Transcript from May 2, 2011 Platinum Growth Club Chat
LOUIS NAVELLIER: Hi, this is Louis Navellier and welcome to our monthly Platinum Growth
Club chat. It’s an honor to speak to you folks. Let me just kind of cut to the chase and talk about
a lot of things on everybody’s mind. Obviously the news last night that Osama bin Laden was
killed should cause a relief rally for the market. The best case study for what should happen is
when Saddam Hussein was also captured. The market rallied dramatically that morning but then
kind of fizzled in the afternoon. So what we want to see is we want to see how does this market
stay closed? It started fairly firm but it’s now lunch time in New York and the real key is what it’ll
do in the last hour.
Because oil prices are hitting record highs and gold’s hitting record highs, there’s still a lot of
anxiety out there, I don’t see a lot of underlying strength in the dollar because of what’s
happened. So the market tends to celebrate a weak dollar and tends to shun from a stronger
dollar because a weak dollar creates windfall profits. So overall this is obviously very good news
and so we should celebrate this. But we wanted to see how we close today and we’ll have a
better feel.
But there’s no doubt that when investors are relieved the markets do better. You know we
tend to do better around Thanksgiving because it’s a happy time of the year when we see friends
and family. It’s same for during the holidays. And probably the most recent case study of the
markets doing better because people feel better was last week’s royal wedding. You know in our
Global Growth letter, our average British stock rose 12.42% last week. When we look at British
colonies, Bermuda rose 5.88% and only one stock in India, which is of course a former British
colony, but that rose a whopping 27.9% last week. So you know anything that makes investors
feel good is good for the market.
And so let me get to where we are right now with the market and things on everybody’s mind.
I personally feel good when the dollar is weak because I know how to profit from it. And you
know the U.S. dollar dropped 37% against 15 major currencies between its peak in 2002 and its
trough in 2008. And during that period of time when the dollar dropped 37%, large-cap stocks
went up 49%. Our Blue Chip Growth stocks went up 132%. The big foreign stocks that trade in
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the United States like Baidu Inc. (BIDU) or Novo Nordisk A/S (NVO), they went up 118% from
2002 to 2008. And of course we’ve been making quite a bit of money in stocks like that, AmBev
(ABV), which is the Brazilian beer company. Now we have CPFL Energia SA (CPL), which is the
Brazilian energy company. So you know the weak dollar doesn’t bother me because I know
where to go. The big difference between the dollar’s weakness now and the dollar’s weakness
back from 2002 to 2008 is we’re not certain emerging economies will do as well. Back then,
emerging economies went up 259%. This time around they are not getting up much flow of
funds.
We saw during the Egyptian crisis that about 7 billion left emerging market type funds and
ETFs during one week. And the money didn’t leave the market, it got reshuffled and it went to
quality international and quality large-cap. So I think that’s really where the strength’s going to be
in the market. And of course we’re at that interesting time of year when many people like to “sell
in May and go away.” And that “see in May and go away” philosophy is kind of rooted in many
people’s minds and it seems to be caused mostly by the lack of pension funding during the
summer months and during the fall. Pension funding is predominantly late in the year, from
Thanksgiving to the end of the year. We often get an early January effect and then of course
from Jan. 1 to Apr. 15, this year it was Apr. 18.
So the pension funding season is over and all that money that was coming to the stock market
is now gone so a lot of people are getting nervous about the smaller-cap stocks, which actually
led the way. I’m not that worried but I will admit that I do think things like our Emerging Growth
letter’s batting average will soften a bit in the summer months. And when I say that, you know,
about 4 out of 10 stocks will probably make most of the money. So you’ve got to be diversified
there. When I get to the Blue Chip Growth stocks, I know about 7 out of 10 stocks are going to
make most of the money. The only difference between Blue Chip and Emerging—because both
are fundamentally superior portfolios and both have good currency tailwinds because we have so
many tech stocks and we have a lot of energy stocks lately in Emerging Growth, so we’re
benefiting from the currency tailwind like the big Blue Chip Growth stocks are. The biggest
difference is Emerging will hit more home runs and Blue Chip will have more steady gains. And
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you can even look at the tobacco stocks that we are recommending like Reynolds American
(RAI) or Altria Corp. (MO). They have their big fat dividends that help them be steady and then
of course they have, because they’re a tobacco company and they sell a lot of cigarettes around
the world, they can actually benefit from the weak dollar environment.
