CWS Market Review – December 28, 2012

“Never buy at the bottom, and always sell too soon.” – Jesse Livermore

The stock market seems to be limping towards the finish line. Thursday was the fourth-straight down day for the S&P 500. We’ve nearly given back one month’s worth of gains in the last four days. This was the worst four-day Christmas stretch in at least 60 years. Still, the market has had a good year, and the indexes are well above where they were six weeks ago.

There was some excitement late in the day on Thursday as stocks spiked after the news that House Speaker John Boehner is going to convene a Sunday session of the House of Representatives. In one hour, the U.S. equity markets gained $150 billion in market value. This appears to be one final attempt to resolve the dreaded Fiscal Cliff before the end of the year. I’ll have more to say on that in a bit (here’s a sneak preview: ignore the hype).

In this week’s CWS Market Review, we’ll take a closer look at what’s impacting the market right now. There’s a lot going on just below Wall Street’s radar. For example, the Japanese stock market is exciting for the first time in more than two decades. Implied volatility is also slowly creeping higher. I’ll also have more to say on the 2013 Buy List, which will go into effect on Wednesday. But first, let’s look at all the hot air about the Fiscal Cliff.

Don’t Buy the Fiscal Cliff Hype

I haven’t said much about the vastly over-hyped Fiscal Cliff story because I thought this was a distraction for investors. I still believe that today. The American people have just gone through a long election campaign, and I don’t believe they have much patience for a drawn-out battle over taxes.

I haven’t addressed this phony issue in detail because I think it’s much ado about nothing. Or rather, it’s a great deal of bluster and posturing about nothing. The latest ruckus merely means that we might to have to wait until January for a compromise. Big deal.

Let’s be clear about the facts—there’s no point of no return. None at all. It’s really more of a fiscal slope than a cliff. Waiting a few days into January isn’t going to push us into a recession, a fact which ought to put to rest the silly notion of a Fiscal Cliff. And I won’t even go into those absurd countdown clocks on CNBC. I suspect that Fiscal Cliff worries are harming consumer confidence somewhat, but that’s about it. Ideally, I wish we had a better-functioning political system that avoided such theatrics, but unfortunately we don’t.

As I mentioned before, the latest news is that House Speaker John Boehner will convene the House of Representatives for a special session this Sunday. Just that announcement caused the S&P 500 to leap 15 points in a single hour late Thursday. That should tell you that the market wants this nonsense resolved. I should caution investors to expect, before this mess ends, one or two days with sharp drop-offs (but no more than 2%) as the political players try to sway the markets to their side. We all know how the market loves to be the drama queen.

Events have gotten so bizarre that the markets actually rallied when Senator Scott Brown posted on his Facebook account that the White House was proposing a last-minute offer. The markets then dropped after journalist John Harwood tweeted that the White House was denying Brown’s Facebook post. Our political system has been reduced to communicating via tweets and Facebook? This is just too silly to comprehend. I’m hardly an expert on political matters, but I think President Obama will ultimately be able to get most of what he wants. There’s too much to lose if this drama drags on.

All Eyes Are Focused on the December Jobs Report

The economic news continues to be—not so horrible. This week, we learned that new home sales rose 4.4% in November. That’s the fastest rate in two-and-a-half years, and new homes sales are up 15.3% over the last 12 months. On Wednesday, the Case-Shiller Index indicated that home values are up 4.3% from last year.

On the jobs front, initial unemployment claims continue to drop. The latest report showed 350,000. Since there tends to be a lot of “noise” in this report, economists prefer to focus on the four-week average. Well, that just hit a five-year low. This also means that the effects of Hurricane Sandy have probably passed.

We’ll learn a lot more about the jobs market next Friday, when the Labor Department releases the December jobs report. Remember that the Fed has specifically said that it expects rates to remain low until the unemployment rate hits 6.5%. We’re currently at 7.7%.

Wall Street currently forecasts that real GDP growth for Q4 will be pretty anemic. Goldman Sachs recently lowered their forecast to just 1% growth. But much of this is a short-term concern because it’s due to firms working off their inventories. In layman’s terms, companies aren’t building a lot of new stuff. Instead, they’re letting their customers buy what’s left on their shelves. This is probably due to the uncertainty coming from Washington. But at some point, companies will want to restock their shelves, so they’ll get back to building again.

