The front half of the week saw stocks trading to multi-week lows as Greece stumbled with its umpteenth bailout package. But as usual, rumors of a deal started circulating across the Street ahead of the weekend, giving the market every reason it needed to bid stocks higher and push the averages into the green.

And that is just fine. In fact, we’ve seen this trade before. This is exactly how stocks traded last year at the same time, just grinding higher day after day as the market saw every dip as a chance to buy. Take a look at the 2-year Dow chart below for a comparison.

2-Year Dow Chart

That movement is indicative of a liquidity fueled rally. As in, the market is expecting action from the central banks of the world to keep asset prices on the fly.

And in regard to the Euro zone and Greece, it also feels like the market is becoming increasingly numb to the whole thing. There have been a thousand alarms so far, but not once has the entire financial system collapsed. And as sick as it sounds, that has cast a reassuring shadow across the Street.

But on a very macro level, much of this optimism and recent rally has been predicated on a very bold assumption; that the ECB and central banks CAN maintain control of the market. Because make no doubt about it, after everything the financial system and markets have been through over the last few years, those are pretty much the last two lines of defense.

So if one of them fails and the situation spirals out of control, instead of having small, periodic adjustments, the market could be in for a wholesale sell off. And that is essentially the down side risk in this market.

But for the time being it definitely looks like the market wants to keep rallying, making the first 6 weeks of 2012 a great time to own stocks and commodities.

Let’s get into some updates.

Updates:

It’s no secret that the second half of 2012 was a pretty brutal time to own energy stocks, clocking in as one of the worst performing sectors of the S&P500 after 2 years of huge gains. But not, it looks like the conversation in once again beginning to shift, as energy move back into favor with the market on hopes for economic growth and rising crude prices.

We saw that show up in Cimarex Energy Co (XEC) this week, blasting higher with an incredible 24% gain after reporting strong Q4 results that came in well ahead of expectations. That sure did go a long way to ease some of the under performance of this stock over the last 6 months. It’s also a stark reminder of the long-term trend in energy, where limited resources and rising prices have pushed earnings and production higher. So even though energy stocks can be a bit fickle in the short run as hot money flows in and out, the long-term trend is most definitely your friend.

Baker Hughes (BHI) was also on the upswing, adding 5% on the week and closing above $50 as natural gas prices rose in tandem with crude breaking above $104.

We also saw some solid movement from Bunge Ltd (BG), climbing 5% of its own as estimates continue to climb on the company’s recent Q4 results. As a global leader in agricultural goods like corn, beans and wheat, BG is a great way to gain exposure to a growing global population and limited food resources.

With the market regaining its appetite for risk, small cappers have been hot, helping lift EZCorp, Inc. (EZPW) to a 3.5% weekly gain. This is another stock that has been a bit volatile over the last 6 months, but with earnings on the upswing and a compelling valuation, the big picture looks solid.

That’s all for this week, but until next time, here is a follow up piece to our conversation about energy, with Iran announcing over the weekend that it will stop selling crude to the UK and France. If the situation in Iran and the Middle East continues to deteriorate ahead of spring and summer, peak months for energy consumption, crude could easily see a bid back to its all-time high of $147 from the summer of 2008. Enjoy.

Iran Halts Crude Sales to UK and France

Your Investment Partner,

Mike

But the action cooled a bit this week as the euro-zone story reemerged, with habitual offender Greece asking for more money as it teeters on the brink of default. It was a very quick reminder to a fairly comfortable market just how volatile things remain in the EU. That tone pushed the averages to their worst performance of the year on Friday as many investors chose to take profit on more short-term gains.

So that should pretty much set the tone for this week. Profit taking will be in play at the highs, and if we see any kind of meaningful down side, longer term players will use it as a chance to buy after letting the market run away from them in the surprisingly bullish market of January.

Other than the euro zone story, where Greece hangs in the balance, the markets got a good amount of data to sink its teeth into this week.

• Tuesday-Retail Sales
• Wednesday-Industrial Production
• Thursday-PPI (Producer Price Index), Philly Fed
• Friday-CPI (Consumer Price Index)

We’ll also be seeing the tail end of earnings, which have once again been pretty solid. We are seeing slower earnings growth, but that’s more normal cycle movement than a signal of Armageddon. Overall, the private sector is still looking strong, operating at record margins with lots of cash on the balance sheet.

So expect a bumpy week as the euro zone and domestic economy remain in focus.

Updates:

Earnings season rages on, and we saw some of our favorite stocks report this week. Let’s take a closer look.

Leading derivatives exchange Intercontinental Exchange (ICE) was at the front of the pack, adding 10% on the week after reporting Q4 results that came in ahead of expectations. The good quarter was driven by higher trading volumes in its energy products, a great example of the bullish trend in energy and commodities. The company also pleased the Street by announcing lower than expenses for 2012 that were lower than expected. So clearly the ICE was firing on all cylinders this quarter, trying to flex some muscle for the Street and get its share price back to its all-time high at $189.

