We’re Staying Defensive Until Earnings Season Brings Clarity

Submitted by Covestor Ltd. as part of our contributors program.

Author: CJ Brott, Capital Ideas

Covestor models: Macro Plus Income, ETF Only

Here comes July, the “summer doldrums” and the start of second quarter “earnings season”. This year’s second quarter earnings reports are already being strongly affected by Europe’s problems. Our position in Ford Motor (F) is a good example.

Although we had hoped that the worst was already in the stock, the company’s warning of higher than expected losses in Europe and South America is pummeling the stock. This may continue until earnings are announced, July 24th.

Unfortunately this will not be an isolated experience. By pointing out that its losses are not limited to Europe, Ford has emphasized that the economic weakness is not limited to that area but is becoming worldwide. With that in mind we have made several major adjustments to our portfolios.

In the Growth and Income portfolio, we sold Freeport-McMoran Copper & Gold (FCX), iShares Dow Jones Transportation Average Index Fund (IYT), PowerShares QQQ (QQQ), and and SPDR S&P MidCap 400 ETF Trust (MDY).

MDY was owned to increase exposure to the mid-cap sector equity market. QQQ was owned to increase our exposure to technology. IYT was a bet on transportation and FCX on the price of copper. In each of these cases a slowing economy is a headwind we did not need to fight.

This left the portfolio approximately 50% in cash. In order not to miss a market rally we committed part of our cash to high beta highly shorted stocks. They are Weight Watchers (WTW), Starbucks (SBUX), Coinstar (CSTR), and Zillow (Z). Because these are momentum plays, stops are close.

In fact we have already been stopped out of WTW. In the ETF Only Portfolio we sold all positions, and held a 100% short position, SH, until the market rally began. We then went flat. At present the portfolio is 100% in cash. When conditions warrant we will allocate the cash into those ETF’s which could benefit from foreseeable events.

At this time we have no ETF’s in mind. We continue to believe the best area to invest in is the US. We had hoped that Asia might have enough economic strength to support itself, avoid recession, and keep a floor under Latin America. We are no longer willing to make that bet. Therefore we will probably remain fairly defensive and await earnings reporting season before making major new commitments.

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