We’re only a few weeks from the start of earnings season. Wall Street currently expects earnings of $25.33 for the S&P 500 (the earnings number adjusted to the index). As recently as six months ago, analysts were expecting $28. Despite the slashed estimates, the current forecast would be an increase of 6.74% over last year’s fourth quarter. It would also be the highest growth rate in three quarters and perhaps the first evidence that not only are earnings growing, but the rate of growth is increasing. For all of 2013, Wall Street’s consensus is for earnings of $112. 82. That means the S&P 500 is currently going for just over 12.5 times forward earnings. That’s not a bad deal.

The Yen’s Impact on AFLAC

In the last six weeks, the Japan Nikkei has soared nearly 20%. It’s been two decades since investors were excited about Japan. Put it this way: the index is still 73% below its all-time high from 23 years ago. That’s about the time that The Simpsons premiered in the United States. The game changer for Japan is that the new Prime Minister, Shinzo Abe, wants to force the Japanese Fed to be more aggressive in fighting deflation.

The effect of this is that the Japanese yen has lost ground against the U.S. dollar, and it will probably continue to do so. I wanted to alert investors that a weaker yen takes a bite out of AFLAC’s ($AFL) earnings since the company does most of its business there. It breaks down something like this: Every additional yen in the yen/dollar exchange rate costs AFLAC about five cents per share in annualized operating earnings. In other words, the weaker yen hurts AFLAC, but it’s not a back-breaker. I like AFLAC a lot, and it’s done well for us in 2012. I’m looking forward to another good year in 2013. AFLAC is an excellent buy up to $57 per share.

The 2013 Crossing Wall Street Buy List

With just two trading days left, our 2012 Buy List is up 14.02% for the year, while the S&P 500 is up 12.76%. Including dividends, we’re up 16.47%, while the S&P 500 is up 15.33%.

Once again, here are the 20 stocks for our 2013 Buy List:

Bed Bath & Beyond ($BBBY)
CA Technologies ($CA)
Cognizant Technology Solutions ($CTSH)
CR Bard ($BCR)
DirecTV ($DTV)
FactSet Research Systems ($FDS)
Fiserv ($FISV)
Ford ($F)
Harris Corporation ($HRS)
JPMorgan Chase ($JPM)
Medtronic ($MDT)
Microsoft ($MSFT)
Moog ($MOG-A)
Nicholas Financial ($NICK)
Oracle ($ORCL)
Ross Stores ($ROST)
Stryker ($SYK)
Wells Fargo ($WFC)
WEX Inc. ($WXS)

Please note that I had the incorrect ticker symbol for WEX Inc. in last week’s email. The correct ticker symbol is WXS.

I want to address a few points that people have asked since I announced the Buy List changes last week. For those of you who have followed for a while, the Buy List changes weren’t a big surprise, and I supposed that’s how it should be. A few of you even guessed my changes correctly ahead of time. Still, some of you were surprised that Bed Bath & Beyond ($BBBY) is on the list. I know BBBY disappointed us with their lower guidance, but I’m willing to give them the benefit of the doubt. They’ve weathered worse storms.

Some of you were surprised to see Microsoft ($MSFT) on the Buy List. This is where I should explain that oftentimes good investments look a bit banged up on the outside. After all, that’s why the price is so good. I agree with Microsoft’s critics, but at $27 and with a 3.4% dividend, the stock is worth owning.

Two of our new stocks, Cognizant Technology Solutions ($CTSH) and FactSet Research Systems ($FDS), are former members of the Buy List. At $73, I admit that CTSH is rather pricey, but I’m not a pure value investor. There are occasions where we need to pay for strong growth, and I think this is one.

With the addition of Wells Fargo ($WFC), we now have two large banks on the Buy List (the other being JPM). Of course, if I hadn’t deleted Hudson City, we were going to get shares of M&T Bank anyway. The Buy List is slightly tilted toward financials, but I don’t believe unreasonably so. Based on next year’s earnings estimate, the financial sector is valued 10% less than the market as a whole. There are some bargains in this sector. In fact, I doubt many active investors will be able to beat the Financial Sector ETF ($XLF) next year.

I’ll have my Buy Below prices for the five new stocks in next week’s CWS Market Review. Until then, you can consider all five to be very good buys at their current prices. I’m also raising my Buy Below prices on Ford ($F) to $15, on Moog ($MOG-A) to $43, and on Harris ($HRS) to $53. On Thursday, Ford touched an eight-month high. Six weeks ago, I highlighted Moog as an outstanding buy, and the shares have rallied 18% since then.

That’s all for now. The market will be closed on Tuesday for New Year’s Day. I’ll crunch the numbers and post the complete year-end Buy List stats then. Remember, the 2013 Buy List will take effect at the open on Wednesday. We’ll also get the big jobs report on Friday. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

Posted by on December 28th, 2012 at 8:44 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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