Bunge Ltd (BG) was also in the 10% club, leading the charge higher on strong Q4 results and strength in its international business. As a leading global grain merchandiser, Bunge is a good way to a secular trend in agriculture. The company also operates very high in the distribution channel, capturing higher margins as prices rise.  As it stands, Bunge is expected to make $7 a share this year, which means at $63, this stock looks pretty undervalued. The 52-week high is $13 away at $76.

We saw a rare blast of strength from one of our energy stocks, with Cimarex Energy Co (XEC) tacking on a 9% gain for the week. It doesn’t look like the move came on any news in particular, but this stock has fallen well off its high so maybe that has attracted some attention in the space. Moving forward, spring and early summer are good times to own energy stocks because of cyclical pricing and demand. So we’ll be looking for some solid upward movement from XEC in the next few months along those lines. If that doesn’t happen, this is a stock that could get kicked to the curb.

And finally, how about a shout out to Apple, Inc. (AAPL), tacking on another 7% as the Street continues to admire its Q4 results. With shares staring down the barrel of $500, those who stepped out and bought in the low $400’s very quickly got in at a great price, up a quick 20% in just two weeks. It’s great to see Apple doing well and cranking out great numbers as the inspiration of Steve Jobs lives on.

That’s all for this week, but until next time, here is the latest on Greece and the Euro zone. The Greeks are rioting as parliament tries to implement budget cuts. The political and social climate is definitely heating up in the Euro zone. Enjoy.

Greece set for critical vote on spending cuts

Your Investment Partner,

Mike

Even though this didn’t look like a blockbuster week for stocks on the surface, it was actually a pretty solid performance. The averages were sitting on a string of quick and easy gains, closing each of the first three weeks of the year in the green. That meant a lot of big and small players would be looking to hit the sell button and lock in some profit going into the end of the month.

So regardless of the data, stocks were going to be under pressure. But as it turned out, the economic data actually continues to be pretty solid.

Earnings Still Solid

On the earnings front, Apple, Inc. (AAPL) chimed in with a monster quarter on Monday to tell the market that consumers will find a way to spend on things they don’t need. Fellow consumer stock Netflix, Inc. (NFLX) also scored big while Caterpillar, Inc.’s (CAT) solid quarter gave the market hope the global economy is stronger than thought.

There was also some respectable economic data on hand, with consumer confidence jumping to a 12-month high and Q4 GDP coming in at 2.8%. That was actually below expectations of 3.0%, but in the big picture, that is still solid GDP growth in a very tepid environment.

But the biggest news came from the Fed, extending its low interest rate policy into 2014. As has been the case for the last three years, that long-term trend is in play, where the Fed will do everything in its power to support employment and growth. That’s your weak-dollar policy supporting stocks and commodities, particularly gold.

Europe Lingers

But as always, in spite of mostly upbeat earnings and economic data, there is always the lingering threat that the Euro zone is going to implode and bring the whole thing down.

That is exactly how the market feels right now and why companies and investors just can’t seem to regain the swagger to spend and invest on stable ground. There is a huge cloud of uncertainty hanging over everything; politically, professionally and financially.

So as it stands, the averages are trading at an 8-month high and have rebounded close to 20% from the late September plunge. Overall, that’s some pretty solid upward momentum. But longer term, expect more polarity, where the market attempts to balance some decent economic news with total uncertainty in the Euro zone.

Let’s go ahead and talk about some updates:

Updates:

With the Fed reaffirming its commitment to destroying the dollar this week, gold and anything gold related jumped to the top of the charts. Somewhere very high on that list is Market vectors Junior Gold Miners (GDXJ), adding 10% on the week. Even though that’s a nice gain for GDXJ, shares have really struggled and underperformed over the last few months. That means gold stocks look seriously undervalued compared to the S&P500 and gold. So if the gold trade starts to heat up again as the global central banks stimulate and dilute, gold miners should benefit.

Double Gold (DGP) was also strong, tacking on 7% of its own to trade within 16% of the 52-week high at $73. The physical price of gold, represented X2 in DGP, has been much more stable than gold mining stocks. You probably won’t see the long-term gains in gold that you will in the physical, but the ride will also be a lot less bumpy. That’s something to think about when you are investing in gold.

Kansas City Southern (KSU) suffered a bit of a setback this week, falling 8% in spite of another solid quarter. Revenue for the period was up 11% to $530 million while earnings jumped to 87 cents from 50 last year. It’s another great example of how energy and cost efficient shipping is in demand and thriving. In regard to why shares fell on the news, KSU is up more than 40% in the last 4 months, so it looks like the market may have gotten little ahead of itself. But longer-term, this stock is trading like a north-bound train, so it looks like we’ve got a winner on our hands.

Shifting back into the winners, we saw some nice movement from our prosthetics company Stryker Corp (SYK), adding 4% on the week on a strong Q4 results. Longer term, the 52-week high is still 18% away at $65.21, but this week’s 4% was a step in the right direction.

