This commentary was originally sent to Action Alerts PLUS subscribers at 11:50 on Feb.11.
U.S. stocks are trading sharply lower on the heels of yet another global market selloff overnight, as Fed Chairwoman Janet Yellen's gloomy, yet ambiguous Congressional testimony sparked a renewed wave of volatility, panic and uncertainty, intensified by a broad-based commodity selloff, continued fears around the health of the European banking system, and prolonged concerns around global and domestic recessionary pressures. Emerging markets, energy and banking stocks are getting hit the hardest, leading the mass exodus of fund flows out of risk (i.e. equity markets) and into safe-haven assets such as gold, Treasury notes and the Japanese yen (all three of which have strengthened).
In the first of two straight days of Congressional testimony, Ms. Yellen re-emphasized the accumulation of risks -- financial market volatility, plummeting stock prices, uncertainty around China's economy, currency and market stability, broader recessionary pressures and sinking consumer prices -- and indicated that the convergence of these risks could impede economic growth. The Chairwoman did not rule out the possibility of negative interest rates, nor the possibility of a March rate hike, leaving market participants hapless, confused and rattled. If anything, the bleak outlook coupled with a perceived lack of conviction served to further obscure what is already an extremely complicated monetary policy backdrop.
Irrespective of what Ms. Yellen says this morning (she recently began her second day of testimony), the rates market has priced a zero percent chance for a rate hike this year; in fact, fed fund futures trades reflect a higher probability of the next rate hike occurring in 2018 than 2017. As a result, we are seeing continued selling pressure within our own portfolio, with shares of Bank of America (BAC) and Wells Fargo (WFC) sharply lower, although BAC has been hit with the brunt of the selling pressure (amplified by concerns around its energy exposure).
As we have stated in the past, while we are constructive on Bank of America long-term and view the stock's extreme sell-off as overdone and historically significant (shares are trading well below recessionary levels on a price to tangible book value, or TBV, basis despite the lack of a recession). We recognize that the market is no longer trading the name on any specific metric, rendering any valuation floor argument irrelevant for the time being. This is why we have refused to buy into the stock's recent bout of wholesale selling.
We continue to hold onto high cash levels and have largely held back from dipping our toes into the market's wrath. On a day when nearly every ticker is trading deeply in the red, we would point to our "One"-rated position, Cisco Systems (CSCO), as a prime example of the type of company we want to own in this environment. Cisco offers a compelling mix of stable growth, diversified end market exposure (which likely helped insulate it from the broader industry slowdown), high operating leverage, robust free cash flow generation, a rock-solid balance sheet ($35 billion net cash) and powerful capital returns (about 4.25% dividend yield and approximately 14% accretion from its $17 billion buyback program which, if applied on annualized basis, represents a total capital return of over 18%).
We will be actively monitoring the market and update our subscribers as circumstances both within and outside of our portfolio develop. We would note that shares of WhiteWave Foods (WWAV) have stabilized after opening down 7%, and as of the time of this publication are trading in the green. We believe this is a result of an initial confusion around consensus estimates (which was blended, with some analysts including currency headwinds in their forecasts, and others excluding the impact, serving to muddle effective consensus estimates) and management's convincing conference call, which we will recap in a follow-up note later today.