So basically at this time of year we usually recommend more international, more large-cap
stocks, a little less maybe Emerging Growth stocks. The other thing I want to remind everybody
is that we have a flow of funds into the market and one of the things that I’m very embarrassed
about is my management company keeps selling more bond products and defensive ETF
portfolios than our normal growth portfolios. And that’s because the stock brokerage community
out there is still very, very nervous and our bond sales are at a record level and we only do
corporate bonds but the reason our bond sales are at a record level is there’s tremendous anxiety
in muni and treasury bonds. Now treasury bonds are obvious. The Fed is out there, for a lack of
a better word, doing their quantitative easing, trying to artificially hold rates down. And it’s not
working. Treasuries had had their worst quarter since 1999 recently. And the muni markets has
been the subject of all kinds of nasty articles in the Financial Times, the Wall Street Journal,
they’ve got all kinds of problems. In fact, I even inherited a big muni bond portfolio from my
father-in-law that passed away recently and we won’t sell those bonds because when you put
them out to bid at a big firm like Merrill-Lynch, they want a 5.5% to 6.5% spread to sell those
bonds. So we’re not going to sell them. We’re just going to hold them until maturity and they’re
not that far out anyway. But it just shows you that there’s anxiety out there because if you want to
sell your muni bonds, you’re going to get hosed, for lack of a better word because of the spreads.
So a lot of money isn’t going into muni bonds now. A lot of money’s not going into treasury
bonds. It’s going to corporate bonds or stocks and that’s really helping the market right now. And
the market is definitely melting up because of that. Now the other thing that is going on is what is
the Fed doing?
It’s widely known that the Fed’s quantitative easing—the second round of
quantitative easing—was designed to cause money to spill out of bonds and into stocks and we
got a very good feel for that last week when Ben Bernanke did it in a historic press conference,
the Fed’s first press conference in 97 years. And essentially what Ben Bernanke said is that he’s
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not going to raise rates anytime soon. He’s going to keep them low for an extended period and
that’s quite shocking because everybody else is raising rates – Canada, the European Central
Bank. They’ve already raised rates in Australia and China and India. I can just go down the list.
So what’s happening is the Fed is acting like an ostrich with its head in the sand, denying there’s
any inflation.
Now the Fed’s favorite inflation tool is called the personal consumption expenditure’s index
and it just came out with inflation of a 3.8% rate. If we measured inflation like we did back in
1990, inflation would be at 9.7%. But because we throw out food and energy and because 40%
of the CPI is tied to real estate and 11% of the homes in the U.S. are unoccupied, basically the
real estate component is pushing down the CPI. But you obviously see the inflation any time you
go to the grocery store or any time you go to the gas pump. So the U.S. dollar’s slide this year
has been shocking. We’re at a 3-year low. It’s accelerated in recent weeks and I don’t want you
to worry about that, I want you to profit from it. And the U.S. dollar is long-term very, very good
for our economy.
You know we’ve already seen a lot of tech companies announce record
earnings and a lot of that was currency conversion. We saw it in cyclical stocks last week like
BorgWarner Inc. (BWA), Caterpillar, Cummings, all announced very strong earnings. We have
Deere & Co. (DE) coming out in early May. And I think you can even take a company like
Microsoft, which I’m not recommending, but you know their earnings were supposed to be down
and all of a sudden they were up and some of it was strength in technology but most of it was
currency conversion. So if I’m a multinational and I get paid in Brazilian , or South Korean wons,
or euros, or Canadian dollars, or Australian dollars, or Chilean pesos, when I convert that money
back to U.S. dollars, that’s manna from heaven. It creates windfall earnings.
So please don’t
stress over the weak-dollar environment. We know how to profit from it; it’s as simple as that.
And those of you that live in the center of the country know that we have a surplus of energy
because there’s more oil than we need in Cushing, Oklahoma right now. In fact, you can’t even
get it out until they finish the pipeline. You know, oil’s going to go up regardless of our excess
supply because it’s priced in dollars and it’s as simple as that. So this weak dollar environment
again does not bother me.
