2023 to date as of the close on Friday, June 2, and up 22.81% in the last month. That performance rests on a record of high sustained growth. It’s the “sustained” part that I think the market finds so valuable right now.
So why did stocks pop on the huge surprise in May jobs report?
The U.S. economy added a monster 339,000 jobs in May. Economists had been looking for 180,000 to 190,000 jobs. On the news, stocks rallied. Strongly. The Standard & Poor’s 500 closed up 1.45%. The Dow Jones Industrial Average ended the day 2.12% higher. The NASDAQ Composite added 1.07% and the NASDAQ 100 finished up 0.73%. The small-cap Russell 2000 moved higher by 3.56%. So why did stocks move up?
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