It’s looking increasingly likely that the current business cycle is primed for one more boom. It could be a whimper or it could be a melt-up. It’s impossible to know at this point. However, with another round of global monetary easing about to kick off, equities in the United States probably have little immediate downside from here.
The way things are looking now, here is how I see it. The last dollar supply print came in at $14.778 trillion, higher than the April peak at $14.705 trillion. That peak was overtaken originally back on June 10th, the quickest overtake of the April peak since online records are available. We are going to leave that figure in the dust though investors could continue to remain cautious awaiting the outcome of the next Brexit deadline on October 31. Until that time, stocks could be stuck in a trading range, followed possibly by a moderate dip on a no-deal scenario in the European Union. By that time, monetary growth rates in the U.S. could be as high as 10% or more. This happened before in 2012, but even then we didn’t have as strong a growth rate as we have now.
Over the next two months, assuming growth rates stay steady week to week (likely), we will be at the strongest monetary growth rates for this time of year since the turn of the century. True, dollar supply growth has been weak for the past two years, but so has the S&P 500, which only now looks like it wants to break out of its past trading range. After about two months, the dollar supply will start accelerating again as it does every year, which could put us at or near record growth rates. Whether they end up being records or not, the point is the money engines will be running very strongly. Which direction we go in—higher stocks or higher inflation (or both) could depend on how bad the trade wars get, and whether another war breaks out in the Middle East or not. So, if there is a war with Iran or the trade wars get markedly worse, none of the following trading advice applies.
Assuming no wars break out then, now would be a good time to scale back into U.S./European equities. Positions can be split between bottom-picking weak stocks and less risky companies that have been recently trending higher. For bottom-picking with some risk, International Game Technology (IGT) looks ideal, not as a long term investment, but as a vehicle to take advantage of the next leg up in the business cycle. IGT remains a fundamentally weak company with high leverage and mediocre growth prospects, but it is trading around strong support established in 2012 and pays a nice dividend that looks stable in the medium term. From a technical perspective, downside looks limited. Traders should be prepared to hold this for the next four ex-dividend dates, collect the dividend, and reassess.
IGT does have some strong points. Rather than blowing them out of proportion to make the case that the company is a hidden gem or something, there still is enough strength there to say that the stock has some upside in the short to medium term, and things look generally stable for now. Longer term things could get ugly, but not quite yet.
The high points: Global unit shipments increased 20% last quarter and new machine units by 44%. Installed base for video lottery terminals (VLT) increased by over 50%. This is all government sponsored and unstable, but it is what it is and for short to medium term trading that’s OK. Total wagers are up 1.6%, and particularly impressive is the improved productivity of amusement with prize (AWP) machines, which suffered a 21% decline due to nothing other than a regulator-mandated reduction in AWP machines, but only saw a 2% reduction in wagers despite that. Growing in an environment where growth is illegal can be a bit difficult. Taxes are also higher than last year. IGT can’t do much about that.
The low points: Long term, Italy is no less risky than it used to be, leverage is 300%, and rather than pay it off, IGT is investing in its own stock, doubling its last buyback program to $200 million. Good news for short term traders, not so much for long term investors.
The other bottom-picking option is Penn National Gaming. If there is going to be a bounce in Penn it should happen soon, or may have already started. We are now at long term support levels established back in July 2015 at $18.76, though we could drop to as low as $14 if traders capitulate. Better to scale in slowly to this one over the next 4-5 months. If you’re looking for a 5% position, do 1% per month on down days and then check back at the beginning of next summer. Penn has similar weak points to IGT, no dividend, and higher volatility. It’s more dangerous to hold but could also lead to higher gains.
Least risky would be to told MGM, which pays a much smaller dividend but has been trending higher with the S&P 500. It could reach or even break old highs at around $36.50 over the next few months, so there is decent upside with low risk over the short to medium term here.