And finally, we have Apple, Inc. (AAPL), which…KILLED IT. Should we expect anything else from this company? I just got done reading Steve Jobs biography and it was incredible. I highly recommend it. It’s not a coincidence that Apple performs like it does. Steve Jobs was a mad man. Ya, he’s gone now, but his legacy lives on, and this company looks as unstoppable as ever. Shares were up 6% on the week for a new all-time high at $454.

That’s all for this week, but until next time, here is a good piece on 10 dividend paying stocks if you’re looking for more stability and yield in your portfolio. Enjoy!

10 Income Paying Stocks that Outperform

**Vodicka Group is on vacation next week. We’ll be back in two weeks with our next update.**

Your Investment Partner,

Mike

The market continues to get a boost from what has been a pretty solid start to Q4 earnings season. That started with some good news out of financial services, where both Bank of America (BAC) and Goldman Sachs (GS) beat expectations. The trend continued in technology with Intel (INTC) and IBM (IBM) both delivering solid results. Transports also stood out with a big score for Union Pacific (UNP), beating and raising its full-year guidance.

But there were also a few soft spots. Dow components General Electric (GE) and American Express (AXP) disappointed the Street with under performances. If you take a closer look, both companies are suffering from weakness in the credit markets. GE is still trying to whip GE Capital into shape, and AXP took a hit from writing off more bad debt. It’s a signal that both companies and individuals continue to suffer from a weak credit environment.

The Tone is Upbeat

But overall the tone was mostly up beat on generally positive results and a confident outlook. That has helped to squash a lot of skepticism that the private sector would be showing signs of slowing down as Europe tries to spend less and China contracts.

But as always, those issues will linger. Right now, the market has a nice sugar high because earnings have been good. But the second the market gets a whiff of any material changes or weakness in the Euro zone story, a lot of hot money will be looking to take some profit and scale back. Those are hedge funds that have made some quick gains over the last few weeks in big positions and wouldn’t mind booking a little profit as we move into the back half of the month.

That means expect a little volatility in the short run. Everything is too quiet and complacent right now. We see that showing up in the VIX (volatility index), trading at a 6-month low.

2012 Looking Strong

But the longer term picture is actually looking pretty solid. Stocks are off to a good start in 2012, and the correlations between a strong January and strong year are high.

Looking forward, we’ve got another full deck of earnings on tap for the week.

From technology we hear from Apple, Inc. (AAPL) and Yahoo, Inc. (YHOO). Blue chips McDonalds (MCD), Ford (F) and Boeing (BA) are also stepping up to the plate. These are all big indicator companies too, so good news from the large-cap, multinationals will juice the market.

We’ve also got some key economic data to think about. On Wednesday we hear from the Fed, which is always interesting, but even more so than usual because clearly the market continues to price in more support from the biggest central bank in the world. So no doubt the market will be looking for the Fed to reaffirm its commitment to play nice. And don’t forget it’s an election year, which means the politicians will be pushing to go all in and do everything they can to boost the economy and bids for re election.

Beyond the Fed, we have:

• Thursday: Initial Jobless Claims, New Home Sales
• Friday: GDP, Consumer Sentiment

Let’s look for some more good news on the economy and earnings to support the nice up trend.

Updates:

Let’s take a closer look at some headline names that reported this week.

Although tech has generally been strong, Google, Inc. (GOOG) chimed in with a rare miss, disappointing the Street with Q4 earnings that came in short of expectations. The big story behind the miss is that GOOG is incurring more expenses, hiring a few thousand new employees during the quarter that weighed on margins. That’s a common problem that many companies are running into right now. Productivity has been maxed out over the last few years, pushing margins to historical highs.

That means earnings growth has to come from the top line and sales. But to get more sales you usually have to spend, and that is what GOOG is suffering from right now. Longer term, Google is still a solid name and legit player, but it’s another good example of how quickly the private sector in general and technology in specific evolves.

It’s funny how a weak economy can actually increase demand for some companies. One of those is EZCorp, Inc. (EZPW), with the pawn and payday lender reporting anther good quarter as credit-strapped consumers continue to seek specialty sources of finance. Although we didn’t see its share price pop, this was a strong quarter. Revenue was up 14% and earning jumped to 78 cents from 55 last year. The company also raised its full-year guidance. Shares have been a bit flat for the last few months after spiking last summer, which might have something to do with regulatory concerns as the payday and pawning industry remain in the cross hairs of the states and Feds. But with earnings on the upswing and a historically low valuation, EZPW is doing its part to support its investors.

Shifting back into technology, Checkpoint Software (CHKP) also looked strong with earnings up 15% from last year. The publisher of Internet and network security applications said that increased cyber and technology threats continue to drive demand for its products and services. That is a solid long-term trend, and CHKP looks well positioned to capitalize. On the whole, this is a top company in a growth industry with high margins and a killer balance sheet. That gives investors a lot of things to feel good about.

That’s it for this week, but we’ll be back again next week for another update. In the meantime, here is a great article that analyzes the relationship between former Fed leader Allen Greenspan laughing at FOMC meetings and the housing bubble. It’s a great example of how when the market gets too comfortable, something bad is about to happen. Enjoy.

