This Too Shall Pass

 | Feb 12, 2018 | 12:30 PM EST
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The market suffered its second week of heavy losses on a continued spike in volatility last week. Investors experienced large losses as the Dow had not one but two days it was down more than 1,000 points and the VIX had the biggest one-day spike in its history. The Dow had two other days when it traded in more than a 1,000-point range.

The other major indices were down approximately 5% across the board. High beta parts of the markets showed deeper losses. The Russell 2000 was down nearly 6% last week and crude oil prices suffered an over 9% decline, which was their worse weekly losses in two years.

The market is now in an 'official' correction, albeit just barely. This is the first time equities have been in this territory since February of 2016. However, investors should take heart with the fact that the economy is on sounder footing than it was two years ago; both domestically and globally. GDP should come in at 3% or better in the first quarter. Investors can also expect double digit earnings growth as global economic activity is at its best pace since the financial crisis. The 40% drop in the corporate tax rate will also be a major tailwind for profit growth in 2018.

My personal view is the market is getting used to a sustainable economic uptick and the accompanying rise in interest rates. A lot of fund managers, bots and trading programs made bad bets on continued low volatility and rates. Those wagers are now being unwound causing substantial rebalancing and huge spike in trading volatility. This too shall pass as my late father was fond of saying.

Even before the corporate tax cut kicks in, we are seeing some solid results from fourth quarter earnings reports. It is in some of these names I have been accumulating stakes in the recent sell-off. I added some shares in FireEye  (FEYE)  -- my stock pick of the year for 2018, late last week. The company beat top and bottom line estimates and turned profitable for the first time. FireEye's migration to the 'cloud' showed solid progress and the stock was also upgraded over at Susquehanna.

Today, I plan to add some shares in LGI Homes (LGIH) that has not reported fourth quarter results yet and I am not worried about the company meeting numbers. The homebuilder has consistently stepped over expectations the past few years. The shares have fallen some 25% from recent highs as investors worry too much about a rise in the 30-year mortgage rate and possible impacts from the capping of mortgage interest expense for new mortgages over $750,000. LGI Homes specializes in entry level homes so it will not suffer any impacts from the recently passed tax reform legislation.

The company will benefit from much reduced corporate income tax expense. LGI has done a great expanding out of its base in the Lone Star State and is now in 10 states. Its footprint covers the Southwest, Southeast and Pacific Northwest -- aka, where the population is migrating to from colder climes. The stock seems to have one of these 'hiccups' every year but soon resumes its multi-year rally. I don't think this time will be any different and I plan to take advantage of these lower entry points while waiting for the storm hitting the market to subside.

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