Higher energy costs cloud outlook in Japan

The month of May was a very active trading period for the Capital Ideas portfolio. Due to the choppy markets and macro-events, several positions were liquidated and proceeds were used to reposition the portfolio for future growth.

For example, I sold off the last remaining position in EV Energy Partners LP (EVEP) and reinvested part of the proceeds in Southcross Energy Partners LP (SXE). My aim is to move my energy investments from the slower developing Utica shale area to the much more active Eagle Ford fields. In my opinion, I possibly picked up a more promising equity position without any sacrifice of yield.

In the momentum investing portion of the portfolio, I purchased the Select Sector SPDR Technology ETF (XLK). As the biotech sector has bottomed and the semiconductor stocks have started moving up, I thought I was prudent to buy shares in the ETF.

As with any momentum-based trade, I will pay close attention to price trends and liquidate the position as relative strength or momentum declines.

Due to market rotation, I was able to purchase Sprouts Farmers Markets (SFM) off of its recent high. The company uses low prices on high quality produce to lure in shoppers.

According to reports written by UBS and Wells Fargo, the company sells a comparable basket of goods at approximately 17% below the cost at major grocers such as Kroger (KR) and Safeway (SWY). The savings are even higher when compared with Whole Foods (WFM) and other “healthy” grocers.

In my opinion, the political bonds between Germany and France are weakening. That matters, because I believe these two countries are the supporting pillars of the Euro currency.

With Germany approaching full employment while unemployment in France continues to rise, they are bound to require conflicting monetary policies from the European Central Bank. My belief is that this strain should continue to depress the nascent recovery in Europe.

I had held the Wisdom Tree Currency Hedged European Small Cap ETF (HEDJ) to participate in a regional rebound. With the European recovery possibly in danger, in my view, I decided to realize my gain and look for a reentry point when politics allow it. In the meantime, I am looking for other potential investments in Europe.

I also sold my position in the Wisdom Tree Currency Hedged Japanese Financials ETF (DXJF). I consider the financial sector a possible and primary beneficiary of Prime Minister Shinzo Abe’s campaign, dubbed Abenomics, to reflate Japan with a mix of radical monetary policies, fiscal spending and pro-growth deregulation.

However, I did not anticipate the Japanese court ruling against restarting the country’s nuclear power plants, which will substantially increase energy costs there. In addition, in my opinion, new and higher consumption taxes will depress economic growth as well.

These events cloud the picture in Japan and I sold off my portfolio’s position in DXJF and will look for other opportunities.

While I believe the U.S. markets will close the year higher, the slow American economy presents a real risk to equity investments. Therefore in my opinion the best investment approach will be to concentrate on growth at a reasonable price.

With that in mind I added to our position in American Airlines (AAL) and started a position in Gilead Science (GILD) for the Capital Ideas portfolio. I believe both special situations have reasonable growth prospects and sell at reasonable multiples of that growth.

DISCLAIMER: The investments discussed are held in client accounts as of May 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.

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