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Curated by Joshua Brown, The Reformed Broker

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The Last Week of 2012 in Review

"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


This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.

Everything You've Ever Wanted to Know About Stock Performance in January

This is typically a slow, yet exciting, time of the year for us. A fresh start in 2013 to show this market what we're made of. Coming up in a few days starts the month of January, a very powerful and predictive period. Appropriately named after Janus, the God of the Doorway, the results for this month could lead to conclusions about the rest of 2013. There is definitely some validity to January's effects as well as some confusion. For example, the January Barometer and the January Effect are two completely different things. I'd bet that plenty will get this one wrong over the next few weeks. So let's get right into it, and let me explain what the month of January means to me:

The January Barometer -- As the S&P 500 Goes in January, So Goes The Year. When the month of January records a gain, as measured by the S&P 500 Index, history suggests that the rest of the year will serve as a benefactor, and finish in the black as well. Since 1950, this indicator has an incredible 88.7% accuracy ratio. This number also includes 2012, as January closed the month up 4.35% and the S&P500 is on pace to finish positive for the year.

Down Januarys Serve as a Warning -- According to the Stock Trader's Almanac, every down January for the S&P 500 since 1950, without exception, preceded a new or extended bear market, flat market, or a 10% correction. 12 bear markets began, and ten continued into second years with poor Januarys. When the first month of the year has been down, the rest of the year followed with an average loss of 13.9%. In most years, these declines later provided excellent buying opportunities. For example, 2008 was the worst January on record and preceded the worst bear market since the Great Depression. But 2009 proved to be one of the greatest buying opportunities in American history.

First Five Days in January Indicator -- This one has a very nice track record as well. The last 40 UP first-five-days-of-the-year have been followed by full-year gains 34 times for an 85% accuracy ratio. This includes 2012 which had a 1.8% rally in the first 5 days. The average gain for the first 39 of those years was 13.6%. It looks like 2012 will close up somewhere right around that number as well. The results are less reliable when the first 5 days in January are negative, showing just a 47.8% accuracy rate and an average gain of 0.2%. Going forward, I think it's important to note that the S&P 500 posted a gain for the first 5 days of the year in just 6 of the last 15 post-election years.

The January Barometer Portfolio -- The Standard & Poors top-performing industries in January tend to outperform the S&P500 over the next 12 months. According to Sam Stovall, if on Feb. 1 you invested equally in the 3 sectors that posted the best returns in the month of January and held them until Feb. 1 of the following year, you would've received a compound rate of growth of 8% as compared with 6.6% for the S&P 500. If you bought the worst performers in January, you would've underperformed the market with a 5.5% return. Since 1970, the compound rate of growth for the 10 best-performing sub-industries based on their January performance was 14.4% as compared with 6.8% for the S&P 500, and 4% for the worst 10 sub-industries in the S&P 500 in that January. The best-performing sub-industries in January went on to beat the market in the subsequent months 69% of the time, so nearly 7 out of every 10 years. The worst performing groups outperformed the S&P only 38% of the time. This indicates to us that you're better off sticking with the winners rather than the losers.

The January Effect -- As we mentioned in our December 6th Post, "It's Game Time for Small-Caps", there is a tendency for small-cap stocks to outperform large-caps in the month of January. There are plenty of theories about why this is the case, but as a lot of us already know, this phenomenon now begins in mid-December. The stats don't lie: from 1953 to 1995, small-caps outperformed large-caps in January 40 out of 43 years. But the shift into the mid-December starting point really got going after the 1987 crash. This year, however, the Russell 2000 actually began outperforming the Larger-Cap Russell 1000 in mid-November. So the results here should be interesting to look back on.

January is the NASDAQ's Top Performing Month -- Since 1971, the total percentage gain for the Nasdaq Composite in January is an unbelievable 115.2%. If you take the rest of the 11 months combined during that period, the rest of the year has averaged just 30.1% (1971-2011). 2012 was no different as the Nasdaq Composite gained 8% for the month of January and is up just about 6.6% since then.


As we did last year, we'll go over all of these again at the beginning of February and see what sort of conclusions we can make based on the results. I always like to make Janus proud and open the door a little bit into the world of January. As a God who looks both ways, some would say that this is a reminder to all of us that we must focus our attention, not just on the long side, but on the short side of the market as well. Markets move both up AND down. So rather that focusing our attention on why a given market may be in decline, let us remember that the markets have ALWAYS gone in both directions and this is perfectly normal behavior. In 2013, let's make a conscious effort to anticipate market corrections and benefit from them, as opposed to looking for people to blame. Let's take responsibility for our portfolios and have a killer year!

