“With little progress made on the fiscal cliff and a big bounce in hand, I’m looking for stocks to be under pressure this week while bonds catch a bid and rally.”
In spite of what Democrats and Republicans agree (they agree on something? wow.) is basically no progress on the fiscal cliff, stocks managed to eek out a gain on the week, with the S&P 500 adding a little over 1% and closing above the key 1,400 level.
The fiscal cliff is dominating the headlines right now, as it should, but in the overall scheme of things, the cliff is barely even a footnote in the bigger-picture financial problems of the United States. And in order to put that into perspective, here is a brilliant piece from my favorite blog, Zerohedge, illustrating how letting the Bush tax cuts expire on high earners will effect the projected $1 trillion budget deficit in 2013. Generating a potential extra $8 billion in tax revenue, letting tax cuts on high earners expire will cover 1/125th of the current $1 trillion budget deficit. Take a look below.
As you can see, it’s almost laughable that this short-term cliff is THE conversation about the debt and deficit.
Since I like pictures so much, here’s another one from Zeroheadge, taking aim at the $570 million powerball craze and how long the winnings would fund the federal government. Hint: it’s less than 90 minutes.
That means the fiscal cliff is really nothing more than a speed bump in the super highway to financial destruction that the United States is currently racing along.
But for the time being, the market is holding up quite well, with the S&P 500 bouncing nicely in the last two weeks and holding above the key 1,400 level. Take a look at the performance of the S&P 500 in 2012 below and the recent bounce.
Looking forward, the fiscal cliff will remain the top story, but Europe has been heating up too, so that’s always something to watch closely. We’ve also got some important economic data on tap, with Friday’s jobs report leading the way.
- Monday: ISM Manufacturing Index
- Wednesday: ISM Service Index
- Friday: Employment Report
With little progress made on the fiscal cliff and a big bounce in hand, I’m looking for stocks to be under pressure this week while bonds catch a bid and rally.
EZCorp, Inc. (EZPW) was at the top of the charts, adding 6% on the week. This has been one of my top picks in the last 2 years, but shares have taken a beating in the last 11 months, currently down 29% on the year. But even though some of that downward movement has been driven by lower earnings projections, with the current-year estimate falling 19% in the last 3 months, EZCorp is trading with a historically low valuation. It’s forward P/E (price-to-earnings ratio) of 7 times is half the S&P 500’s 14 times in spite of a bullish 18% growth projection. So even though EZPW is struggling right now as investors swarm into large caps, I am still recommending holding for the long haul.
Double Gold (DGP) also saw some interesting movement this week, with shares falling 4.2% as gold failed to keep pace with the bullish movement in equities. But in spite of the setback, gold is still having another solid year, with prices up 6% in 2012.
Apple, Inc. (AAPL) has also come screaming back in the last 2 weeks, adding another 2.4% this week for a total bounce of 11.4% since bottoming out just above $520. It;s rare to see a pullback like we just did in Apple, but its clear the market viewed it as a chance to buy, particularly ahead of the holiday season, traditionally Apple’s best quarter when the tech company sells millions of its gadgets to legions of loyal followers all across the planet.
That’s all for this week, but until next time, here is some analysis of how some ETF’s are positioning their funds for potential changes in the tax code. Enjoy!
Your Investment Partner,
Michael Vodicka is the president and founder of the Vodicka Group, Inc., a Registered Investment Advisor (RIA). He specialized in trading fixed-income derivatives at the Chicago Board of Trade before spending five years managing equity portfolios for a private investment research company.
Michael graduated from the University of Kansas with a degree in business communications and is registered with the State of Illinois and the SEC (Securities and Exchange Commission) as a Licensed Investment Advisor (Series 65).