There are plenty of issues for investors to fret over right now, from geopolitical risks to continuing economic woes. But, even so, the market continues to push higher and stretch valuations. The S&P 500 is hitting record highs, albeit without a high level of conviction -- when we zoom in to individual stocks, we see that only around 5% are achieving 52-week highs. Meanwhile, the CBOE Volatility Index (VIX) is at a 14-month low, a sign that investors may simply be entirely too complacent about the various risks -- which include the following:
• The Ukraine situation remains troubling, and European Union-leaning Petro Poroshenko has won the presidential elections -- which is not pleasing to Russian President Vladimir Putin, despite an aide's insistence that the Russian leader respects the wishes of the Ukrainian people.
• China, whose growth kept a good bit of the world at least treading water after the big economic crisis, is now experiencing noticeably slower growth. Meanwhile, the country's credit bubble is deflating: Its 10 largest lenders are reporting that overdue loans rose 21% year over year, to $94 billion, as of the end of 2013. Yet that isn't stopping China from using its powerful navy to bully many of its neighbors, including Vietnam, the Philippines, Malaysia, Taiwan -- and, of course, Japan, with which it has had increasingly nerve-wracking disputes.
• Growth in the rest of the world isn't quite ready to take over the lead from China, either. Eurozone gross domestic product, for instance, was again a disappointment in the first quarter: Growth came in at a meager 0.2% vs. expectations of 0.4%. Germany again posted gains while France stagnated -- and the eurozone's third-largest economy, Italy, contracted.
• On our side of the Atlantic, economists surveyed by Bloomberg are expecting U.S. GDP to be revised substantially lower for the first quarter, potentially to a contraction of up to 0.9%. This should be partially driven by a quicker pace in inventory adjustments, which alone could generate a decline in excess of 1.1%.
• The former high-flying biotech sector, finally, took a nasty hit recently. The largest sector ETF by assets -- iShares NASDAQ Biotechnology Index (IBB) -- lost 21% from its February peak to its relative bottom in April, while many of the larger-cap Internet companies also saw their shares pressured.
Of course, despite all these causes for concern -- and barring an exogenous shock -- the market will likely continue to grind higher in the coming months. Yet this is a good time to consider implementing some sort of portfolio insurance, as an impactful jolt could emerge from an awful lot of areas of the market.
Most don't think twice about insuring a home, a car or even a life in order to protect their family's finances. Why not consider putting aside a small amount of money as insurance for your portfolio? The iPath S&P 500 VIX Short Term Futures ETN (VXX), for instance, is at very low levels right now, and it can be held as a defensive measure. But keep in mind that it can carry costs in the form of contango, so it isn't something you'd want to hold indefinitely.
Even though the market is poised to grind higher, there are situations for which it makes sense to trim back positions and book a profit in the process. One such example is Pilgrim's Pride (PPC), whose shares have risen more than 50% since the start of the year. That's a high-flying move, particularly when compared with those of any of the major market indices year to date. So why trim back now? After all, according to comments from Tyson Foods (TSN), beef prices are poised to move higher in the coming months.
Yesterday Pilgrim's Pride announced a major offering for Hillshire Farms (HSH) -- which had already had a bid from Pinnacle Foods (PF). A Pilgrim's-Hillshire tie-up radically change the mix of Pilgrim Pride's poultry-led business. Not only that, but there are integration issues and synergy realization issues and, of course, the potential for a competing bid from Pinnacle or even an outside one from Tyson Foods. So it seems the best choice right now would be better to ring the register on Pilgrim's Pride shares, particularly if you scooped them up early in the year.
The Pilgrim's-Hillshire-Pinnacle triangle is the latest sign of consolidation in the food industry. In recent weeks United Natural Foods (UNFI) expanded its footprint with the acquisition of Tony's Fine Foods, while in the grocery business Safeway (SWY) is set to merge with Albertsons to create one of the largest grocery chains in the U.S. One potential consolidator that investors should consider -- and one that has been on the sidelines thus far -- is Kraft Foods (KRFT). Kraft not only sports a cash balance of $1.5 billion on its books, but it has ample earnings before interest, taxes, depreciation and amortization to interest coverage.
Lastly, next week brings us Apple's (AAPL) World Wide Developer Conference, which the company is streaming live over the Internet. This seems to suggest that Apple has some big things to announce. While it could be a new iPhone or iPad, or perhaps even a new set of Macs, speculation is running from the much-discussed iWatch to a new software platform that would put the iPhone at the center of the connected home.
Whatever Apple announces, it will mean pushing mobile connectivity beyond smartphones and tablets, and that's a good thing for chip companies such as Qualcomm (QCOM). We own Qualcomm shares in the Thematic Portfolio -- and it is a core long-term holding of ours, given the push-pull of the licensing-and-chip businesses, and in light of the company's prospects for significant growth in mobile connections over the coming years. Qualcomm continues to hike its dividend, as well, which doesn't hurt either.
