Tax Break Extension = Stock Rally Extension

by: Steve Reitmeister

It’s not in stone yet, but most likely we will have an extension of the Bush era tax cuts for both personal income as well as dividend income and capital gains. Throw in a reduction in pay roll taxes, which is a new form of stimulus, and you clearly understand why the market jumped out of the gates pushing towards the recent highs on Monday.

Yet as the day progressed, the market got altitude sickness and retreated back to a breakeven finish. That often happens while trying to make new highs. We have all the right ingredients to see more upside in stocks through year’s end. So don’t let today’s fizzling rally fool you.

One more thing to note. You can officially stick a fork in the 30 year bond rally. Rates bottomed in mid October and now have made a clear and convincing break higher. So congrats to all those who realized this was a bubble about to burst and profited from shorting treasuries with instruments like TBF and TBT. (If you haven’t done so already, then still time to join the party).

One of the benefits of rising bond rates, is that for the first time in 30 years bond investors will start losing money. Meaning far too many have been taking the easy way out with this ongoing trend convincing themselves that you can “always make money in bonds”.

Guess what, Bub? You can also lose money in bonds in a hurry. Oops…you already have.

So as bond investors smell the coffee of this new reality they will seek to get a better rate of return on their money. A lot of that money will flow back into the stock market which will provide another catalyst to the strong fundamental ones already in place (rising corporate earnings and reasonable valuations).

The one ever present caveat to this the above trend is that all will go well with stocks over the next year plus unless something blows up (Europe, US government debt or terrorist attack). And yes, there is some risk there.

That is why I still have SKF on the books to help soften the blow if we wake up one morning in the future with the banks in crisis. Most other reasons for the stock market to go down will not be overnight affairs. So folks with more of a trading mentality will have ample chance to get more defensive if that is what is in the cards.

Yes, I know this is a backhanded endorsement of the stock market. But too be 100% bullish or 100% bearish just doesn’t seem prudent at this time. So for me, the preponderance of the evidence says that the economy is slowly, but surely on the mend. This leads to higher corporate profits and equity prices. So I am about 85% long stocks with insurance policies in place like SKF in case things get ugly in a hurry.

Take 5

This is where I share 5 of my favorite stocks that all have a coveted Zacks Rank of 1 (Strong Buys)

  1. Caterpillar (NYSE:CAT): They are right in the middle of many positive trends. Perhaps valuation getting a bit stretched. But the long term fundamentals say buy more while you can.
  2. Cooper Tire (NYSE:CTB): If you haven’t noticed the revival of the auto industry, then you are dead or in a deep coma. Many ways to profitably play this trend. CTB is certainly one to consider.
  3. Domtar (NYSE:UFS): Making new highs as company keeps banging out huge upside earnings surprises. The trend is clearly your friend with this one.
  4. InterActiveCorp (IACI): Investors clearly agree with Barry Diller that he is a better visionary than manager as shares bolted higher on the news of him stepping down as CEO. Wall Street is impressed leading to another round of positive estimate revisions. Shares now above the previous resistance at $30 and ready for more.
  5. Parker Hannifan (NYSE:PH): Another extremely attractive industrial players. Exploding earnings is the clear catalyst to it making new highs today. You also get a solid dividend to boot.

Disclosure: I am long SKF, TBT, IACI.