Volatility in June as several markets decline sharply

In June, the S&P 500 returned -2.1%, its worst month since January, 2014. For the year it is now +0.2% (excluding dividend reinvestment). Several other markets around the world also experienced difficulties in June, such as the FTSE 100 which was down 6.6% and the Shanghai stock market has dropped nearly 25% from its recent high.

In the US, last year's best performing asset class was REITs and this year they are down 6%. US Treasury bonds have also performed poorly, with the return of the 10-year note down approximately 6% and the 20-year down over 7% for the year. While I don't believe US bonds are in a bubble (how can something that will return 100% of the principle be in a bubble?) I do believe they are misunderstood by many investors who believe them to be safe (in the sense that they can't lose value).

Predicting interest rates is beyond my abilities, but I expect a small move from Janet Yellen before year end. From a bigger picture perspective, many parts of the world are awash in debt, which risks having the unintended consequence of limiting growth, as debt service soaks up funds that would otherwise be used for expansion, consumption, investments and so forth. Broadly speaking I think the world is oversupplied, which is deflationary and will keep something of a lid on longer term interest rates.

A quick recap of Peattie Capital's six largest holdings (in order)

Macquarie Infrastructure Trust ("MIC"): MIC continues to grow operations and free cash, and has stated repeatedly its intention to payout 80%+ of its cash from operations. MIC has already raised its dividend twice this year and I expect increases to continue. Units have returned 19% in 2015 and still yield over 5%.

Sealed Air ("SEE"): SEE continues to execute its turnaround, and has repeatedly bested its own forecasts for free cash growth. At its June 18 Analyst day, SEE outlined its long term growth plans and the strategies to achieve them. Carole Lowe, CFO, stated "we are ahead of plan and well-positioned to do even better." SEE has outstanding management, which is still finding ways to manage expenses and expand margins. For example, SEE recently replaced US debt with lower coupon Eurobonds, which has the twofold benefit of reducing interest expense and providing a natural hedge to overseas operations. Shares have returned 22% in 2015.

KVH Industries ("KVHI"): KVHI is a work-in-progress. Over the past couple years it has completed building its global network, and added middleware and content to provide an "end-to-end" solution for marine satellite customers. In June, KVHI announced a joint distribution agreement with Inmarsat, which should benefit both companies greatly. With twice the market share of its nearest competitor, I think KVHI is well positioned to take share in the growing marine satellite communications industry. Other parts of the business have been lumpy, but appear to be headed into an upswing. Shares have returned 6% in 2015.

Wells Fargo ("WFC"): One of the intentions of the Dodd Frank legislation was to end the era of banks that were "too big to fail". Alas, the remaining banks in the US are bigger than ever, with the four largest controlling the majority of the country's deposits. WFC is my favorite of the group and it is also Warren Buffett's as some 20% of his equity holdings are WFC shares. For the year, WFC has returned 3%.

Royal Caribbean ("RCL"): RCL's stated goal is to double earnings by 2017 to roughly $7 per share (from $3.39 in 2014). With China opening up I think the chances are good that RCL will achieve its goal, although the shares will likely respond to other issues short term such as the price of oil. RCL is down ~4% year-to-date.

DirecTV ("DTV"): It looks like AT&T's ("T") purchase of DTV will go through very soon, which presents the question of whether to hold T shares or sell them. My current thinking is to hold them for income-oriented acounts as the yield is 5%, and looks safe based on what I know today. For more growth-oriented accounts I will likely sell T. DTV has returned 7% through June 30.

Global issues masking improving US economy

At the risk of repeating myself (again) I maintain that the US economy is doing better than is widely believed. Auto sales are strong, home sales are the highest in seven years, and jobless claims the lowest in 15 years. Bank and homebuilder stocks are breaking out and I believe we will see GDP growth above 3% in the second quarter. As far as I'm concerned, there is no recession in sight.

As to global issues, Greece's economy contributes 2% to the Eurozone economy (Source: Gary Antonacci Dow Theory Letter July 1, 2015) and their debt is believed to be held mostly by sovereigns and the odd hedge fund taking a plunge. Unlike the financial crisis, in which all the major banks were exposed to each other, I don't see any contagion here. Simply put, I just don't see Greece being a cataclysmic event, as intractable as the situation is.

To be sure there are trouble spots around the globe which is why now is a particularly good time to focus on US stocks rather than rely on a broad-based asset allocation program. My position is that overall US stocks are modestly expensive, but are still supported by a number of factors: inordinate liquidity and highly accomodative monetary conditions, an active merger calendar, scepticism by the public, and reasonable valuations based on today's levels of interest rates. One old rule of thumb is the "Rule of 20" which states that the market's multiple should be 20 less the inflation rate, which would argue for 18x, slightly above today's level.

It has been a long time since the last meaningful correction in US stocks, and many people are calling for one. However I think that US stocks are attractive to many global investors, and my guess would be that a significant selloff in US indexes is unlikely.

Stock picking continues to shine

Peattie Capital believes that paying the right prices to own the right stocks is a good approach to the market. For some clients, depending on their specific characteristics, I might also overlay a tactical hedging program to protect against material downdrafts which might consist of boxing existing long postions, shorting, or raising cash.

Here is an updated version of recent Peattie Capital recommended stocks, using closing prices from June 30.

This chart shows all PCM's recommendations for the past 48 months showing an average return of +42.3%.

Additional recommendations are available on request. This table does not include speculative
and short sale candidates which are only appropriate for clients who have requested them.