Get Out Before a February Correction
U.S. stocks have been outperforming as of late, rallying since late August, with one shallow pullback around Thanksgiving. And while some emerging market stocks have pulled back, with the iShares MSCI Emerging Markets Index (NYSE: EEM) down a relatively modest 1.6% year-to-date, we have consistently made some great profits in emerging markets ranging from China to Brazil, Singapore to Chile, and India to Indonesia.
However, as we head into February — historically the second-weakest month for the U.S. market — we are ripe for a correction. And not just in U.S. stocks. We’ve seen some weakening in select emerging markets due to inflationary pressures that have caused a policy response. Although I’m bullish on emerging market stocks, I do believe that there are certain global stocks that are not worth hanging on to. In the immediate-term, I think we could continue seeing a wider sell-off in select markets as traders take profits and rotate capital into what they perceive to be less-risky assets. Today, I’d like to share six global stocks to sell before the February correction.
Stock to Sell #1 – Youku.com (YOKU)
There is nothing wrong with China, other than an inflation problem that will keep the central bank in aggressive mode a little bit longer than investors originally thought. I’ve gone on record recently saying that I think that China’s inflation concerns, while certainly something to take seriously, will be handled properly by China’s policymakers, and in fact, we’ve already seen some evidence of this in the fact that the trend in consumer inflation is coming down.
However, in the near-term, these inflation concerns may cause some Chinese high-flyers to come under pressure, while creating a buying opportunity in other stocks. One such Chinese high-flyer that is ripe for a larger sell-off is a recent Chinese IPO Youku.com (NASDAQ: YOKU). This is an Internet television company in China whose platform enables consumers to search, view and share video content quickly and easily across multiple devices. While revenues are growing at a rate of 143% last quarter, this Chinese company trades at 74 times sales, and the valuation is too expensive even for such growth. Avoid YOKU.
Stock to Sell #2 – General Motors (GM)
It was Jim Rogers, quoted by Marc Faber, who is supposed to have said that “you can short GM at any price.” Well, he turned out to be right — as you well know, the old General Motors’ (NYSE: GM) share price went to zero. On the other hand, the new GM is much smaller and leaner, and it has been rallying of late, but I don’t believe that it’s a buy here.
GM now sells more cars in China than in the United States, so it’s being put on investors’ radars as a potential China play. What’s even more interesting is that GM is selling cars faster in the United States and China than Toyota. Toyota’s U.S. sales slowed 0.4% to 1.76 million units last year after record recalls for defects related to unintended acceleration. Toyota’s China sales jumped 19%, and they trailed GM’s 29% surge in the world’s largest market. So why be cautious on GM if it is doing better than archrival Toyota?
Chinese car sales are forecasted to slow. This year sales growth is expected to rise just 10% — a sharp drop from 2010’s 32% growth. This is due to several factors, especially the end of tax subsidies, government policies to cut back on traffic congestion, and license lotteries that reduce the number of new vehicle plates that Chinese cities issue. Without a license plate, you can’t drive in the city. With record thin margins — a profit margin of 1% and an operating margin of 1.6% — we may see the share price turn weaker in early 2011, despite the recent perkiness. Avoid GM.
Stock to Sell #3 – Banco Santander (STD)
Banco Santander (NYSE: STD) has rebounded with the bailout of Portugal, but all signs point to an increasing stress in the Spanish financial system. Spanish 10-year government bonds saw their yields start rising again after the Portuguese bailout, currently yielding 5.44%; the high for the year is 5.58%, at which point they traded at record spreads to the relevant German bunds. Spanish credit-default swaps are rallying, currently quoted at 266 basis points with a yearly high of 364.
Santander is a very large bank that looks cheap on book value basis — but this is misleading. This is because it carries loans and European sovereign bonds on its book that are probably not marked down with the sell-off in peripheral euro-area bonds and overall deflationary shock in most problematic countries in Europe. Avoid Santander as I doubt that we’ve seen the lows for 2011 yet.
You should distinguish between STD and the locally-funded, publicly-traded subsidiaries in Brazil and Chile: Banco Santander Chile (NYSE: SAN) and Banco Santander Brazil (NYSE: BSBR). SAN and BSBR also have separate corporate structures that do not allow the losses of the parent to affect them. Those two banks, in contrast with the parent, look like very interesting buys on any pullbacks.
Stock to Sell #4 – Deutsche Bank (DB)
Deutsche Bank (NYSE: DB) has similar issues to Santander, but even bigger. The bank has significant exposure to all PIIGS government debt, so it has seen notable weakness with the rolling crises in Greece, Ireland and Portugal. Since a funding crisis in Spain may be only a matter of time given how Spanish government bond yields are pushing higher, Deutsche is likely to be weak along with Spanish banks like Santander
Spain is much bigger than the other problematic PIIGS — its GDP is twice the size of Greece, Portugal and Ireland combined. If the Spanish government faces a bailout situation, all PIIGS government bond markets will weaken, disproportionately affecting Deutsche Bank as its European exposure is simply too large. Avoid Deutsche Bank.
Stock to Sell #5 – Freeport-McMoRan Copper & Gold (FCX)
Freeport-McMoRan Copper & Gold (NYSE: FCX) is a huge copper producer and is on our list of stocks to avoid only because it has done too well. Copper just made an all-time high and it has been correcting some due to tightening measures in many emerging markets seeing rising inflation. More monetary tightening in the emerging world, which is the fastest growing incremental consumer of the metal, will surely cause a bigger correction in copper prices and FCX.
I think this will actually be a correction to buy, but I’m not convinced that the full correction has run its course yet. For example, last year when copper prices corrected from $3.68 to $2.72 amid the Greek crisis — and I think we could have a similar crisis in Spain this year — FCX corrected from $86 to $55. A similar percentage move cannot be ruled out this year.
I am hopeful that the European situation will be resolved and we will have another buying opportunity in FCX, but it is too early to step in at the moment. Avoid Freeport through February or until the correction runs its course.
I like palladium for the long haul, but I think we need a correction to initiate new buys at this point. My reasoning is similar to Freeport’s — we have had a strong run in the metal and any continued weakness in the commodity space is bound to produce a correction, especially given that it is the only precious metal that has not sold off. The relative strength comes because China has high demand for catalytic converters, which require palladium. In addition, I expect that Russian stockpile sales are likely to be less this year than in 2010.
Still, palladium is known for its sharp moves as it is relatively thinly traded. Since I see a weak February for aggressive assets like commodities, we may see sharp correction in palladium simply because it has done very well. Many futures trades are sitting on large gains in palladium futures and have likely placed protective stops under the market price. When they get activated, we will see a sharp correction (similar to what we see in silver at present). Avoid palladium and ETFS Physical Palladium Shares (NYSE: PALL) for now, but look to buy a correction due to strong demand from China.