Amazing Chart: Alan Greenspan Laugh an Indicator of Housing Bubble

Your Investment Partner,

Mike

The averages were off to a fairly strong start early in the week after aluminum maker Alcoa, Inc. (AA) reported that it expects to see strong demand in the first half of 2012. That provided a very nice injection of confidence into the Street because the company’s industrial exposure is viewed as a barometer for the health of the general economy. The forecast also played into China, providing hope that the massive consumer of resources recent bout of weakness is merely transitory in nature.

That bullish trend held strong through the middle of the week before the market hit some speed bumps on Friday.

The first was JP Morgan’s (JPM) Q4 results, coming in short of expectations as the financial mega-giant and financial sector in general continue to struggle with asset deterioration and weaker revenue growth. Keep in mind, the financial sector led the way into the recession of 2008 and also led on the way out in 2009. That means there are more than a few analysts, portfolio managers and investors keeping a very close eye on the group to gauge the health and trajectory of the economy.

Euro Zone Downgraded

But things got even more interesting on Friday after a leak hit the wire that ratings agency S&P was set to downgrade a number of euro zone countries after the close. The final tally came to nine, with France losing its coveted AAA rating while also being placed on negative outlook. That is definitely a build on the already troubling Euro zone scene, so the market is once again on notice that the union stands on shaky ground.

Looking forward, we’ve got a super busy week on our hands. Earnings season will continue to accelerate as a flurry of blue chips and high profile names step up to the plate. On the financial front we’ll hear from Citigroup, Inc. (C), Wells Fargo Co. (WFC), Goldman Sachs (GS) and Bank of America (BAC).

We’ve also got some headline technology companies in the mix, with Intel (INTC), Microsoft (MSFT), and Google (GOOG) on deck. And on Friday, we hear from General Electric (GE), another company that the Street views as being a bellwether indicator on the health of the economy.

We’ll also be seeing plenty of economic data in the holiday shortened week, giving the market some more information to sink its teeth into.

• Tuesday-Empire State Manufacturing
• Wednesday-Industrial Production
• Thursday-Consumer Price Index & Philly Fed Manufacturing
• Friday-Existing Home Sales

So as it stands, in spite of some turbulence on the earnings front and another chapter being written in the never ending Euro saga, stocks continue to trade relatively strong. For that you can thank a compelling valuation, with the S&P 500 back to peak earnings from 2007, and anticipation of more support and intervention from the central banks of the world. So with a little help from earnings and some respectable economic data, the market could be well positioned for another leg higher.

Updates:

Last week we introduced a new format to our updates, choosing to take a more in depth look at one area of the market as opposed to an overhead view of 4 or 5. So sticking with that concept, let’s go ahead and introduce our latest topic; Gold.

Gold has been one of the most divisive assets of the last few years, creating two very distinguished camps that are sharply positioned against each other; those who love it and those who hate it.

Those strong opinions come on the heels of what has been a historic run for gold, up more than 650% over the last ten years as investors continue to migrate into hard assets to protect their portfolios from currency devolution and central banks gone wild.

But while 2011 was another great year for gold, beating stocks and commodities with a 14% gain, various gold investments performed very differently.

At the top of the charts you have investments in physical prices, in this case X2, taking the form of Deutsche Bank Double Gold (DGP), which clocked in with a 28% gain over the last 12 months. Check out the killer one-year chart below where double gold handily outperformed the S&P500.

Double Gold vs S&P 500

But while the physical price of gold saw nice gains in 2011, there was a very unusual decoupling between the actual price of gold and gold stocks, otherwise known as gold miners. In spite of higher selling prices and robust earnings growth, gold miners had a terrible year. Below is a comparative chart that showcases that divergence pattern between Junior Gold Miners (GDXJ) and the actual price of gold in SPDR Gold Trust (GLD), with the S&P500 in green.

GDXJ vs. GLD and S&P 500

There are a few theories as to why this happened. The first is that investors are bypassing gold mining stocks and choosing to invest in physical prices through the use of ETF’s. These gold ETF’s have only existed for a few years and compete for a limited number of investment Dollars. So where as in the old days the only way to invest in gold was to buy a gold miner, investors now have more options.

The second theory is that gold stocks at the end of the day are still stocks, and growth stocks haven’t performed well in 2011. So even though the gold miners are posting impressive earnings growth on the back of higher selling prices, the market is still treating them as speculative growth stocks.

And finally, one for all the conspiracy theorists is that gold stocks and the price of gold are being manipulated by central and investment banks to try and keep a lid on gold prices. It would be hard to prove that, but at the very least it provides some context to how hot the conversations run with precious metals.

So big picture, the highest level take away is that there has been a massive divergence pattern between the price of gold and gold stocks. At some point, history tells us that gap will close, which requires either gold to collapse or the miners to rally. So if you’re still bullish on gold as the central banks continue to dilute, it could be a good time to load up on the group while prices and valuations remain at historic lows.

That’s all for this week, but until next time, here is an interesting article that discusses the probability China will lower interest rates in response to its cooling economy. If that happens, it’s good for gold, crude and stocks in general. Enjoy.

China on Verge of Easing?