Best of luck in 2013,

*Make sure to check out the Stock Trader's Almanac, Bespoke Investment Group and Standard & Poors, who I believe provide some of the best data and tools for the above mentioned stats.


Garbage Time

From Wikipedia:

Garbage time, also known as "junk time", is a term used to refer to the period at the end of a timed sporting event that has become a blowout when the outcome of the game has already been decided, and the coaches of one or both teams will decide to replace their best players with substitutes.This serves to give those substitutes playing time experience in an actual game situation, as well as to protect the best players from the possibility of injury.

Garbage time owes its name to the fact that that period in a game is frequently marked by a significant drop in the quality of game play. This occurs for two primary reasons. First, the players involved during that time are generally less experienced, having not played nearly as often as the starting players. And second, the fact that seldom-used substitutes usually desire more future playing time means that when those players do play, they are often more concerned with making an individual impression than with executing team play at its best; this is especially true during garbage time because at that point, the matter of which team will win has already been decided anyway.

Tomorrow begins the period of the trading year we refer to as Garbage Time. It can be fun to watch that handful of sub-5 dollar tech stocks and Chinese microcaps get run up into year-end. We've also seen plenty of market-wide meltups during this period historically, as people attempt to position themselves for the "January Effect." Shhh, don't tell anyone that the January Effect now begins sometime around Labor Day.

Anyway, here are the rules of Garbage Time trading, as they've been passed down from trader to trader, desk to desk, for thousands and thousands of years on Wall Street:

1. Anyone who's had a good-to-great year is playing light, their books are closed and the track record is not being put at risk. Profits and losses at these same desks have likely already been harvested as well. So, in general, outsized trades are only being put on for window-dressing, tape-painting or other non-traditional reasons. Basically, this means not to make too much of what you're seeing, stop chasing cars like a cartoon dog with its tongue hanging out.

2. If you're trading seriously or intently this week, you probably blew up this year. The last week or so is like a Hail Mary pass at the buzzer. This is why you normally notice the thinner, higher-beta junk moving. Duh.

3. Garbage Time is a total "amateur hour." Buysiders like myself (especially those who've been on the sell side) know better than to come into this week with any real orders of consequence. The kid who's been left behind to execute trades while the Big Dogs are in Turquoise is probably not your best bet, lol.

4. Real investors have mentally closed the books on 2012 even if they've still got all their positions on. This is a week better spent cleaning out office desk drawers, de-cluttering hard drives and emailing best wishes to colleagues, customers and vendors. And thinking about 2013. I plan to spend most of my week reading all the previews and "look ahead" research reports for some semblance of the consensus view.

Anyway, enjoy the show this week and don't play too hard. You can still get injured or beclowned during Garbage Time after all!


Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.

Assess the Mess

While there are shades of last summer's fiscal cliff in today's actions it is worthwhile to keep things in perspective. There was a sizable gap up to begin the week on a move by Speaker Boehner over the weekend to budge on tax increases for some people (>$1M). Then Obama gave in on the income threshold, moving it up from $250K to $400K. (Yesterday he mentioned that could go up to even $700-$800K) Whatever the negotiations, there was a substantial two day move early this week on anticipation of a deal sooner or later. This morning the market is gapping back down to fill that gap up. So it's come full circle in four days and we look to open just about where the market closed last Friday.

With that said, this sharp pullback pushes the major indexes back down below their respective necklines which the early week move had helped breach. Lucy pulled the football away from Charlie for the second week in a row. Hence, the near term has become much more muddled than it looked at the close yesterday. So now we'll observe if these indexes can get back OVER these necklines for a third time.

On the "positive" side the market had been lining itself up for a sell the news reaction as a deal has become priced in. Now that would seem less so. So now we see if the folks in D.C. try to make one last attempt before the end of year or if the fiscal cliff (not really a cliff but a slow long slide) hits on Jan 1, and then they come to do a deal after the New Year when the GOP can vote on a deal without having to officially "raise taxes" since they will then be voting for a tax cut after everything reverts back higher.

There is some economic news this morning but it is completely ignored of course. Boehner speaks at 10 AM but being effectively neutered not sure what he can say of substance.


Are Spanish Stocks the Next Bank Trade?

How about that for a headline?

The financials, banks, XLF, broker dealers, or all of the above. The group they call, "The Financial Sector", has led the United States stock market higher for the year. Tell me the capital markets aren't awesome.

