The market seems bound and determined to reach its 2007 highs for both the DJIA and S&P indexes. The strength of the market has been surprising given the still tepid economic and job growth prevalence. Equities have now surpassed the all-time high on the DJIA and are closing in on their previous S&P highs as well. Even as trading is showing relatively low volume and the market is making fewer and fewer 52-week highs, I believe we will take out previous S&P levels before the market falls back.
Even if the market is stronger than I thought it would be so far in 2013 on the back of Uncle Ben's continued easy money policies, my five predictions for 2013 are looking solid. In this article I will review and update those five predictions. I will end the piece by offering up a cheap yield play that has underperformed the market so far in 2013. It is the type of stock that should do fine should we get a sell-off after we take out previous highs.
Prediction #1 - The euro will end the year at under $1.20.
The euro surprised most pundits with its strength in the first month of 2013. However, over the last five weeks, reality has set in and the currency is down nearly 5% since then (see chart). Growth in the Eurozone is expected to be slightly negative for all of 2013. In addition, unemployment is at record highs in the zone with Spain and Greece now having over a quarter of their working age population out of work. The industrial production figures out of France Tuesday morning were also dismal. With the United States still expected to grow this year in spite of tax hikes, high gas prices and the expiration of the $120B payroll tax holiday, it still seems a good bet that the euro will end the year under $1.20. I am short the currency using the EuroCurrency Index (FXE).
Prediction #2 - Domestic job growth will remain anemic and will average less than 100K monthly jobs by the 4th quarter.
Too early to say either way on whether this prediction will be prescient or not. We seem stuck in the 150,000 jobs/month cycle. It is still an open issue to see how much the implementation of the Affordable Care Act and headwinds to consumer spending (high gas prices, payroll tax holiday expiration, etc.) will impact this figure as we move through the year.
Prediction #3 - 2013 will see a marked increase in M&A activity.
This prediction has been right on during the first months of the year. Global M&A activity totaled over $350B in the first two months of the year, its strongest start since 2010. Domestically, activity has also been strong with the $20B plus buyout of Heinz (HNZ) by Warren Buffett's consortium being the highlight so far.
Prediction #4 - The Fed will start to ramp down QE efforts sooner than the market expects.
Too early to say if this will come to pass or not. We do know from the sharp pull back on some Fed governor's comments recently on questioning the prudence of continuing QE3, the market is highly susceptible to any signs the Federal Reserve might eventually pull away the punch bowl. It will be interesting to see what the Fed will do if inflation shows signs of picking up. Stay tuned.
Prediction #5 - Turmoil in the Middle East and North Africa will increase significantly in 2013.
Syria continues to descend into an escalating civil war. Egypt has had several riots leading to deaths and Iran is two months closer to having a nuclear bomb. These items have been mainly pushed off the front pages by our own political acrimony. However, I still believe at some point this year a major event will disrupt our own market.
So what is an investor who believes the market is currently overbought to do? Cash pays nothing, and the Fed's push to get investors to buy risky assets makes shorting the market or individual equities a dangerous game. For those investors I offered up a defensive yield play that has underperformed the market over the last few months (see chart).
Aflac Incorporated (AFL) provides supplemental health and life insurance. The majority of its business is in Japan.
4 reasons AFL is undervalued at $51 a share:
- The stock has been hurt by the recent rise in the yen. This seems priced in after the recent decline in the stock. A five percent decline in the yen equates to an approximate 20 cent a share loss in earnings.
- AFL is cheap at less than 7.5x 2014's projected earnings and under 3x operating cash flow.
- The stock pays a dividend of 2.8% and the company has almost quadrupled its dividend payouts over the last decade. The company has plans to buy back $400mm to $600mm in stock this year.
- The company has well-known brand name and mascot as well as an A- rated balance sheet. It has S&P's highest rating "Strong Buy" on the shares. The shares are noted as an "Outperform" at Credit Suisse as well.
Disclosure: I am short FXE.