This week I’d like to coddiwomple through making mistakes and staying data-dependent to gain a...
5 Railroad Names Chugging Higher
07/12/2011 9:00 am EST
Today, Kate Stalter talks with Paul Maher of Santa Fe Wealth Advisors, who discusses how technical analysis guides his view of the market, and reveals some railroad-industry stocks that have been showing strong charts even in volatile trading conditions.
Kate Stalter: We are talking today with Paul Maher. He’s an independent financial advisor with Santa Fe Wealth Advisors, and that clears through Raymond James. Paul is in Santa Fe, New Mexico. Great to be with you today, Paul. Thank you for joining us.
Paul Maher: Well, thank you for inviting me, Kate.
Kate Stalter: The first thing I wanted to ask you about: Give us your overall take on the market. What particular factors these days do you think individual investors need to be aware of?
Paul Maher: On an overall view, which is the way a technical analyst sort of starts the day off, I think that the risk in the marketplace is actually high.
The global risk seems to be more significant than the domestic risk, and the reason I draw for that is that the euro is deeply troubled. We’ve been watching Greece’s inexorable path toward default, and you’ll have to accept that as my opinion—but we’ve watched Greece in the past, and they have a history of defaulting. I have a very strong feeling that that will reassert itself.
In the process of evaluating this risk, we’ve learned that the US exposure to Greek debt is modest, and may already be built into the reserve capacities of the involved US banks.
There’s an undertone to that. That kind of means they’re holding extra reserves to cover that Greek debt mark-down. Again, I think it’s inevitable. That can be, and is thought to be, as high as 66%.
It made some evaluations against other mark-downs of people like Argentina and Venezuela, and they’ve come to the conclusion that the debt mark-down is going to be pretty significant when Greece does default.
Now, that means all of those European banks—and other banks around the world—that hold so much debt, are also trying to build their reserves to encompass that—and I’m using the word again—inevitability.
In my opinion, it’s slowing European growth on a greater scale than it is US growth. The money seems to have to go somewhere, so we’re seeing it end up here in the United States—which isn’t all bad, by any stretch of the imagination, but I’m seeing a form of tension away from the mean.
That shows me that there’s more money there than is being thoughtfully placed. We look at certain characteristics on the charts that become the mean, and when any security or any characteristic of securities, any asset class, pulls away from that mean, there is a natural tension.
And that tension is to revert to the mean—and the further away they are, the greater the tension, the greater the adjustment.
Kate Stalter: So perhaps you're referring to the US indices that have scored some big gains in the past couple of weeks.
Within that, Paul, what are some of the sectors and industries—perhaps global regions, though you’ve just alluded to that—that you see as showing particular strength at this moment, and why do you see these as being in favor?
Paul Maher: Well, I find that to be very telling. The thing that you need to know about technical analysis is that it’s not really a short-term analysis.
We tend to include nothing shorter than ten-week analyses, to as far as 40-week analyses, in forming these scores, for what sectors, what sub-sectors, what micro-sectors are doing well.
When you look at the favored sectors, they are all defensive. They are health care, consumer staples, and—on an average basis, rather than being favored—utilities. And then the other seven are unfavored on a broad economic scale.
Kate Stalter: Now, you have mentioned, of course, that you’re looking at the European market, which is showing particular weakness right now. Anything else that you’d like to mention that individual investors should avoid at this moment?
Paul Maher: Well, here is kind of an analysis that I’d like to throw out at you. I have recently reviewed a study (from Dorsey Wright & Associates) that showed all of the asset classes, looking for the differential between the top-performing portions of an asset class and the bottom-performing.
This study went back to 1998, and compared the beginning of 1998 through the end of 2010 for the first six months of the year here, in our domestic equity. Well, actually, they took into account all positions: US equity, global equity, fixed income, currency, and commodities.
They discovered that the first six months of the year saw dramatically lower differentials between the top-performing security in an asset class and the bottom-performing security in an asset class.
A couple of quick examples to give you an idea—and this is across the board; the numbers are a little different, but the dramatic nature of this differential is the same. Domestic equity, on a 13-year average, the differential between the top and the bottom positions is 105%. In the first half of 2011, it has been only 31%.
On a completely uncorrelated level, fixed income typically has a 13-year average differential of 38%, and in 2011, it’s only 10%.
This leads me to believe that, particularly in the thinly traded markets that we’re seeing—not just because it’s summer, but on an all-the-time basis now, since we had the big credit crunch—we’re seeing a much quicker tendency to pick off profits, and a much lower tolerance for losses. That is absolutely across the board.