I have conversations with random non-market professionals all the time. And to this day, if I tell them I'm buying banks, they get this disgusted look on their face, "Really, financials? Why?". I tell them, "there's one reason why -- look at your reaction". All those disastrous banks blowing up was over 4 years ago. Do you know how long that is in internet years? Instagram didn't even exist yet.

Sentiment is a powerful thing. And it's our choice whether to take advantage of it or not.

Bespoke Investment Group has a timely post up today showing the sector by sector performance for 2012. Financials are up almost 27% and leading the way higher for the market in 2012. How about that?

Last week an accountant friend of mine came by the office and was looking over my shoulder at my monitors. I had a chart of Spain up and told him we were buying EWP -- the Spain ETF. He had the same disgusted look on his face that I've seen many a time when bringing up a long financials position. Coincidence?


Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.

And Now, Here Comes the Industrials Breakout

I hear you all chuckling. The Industrial Select Sector SPDR, (XLI), broke out over a week ago. Yes I know that. The daily chart below shows the breakout, back test and move higher. Old news. But

have you looked at the longer time frames? That is where the news, and real money, is to be made. The weekly chart below shows a break of a 18 month long symmetrical triangle this week. The target for the pattern break is a move to 46 nearly 20% higher. And it has support from a rising

and bullish Relative Strength Index (RSI) testing 18 month highs itself. And the monthly view (bottom) is looking very strong as well, less than 2% from breaking above 5 year resistance. The monthly view also has support from a rising RSI making new higher highs. You can play the ETF itself or the Top 10 Holdings all look good as well with several, Honeywell (HON), Caterpillar (CAT),

Emerson Electric (EMR), General Electric (GE) and UPS (UPS) already breaking higher. But 5 of those top 10 are just at the breakout levels: Boeing (BA), Deere (DE), Union Pacific (UNP), United Technologies (UTX) and 3M (MMM), and ready to go. Focus on the second list if you are not playing the ETF.


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.

Kicking a Beehive

One thing I just think ought to be pointed out for those who don't follow the market that closely -- the Vix, the most widely followed measure of volatility, hasn't seen a print above 20 in almost six months.

This is remarkable given all the "headline risk" we've been warned about now that China and Europe are undergoing a double decker, mutually-reinforced economic collapse and the fiscal cliff threatens to blow up all of our houses and jobs.

When they write the chapter on 2012, they'll be remiss in not mentioning the things Mario Draghi had done this spring and summer and unfatten the tail risk.For more on this, read:

TIME's Person of the Year Should Be Mario Draghi (Business Insider)


FT Person of the Year: Mario Draghi (FT)

Markets are much calmer in the face of possible recession than they are in the face of possible Lehman II. And it shows in the buying (or lack there of) of put protection:

(BTW, now that I've posted this, expect a Vix spike to 30...)


Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.

Finally, a Bottom in Coal and Steel?

As quaint as it sounds, one sign of a major decline being largely over occurs not necessarily when price starts to scream higher but rather when it simply stops going lower. Specifically, in the case of the coal and steel sectors, on their expected way to zero a funny thing happened-They stopped going down.

Looking at the weekly charts of coal and steel, you can see that after ceasing to make new lows price has tightened up on this timeframe with Bollinger Bands starting to become constricted. Even with a Romney loss, coal could easily be forming a diamond bottom. Perhaps of equal significance, no new lows were made even after the (widely-viewed) anti-coal Obama administration won control of the EPA for the next four years with the election.

Steel refused to give up the $40 level on its sector ETF, and is looking more and more like a massive base instead of a bearish consolidation on its weekly.

As long as the emerging markets continue to show strength, it is hard not to become more constructive on the beaten-down steel and coal sectors as they make strides in their own right.


CWS Market Review - December 14, 2012

The stock market is a giant distraction to the business of investing. - Jack Bogle

The S&P 500 rose for six straight days, and on Thursday, for the 13th time in a row, the index failed to extend a six-day winning streak into a seven-day streak. Nevertheless, the market continues to do well, which is exactly as I suspected. I'm still holding to my view that the market will rally well into 2013; this is a good time to be an investor.

This was an eventful week. On Wednesday, the Federal Reserve made news by announcing economic triggers for its interest rate policy. The stock market responded by surging to a two-month high. I'll explain what it all means for investors in just a bit. Perhaps the best news of the week was that Nicholas Financial (NICK) joined the special dividend parade by announcing a monster $2-per-share dividend. Percentagewise, that's a big deal, and the stock surged.

Let me also remind you that next week, I'll unveil our 2013 Buy List. I won't start tracking the new list until the start of the year. I'm happy to report that the current Buy List is ending the year on a strong note. Since August 2nd, our Buy List has more than doubled the S&P 500, 9.2% to 4%. It looks like we're going to narrowly beat the S&P 500 for our sixth-straight market-beating year. Now let's take a look at the Fed's announcement this week and what it means for us.

