Market Week: February 26, 2013

February 26th, 2013

The Markets

Equities spent Friday trying to recover from downdrafts earlier in the week. The Dow industrials managed to squeak back to 14,000, but the other domestic indices reacted more strongly to Fed discussions of how to wind down its bond-buying program. It was the first down week for the S&P 500 so far this year.

Market/Index

2012 Close

Prior Week

As of 2/22

Week Change

YTD Change

DJIA

13104.14

13981.76

14000.57

.13%

6..84%

Nasdaq

3019.51

3192.03

3161.82

-..95%

4..71%

S&P 500

1426.19

1519.79

1515.60

-..28%

6..27%

Russell 2000

849.35

923.15

916.15

-..76%

7..86%

Global Dow

1995.96

2098.72

2086.49

-..58%

4..54%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

1..78%

2..01%

1..97%

-4 bps

19 bps

Equities data reflect price changes, not total return.

Last Week’s Headlines

· Stay tuned: The March meeting of the Federal Open Market Committee will focus on when and how to wind down the Fed’s purchases of $85 billion worth of bonds each month. Minutes of the most recent meeting suggested that committee members are divided on how to ease out of quantitative easing without disrupting the economy. Staff members will report on the potential impact of various options, including varying the size of bond purchases from meeting to meeting and selling existing holdings gradually.

· New residential home construction fell 8.5% in January, though housing starts were still 23.6% higher than in January 2012. The Commerce Department also said building permits for single-family homes were up 1.9% for the month, while permits for buildings with 5 or more units were up 1%.

· Wholesale prices were up 0.2% in January. The Bureau of Labor Statistics said roughly 75% of the increase could be accounted for by a 0.7% increase in food prices, especially the 39% jump in the cost of vegetables. The January figure put the wholesale inflation rate for the last 12 months at 1.4%. The BLS also said raw materials were up 0.8% for the month. Meanwhile, the BLS said consumer prices were unchanged in January; increases in housing and apparel costs offset a 1.7% drop in energy prices, leaving the annual inflation rate at 1.6%.

· The FBI said it is joining a Securities and Exchange Commission investigation of possible insider trading related to Berkshire Hathaway’s recently announced intent to buy H.J. Heinz Co. A U.S. court approved continuation of an SEC-requested emergency freeze on assets in a Swiss trading account; the account’s unidentified owner allegedly bought a substantial amount of Heinz call options the day before the acquisition plans were announced.

· Sales of existing homes were up 0.4% in January, and were more than 9% ahead of last January. The National Association of Realtors® said tight inventory helped drive the median price for home resales up 12.3% from January 2012; the number of homes for sale fell almost 5% during the month and was at its lowest level since April 2005. The NAR said the inventory shortage is beginning to create a seller’s market in much of the country.

· The European Commission (the eurozone’s executive body) forecast a 0.3% contraction in the eurozone during 2013, and only 0.1% growth for the entire European Union. However, the EC forecasts 1.6% EU growth in 2014, with 1.4% growth in the euro area.

Eye on the Week Ahead

A steady stream of economic data will likely be overshadowed by the approach of the sequestered budget cuts. Unless Congress surprises the country with a last-minute plan for avoiding them, the $85 billion in cuts for 2013 are scheduled to begin taking effect on Friday.

Key dates and data releases: new home sales, home prices (2/26); durable goods orders (2/27); 2nd estimate of Q4 GDP (2/28); personal income/spending, U.S. manufacturing, construction spending (3/1).

Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

US TREASURIES: Guaranteed to Disappoint

February 19th, 2013

If you’ve read our newsletters and/or blogs, you know that we avoid making investment guarantees, as the future is inherently unknowable. However, one thing we can say with much confidence is that there is virtually no chance that US Treasury securities will perform as well over the coming decade as they have over the past 10 years. In fact, we think Treasuries will be big losers over the next several years.

How well have they done recently? For the 10 years ended January 31, 2013, the iShares 7-10 Year Treasury ETF, which invests in intermediate-term US Treasury notes, had a total return of +79.2%, or +6.0% per year. After inflation that equals +3.5% per year, considerably higher than the historical average of +1.8% per year. Over the same period, the S&P 500 returned +112.0%, or +5.3% per year after inflation; this was well below its long-term average of +6.8% per year. Will the next 10 years be similar, with Treasuries outperforming and equities underperforming? We think not.

