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The Day Ahead: Living in the Nightmare

This is the fiscal base jump in play: It infects sentiment (good news is ignored/bad news is really bad = stocks are ejected from the portfolio regardless) as it casts a thick, black smog over future earnings streams of companies. I don't mean to be the bad guy in pointing these things out -- wait, actually I do. If you have not woken up yet in the real world it's time to do so.

But either way, humor me a bit. For each company you own, find its 2013 earnings estimate and present P/E multiple (note: the S&P 500 is around 12.8x) off that forecast. Select at least five companies you are considering to buy, as well. Shave $0.10 to $0.15 from those 2013 earnings estimates and mark the projected P/E multiple down by 10%. I characterize this as the "worst case scenario." Compute to get a hypothetical stock price, compare to the latest quote. I would bet that the outcome of this exercise yields a majority of the stocks still trading nowhere near a worst-case scenario for the U.S. economy and subsequently, how that impacts overseas markets. Now, do I expect the end of the world due to temporary government inaction and then, domestic style austerity? No, the point here is that stocks have room to go in pricing in an even less dire fiscal cliff scenario. You dig? I remain bearish.

P.S. Williams-Sonoma (WSM - Get Report) boasts positive pricing action relative to its specialty retail group pre-earnings (and broader retail, which has been beaten into the ground since September). Ethan Allen (ETH - Get Report) had a strong quarter, and Williams-Sonoma caters to a similar customer.
At the time of publication, Sozzi had no positions in the stocks mentioned, although positions may change at any time.

Brian Sozzi is Chief Equities Analyst for NBG Productions. In this capacity, he is responsible for developing independent financial content and actionable stock recommendations (including ratings and price targets) for an institutional and retail investor base. In addition, Sozzi is the Editor in Chief of the "Decoding Wall St." investor education online platform.

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