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Bear Market Watch: Inflation + Stock of the Week

I think the best label for my current market outlook is “cautiously optimistic”. Meaning the stock market is bullish til proven otherwise. Especially true when so many of the economic indicators are quite positive. However, when you are riding the longest bull in history, it pays to sleep with one eye open looking for early signs of the next bear market.

I believe that inflation poses the biggest threat to this bull market. That is primarily because it has proven to be one of the leading causes of recessions and bear markets.

The Econ 101 version of this relationship goes as follows…When consumers see inflation heating up they then rush out and buy more of what they need for fear of even higher prices in the future. This initial burst in economic activity is followed by a decline in purchasing behavior which blossoms into a recession.

A secondary effect of higher inflation is that the Fed will raise rates in hopes of taming the rise of prices. At a certain point these higher rates can make bonds look like a more attractive investment than stocks leading to a decline in share prices.

OK, that is the backdrop of why we need to be avid inflation watchers. Now let’s see what the tea leaves are telling us on this front. The best place to see this is in the Producer Price Index as this is a leading indicator of what will show up in the Consumer Price Index.

[Chart]

The trends in this graph should be obvious. Inflation has been going higher and we have been above the Fed’s 2% target for a while, which is why they have been on a rate hike path and will continue to be vigilant on this front.

Now the key question: Is inflation a problem for the economy yet?

No. It is still early in the game for inflation. And with bond rates coming off historic lows, it will take a while longer until Treasury rates are truly more attractive than the expected rate of return on stocks. Yet given the rising trends it says that prudent investors need to stay alert of these developments because at some point in the future it may tip over into a bear market signal. I will continue to provide updates on these trends in this commentary.

Bonus Trade Ideas

For those who want to profit from rising inflation, then I have 2 good trades to consider. First, realize that rising inflation = rising bond rates = lower bond prices = shorting bonds as the route to profit. With that in mind consider these 2 ETF trades.

  • Buy TBF which is a short of the US Treasury long bonds. This looks especially attractive now as the 10 year Treasury is breaking above previous resistance at 3% yield.

 

  • Short IGOV which primarily holds European government bonds. Unfortunately there is no TBF equivalent inverse/short of the European bonds. So you just have to short this ETF yourself, which can only be done in marginable brokerage accounts. This trade may have more upside than TBF since the rates in Europe are so much lower…and thus so much more to come up as the ECB unwinds their extensive Quantitative Easing programs.

Stock of the Week: Cypress Semiconductor (CY)

The company makes a broad range of semiconductor products. The segment that is getting the most attention is the Wireless IoT (Internet of Things) business that is expanding faster because of more usage in the automobile industry. In fact, this is what 5 Star analyst Raivindra Gill from Needham had to say:

“We reiterate our Buy and $23 PT following another beat and raise quarter. Wireless IoT is on track to grow 16-18% Y/Y as auto increasingly accounts for a larger portion of the business and CY expands its platforms to new products. As we thought, CY raised its NOR flash forecast to grow high-single digits driven by the 4.5G/5G transition and long-term demand for automotive grade NOR flash. Recall that this segment was supposed to decline at a 3-5% CAGR. Gross margin expansion remains on track and we see a higher margin profile in ’19 driven primarily by favorable mix shift. With product cycles like USB-C ramping, new PSoC roll-out and healthy overall demand environment, we think CY will outperform the group in 2H18.”

Here are some other CY positives from a TipRanks perspective:

  • Investor Sentiment from the top 20% of investors based on performance is as positive as it gets. More details.
  • Financial Bloggers are not shy in their 100% unanimous praise of shares. More details.
  • Insider Activity is also a feather in their cap. More details.
  • Hedge Fund managers are also clamoring to buy CY shares. More details.

Semiconductors are known as a group with erratic earnings results leading to feast and famine periods for the share price. So it’s always nice to find one in the group having more consistent operational results. Cypress fits that bill with 13 straight quarters without an earnings miss.

That earnings consistency + strong growth prospects + 2.8% dividend yield + 35% upside to target price + the 4 TipRanks positives noted above = Plenty of reasons to check if Cypress is right for your portfolio.

Start your research on CY here.

Wishing you a world of investment success!

Steve Reitmeister
Editor in Chief
www.TipRanks.com

Disclaimer: In general, I own the stocks that I highlight in commentary. When you think about it…why would you ever take advice from an investment professional who wasn’t willing to put his money where his mouth is?

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