Run for “safety”

US Treasuries are the “safest” investment in the world in just one way—you will unquestionably receive your interest payments on time and your principal will be returned at maturity. This is why investors flocked to Treasuries in 2008 following the global economic downturn, and why Treasuries still yield so little today. People who had been burned by the stock market and other “risky” investments decided to opt for safety over opportunity, perhaps a logical decision at the time but one that has made it increasingly difficult to generate good returns from fixed income investments.

Today, a 10-year Treasury note yields just 2.0%. You lend the government $1,000 today in exchange for $20.00 annually in interest, and on January 31, 2022 you receive your $1,000 back. If the choice is between 10 years under your mattress or the Treasury, go with the latter because at least you will be $182 richer. However, the same bond market that’s pricing 10-year Treasuries at 2.0% is pricing inflation over the same period at 2.6% per year. Thus, your after-inflation return would be -0.6% per year, or -5.5% over 10 years. But don’t forget taxes: at a marginal rate of 28%, Treasuries today are only yielding 1.4%, so your annual loss is actually -1.1% after inflation, or -10.6% over the next decade. Are you really so eager to lock in a loss of spending power over the next 10 years? Invest $1,000 now; walk away in 2013 with $894 after inflation and taxes. What price “safety?”

If the expected return for Treasuries is so crappy, why are investors still buying them?

The majority of Treasuries are owned by large financial institutions, non-financial corporations, and government (our Fed and foreign governments like China)—sophisticated investors for the most part. Governments and financial institutions hold Treasuries mainly because they have so few other options, given regulatory and other restrictions. Investors who have choices, whether individuals or institutions, hold Treasuries in part to guard against another financial meltdown, with memories of 2008 still fresh. While we are certain that another financial crisis will occur, perhaps on a similar scale to the last one, we doubt it will occur within the next decade, or even the next 30 years. Crises of such magnitude typically happen only a couple of times in a century. But investors, even “sophisticated” ones, typically fight the last war for far too long.

Best-case scenario

The bond game is simple—if interest rates go up you lose because bond prices fall; if interest rates go down you win as bond prices increase. [Read that last sentence two or three times to be sure you understand it.] As you can see below, bondholders have been big winners over the past two decades as they watched the prices of their bonds appreciate as interest rates fell to historic lows. In order for the bond bull market to persist, one or more of the following needs to occur:

(1) Deflation – The average prices of goods and services in the US would have to persistently decrease over several years, such as they did here in the 1930s and Japan over the past 2 decades. This is unlikely because the Fed has been so aggressive at increasing the money supply. And remember, over the past 100 years, inflation has averaged +3.2% per year. Even since the financial crisis (2008-2012) it has averaged +1.7%.

(2) Historically low interest rates persist – Interest rates would have to stay at these unprecedented levels over several years, which would require (as the Federal Reserve recently made clear) both persistent unemployment (above 6.5%) and low inflation forecasts (less than 2.5%) for some time to come.

10-year US Treasury interest rates since 1993

But let’s give today’s bondholders the benefit of the doubt. Assume we purchase a 10-year Treasury today for $1,000 at a 2.0% yield. How do we do if two years from now, 10-year rates drop back to their all-time low of 1.5%? Our $1,000 bond will be worth $1,037 in 2015: including interest, we’ve made $77 or +7.7% over 2 years before taxes and inflation (roughly +6.0% after). Now let’s go crazy and assume 10-year Treasury rates plummet to 1.0% in 2015. Your $1,000 Treasury would be worth $1,077 in this scenario, for a total return of 11.7% (+9.4% after taxes and inflation) in this extremely unlikely, best case scenario.

Worst-case scenario

If you think the best-case scenario isn’t so great, get ready for the worst-case scenario. All it will take for Treasuries to get mauled over the next few years is a very modest uptick in interest rates.

If the 10-year rate increases to 3% by 2015, which isn’t unlikely, the price of a 10-year, 2.0% Treasury issued in 2013 falls to $930 (-3.0% loss before taxes and inflation, roughly -8.3% after). If rates were to climb to 4% by 2015, another likely scenario considering we saw 4% as recently as 2010, your 10-year Treasury falls to $865 (-9.5% before taxes and inflation, roughly -13.8% after). And if rates go up to 5.8%, their average since WWII? Forgedaboudit!

