The last couple of days have not been a sweet ride for the blue chips. I think this quote from JP Morgan’s chief equity strategist sums up the “big money” view. I don’t agree with it but you would be foolhardy not to watch out for trains crossing the tracks. ”
US equity strategy update from JPM’s T Lee – we see the shift out of defenses and into cyclicals continuing. We still see the early 90s as the best analog for today and in the ’93-’94 period of abrupt rise in yields saw a progressive collapse of Defensive sectors. The last major bond market surprise was from October ’93-YE ’93, which saw the 10-yr yield rise nearly 100bp to 5.8% and 300bp by the end of ’94. We see positive bias to our YE target of 1715 and believe a Cyclical OW, while non-consensus, has support short-term and longer-term. We have identified 19 cyclical stocks with reasonable valuations. The tickers are: ACTG, APOL, UFS, SYMC, CG, CA, BRCM, CF, AAPL, APO, VRNT, OZM, EXPR, ORCL, OSK, ATK, RGA, M and DFS”.
Instead I think the market is giving you a shot at buying the very names that have led this rally and will continue to find safe harbor investment. You have to buy on weakness. Although not there yet, we have sold puts on PFE, VZ May 49, June 45, PFE June 28, July 27, T June 34,35. We own PFE here thinking that the spin-off of ZTS in June could provide some pin action on the name as it has pulled back some already. The PFE ZTS spin-off is very interesting to us and we are continually thinking their could be an arbitrage situation. It seems though that a lot of the major houses have dropped coverage on PFE because they are engaged in the separation of Pfizer from its recent IPO Zoetis. Spin-offs can be great investments and ZTS is the giant in the pet pharmaceutical business. Pfizer is planning on exchanging their stock for ZTS at a 7% discount. As good as ZTS is, it’s hard to get too excited about giving up PFE here with a 3.3% dividend yield and AA rating. PFE has been on of the best performing stocks out there over the last two years.
Other names we are watching are Kellogg, looking to get back into DRC (although not a blue chip), , XOM, ABT, but they are far away from where would sell puts.