Posted on Monday, January 9th, 2012 | In Exchange Traded Funds
Phil’s Stock World: The European (NYSEARCA:IEV) “Black Debt” crisis seems to be dragging on and on. And while we worry about that, Bruce Krasting expressed the flip-side of our fears. The end could be near. He wrote, “We could see the whole Euro experiment unwind by March. The Fed can’t really do a thing. Its hands are tied. Bernanke has already said he would not bailout the EU. If he reverses himself he will lose his credibility, and his job. (He knows that.) Tim Geithner can’t do much with what is available to him. The ESF [Exchange Stabilization Fund] has no size behind it ($105 billion). The IMF will probably do something, but the most it could bring is a few hundred billion Euros (NYSEARCA:FXE). If the ECB goes into the QE [quantitative easing] business, the rating agencies and the market will retaliate. My bottom-line is that no one has a bazooka.” (On FX)
UBS AG, a Swiss (NYSEARCA:FXF) financial services company with $1.4Tn in total assets as of 2010, issued a report from its Global Rates Team also giving a bleak prognosis for the future of the European Union. The team surmised, “The crisis will deteriorate further than the stressed levels of late November. We do not believe that Greek PSI [private sector involvement] will take place in a ‘voluntary’ fashion but instead expect coercive restructuring of Greek debt either before or soon after the March redemption, triggering CDS contracts. Greece is not likely to decide to leave the euro area in 2012, though the risks of that happening have certainly increased.” (UBS’ Releases Most Dire Prediction To Date: Greece To Experience “Coercive” Restructuring With CDS Triggering Around March)
On Saturday, an adviser to Germany’s (NYSEARCA:EWG) finance minister Wolfgang Schaeuble, told a Greek newspaper that a “50 percent write-down on Greek debt holdings, part of Greece’s debt swap deal, is not enough to put the country’s huge debt on a viable footing.” Reuters reported that Athens had been negotiating with banks and investment funds for weeks on a bond swap scheme that would reduce Greece’s debt-to-GDP ratio. Reducing Greece’s debt-to GDP is part of a 130Bn euro bailout package. However, discussions have stalled due to “disagreements over the real cost of the haircut.” Clemens Fuest, a German economist and professor, said that while Greece wants investors to voluntarily sign up to the PSI to avoid triggering a credit event, this was putting the deal at risk and the swap should be compulsive. In his view, Greece already defaulted, and admitting it cannot repay its debt is Greece’s best option. (Greece needs a bigger debt ‘haircut’-German adviser)
The current tensions in the Persian Gulf are likely to provide more grist for the markets during the coming week. The situation took an interesting twist this week when forces with the USS John C. Stennis aircraft carrier strike group intervened on behalf of 13 Iranian fishermen who had been held hostage by Somalian pirates for over a month. The fishermen were reportedly freed without a shot being fired, while the pirates were taken prisoner. “The fishermen were sent home with food and fuel, wearing baseball caps with the name of the U.S. warship that freed them. ‘Once we released them, they went on their way very happily, waving to us, wearing USS Kidd Navy ballcaps,’ said Rear Admiral Craig Faller, commander of the carrier strike group.” (Navy rescues Iranians held by pirates)
While U.S. forces were making gains on the public relations front, the semiofficial Fars news agency reported that Iran also launched new military maneuvers near its border with Afghanistan, ostensibly to “boost border security” while undoubtedly helping to escalate an already tense situation. (Iran holds military exercises near Afghan border)
For the upcoming week, Phil is concerned that the Fed may need to encourage treasury (NYSEARCA:TLT) buying by playing up fear. He wrote, “I think we should hold up Monday, but on Tuesday, there should be some bad news to scare people into Treasuries, and for sure on Wednesday, as a failed US 10-year auction is a disaster that the Fed is not willing to risk.”
Lee Adler of the Wall Street Examiner was more sanguine. (Take note, Lee being more optimistic than Phil is a rarity.) “Treasury supply is moderating as a result of a surge in Federal Withholding Tax collections in the second half of December. I suspect that this is a one time event due to Wall Street doling out much larger bonuses than last year, thanks to the wonderful job its bankers have done in guiding our financial system to greater profits for the good of all (insert sarcasm smiley). Regardless of the cause, supply will be light next week, and new notes settling at mid month will be less than normal. Even with the reduced sizes, there will still be $30 billion in new notes and bonds settling on January 17. That’s not an amount that should pressure the markets much as long as the flows into the banking system remain strong. The worse things get in Europe, the more that will benefit the US markets in the short run.
“All of which sets conditions conducive for the markets to continue to catch a bid. Whether stocks or Treasuries get more of the benefit, we’ll have to leave to the technical analysis for possible answers.