10-year US Treasury interest rates since 2008

But this isn’t the worst of it. While you might be able to live with a -13.8% loss on your Treasury investment over the short term, knowing that you’ll still get your $1,000 back if you’re willing to wait another 8 years, the longer-term effects of gradually rising interest rates and inflation are devastating, but barely noticeable in the short term. Similar to the erosion of rock by water, you don’t see what’s been happening until many years have gone by.

As an historical example, let’s look at what happened to Treasury bond investors from 1963 to 1973, before inflation really started to kick in. At the start of 1963, 10-year Treasuries yielded 3.8% and ended the decade at a 6.4% yield. Inflation during this period averaged 3.4%. Tax rates were much higher, but we’ll impute a 28% AMT rate to be generous. So what was the after-tax, after-inflation return to 10-year Treasuries during that rather prosperous decade? Exactly -0.635% per year, or -6.2% for the decade. At least inflation was lower than Treasury yields at the time, unlike today.

Amazingly, after that experience, many people bought Treasuries in 1973, perhaps assuming the worst was over. During this next decade, rates went from 6.4% to 10.4%. Inflation averaged a whopping 8.7%. How did the Treasury investor do, after taxes and inflation? He “earned” -3.7% per year, or -31.5% for the decade. Terrific: invest $1,000 in the “safest” investment in the world; get $685 back in 10 years.

In sum, we believe that, over the next decade, the Treasury market offers more downside than upside, and there are much better places to invest. In Part 2 we will discuss other asset classes (not just equities) that we believe offer better opportunities for return than Treasuries with little additional risk.

Dr. Ken Waltzer MD, MPH, AIF®, CFA, CFP®
Founder and President – Kenfield Capital Strategies (KCS)

Strategic Investment Advisors, d/b/a Kenfield Capital Strategies℠ (KCS) is a registered investment adviser. Our services include discretionary management of individual and institutional investment accounts, along with comprehensive financial, estate and tax planning services.

Market Week: February 20, 2013

February 19th, 2013

The Markets

Equities markets generally spent a second week digesting January’s strong gains. The Dow continued to flirt with the 14,000 mark, while neither the small-cap Russell 2000 nor the S&P 500 have had a negative week so far this year.

Market/Index

2012 Close

Prior Week

As of 2/15

Week Change

YTD Change

DJIA

13104.14

13992.97

13981.76

-..08%

6..70%

Nasdaq

3019.51

3193.87

3192.03

-..06%

5..71%

S&P 500

1426.19

1517.93

1519.79

.12%

6..56%

Russell 2000

849.35

913.67

923.15

1..04%

8..69%

Global Dow

1995.96

2110.62

2098.72

-..56%

5..15%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

1..78%

1..99%

2..01%

2 bps

23 bps

Equities data reflect price changes, not total return.

Last Week’s Headlines

· U..S. retail sales bumped up 0.1% in January, according to the Commerce Department. Excluding autos, which slipped 0.1%, the monthly increase was 0.2%, with nonstore retailers and general merchandise stores performing the best. The increase put overall retail sales, which are not adjusted for price changes, 4.4% ahead of last January.

· Optimism about the European Union’s economy got a reality check when the region’s statistics agency reported that the eurozone’s GDP fell by 0.6% in the final quarter of 2012 and was 0.9% lower than a year earlier. For all of 2012, the eurozone’s economy shrank 0.5%.

· U..S. industrial production was down slightly in January; the Federal Reserve said a 3.9% decline in auto manufacturing contributed to the 0.1% drop. However, industrial production was still 2.1% ahead of a year earlier, though it’s still only at 98.6% of its 2007 average.

· The Group of Seven industrialized nations issued a joint statement saying that members’ monetary policies should not devalue currencies simply to bolster an individual country’s economy by encouraging exports. European leaders have expressed concern about a rising euro, and Japan recently increased bond-buying efforts that resemble the U.S. Federal Reserve’s and that have reduced the yen’s value.

· American Airlines and United agreed to merge, forming the largest airline in the world, and Berkshire Hathaway (in conjunction with a private equity firm) announced plans to acquire H.J. Heinz.