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Now I want to go talk about what the Fed’s doing and then I’ll take all your questions. What
this quantitative easing has all been about is expanding the Fed’s balance sheet. The Fed had a
trillion dollar balance sheet before 2008. Now they have a $3 trillion dollar balance sheet and
they’re not selling distressed mortgage securities that they got back in 2008; they don’t just sell
them and get the money back. No, no, no. They keep the money and they’ll keep buying
treasuries. So the Fed has to enlarge its balance sheet even more. Okay, they’ll do another
round of quantitative easing, but my favorite economist, Ed Yardeni, basically says after the Fed’s
done with the quantitative easing on Jun. 11, it will go to QE2.5, which means it’ll just keep out
there buying. And they’ll be buying treasure bonds, notes, bills, and continuing to manipulate the
yield curve and keeping our interest rates artificially low. So don’t let that bother you. That’s just
what the Fed’s doing.
There is anxiety on economic growth because you know they reported that our economy grew
at 1.8% last quarter. That was a flash estimate. We’ll get two more revision. But that’s because
government spending contracted to 1.1%, so if government spending had been flat, we would
have been at 3%. So it’s not that bad, but we are watching the job market. New claims for
unemployment have been unusually high in the last few weeks and there’s some pessimism with
April payrolls. So the economists are expecting 140,000 so it’s going to be big news for us and
hopefully we’ll have the surprise but basically it looks like high gas prices are making everybody
be a little bit more cautious here.
The other question I’m getting is what’s going on with silver. You know pretty much everybody
wants to short silver nowadays and it is down today. And we have Silver Wheaton (SLW) in our
Blue Chip Growth portfolio. You know SLW has long-term contracts so they are selling some
silver at not these record prices but their forecasted sales and earnings are supposed to be very,
very strong and I’m counting on earnings growth more than anything to drive SLW. But that’s
what’s causing that stock’s herky jerky movement and that stock is what I call a zig-zag stock. It’s
supposed to zig when other stocks zag.
As far as gold is concerned, it and other commodities continues to go higher and higher.
Incredible anxiety this year on crops because of the floods in the Midwest. You know the rivers
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are already high. One of Illinois’ mayors evacuated a town, very stressful. And we’ve had a bad
wheat crop around the world and so what’s going to happen is that it looks like our growing
season is off to a rough start here because of the flooding and the anticipated flooding so crop
prices are remaining amazingly high.
We have a question here, is Apple (AAPL) going to split? I hope they do. Apple’s kind of
funny. You know they like being one of the biggest companies up there. They like being bigger
than Microsoft. I really think they ought to – they’re probably at the point where they ought to buy
more of their competitors and pay dividends, but hopefully it will be sooner rather than later, but it
is still a cult and when they announced all their 4G devices, which I’m now told is speculated for
September and just in time for holiday sales, things should be very, very strong. You know if you
want to order an iPad 2, you have to wait. That’s how bad it’s gotten. Okay, but Apple’s still a
very good stock.
Again, I get lots of sell in May and go away questions. I don’t really want to sell in May and
go away for a variety of reasons. One is if you do that, you’re going to pay 35% taxes on most of
your gains. If you can hold stocks through the bumpier summer months and book long-term
gains, you’ll pay 15% taxes. Obviously, in a pension, it’s easier to trade, because you don’t have
any tax liability. I can tell you I do not sell in May and go away. I just reallocate more to the
large-cap and that’s exactly what I’m doing. I’m not abandoning the Emerging Growth stocks.
They have better earnings than the large-cap stocks. I just have a little higher weight in large cap
right now with some of the big quality international ones.
Okay, Yako from New Hampshire has some questions. I understand selling the F, D and C
stocks, but when it comes to A and B categories are there any clues of various variables of
buying and selling the stocks? Well Yako, I have to admit that if you just held A stocks you’d do
better, but A’s don’t last 12 months on average so I often have A’s and B’s to get long-term gains
in and Blue Chip and Emerging. But if you have just a pension account or if you’re one of those
great Americans that want to pay 35% taxes instead of 15% taxes, because you like to trade
more, yeah, you’ll make more money holding A-rated stocks and you can use that as a criteria.
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The other thing you should be aware of is Quantum Growth stocks are fundamental A stocks and
only one out of every 300 stocks gets that grade.