At the end of the day, I’ll open up a big screen, set apart by sectors, so that I can see kind of even strange color patterns, and we are showing sea changes on a daily basis. Everything rises on one day, and everything falls on the next.
They are all going up and down together, and it is very strange and possibly related to some of these computer programs, but certainly related to a lower tolerance for loss and a quicker taking of profit.
Kate Stalter: Within the context of all that, Paul, what are some funds, some stocks, some instruments that perhaps could be worth a look on the part of individual investors?
Paul Maher: Well, you know, I’ve got a real big category I want to throw out at you. We are seeing an extremely clear tendency this year for growth to outperform value, and it is significant.
In all three capitalization classes, the growth has just far outstripped value. In large caps, for example, growth was almost up 1% in the second quarter, using the SPDR S&P Growth ETF (SPYG). The value, which is the SPDR 500 Value ETF (SPYV), was down 2.29%.
That’s in one quarter, a gap between growth and value of 3.3%, and it just gets more exaggerated as you go to Mid-Cap and to Small-Cap. Small-Cap growth is up over 11% on the year, and value is up 1.69% on the year.
So, my first place to look is at growth investing.
Kate Stalter: Okay. Can we drill down any further and talk about some more names to take a look at?
Paul Maher: Oh, yeah. I’ve got some fascinating things.
First off, I want to just share with you that one of the key characteristics of technical analysis is the fact that we evaluate risk and opportunity. So, given all the studies of preservation of capital, which contributes so much to long-term growth—so much more than any other characteristic to long-term growth—I’m watching out for risk at all times.
So, I’m looking for really good ballast. Depending on the client’s risk tolerance, I’m going to have more or less of a brilliant asset allocation portfolio called Permanent Portfolio (PRPFX), which is just beautiful across 20% gold, 5% silver, 15% Swiss francs...just look these things up.
This fund has been around for a long time, and it is just an absolutely brilliant asset allocation.
Very interestingly, in the entire financial sector, there’s only one area that is favored, and that’s real estate. Sounds strange, but it’s real. I’m using REIT positions—actually, a preferred REIT Mutual Fund from Forward Select Income (KIFAX)—that gives my clients' dividends (or interest, as it were) close to 9%, while growing real nice and steadily.
So, there’s my ballast. Depending upon the client’s objectives and tolerance, I’ll have more or less of that.
Given the nature of what we’re doing right now, we’re watching these markets be very tightly held together. I don’t see necessarily a lot of rationale to it, other than that corporations are cash-rich and very profitable, and are becoming highly productive off of a reduced workforce, which works entirely in the favor of the bottom line. So, even in a small economic growth process, these guys are making money.
So, then, I’m looking for the opportunity, and in technical analysis, we have processes that review relative strength. What is an asset, as compared to, for example, the S&P 500? We prefer to use an equal-weighted index so we can see if it’s better than the broad market.
We also look at its peer group. What is auto parts and tires doing? Is there something in auto parts and tires that we really love, that is doing better than its peer group?
An example would be AutoZone (AZO). AutoZone is just doing a great job against its peer group. It has all of the technical attributes and is an excellent thing to look at.
Again, I’m going to avoid making recommendations—and of course, this isn’t any solicitation—but these are things I’m using, and they’re working for my clients, so I’m absolutely thrilled.
And it isn’t necessarily by sector. It is really drilling way down and looking at sub-sectors, and even, in some cases, micro-sectors.
And in a beautiful area that I’m just thrilled by, we basically know that transportation’s a leading indicator. You would not believe the performance of the railroads.
I mean all of the railroads are excellent things to look at: Union Pacific (UNP), Canadian National Railway (CNI), CSX (CSX), Norfolk Southern (NSC), Kansas City Southern (KSU). They are all excellent opportunities, even going so far as Trinity Industries (TRN).
Trinity Industries, besides building railcars, builds the uprights for wind turbines, and they are the world’s leader in those uprights. So, a little side business puts them into a green environment and gets them some future.
Actually, it is my belief that the last drop of fossil fuel will go into some sort of a hybrid locomotive that’s moving raw materials and finished products down the very level infrastructure that railways are made of. So did Warren Buffett when he bought Burlington Northern Santa Fe. He was thinking very long term.
Kate Stalter: Well, Paul, thank you so much. These are some great names that you’ve shared with us today, and some great ideas, and I really appreciate your time today.
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