As the end of the year approaches, seasonal factors typically help boost the stock market. After all, the Christmas rally is one of the staples of Wall Street. However, if there is going to be a Santa Clause rally this year, it better start soon … and the big man had better be packing that howitzer that many say Europe needs.
There is no doubt that the lack of a European solution is weighing down the markets. Yet, deep down we all know it’s more than just that. Although the U.S. has been improving marginally with the help of QE Mini-Me, it is nowhere near where it needs to be to put Americans back to work and usher in a new era of prosperity.
The lukewarm economic announcements brings both the good and the bad: good in the fact that the U.S. is not close to a recession, but bad in that the economic data is not grave enough to allow Bernanke and the Federal Reserve to initiate another Quantitative Easing Program, or QE3 which it so desperately wants. Time is of the essence here because it will take 9 months to feel the effects and if it doesn’t happen soon it will be too long since QE2. Clearly the massive global deleveraging and demographic challenges discussed in the book, "Facing Goliath: How to Triumph in the Dangerous Market Ahead," are now taking hold in the world economies.
There is some good news. The U.S. market is number 1 this year … woohoo. That’s right folks, we’re getting hammered but at least we’re getting hammered less than everybody else. While being #1 might give us some sense of accomplishment, it still is disappointing that we have not performed better considering S&P 500 earnings are on track to rise +15.5 percent for the full year. The S&P 500 today is where it was 13 years ago in 1998 when S&P earnings were $37.70, versus the $89.36 expected this year.
Undoubtedly the market is adjusting to a normal bear market valuation. Secular bull markets end when optimism and Price-Earnings ratios (P/E’s) hit their peaks. In 2000-2001 the S&P P/E hit all-time highs in the mid 40’s. At the opposite end of the spectrum, during a secular bear market there is a dramatic constriction in P/E ratios to about 7-9, which is what we have been witnessing over the past decade.
Corporate earnings have doubled since 1998, but with no rise in stock prices. P/E’s have contracted by almost 66 percent, falling from the mid 40′s to low teens, currently. Today’s P/E ratio of 14 for the S&P was last seen in the 1980’s! Regardless of the supposed inherent value in the market right now, there is plenty of room to the downside for stocks.
Current stock market action is very alarming. At important bottoms, the market typically moves lower when Selling Pressure dramatically increases as capitulation takes place with investors dumping stocks at all costs. That is not the case right now, which implies that significant risk exists in growth oriented non-dividend paying stocks. Even though the market is oversold and could very easily bounce, it does not appear that it will be sustainable.
Therefore we are suggesting that investors should avoid growth stocks, with the high-flyers such as Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), Intel Corporation (NASDAQ:INTC), Microsoft (NASDAQ:MSFT), Cisco Systems (NASDAQ:CSCO), Dell (NASDAQ:DELL), Caterpillar (NYSE:CAT), General Electric (NYSE:GE) and Yahoo! (NASDAQ:YHOO) as well as financials such as JPMorgan (JPM), Bank of America (BAC) and Wells Fargo (WFC).
Gold is pulling back from the realization that, at the end of the day, the metal is simply an historic inflation hedge. It has been trading mostly as a third currency for protection from dollar or Euro debasements. However, absent of another QE3 in the U.S. or the European Central Bank printing of money, deflation no inflation is the order of the day. Therefore gold will trade modestly lower but stocks such as SPDR Gold Shares (GLD), Market Vectors Gold Miners ETF (GDX), Newmont Mining Corp. (NEM), Goldcorp. (NYSE:GG), Freeport-McMoRan Copper & Gold Inc. (FCX), Silver Wheaton Corp. (SLW) and ProShares Ultra Silver (AGQ) should be accumulated over the next few months in preparation for dollar and Euro printing that is sure to occur when things slow down again…and they will.
This is the most difficult and dangerous environment I have seen in my 27 years in the business, and it is crucial that we all do the 2 most important things that I mention every week on my radio show, "Smart Money with Keith Springer" -- Invest for need, not for greed and get the best return with the least risk possible. Yet, there are plenty of places to make money in this market without all the risk, and investors should focus on the sweet spot which is currently high yielding issues such as preferreds, MLP’s (for non-retirement accounts) and especially corporate bonds, many of which have hefty yields of over 8-10%.
- Ally PrA – 11.5% There are three very attractive Ally Bank Preferreds yielding around 10%. Ally is 91% government owned, so they’re not going anywhere.
- Ally PrB – 12%
- Terra Nitrogen (TNH) –10 1/4% yield. Makes and markets farm products. One of the few hot sectors in our economy. It is yielding 8%.
- CVR Partners, LP (NYSE:UAN) – yielding 10+%
- Legacy Reserves LP (LGCY) –- yielding 9+%
- Breitburn Energy Partners (BBEP) – yielding 9+%
- Vanguard Natural Resources (VNR) – yielding 9+%
- Edison International (EIX) 7.5% of 6/13 cusip 281023AN1. This is yielding almost 10% for less than 2 years
- Solo Cup (SOLO) - 8.5% of 8/15/14 – yielding 15% (cusip 834260AB7)
- Tutor Perini Corp (TPC) - 7.625% 11/1/18 yielding 9.8% cusip 901109AA6.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.