Eye on the Week Ahead

In a holiday-shortened week, minutes of the Federal Open Market Committee’s most recent meeting could shed light on members’ thinking about winding down the Fed’s bond-buying activity. Housing and inflation data also are on tap.

Key dates and data releases: wholesale inflation, housing starts, FOMC minutes (2/20); consumer inflation, home resales (2/21).

Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Market Week: February 11, 2013

February 12th, 2013

The Markets

After suffering its first triple-digit loss of the year on Monday, the Dow fought to hang on to the prior week’s 14,000 level but in the end just couldn’t manage to do so. The other domestic indices managed minimal gains, and the S&P 500 hit its highest level since November 2007. Meanwhile, the Global Dow was hampered by anxiety about rising Spanish and Italian bond yields.

Market/Index

2012 Close

Prior Week

As of 2/8

Week Change

YTD Change

DJIA

13104.14

14009.79

13992.97

-..12%

6..78%

Nasdaq

3019.51

3179.10

3193.87

.46%

5..77%

S&P 500

1426.19

1513.17

1517.93

.31%

6..43%

Russell 2000

849.35

911.20

913.67

.27%

7..57%

Global Dow

1995.96

2124.94

2110.62

-..68%

5..73%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

1..78%

2..04%

1..99%

-5 bps

21 bps

Equities data reflect price changes, not total return.

Last Week’s Headlines

· The nonpartisan Congressional Budget Office said the annual U.S. budget deficit as a percentage of the economy will shrink in 2013 for the fourth year in a row. The estimated $845 billion deficit would be less than $1 trillion for the first time in five years, and represent only 5.3% of GDP–roughly half the ratio of 2009. The bad news? Without tax and spending changes, the CBO said that the total national debt will be at 77% of GDP in 10 years and growing, largely because of rising health-care costs for an aging population and interest payments on federal debt.

· The U.S. trade deficit shrank to its lowest point in almost three years as a result of record oil exports. According to the Commerce Department, the trade deficit fell more than 20% to $38.5 billion.

· The U.S. Treasury said it will launch its first new investment product in 15 years when it auctions floating-rate notes sometime in 2013. The Treasury also said it plans to increase issuance of Treasury Inflation-Protected Securities (TIPS) this year.

· New factory orders were up 1.8% in December, with an 11.7% jump in transportation-related orders leading the way, according to the Commerce Department. It’s the third increase in factory orders in the last four months.

· The U.S. services sector grew at a slightly slower pace in January. The Institute for Supply Management’s index registered 55.2% for the month. That’s slightly lower than December’s 55.7%, but any figure above 50% represents growth, and it’s better than the 53.1% of the ISM’s manufacturing index.

· The U.S. Justice Department filed suit against Standard & Poor’s, charging that during the three years prior to October 2007, the ratings service deliberately inflated its ratings of certain mortgage-backed bonds because of its own business concerns.

· Bond yields for Spanish and Italian sovereign debt rose to 5.4% and 4.5% respectively after Spanish Prime Minister Mariano Rajoy’s political party was accused of taking kickbacks and as polls showed new strength by former Prime Minister Silvio Berlusconi as Italy’s February 24-25 elections get closer.

Eye on the Week Ahead

As earnings season winds down, the approaching March 1 deadline for implementation of the sequestered federal budget cuts may begin to get renewed investor attention. Retail sales may give insight into the consumer mindset.

Key dates and data releases: retail sales, business inventories (2/13); industrial production, options expiration (2/15).

Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Market Week: February 6, 2013

February 6th, 2013

The Markets

A stream of strong earnings reports helped the Dow industrials end their fifth straight week of gains by closing above 14,000 for the first time since 2007. The Nasdaq’s best week since the first of the year helped it close the gap with the other domestic indices, while the small-cap Russell 2000 continued to lead the pack.

Market/Index

2012 Close

Prior Week

As of 2/1

Week Change

YTD Change

DJIA

13104.14

13895.98

14009.79

.82%

6..91%

Nasdaq

3019.51

3149.71

3179.10

.93%

5..29%

S&P 500

1426.19

1502.96

1513.17

.68%

6..10%

Russell 2000

849.35

905.24

911.20

.66%

7..28%

Global Dow

1995.96

2115.30

2124.94

.45%

6..46%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

1..78%

1..98%

2..04%

6 bps

26 bps

Equities data reflect price changes, not total return.