I’ve got a good question here, do I expect the market to drop when Congress engages and
what’s going to happen to the debt ceiling? Well, the debt ceiling’s basically a tool for one side to
get what they want and obviously the Republicans will agree to the debt ceiling, but they want
more fiscal discipline. And the gridlock is already working. Again, it reduced GDP by 1.1% in the
first quarter. And obviously President Obama wants to downsize defense. He might use the
capture of Osama bin Laden as a reason to downsize defense and get out of Afghanistan faster.
Obviously we’re going to more covert operations with General Petraeus going to take the helm of
the CIA, so it’ll be fascinating to see what happens. But you know, the fact that both sides want
to reduce spending is good. It’s just they’re only about $4 trillion apart. So, Paul Ryan and
President Obama don’t have a lot in common lately.
But you know, we did also have the issue with the S&P downgrading their outlook on U.S.
debt to negative and if the two sides can’t get together, we’re going to lose our AAA-credit rating.
That won’t happen until 2013, so we have to get through the 2012 elections and we’ll figure all
that out.
Okay, now we have a question here from Jim. He says I’m puzzled by the pitch to get
everybody to subscriber and we always refer to a stock of the decade, our most perfect stock.
And you want to know what that stock is. Well, when we do a promo piece, we usually find niche
monopolistic companies that dominate their respective businesses and these are big high margin
companies.
And the one pitch we had was ARM Holdings PLC (ARMH), which is a
semiconductor company out of Britain that has captured a tremendous amount of market share
from Intel. That was one of the stocks in our promo pieces and as everything goes more and
more mobile, they’re one of the big winners.
Okay, Yako asks a good question on Silver Wheaton (SLW). He wants to know where do the
earnings come from? Well they come from selling some silver contracts and their forecasted
earnings are very, very strong. But they are fixed contracts at lower prices and it’s obviously
impacted by silver prices, but they don’t sell at quite these record levels.
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P.J. has a good question here. There are stocks like AREX, ASYS and DDIC that have losses.
And do I see those stocks improving? AREX is obviously an energy stock and it’s benefiting from
high energy prices. Like a lot of domestic companies, they’re very dependent on natural gas, but
I’m very comfortable with AREX. ASYS is expected to announce very good earnings and so I’m
not too worried about that. And DDIC will announce its earnings on Thursday. Now I can tell you
that DDIC’s earnings aren’t quite as high as they were earlier. I want to see how the stock reacts.
But you know that may be a good time to sell the stock in the wake of its earnings on Thursday.
And that’s that.
Richard has a good question here. What is my view of earnings for the third quarter? Well,
it’s still decelerating and it’s decelerating despite low economic growth because we have a more
difficult year, we have comparisons. So what you really want to do is you want to try to find
stocks that can sustain strong earnings momentum in this decelerating environmment. And the
blue chips have hogged kind of the attention because a lot of the tech companies, the semi’s, the
cloud computing companies and the networkers all has very good expected earnings, but they all
had a big currency tailwind.
And then last week we had the cyclical stocks like the Borg
Warner’s (BWA), the Caterpillars, the Cummings, all had good earnings and a lot of them had
higher guidance, so that makes sense of that. But really the key right now is to have stocks
continue to surprise and guide higher. When FFIV came out with its earnings, it popped for two
days. Apple came out with its earnings, it popped for two days. That’s unusual for the large tech
stocks. Usually they pop once and that’s it. Or sometimes they go up in anticipation and then
they get hit with profit-taking. So I have no problem with you taking profits in any stock. In fact I
want you to take profit. Any time one stock outruns another one, please go in there and take
some profits. That was the whole point of our Model Portfolio by showing you optimal share
allocation. The other thing is you look at any portfolios, whether it’s Blue Chip or Emerging or any
letter, if one stock is overweighted from the other one due to recent price appreciation, that
means you can trim it. It’s as simple as that.
And let’s see here, Mike has a good question. At what level do I think oil prices are going to
start to have impact on the U.S. recovery? Oh absolutely Mike and we’re already there now. We
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already have vehicles sales modeling. In the first quarter, retail sales were actually okay until we
got the vehicle sales and apparently we Americans do not like some of these little cars. I know
they’re trying to make little cars cute and fun like the Mini Cooper, but we just aren’t there yet.