Your Investment Partner,

Mike

Everyone knows that employment remains one of the weakest areas of the economic recovery of the last few years, so any good news on jobs goes a long way to support sentiment. And that’s exactly what we saw this week, with the ADP jobs report showing a gain of 300,000 in December and the government’s non-farm payrolls not far behind at 200,000, both coming in well ahead of expectations.

That sharp turn in hiring could mean that private-sector productivity and margins are finally tapped out, and that companies will now need to hire additional labor resources in order to grow sales and earnings. If that’s the case and the trend sticks, more jobs will go a very long way to support GDP, earnings and equity prices.

Europe Still a Question

Shifting into big picture, the Europe story continues to be relatively quiet in spite of Italy’s bond yields remaining above the critical 7% area. Both Ireland and Portugal required financial assistance when their yields breached 7%, so this is definitely a warning that the Euro story remains well in play behind the scenes. But the relative quiet over Europe has allowed investors to focus on other parts of the global economy that aren’t nearly as gloomy.

Q4 Earnings on Tap

Like earnings, with Q4 earnings season set to kick off on Monday with Alcoa stepping up to the plate. For as bad as employment has been for the last two years, earnings have been equally good, pushing the S&P500 back to peak earnings from 2007. But back then, the index was trading at a 20% premium to its current level, so clearly the valuation picture is fairly compelling right now. Just like jobs growth, if we see another solid quarter of earnings it could set the stage for some nice equity gains.

Looking forward, the market should have plenty to focus on with another full week of economic data on tap.

• Monday-Federal Reserve Consumer Credit
• Tuesday-Wholesale Inventories
• Wednesday-Federal Reserve Beige Book
• Thursday-Initial Claims and December Retail Sales
• Friday-Consumer Sentiment

So as it stands there are actually a few reasons for investors to be feeling good right now. Stocks are off to a good start in 2012, the domestic economy is adding jobs, valuations look compelling and another season of earnings is set to kick off. So as long as we can avoid a wholesale implosion of the Euro zone, we could have the making of a decent year in the market.

Updates:

We usually highlight about 5 or 6 stocks in the updates section. But this time around and probably more frequently down the line, I wanted to trim that number down and take a more granular look at one specific sector, its stocks and how they have performed compared to the overall market. So for our first incarnation of this format I have chosen energy.

Energy was a huge underperformer in 2011, clocking in as the worst performing sector in the S&P500. That weak performance was predicated on two things; the first was just general concern about the growth of the global economy. The second was more specific; concern about the growth of China, which has been an absolutely massive consumer and importer of natural resources and energy over the last 10 years. So when China shows signs of slowing, which it did in the second half of 2011, natural resource and energy stocks take a beating.

But as an analyst it is my job to be skeptical, so I decided to dig below the surface to see if I could find any material deterioration in the fundamental profile of any of these energy stocks.

So let’s go ahead and take a look.

The company I am going to profile is Baker Hughes, Inc. (BHI), an energy services and drilling company that operates both domestically and internationally with a market cap of $23 billion. So this is a pretty big company.

Baker Hughes had a terrible run in the second half of 2011 (along with the entire sector), falling 30% while the S&P500 gained 5%. You can see that in the chart below, with BHI in green/red and the S&P500 in red.

bhi vs S&P500

But the chart only tells half the story, technicals as they are called. The other part is the fundamental story, related to earnings and valuation. This is where the story gets interesting. Below is a chart of earnings projections for Baker Hughes. As you can see, analysts remain bullish on the company, with earnings projections showing almost no deterioration and holding in higher territory.

BHI Earnings Projections

That has Baker Hughes trading at a historically low valuation, where shares have gotten killed while earnings have held strong. A compelling valuation is by no means a guarantee that shares will rally, but investing is all about probability and mean reversion. So buying a stock like BHI with a current PEG (PE/Growth) ratio of .55 against a 10-year average of 1.2 means that probability is on your side.

• Current PEG ratio: .55
• 10-Year Median: 1.22

So what you have here is a situation where the market has fully priced a recession into energy stocks while the fundamental story remains unchanged. So if you are bullish on the long-term trend in energy it could be an opportunity to reduce your cost basis on existing shares with a historically low valuation.

That’s all for this week, but until next time here is a list of 10 investment ideas for 2012. Enjoy!

10 Investing Ideas for 2012

Your Investment Partner,

Mike

• The Euro Zone

As if I have to remind anyone, the Euro zone remains market enemy #1. So far, in spite of the endless line of remedies thrown at this financial sink hole, nothing has been able to provide any meaningful long-term solution. In the meantime, bond yields continue to rise, putting addition pressure on an already fragile situation. The Euro zone needs to show meaningful signs of stability to boost investor confidence and put a long-term bid back into the market.

• China is Slowing

China has been one of the great economic growth stories of the last ten years, stimulating GDP growth in its trading partners and sucking up natural resources at a breakneck pace. But in the last few months, the country’s torrid growth trajectory has begun to show signs of cooling. That has the investors very concerned that a drop in GDP growth from 10% to 7% could have a serious impact on the global economy. If there is one caveat in the story, it’s the fact that China itself has no interest in watching its economy crumble on top of itself, so if further signs of weakness appear, it will be very difficult for the central bankers and politicians to resist simulative measures to keep things cranking.