“Thanks to the ongoing capital flight from Europe, the dollar (NYSEARCA:UUP) remains strong and appears to have more upside… Foreign central banks are still dumping Treasuries, but it continues to not matter as long as the Europanic continues. It will matter when that panic begins to exhaust itself, or slow for any reason.” (Huge Surge in Withholding Taxes Shows How Great Wall Street Is)
While many have been hoping for more quantitative easing action by the Fed to bolster the stock market, recent positive news on the U.S. economy may ironically prevent the Fed from doing more, at least in the near term. (Whether the U.S. economy has really decoupled from the European economy and perhaps the rest of the world is a big topic for another day.) Addressing this question, Fed President James Bullard told reporters, “I don’t think it’s very likely right now because the tone of the data has been pretty strong,” and “we can probably wait and see for now.” (Strong data damps Fed need to buy bonds: Bullard)
For those looking for a bullish trade idea, Phil likes Corning Glass Works (NYSE:GLW). He wrote, “GLW announced ‘Gorilla Glass 2’ today. We’ve loved it since it was below $10 but bailed at $20, and now it’s interesting again at $13.50. GLW is a LONG term trade idea. I think it has a good potential for a big move so I like selling 2014 $12 puts for $2.35 and buying the 2013 $10/15 bull call spread for $2.85 for net cost of $0.50 on a $5 spread that’s $3.50 in the money. With this strategy, even a flatline is a winner! Think Or Swim says ordinary margin on the short puts is net $1.20 – pretty reasonable…”
If you missed Sabrient’s Baker’s Dozen webcast, we have Sabrient’s stock picks for next year here. Steven Russolillo at the Wall Street Journal covered the Baker’s Dozen in “Stock Picks From a Group That Has Beaten the Market for Three Years Running.” He wrote, “Classic Wall Street strategies like the ‘Dogs of the Dow’ or ‘sell in May and go away’ have been around for years and have produced mixed results. A relatively new approach with a strong track record is hoping to gain some traction.
“Market research firm Sabrient Systems last night unveiled its ‘Baker’s Dozen’ list of top stock picks for 2012. The firm combines a fundamental and quantitative approach that combs through thousands of stocks before selecting what it believes will be 13 top picks of the year…”
Chuck Jaffe at MarketWatch also reported on the Baker’s Dozen in “13 stocks for 2012.” Reviewing three years of results, Chuck noted, “In 2011, Sabrient’s list averaged a gain of 7.3% — hurt by a loss of 73% in Trina Solar TSL — with its best stock up 105%.” (Trina may illustrate why a stop loss might be worth considering with this strategy.) In 2010, the Baker’s Dozen stocks gained an average of 21%, and in 2009, they gained an average of 36%.
Sabrient’s top stocks are selected because they score high on Sabrient’s “growth at a reasonable price” (GARP) scale. Phil’s buy-write strategy is also well-suited for these stocks, as these companies have solid fundamentals selling at reasonable prices according to Sabrient’s formulas.
Sabrient’s Baker’s Dozen list for 2012:
Seagate Technology (NASDAQ:STX) – Currently $18.30
Western Refining (NYSE:WNR) – Currently $14.83
Ocwen Financial Corp. (NYSE:OCN) – Currently $14.47
Watson Pharmaceuticals (NYSE:WPI) – Currently $63.21
United Therapeutics (NASDAQ:UTHR) – Currently $48.52
Cloud Peak Energy (NYSE:CLD) – Currently $19.86
Globe Specialty Metals (NASDAQ:GSM) – Currently $12.71
Dana Holding (NYSE:DAN) – Currently $13.16
AGCO Corp. (NYSE:AGCO) – Currently $47.64
DXP Enterprises (NASDAQ:DXPE) – Currently $33.95
Kronos Worldwide (NYSE:KRO) – Currently $21.70
United Rentals (NYSE:URI) – Currently $29.63
Ameristar Casinos (NASDAQ:ASCA) – Currently $17.35
Stock World Weekly (try it here) editor Ilene asked Scott Brown at Sabrient to give us some buy-write ideas, designed so that one could enter some of these picks with a 10-20% discount. Scott sent in several ideas. Using a buy-write strategy, one would buy 100 shares of stock and sell 1 call and 1 put to complete the position. For more details, see the updated post How To Buy Stocks For a 10-20% Discount here.
Posted with permission of author by Wall Street Sector Selector
About John Nyaradi (http://www.wallstreetsectorselector.com)
John Nyaradi is Publisher of Wall Street Sector Selector: Your Home For ETF Investing! John writes a weekly guest column, John Nyaradi’s ETF Edge for MarketWatch.com and his investment articles have appeared in many online publications including Trading Markets, Money Show, Yahoo Finance, Investors Insight, Fidelity, ETF Daily News, iStock Analyst , among many others. His book, Super Sectors: How to Outsmart the Market Using Sector Rotation and ETFs, is published by John Wiley and Sons and included among the Years Top Investment Books in the 2011 Stock Trader’s Almanac.