And so what happens when gas prices get high, a lot of us say I’m not sure I want buy my gas
guzzler this month. But I want to admit that Ford’s done an incredible job of really, as a U.S.
company, making money on the smaller cars. So what’s happened is it’s already impacted and
it’s not so much impacting discretionary spending at restaurants and things, it’s more on the bigticket items. Nonetheless, durable goods still had a big jump last month and the biggest increase
in 5 months so we do think GDP is about to reaccelerate here. But we’re watching this very, very
carefully. We are definitely near a tipping point where consumer behavior is going to change
here. So we need to – it would be nice if we could have assurance that oil prices will fall and the
most likely time it would fall would be in September when the summer driving season is over. I
would also want to add that Goldman Sachs has said that we have too much oil now and prices
should soften. Earlier, during the Egyptian crisis, GS thought that OPEC could produce more and
they didn’t and demand dropped. But Goldman says oil could spike to $160. The bottom line is
when demand drops after September, we’ll hopefully get some price relief. In the interim, we’re
all looking at the U.S. dollar. It’s going to drop 10% in the next 3 months, then oil’s going to rise at
least 10%. Conversely, if the dollar rises 10%, oil could fall at least 10%. So oil’s priced in
dollars, so you’ve got to watch that factor very carefully.
And then a good question here, what’s up with the GSIT? Well we sold that in Quantum
Growth and it looks like we impacted the stocks so I apologize for that. If you see a stock move
on my recommendation, sometimes you don’t want to sell that day, you might want to wait for a
bounce. Either whether I’m buying it or selling it, but it looks like GSIT is reacting to my sell in
Quantum that I put out on Friday.
Jim asked a good question. Again, especially stock of the decade, I like to load up on that
stock and Jim already owns 140 of my recommended stocks. Well, Jim I want to reiterate what a
stock of the decade is. It’s usually a monopolistic company and monopolies don’t last forever.
I’ve been doing this 30 plus years and the one stock I found that had the longest monopoly I
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could remember was Tyson Foods because 25 years ago they were chopping up chicken and
making chicken chunks and there was very little competition. I guess everybody didn’t think that
would be how we would eat chicken one day. And they’re the big supplier for McDonald’s and so
eventually everybody figured out how to chop up chicken and you know, competition would rise.
But you know when any company has a big lucrative niche, it doesn’t last forever. But some
stocks that have super good niches right now would be of course Apple (AAPL), because it’s a
cult and everybody’s going to have the 4G devices soon so their sales will rise. Whoever bought
stuff from Apple last year is going to buy the same Apple this year. The 4G device is supposed to
come out in September.
ARM Holdings PLC (ARMH) is dominating the chip sets on
smartphones and small devices, so they’re good. BorgWarner (BWA) is an interesting company.
They make all kinds of emission controls and stuff that they sell to automotive companies. Even
in China, they’re getting serious about emissions. They’ve got a serious smog problem over
there. They make these dual clutch transmissions that make your car faster and more fuel
efficient. They have them on Audi’s and Porsche’s, high end cars right now. They make variable
valve train technology so you can get more power and yet be more fuel efficient. So I really like
them right now. I think they’re unusually dominant.
Deere & Co. (DE) is a monopoly. As long as we have high crop prices, they’re going to do
well. Ilumina (ILMN) is a monopoly. If you have cancer they can create a drug just for you to
target it, based on your DNA profiling and that’s what Ilumina does and the cost is coming down
and so that’s quite a lucrative niche. Then I get to some of my other stocks and it’s harder to find
monopolistic companies but we have some here. We do like OYO Geospace (OYOG). They are
very good at fracking, taking seismic surveys at the oil fields and just like we frack to find a lot
more natural gas, we’re fracking now for oil, especially in Texas and other places where they’ve
got a lot of oil. So you know prices are high now. When prices go high, we can go after this stuff
and so their business looks very, very good.
You know Cleveland Cliffs (CLF) has a bit of a monopoly going with coke. The coke that’s
used to make steel and their earnings recently were just stunning. That’s the best way to say
that. LSB Industries (LSB) is a nice little specialty chemical company that has a very, very good
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lucrative niche right now and they have unusually fat operating margins.
Another chemical
company I like right now is Westlake (WLK). Again, very fat operating margins. And then when
we get to our Global Growth letter, we get lots of monopolies because a lot of our companies are
government owned.