• The US has too Much Debt

And finally, creating the perfect trifecta of uncertainty is the US, which continues to battle its own financial demon with an unsustainable deficit and too much debt. So far, the country’s weakening financial profile has yet to show up in higher bond yields like it has in Europe, but if that conversation gains traction, things will get ugly pretty quick as the only “risk-free” asset in the world, US Treasuries, suffer from a lack of confidence.

Is There Anything to Feel Good About?

The answer to that question is absolutely. The first place to look for confidence is in the private sector. Remember, the problems with the market and global economy is not related to the private sector; its problems come from the financial sector and bloated government balance sheets and entitlements. Yes, there is a correlation between GDP and the pending austerity measures required to get things back in lin in the US and Europe, but for the time being, earnings have continued to move higher and projected to continue to do so. In fact, the S&P 500 is back to peak earnings from 2007 while the index trades at a 25% discount. That means this strong trend in earnings has sweetened the valuation picture considerably.

What about the Central Banks?

As much as I hate central bank and political intervention in what is supposed to be a free and capitalistic market, the reality is that both of these entities have and will have a profound effect on economic growth and asset prices. What that means in a nutshell is that we could be looking at a situation where bad news is good news, because the worse things get economically, the more pressure the central bankers will have to get in there and stimulate. And once one central bank moves, it creates an incentive for others to do so in what boils down to a race to the bottom for the weakest currency to stimulate exports. So even though the central banks and politicians don’t belong in the economy, anyone watching the market and buying stocks needs to pay close attention to what these guys are up to.

The Take Away

So that’s a quick look at the headline issues we confront heading into 2012. If it sounds a lot like what we saw in 2011 then you get a gold star for being absolutely correct. That means it should be another wild and crazy year filled with tons of volatility and uncertainty, so be sure to adjust your portfolio accordingly. If that makes you nervous, then avoid growth stocks, small caps and emerging markets and shift into large caps, utilities and dividend stocks. But if you see opportunity when others are fearful, 2012 could be a great year invest and move into risk assets, because there is certainly no shortage of fear and uncertainty on the Street these days.

Let’s go ahead and talk about some stocks.

Updates:

If there was one thing that we learned this year, it’s that when the market gets worried about growth, growth stocks quickly fall out of favor. So if you are looking for more stability in your portfolio, here are a few good names that will be on my radar.

Google, Inc. (GOOG)-leading search engine expected to make $38 a share in 2012. That is some serious earnings power for a share price trading at $640.

International Business Machines (IBM)-shares trading at an all-time high but this mega-cap, blue-chip traded strong all year in spite of tons of uncertainty and volatility. Company also pays a nice little 1.6% dividend.

Visa (V)-was also an all-star player in a weak market, hitting a series of new highs in 2011 in spite of the uncertainty. The company is expected to make $7 a share this year so the valuation picture looks pretty solid too. Mastercard, Inc. (MA) traded much the same, so either one of these guys will get you a stable pick with nice upside.

Verizon Communications, Inc. (VZ)-finished 2011 ahead of the market with a 10% gain, and when you throw in a 5% dividend yield this is another stock that traded strong in a tough market.

And finally, we have Exxon Mobil Corp (XOM), the largest company in the world. Energy was the worst performing sector of 2011, so XOM’s 16% gain and 2.2% yield look like a good send compared to its peers.

That’s all for this week, but until our next update, here is a good article on how bonds had a great year as investors moved away from risk and shifted into more conservative assets amongst all the uncertainty. Enjoy.

Bonds Prove Best Asset for First Time Since 1997

Your investment Partner,

Mike

At this point, it’s pretty obvious that the Euro zone is a total disaster. Bond yields continue to spike, growth remains anemic and uncertainty reigns supreme as the politicians, regulators and central bankers struggle to find any kind of meaningful resolution to the situation.

That means there are basically two paths for the Euro zone, and global economy in general, to walk down. The first path is to simply let the market function naturally and shake out all of these kinks on its own. But with mountains of sovereign and bank debt creating a huge, deflationary black hole that threatens the stability of the global financial system, it is highly unlikely that the previously mentioned politicians, regulators and central bankers are going to stand on the sidelines and let that happen.

That places the onus on the second option, which is for the politicians and central bankers to get even more aggressive on the monetary front and do everything they can to stimulate the economy and juice liquidity. That of course involves one of economists favorite words, monetize, which is just another way of saying print more money until smoke billows out of the printing press.

Inflation  Collapse?

So those are basically the two options on the table. Let the entire financial system collapse on itself under mountains of debt and unsustainable deficits, or let the politicians and central bankers get crazy on the monetary front to try and save the whole thing or at the very least kick the can down the road as long as possible.

If that’s the path we go down, it is highly inflationary, which would be good for stocks, gold and oil.