The Fed Lays Its Card on the Table

Meetings of central bankers are usually rather dull affairs, and that's probably how it ought to be. This past week, however, the Federal Reserve actually did something interesting. For the first time, the Fed laid out specific trigger points for its interest rate policy.

Let me explain, and I'll try to avoid any econo-speak. When the economy went into the toilet, the Fed responded by slashing interest rates. In fact, they even cut rates to 0%. After all, that's what models say you should do. The problem was that the model even said to go into negative rates. The Fed responded by doing the equivalent--they started buying bonds--or as economists call it, "Quantitative Easing" (QE if you want to sound cool).

The Fed then ran into another problem. The central bank was simply announcing a bond-buying program with a price tag. Once that ran out, they announced another. Then another. Then in September, the Fed took a step back and said "Look, this isn't working. Forget these dollar amounts and deadlines. We're going to keep buying bonds and we're not going to stop until things get better. That's that."

To be more specific, the Fed said it was going to buy $40 billion of agency mortgage-backed securities (MBS) each month. In practical terms, the Fed swaps assets with a bank. The Fed gets a risky MBS, while the bank gets low-risk reserves, which, I should add, are held at (guess where?) the Federal Reserve.

The game-changer in September wasn't the $40 billion number. It's that the Fed said it was going to go all in until things got better. By taking a time horizon off the table, the Fed sent a clear signal to investors that it was going to do what it had to in order to help the economy. But there was still the question "how will we know when things get better?" That's where this week's news comes in. But first let me quote the CWS Market Review from September 21:

In this week's policy statement, the Fed gave us an answer. They said they won't raise interest rates as long as the unemployment rate is over 6.5% (we're currently at 7.7%) and inflation is under 2.5%. Basically, this means that rates are going to stay low for a long while more.

There are a few key takeaways: This is especially good news for financial stocks. Nicholas Financial, for example, borrows money at the short end of the yield curve. The lower rates are, the better it is for them. In fact, I think a lot of the major banks are going for good values. Given the current conditions, I think JPMorgan Chase (JPM) will have a very profitable 2013.

The housing market should also continue to get better. This has been an underreported story this year. A key difference between the current "Quantitative Easing" and the previous attempts is that back then, the housing market was still in free fall. Now it's gaining strength, and in turn, that's helping consumers. We don't have the numbers in yet, but this may turn out to be a good holiday shopping season. We just got the retail sales report for November, and it was pretty good. The initial jobless claims report came very close to hitting a five-year low (which means the spike from Hurricane Sandy has now passed).

This new Fed policy will also be good for economically sensitive "cyclical" stocks. These are sectors like energy, transportation and heavy industry. There's also a key "double whammy" effect with cyclicals since they tend to outperform the market when the market itself is doing well. I like to follow how the Morgan Stanley Cyclical Index ($CYC) performs relative to the S&P 500, and it's improved very nicely since the summer. The CYC-to-S&P 500 ratio is close at an eight-month high. I should warn you that Q4 GDP will probably be a dud (0% to 1% growth), but we may see greater than 3% growth toward the latter half of 2013.

This week's Fed news is a clear signal that the Fed is in the investors' corner and is willing to boost the economy for several more quarters. The risk right now is finding yourself getting left behind. Now let's look at my second-favorite NICK of the holiday season.

Nicholas Financial's Special Dividend

On Tuesday, Nicholas Financial announced a special $2-per-hare dividend. In previous issues, I've talked about how companies have announced special dividends before the end of the year so they won't get hit by higher taxes, which are almost certainly on their way next year.

The major difference with NICK is that this is a pretty large dividend. It works out to be about 15% of the stock's value. The dividend will be paid out on December 28th to shareholders of record as of December 21st. Also note that NICK is a Canadian company, so there may be foreign tax withholdings (please consult your tax advisor).

I want to clear up a few things about this dividend. This news, by itself, doesn't do anything to boost NICK's value. It's simple math: Once the dividend is paid out, we can expect the shares to fall by $2. Since the dividend works out to be roughly one year's worth of profits, we shouldn't expect any dividends next year.

While the special dividend doesn't add value to NICK, the perception did, as the value of the stock rallied nicely on Wednesday, getting as high as $14.14 per share. Why did it rally? That's hard to say exactly, but it was probably an appreciation of the company's boldness. Think of it this way: You're not going to pull a big move like that unless you're pretty darn confident about your business's ability to rake in cash. Traders took notice. NICK continues to be a very good buy.