So CPFL (CPL) which is the big electric utility in Brazil, BCA which
dominates banking in Chile, another one is PVD. And of course you know about Baidu (BIDU),
which dominates the Internet in China but in our Model Portfolio we’re recommending SINA
Corp. (SINA), which is kind of an up and coming one.
So that’s what we like. We like monopolistic companies that dominate the business. The
most recent company I had that’s very dominant is a company Zagg (ZAGG). They make the
covers for smartphones and things but their covers for the iPad are very popular. In fact, they’ve
got a built-in keyboard with a blue tooth device that a lot of people like. But that niche won’t last
forever, obviously, and competition will rise, but we’re going to exploit these niches as long as we
can. Some of the best start-ups we find are coming out of Israel and things like Magic Software
(MGIC). Israel’s got an incredible Silicon Valley. They’ve got a lot of venture capital and they’ve
got a lot of great start-ups and we’ve invested in quite a few of them.
Okay, we have a question here from P.J., would I reveal my process again? Well, P.J. it’s
very simple. My process is I use Portfolio Grader like you guys do but I obviously know how the
screen filters it. And we like to put about 60% of our portfolio in service stocks, about 30% in
moderately aggressive and 10% in the most aggressive stocks. It’s obvious to you in Blue Chip
and Emerging Growth, because that’s where we break up in the Buy List. In the Model Portfolios,
we’re just going in there and buying the crème de la crème out there fundamentally. We do think
38 stocks is all you need to be diversified and it’s just as simple as that. And you know I own all
these stocks in the Model Portfolios, so I’m very comfortable with them.
But Don down in
Monterey has a question. You want to know what’s happened to VRX. Well VRX was trying to
buy another pharmaceutical company in a hostile bid. And that’s not going to happen. So
everybody thought VRX was going to be able to buy this other company that’s hostile. It looks
like the other company is not going to be acquired by VRX. That’s probably why VRX is down
today.
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So folks, I want to wrap it up here for you because we try to keep these calls around 30
minutes. We have a healthy market environment because we have flow of funds in the market.
The flow of funds is caused by chaos in government bonds, muni’s and treasuries, not so much
corporate. It’s caused by record corporate buybacks. It’s caused by windfall earnings from a
weak dollar and this first-quarter earnings announcement season has been better than expected.
We’ve seen better than expected earnings on tax, reciprocals. There is a common theme that if
you’re an international company, you seem to be surprising more, obviously due to the weak
dollar. You get pain in appreciating currencies and also there’s a growing middle class all over
the world. So that’s what’s really driving the market. So that’s the good news. The bad news is
the bumpy summer months are coming. I have these presidential election slide charts that show
that if we have a correction this summer, the most likely time will be mid-August, early
September. It won’t be now.
It will get bumpy, but it won’t happen until mid-August, early
September and that’s really when my Wall Street friends like to go on vacation. They don’t pay
attention to the market and I guess it corrects due to neglect.
So I wouldn’t worry about the market right now. What I would do is realign your portfolio to
have more of the large-cap stocks, the multi-nationals that benefit from the naturally weak dollar.
It’s a bit of a flight to quality so you can buy something like a Novo Nordisk (NVO) or a lot of the
big Blue Chip stocks. Now a lot of the global stocks have been doing very, very well here
recently. Do not abandon the Emerging Growth stocks. Those things, you know, we were in an
article recently that said that Emerging stock were up 27.7% in February, while Blue Chip ones
were up 32%. But you know Emerging is designed to hit homeruns so you’re going to obviously
pick up some more home runs there but you need to be super diversified. But definitely during
the bumpy summer months I really, really love the Blue Chip and the quality of international
stocks and I think they’re well poised. So this week in Quantum, we have lots of earnings coming
out so we’ve got that to look forward to. So we want to take this earning season, a lot of stocks
will pop and if you’re overweighted you want to trim them and reallocate. And that’s really when
you should do all this. But folks, we appreciate your business very, very much. I always look
forward to these monthly chats and I look forward to talking with you in seminars this week in
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Atlanta and Cincinnati. So I’ll probably see some of you folks there. Take care everybody. It’s
still going to be a very favorable market for us but it’s going to be a little bumpy in the
summertime. Take care.
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