For the time being, we actually saw some restraint from the Fed and European Central Bank, both failing to announce any fresh rounds of monetary stimulation in their latest meetings. That is why stocks, gold and oil were down so much this week. But moving forward, if the central banks do choose to stimulate and try to save the dire situation in the Euro zone, expect to see stocks, oil and gold rallying pretty hard.

Let’s get into some updates.

Updates:

In a market where growth is anemic, you would think that a company that grew sales by 50% and earnings by 30% in just one year would be rewarded. But that’s not what happened this week with VeriFone Systems, Inc. (PAY), taking an 18% nose dive in spite of awesome Q2 results that came in well ahead of expectations. Revenue was up 48% from last year to $411 million. Earnings came in at 53 cents, up 30% from last year’s 40 cents and safely ahead of expectations of 51 cents. VeriFone also forecasted full-year, 2012 earnings between $2.53 and $2.60, also ahead of expectations of $2.48. So all in, as you can see, it was a great quarter, with the outlook coming in strong too.

So it’s basically a great example of how the market is treating any kind of growth oriented stock right now, regardless of what the numbers look like. Risk is off the table, with investors choosing capital preservation as uncertainty rules the day.

It was much the same story for energy stocks, with any kind of growth asset getting beaten into the ground as the market shifts into bonds and conservative segments of the market like consumer staples and utilities. That hit energy services company Baker Hughes (BHI), down 9% on the week.

Cimarex Energy (XEC) was also on the ropes, falling 9.5% and within $10 of its 52-week low at $50. At this point, being in the energy trade is all about conviction, because it has not been easy to own these stocks this year. If you believe in the long-term trend of growing demand and decreasing resources, then you live with the volatility and buy more shares. Because if the market regains its appetite for growth, there are few areas of the market that will rally as hard as energy.

We are also seeing some interesting movement in gold, with prices coming under pressure over the last two weeks as the Dollar strengthens due to weakness in the Euro (currency). That weighed on Double Gold (DGP), falling 14% on the week. It also showed up in the basket of Gold Miner Stocks (GDXJ), trailing the market with a 12% loss. Even more so than stocks and energy, gold ties into the conversation about the behavior of the central banks. If they choose to print, that is highly inflationary, so expect to see gold resume its upward trajectory. But for the time being, with the Fed and ECB showing a little restraint, it was a tough week to be in the gold trade.

So now that everyone is thoroughly depressed about the performance of the market and various stocks, let’s shift gears into some good news and try to end on a high note.

The down market will always make you appreciate having a diversified portfolio with defensive names in the mix. There not as sexy as growth stocks, but they will help keep you in the game when the market goes south. That’s exactly what we saw this week from CPFL Energy (CPL), gaining 2% as investors chased the company’s solid 6% dividend. We also saw that show up in McDonald’s Corp (MCD), handily beating the market with a marginal .5% decline. We’ve seen great things from MCD this year, up more than 30%, so let’s look for that trend to carry on and support the portfolio.

That’s all for this week, but until next time, here is an article related to our discussion above about the Fed and how its actions will affect the market in 2012. Enjoy!

What to Expect from the Fed in 2012

Your Investment Partner,

Mike

Stocks were steadily grinding higher early in the week as the market looked forward to a rate cut from the European Central Bank. That came to fruition on Thursday, but quickly morphed into “buy the rumor, sell the news”, with the averages closing the day deep in the red and shedding most of the weekly gains.

But on Friday, help was on its way, coming in the form of an agreement between 26 of the 27 Euro zone countries to tighten their fiscal unity to combat the union’s financial problems. It served as a big catalyst for stocks, sending the averages sharply higher and into the green for the week.

No doubt it was great to see stocks rally on Friday, but taking a step back and looking at the big picture, everyone still wants to know if any of this matters in the long run. Is the Euro zone even fixable? Because so far, close to two years into the debate, not a single thing the regulators, politicians or central bankers have done has been able to stem the tide of financial erosion washing through the region.

Earnings and Valuations Support Stocks

But in spite of the uncertainty clouding the Euro zone, the averages are hanging pretty tough right now, with the Dow and S&P500 both back in the green on the year. That has everything to do with earnings, which are back to record levels from 2007. Back then, the averages were trading at a 20% premium to current levels, so the valuation picture looks compelling too.

Longer term, even if the Euro zone does manage to escape a wholesale implosion, its financial instability is expected to weigh on economic growth. That means we could be seeing GDP contractions in key Euro zone areas in 2012. We’ve also got China to worry about, which validated concern over slower growth by juicing its economy with a 50 basis point reduction in lending rates last week.

Domestic Q3 GDP came in at 2%, considered a fragile recovery at best in light of how hard the economy contracted in 2008. If the Euro zone and China slow, that will spill over into the domestic economy and put our tepid economic growth in question.

Looping back to earnings, we have also seen some companies warning about profit forecasts going into 2012. That is not something we have seen over the last two years as strong earnings growth drove the averages to big gains.

So really, the market is looking at a whole bunch of potential land mines right now. Not exactly a news flash but not great for sentiment either. For the time being, the Central Banks still have control of the market, but that doesn’t look like a sustainable model either.

