Last week’s 2.25% drop in the Dow was hardly a bad week by any standards. Yet it was the Dow Jones Industrial Average’s worst week this year, with investors ditching stocks as longer-term Treasury yields rose to two-year highs. That’s just a testament to how bullish this market has been. Things did seem to change last week, though. The warning signs were certainly there. The market was technically over bought. Profit taking was almost inevitable as investors were near unanimously bullish which is just another way of stating that everyone is all-in.
While it was a poor week for the bulls, there was real carnage in the interest rate sensitive sectors, like REITs. Real-estate investment trusts made up half of the top-10 losers. Our position in beaten down commercial REIT, American Capital Properties was a loser even though it had significant insider buying and was already trading at a 52 week low. Commercial real estate pickup usually lags residential by 18-24 months. If the economy is picking up this name should work. This was a classic case of the macro ruling the micro. Our large position in homebuilder, Pulte Group was one of the best performers for the week. PulteGroup (PHM) gained 2.3% to $16.28.
What the market giveth, it taketh away. Tobacco was a particularly poor performer. There were no obvious headlines except for the rise in interest rates. The only comment I noticed was Morgan Stanley attributing electronic cigarettes for shaving real cigarette sales. Lorillard was a poor performer yet it has the industry leading e-cigarette brand, Blu. I continue to believe electronic cigarettes will ultimately grow the market not shrink it.
We threw in the towel on Apache. Apache has massive operations in Egypt deriving 20% of their operating profits there. Hundreds of people died in street clashes in Egypt, buildings burned and polarized sides dug in. The initial euphoric reaction of the Egyptian stock market on the overthrow of Morsi was wrong. This week ended with financial markets closed and and a general country wide curfew. Chaos is settling in. Numerous multinationals ordered the closure of their operations in Egypt. The chances of a near term deal to validate the value of Apache’s Egyptian oil assets are now slim to none. We can certainly be accused of throwing in the towel when we should be buying but Apache really did not sell off that much. All I can see now is very limited upside with 10% downside risk. It just wasn’t worth holding. We don’t like following the herd but getting caught in the stampede is worse.