Earnings from Oracle and Bed, Bath & Beyond

Next week, we'll get earnings reports from Oracle (ORCL) and Bed, Bath & Beyond (BBBY). Also, BBBY will lay out some important planning assumptions for next year. Both of these companies wrapped up the end of their quarter in November.

Oracle made news last week by announcing that they're going to pay out their next three dividends before the end of the year in order to avoid the taxman. The company will report its fiscal Q2 earnings on Tuesday, December 18th. In September, Oracle told us to expect earnings to range between 59 and 63 cents per share. The Street expects 61 cents per share, which Oracle should be able to beat.

Last quarter, Oracle got dinged by currency costs. That's frustrating, but I'm not particularly worried, since those tend to be transient concerns. I'd be much more concerned by a downturn in their overall business, and Oracle isn't experiencing that. I'll be interested to hear what Ellison & Co. have to say about fiscal Q3 and how badly Europe is hurting then. I continue to like Oracle a lot and rate it a good buy up to $35 per share.

Bed Bath & Beyond is due to report on Wednesday, December 19th. In June, BBBY surprised Wall Street (and me) by guiding lower for their August quarter. The stock got hammered, and analysts quickly slashed their forecasts. When the results came out in September, BBBY still came in four cents below consensus. It was just an ugly quarter, which is very uncharacteristic of BBBY.

The problem is that Bed Bath & Beyond had become overly reliant on coupons to get feet in the door. I understand the temptation, but a retailer can't discount their way to sales for the long-term. I'm not giving up on BBBY. This is a very well-run outfit, and they've already steered their way though an historic housing bust. I think they can handle this.

Interestingly, the guidance for Q3 was 99 cents to $1.04 per share, which really isn't that bad. What traders seemed to overlook is that the company stood by its previous full guidance of earnings growth between the high single digits and low double digits. BBBY also has a rock-solid balance sheet. I currently rate BBBY a buy up to $62 per share. This is a solid company, and the shares are going for a good value.

Before I go, I want to make two adjustments to our Buy Below prices. Fiserv (FISV) has been a monster for us this year. I'm raising our Buy Below price to $83 per share. Moog (MOG-A) has been a lousy stock this year, but I think it's an exceptionally good value. I'm raising the Buy Below on Moog to $40 per share.

That's all for now. Next week, we'll get important reports on industrial production and retail sales. Also, the Fed meets on Tuesday and Wednesday. Following the meeting, Bernanke will hold a press conference. 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


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.

December, Technically Speaking

I mentioned a few weeks ago that the next 2% either way would not mean much and since then the market has been very range bound if incrementally positive. This month the S&P 500 is up about 0.8%, with almost all of that happening Tuesday of this week. But as you can see in the charts below we have near identical setups in the big 3 (DJIA, S&P, NASDAQ) - a very obvious "inverse head and shoulders" formation, with the market fighting to create a new higher high. Immediately after the FOMC announcement the knee jerk reaction was "buy buy buy" which pushed these indexes (save NASDAQ) over those highs, but it did not last.

Ironically the Russell 2000 had been the best of the bunch, being the only index to clear it's November's highs - and of course that was the worst performer yesterday.

That said while the market has not been on a tear there has been very little pullback since the mid November bottom, so things were a bit short term overbought/extended by yesterday afternoon as well. This is especially true of things relating to China (the past week) and Europe believe it or not, the latter group being very hot markets the past two or so months. Emerging markets as a whole (China was the last to join) have also seen a lot of buying activity, so some of these areas are very overbought and need a rest of some sort.

This morning we have a nice dip in weekly jobless claims - down 29K to 343K. These numbers are often strange this time of year with holidays so we'll see in mid January where things are more accurately. Retail sales which was the big economic number of the week came in at +0.3% versus expected +0.5%. One area that has been weak this week in general has been the retail stocks as a whole. So it might point to a less than happy Christmas season despite the annual hype. And in an economy 70% dependent on consumer spending that's an issue. Of course they will blame the fiscal cliff talk for the retrenchment.

Bigger picture not much has changed than a week or two weeks ago other than an incremental move up in the major indexes - we need to see those levels cleared and held (not cleared and failed as yesterday) and then followed by the slope of these 50 day moving average changing from downward back to upward sloping. The longer we stay in this area +/- 20 S&P points the better chance that begins to happen. However, Apple continues to be an issue for the NASDAQ - showing little relative strength and as I type down another 1.6% this morning.


Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund's holdings at the end of the prior quarter, visit the Paladin Funds website at

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