Current Market Outlook - 01/07/2013

Market Outlook - 01/07/2013

S&P 500 closed at 5 year market high of 1466.47 end of last week for a gain of 4.57% for the week in one of the best weekly performances during last few years. Bulk of the market gains came on 01/02 after the market opened post the resolution of the fiscal cliff which came after we momentarily went over the cliff, since it wasn't resolved by 12/31 which was the deadline. US lawmakers came together to pass and clear the bill (look at my commentary from Market Outlook - 12/31/2012 where I indicated that the lawmakers would put together a fiscal cliff deal of some sort) which was sent to the President for his signature before it is passed as a law. All of this was done over 12/31 and 01/01 and by close of market on 01/02, S&P 500 had shot up 2.53%. As part of the deal Investors cheered the fact that the impasse and the fiscal cliff overhang does not exists on the market anymore.

Fiscal Cliff Deal

A last minuted deal helped the country avoid a dive over the fiscal cliff. The bill which was approved would keep the tax-rates in place for most Americans. The marginal tax rate will rise to 39.6% from 35% currently for taxpayers with $450,000 in joint income or $400,000 in individual income. There's also a 2% jump in the Social Security tax for Americans at all tax-rate levels. Additionally the capital gains and dividends taxation would apply at 15% rate across all taxpayers except for the topmost category for whom the rates were increased to 20%, i.e. the Bush era tax cuts was permanently extended for most taxpayers.

Market Economic Indicators

Economic indicators from last week came in pretty well. ISM (Institute of Supply Management's) U.S. manufacturing factory index rose for the month of December 2012 to 50.7 from 49.5 in November 2012 and above the median forecast of 50.5 by economists. A value above 50 indicates expansion whereas a value below 50 indicates contraction. ISM non-manufacturing (service industries) index rose for the month of December 2012 to 56.1 from 54.7 in November 2012 and above the median forecast of 54.1 by economists. Non-manufacturing industries like construction and retailing reported growth in December. 

Labor report by ADP Research Institute showed 215,000 jobs gain for December 2012 from November 2012 adjusted value of 148,000. Non-farm payroll report by BLS showed (U.S. Bureau of Labor Statistics Non-Farm Payroll Report - Dec 2012) employment gain of 155,000 and the jobless rate held steady at 7.8%.

Based on the breakout of the different indices (including S&P 500, Russell 2000 index of small-caps, Dow Jones Transportation Average) this market has the potential to continue adding on to gains for the next few weeks, after which we may hit some volatility as the debt-ceiling talks heats up and correction may set in. Also earnings season starts the coming week with the aluminium giant Alcoa (NYSE:AA) kicking off the earnings on 01/08 after close of market. Additionally I would be looking forward to the reports out of CES (Consumer Electronics) Show in Las Vegas to pick up technology cues for this year and what's trending in technology.

Best Picks List 2013 - My Holdings (Part 2)

My Holdings - Part 2

Dogs of the Dow Theory - Every year at the beginning of the year the top 10 stocks of Dow Jones Industrial Average ranked by their dividend yields are coined the 'Dogs of the Dow'. Although the return varies from year to year for the 'Dogs of the Dow', they are very stable blue-chip companies with consistent dividend payments and dividend growth. Investors seek shelter in them in troubled times and during those times the 'Dogs of the Dow' tend to outperform the market. Hence the presence of 'Dogs of the Dow' in a portfolio add both income and stability and preferred by investors. For the last few years with fixed income instruments/securities offering very minimal yields, investors are looking elsewhere to compensate for their appetite for income and the 'Dogs of the Dow' offers them a very good alternative. Some of the top 'Dogs of the Dow' have performed very well in 2012 including AT&T (NYSE:T), Pfizer (NYSE:PFE), General Electric (NYSE:GE), etc. offering investors +20% total return (including dividends), handily outperforming the overall broader market (S&P 500). Hence it makes sense to take a look at closely the 'Dogs of the Dow' for 2013 and deciding which ones can generate good returns.

The top 'Dogs of the Dow' for 2013 are: AT&T (NYSE:T), Verizon Communications (NYSE:VZ), Intel Corporation (NYSE:INTC), Merck & Co. (NYSE:MRK), Pfizer Inc. (NYSE:PFE), etc. As Intel Corporation is struggling to make its presence felt in the hugely growing smartphone and tablet chips market, I think Intel will remain a 'Dog of the Dow' for a while unless it does some 'smart' acquisition or device a way for its chips to be present in the popular smartphone and tablets (i.e. Apple and Samsung devices). 

On the positive side I think T, PFE and MRK offers the best upside in 2013 as the 'Dogs of the Dow' and those are my preferred holdings for 2013. Both T and MRK have pulled back significantly (+10%) from their 52 week high in 2012 and experienced some selling as investors were worried with the taxation on dividends. Fiscal cliff resolution will provide clarity on the taxation of dividends and likely will bring back investors into these names. I expect all three of these names to perform significantly well in 2013. T is the top 'Dog of the Dow' with +5% yield. Similarly MRK and PFE have close to ~4% yield each. Fundamentally a lot of positive things are going on for PFE after the company lost its patent protection on its blockbuster cholesterol drug Lipitor. PFE recently got FDA approval along with Bristol Myers Squib Co. (NYSE:BMY) for its blood thinner drug Eliquis, which has the potential to be another blockbuster drug for PFE and BMY and will keep PFE moving higher.

Best Picks List 2013 - My Holdings (Part 1)

Best Picks List - 2013

I have created and started tracking my model portfolio of around 30 stocks in 'Best Picks List - 2013'. I would publish the performance of my model portfolio 'Best Picks List - 2013' on 12/31/2013 same as what I did for last year 2012 where my model portfolio beat the US major benchmark index S&P 500 by +5.6% (non-risk adjusted).
I am positive on the US markets performance this year as well (looking for at least +10% return) and think that it is a stock-pickers market, or in other words if you can pick the proper stocks you can outperform the broader indices. Over a period of time I would share some of my holdings.

My Holdings - Part 1

With close to 20% 1-yr return in 2012, I have kept both Macy's, Inc. (NYSE:M) and Limited Brands, Inc. (NYSE:LTD) in my model portfolio. Both M & LTD have outperformed S&P 500 in 2012 and both M & LTD (when total return is taken into account) have outperformed the S&P Retail Select Industry Index in 2012. Both M & LTD sport a 2% dividend yield which is good, despite the fact that dividends may be taxed at a higher rate in 2013. LTD is a shareholder friendly company returning cash to shareholders through special dividends which it announced consistently for the last couple of years (2010 - 2012). With consistently beating Wall Street's expectations on same store sales (SSS) both M & LTD will continue to go higher in 2013. Consumer Confidence and gas prices can be a drag on retail sales as we know, so those are something to keep an eye on.

Macy's Inc. - Monthly & Yearly Same Store Sales Chart