I'm picking up right where I left off yesterday, reaching into the WSD Mailbag to field some questions concerning the market outlook for 2013. Again, my goal couldn't be more straightforward. I want my answers to be both informative and instructive. And ultimately profitable, too.
You've been mind-numbingly bullish on stocks for all of 2012. Granted, you ended up being right. But you can't possibly expect the bull market to last well into 2013. Or can you? - J.H.
Oh, yes I can!
I've never shied away from making a bold prediction. That is, as long as the data backs me up. And I can point to countless reasons why this bull market's destined to endure…
Like the fact that investors keep hoarding cash, which is bound to eventually flow back into the stock market… Or that eight other bull markets lasted longer than the current one… Or that institutional investors still remain ridiculously underweight to equities, too.
But let's stick to the two most important factors that point to a continued bull market: valuations and insider buying. It's completely counterintuitive, but true: Stocks in the S&P 500 have risen in price, but gotten cheaper. How's that possible? Simple. Earnings have been growing faster than stock prices have been advancing.
Consider: Over the last two and a half years, the price-to-earnings (P/E) ratio for the S&P 500 has never topped 16. Yet during all other bull markets since 1962, the average P/E ratio checked in at 17.4. Based on that average - and the current P/E ratio for the S&P 500 of 15.1 - stocks could rally another 15.2% in 2013. That's a conservative estimate, though.
You see, bull markets typically end on a high note, at a P/E ratio of 19.9, according to Bloomberg.
Or as Michael Shaoul, Chairman of Marketfield Asset Management, says, "[Bull markets] normally finish with a real burst of hyper enthusiasm. We haven't seen the beginning of that yet."
Not even close. In fact, if earnings don't increase a single penny more, this bull market's got another 31.7% upside left before it runs out of steam.
The latest actions by corporate insiders also signal that there's plenty more upside ahead for stocks. In late November, as stocks hit a short-term bottom, the insider sell-to-buy ratio dropped to 1.6-to-1. That's well below the 10-year average of 3.4-to-1. And an eternity away from the 6.9-to-1 ratio we witnessed in early fall, when stocks hit a short-term high.
As MarketWatch's Mark Hulbert said, "Insiders are more than four times more optimistic about their companies' shares now than two months ago. This much insider enthusiasm is a good sign."
Indeed. So, yes, I absolutely believe the bull market's going to last well into 2013.
Kudos on the short Facebook IPO call. Since you seem to follow IPOs closely, what's your outlook on IPO activity for 2013? - R.B.
As far as the outlook for 2013, I'll say this: The IPO market mirrors the broader stock market. So as long as the bull market continues, we can expect the IPO market to keep humming along - churning out about 125 to 150 new opportunities over the course of the year.
There are already 149 active IPOs in the pipeline. In other words, we're locked and loaded for a strong year.
With that in mind, here are three IPOs I'd keep a close eye on: AutoTrader Group (Proposed Ticker: ATG),Gigamon (Proposed Ticker: GIMO) and Exponential Interactive (Proposed Ticker: EXPN).
Rest assured, I'll share any other "hot" IPOs as I come across them.
You've been bullish on Japan for a while. And wrong. Do you really think the fledgling rally in the Nikkei 225 Index is anything more than another head fake? - Z.K.
It's true. I've been bullish on Japan for over a year now. When I first made the recommendation, though, I told you the only thing that could undermine our profits is impatience. So be patient! I can't think of a cheaper, super-low risk, high-reward trade than Japan right now. And I'm no longer alone.
"With expectations so low and the market having underperformed, we would not be surprised to see the sun also rise in Japan," says James Hunt, Portfolio Manager of Tocqueville's International Value Fund.
Just remember that the biggest threat to Japanese stock gains is still a weakening yen. And when I say "biggest threat," I mean BIG. Jens Nordvig of Nomura Securities expects shorting the yen to be one of the best investments to make in 2013.
Bottom line: The momentum's building for Japanese stocks. The Nikkei 225 Index broke above the 10,000 level this week for the first time since April. Don't miss out. Just don't forget to hedge your currency exposure.
Is the United States on the cusp of another recession or full-blown economic collapse? - B.W.
Although the fear mongers are out in full force, claiming that the Fiscal Cliff is going to cause another recession, a compromise will be worked out. And once again, we'll avert disaster and avoid the dire impact on the GDP that I chronicled here.
Truth is, the biggest threat the Fiscal Cliff poses involves consumer spending. The longer it takes to work out a compromise, the longer it's going to take the IRS to implement the changes.
The end result?
"More than 60 million taxpayers would have to wait until late March or later to file their returns and receive a refund," according to Paul Cherecwich Jr., Chairman of the IRS Oversight Board, in a November 19 letter to the Senate Finance Committee.
In dollar terms, we're talking about roughly $200 billion in tax refunds getting delayed until the second quarter. That's a whole lot of consumer spending being put on hold.
Of course, any dip promises to be a short-term anomaly. One that's incapable of derailing the prevailing economic trends, which include year-over-year increases for a multitude of indicators. Like manufacturing, housing starts and automotive sales, to name a few.
For the record, our country's largest bondholders don't appear particularly fearful of another recession - or outright collapse, either. If they were, they wouldn't be buying up our Treasury bonds. As it turns out, they can't get enough.
Foreign ownership of U.S. Treasury securities hit a record level in October. China, the largest holder, increased its stake to $1.16 trillion. The second-largest holder, Japan (who knew?), increased its holdings to $1.13 trillion.
Add it all up, and I have no reservations predicting that the U.S. economy will not slip back into a recession in 2013.
Are you bullish on any particular commodities heading into 2013? - D.R.
I'm a contrarian at heart, so my answer shouldn't be too shocking: Go long coal and uranium!
Coal has been brutalized in the wake of soaring natural gas supplies. Prices have been hovering near two-year lows for the last six months. Even my colleague, Jason Simpkins, has trashed coal in Wall Street Daily this year.
However, as natural gas prices keep rising, it's going to "improve the competitiveness of coal" for power generators, says Prakash Sharma of Wood Mackenzie. I couldn't agree more. I'm convinced that an uptick in demand from China promises to provide another boost.
As for uranium, the investment case is equally straightforward. The media might be overrun with headlines calling for the end of nuclear power. While that's a nice thought, the world can't live without nuclear.
Even after the Fukushima nuclear disaster, Japan understands this…
In October, Japan Oil, Gas and Metals National Corporation announced a joint venture with Uzbekistan to find uranium deposits. Japan simply realizes that it can't meet electricity demand without cheap nuclear power.
A shortage of supplies is setting the stage for another dramatic boom for uranium. Invest accordingly, if you're brave enough to be a true contrarian!