So if nothing else, expect more volatility from the market. And if things get ugly, remember, the Central Banks will be looking to monetize (print), and that is usually good for stocks. So sadly, we might be looking at a situation where bad news for the economy is actually good news for stocks.

Let’s shift into some updates.

Updates:

With the market posting a small gain on the week, a number of stocks followed suit. McDonald’s Corp (MCD) continues to look like an all-star, adding 2% on the week and hitting a new 52-week high at $98.43.

CPFL Energy (CPL) was the leader of the pack, adding 5% on the week as the “risk on” trade pushed emerging market stocks higher. This Brazilian electric utility pays a solid 6% dividend but has also been strong on the capital side as well.

Apple, Inc. (AAPL) also finished in the green, adding 1% as shares move back within striking distance of the $400 mark. That has been the key level for Apple for the last few months, so if shares can close above this area the stage should be set for another leg higher and possibly into $500.

Shifting into the laggards, Baker Hughes (BHI) fell 6% on the week on no major news as energy stocks were once again volatile with the market. In the meantime, earnings and estimates continue to look great, so for the energy bulls out there these are the times to be buying more shares.

Cimarex Energy (XEC) fared better, adding 2% on the week as crude remains stubbornly glued to the $100 level in spite of concern about global economic growth.

That’s all for this week, but until next time, here is an interesting article that discusses how 401K plans are being regulated to reveal their costs for the first time in 2012. Hey, isn’t that an incredibly brilliant and novel idea? Making the big banks and financial companies reveal to their customers how much they are paying for their services? Now that’s what I call innovation. It’s just one more reason why everybody loves those big banks so much, nothing but a swell bunch of guy who hold client interests very close to their hearts.

It will be a great way for people to see how incredibly expensive 401Ks and mutual funds are while getting little support, transparency or relationship. Enjoy.

401K Fee Disclosure Coming in 2012

Your Investment Partner,

Mike

If that sounds absurd then you’ve probably never heard of the Fed.

Back in 2008 it was the Fed and other Central Banks that bailed out the financial institutions and saved the global economy. And now, in the late stages of 2011, it is the Central Banks once again coming to the rescue to save the Euro zone and other financially stressed countries/regions.

That’s what happened this week, when a group of global central banks that included the Fed, Bank of Japan, European Central Bank, stepped in to lower the cost of lending in Dollars. With borrowing costs falling, fresh capital gets pushed into the market, providing additional liquidity and driving asset prices higher.

Is it Sustainable?

No doubt that was good for stocks in the short run, which saw their best gain in almost three years this week. But the real question is the sustainability of this model.

If the financial system isn’t strong enough to stand on its own then it clearly operates in a broken system. The way problems like these correct themselves in the free market is through innovation and competition, where weak hands are allowed to die off.

But that’s not being allowed to happen in the financial sector, because what we have learned over the last three years is that stress in even the smallest area/region has profound implications across the globe.

So as it stands, the Euro zone and global financial system continue to limp along in spite of ongoing support from the Fed and other Central Banks.

But even countries and central banks can go bankrupt. And with a river of debt being used to fix a “too much debt” problem, that leaves one of two options; Financial Armageddon or hyper inflation.

So that’s a bigger picture look at what’s going on right now. It’s also a strategy for how to play your portfolio. If you think the financial system is going to collapse then stocks will get killed. But if the long-term solution is inflation, that is usually good for stocks.

Let’s get into some updates.

Updates:

With the marker regaining its appetite for risk, growth stocks were in play.

Cimarex Energy (XEC) was up 13% with Baker Hughes (BHI) close behind at 10%. Energy stocks have been pretty brutal this year, one of the worst performing sectors in the S&P500 as investors worried about economic growth. But this is a good example of how stocks that fall the most in a selloff are also usually the ones that gain the most in a rally. Bigger picture, both of these stocks are trading well off their 52-week highs, but if you believe in the commodities super cycle on diminishing resources, energy companies are a great way to play that.

Sticking with the commodities trend, stimulated by the most recent central bank intervention, Market Vectors Junior Gold Miners (GDXJ) posted a solid 10% gain. This ETF has been volatile this year in spite of gold’s bullish trajectory, something that has been a bit of a mystery to the market. But in the meantime, earnings are way up, creating some very compelling value that suggests plenty of upside.

We saw some decent movement from Apple, Inc. (AAPL) adding 7% on the week to close at $390. Apple has been fiddling around with this $400 level for the last six months, so a strong close above and good holiday sales could provide the support we need for another leg higher and fresh all-time high.

You really have to love McDonald’s (MCD). Not just because they have good French fries, but also because their share price is resilient in a weak market and strong in a bullish one. We saw that show up this week, with shares adding 5% to move within $1 of the all-time high of $96.48. This stock is a great combination of growth and stability.

That’s all for this week. Until next time, here is some good insight into using coporate bonds to generate a solid yield while also staying defensive. Enjoy.

Pad Your Portfolio with Corporate Bonds

Your Investment Partner,

Mike