Last Week’s Headlines

· Hampered in part by fiscal cliff fears and Superstorm Sandy, the U.S. economy slowed substantially in 2012’s final quarter. According to the Commerce Department’s initial estimate, gross domestic product contracted during the quarter at an annual rate of 0.1%. That’s dramatically lower than Q3’s 3.1% growth, and is the first quarter of contraction since Q2 2009. A 22% decline in defense spending, lower state/local government spending, and reduced inventories and exports were major contributors to the contraction. The initial GDP estimate is subject to two revisions over the next two months.

· Businesses added 157,000 new jobs in January, according to the Bureau of Labor Statistics, and the figures for November and December were revised upward. Unemployment edged upward slightly to 7.9%; it has stayed within one-tenth of a percentage point of that level since last September.

· Congress passed legislation that would temporarily suspend the debt ceiling until May without requiring spending cuts. However, lawmakers’ paychecks would be withheld if their chamber of Congress doesn’t pass a budget resolution by April 15.

· Durable goods orders leaped 4.6% in December, in part because orders for transportation equipment, which had declined for two months, soared 11.9%. The Commerce Department said new nondefense orders–an indicator of capital spending by businesses–also were up 3.8%. Durable goods orders have now risen in seven of the last eight months.

· U..S. manufacturing saw solid growth in January as the Institute for Supply Management’s index rose almost 3 points to 53.1 (any figure over 50 represents expansion). The ISM said that was the index’s highest level since April 2012.

· Going into the holiday season, home prices in the 20 cities measured by the S&P/Case-Shiller index fell 0.1% during November. They were 5.5% higher than a year earlier, though the average price nationally was still 30% below its 2007 peak.

· Personal income jumped 2.6% in December. However, according to the Commerce Department, much of the increase resulted from lump-sum Social Security benefits, the rebound from Superstorm Sandy, and companies accelerating payment of dividends and bonuses because of uncertainty about 2013 tax rates; otherwise, the increase would have been 0.4%. The personal savings rate was also up dramatically, rising from 4.1% of disposable income in November to 6.5% in December; that’s the highest savings rate since 2009.

· Steady as she goes: The Federal Reserve Open Market Committee reaffirmed its plan to continue its bond purchases and keep interest rates at current levels until unemployment falls to 6.5%.

Eye on the Week Ahead

Data on factory orders will be watched to see if they confirm last week’s encouraging manufacturing data. Also, the European Central Bank will meet on interest rates.

Key dates and data releases: factory orders (2/4); U.S. services sector (2/5); labor productivity/costs (2/7); international trade (2/8).

Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Reality Check

February 3rd, 2013

It’s been an exciting week. Apple is down and Netflix is up. Many experts predicted just the opposite. And my views have changed dramatically in January.

First of all I am looking at the economic forecasts for 2013. The forecast for the US market doesn’t look all that exciting in spite of the great corporate earnings reports. In general the experts are predicting a 3-4% uptick in the stock market for the year. But clearly that’s too conservative since the S&P is already up 3% and the year has just begun. Many experts think the S&P will get to 1600 this year.

But the bigger predicted jump is in the Asian markets. For that reason I’m putting a little money into the Asian ETF’s. There are a lot to choose from. Here is part of the selection:

From these EPP and GMF have, for some reason, been recommended to me. As I’ve mentioned before, my preference is always to invest in the US, where we have good monitoring of investment information. But economists are predicting that 80% of the economic growth in 2013 will be in Asia (40% in China alone) and I don’t want to be left out.

And, by the way, I’m completely out of Eurozone stocks, with that area likely to be level or slightly down for 2013.

I bought a few hundred shares of Apple stock when it dropped down around $450 a share. I don’t know when, but I believe that someday it will go back up into the $500+ range. After all, the earnings report was good, and the products are still selling. What more could one expect? And that 2% dividend doesn’t hurt either.

But in some accounts I’m losing on the 570 Apple puts I sold when the stock was about 100 points higher than now. With the stock down 100 points my 5 put position is losing $50,000 less the $16,000 I’ve taken in on the initial premium from the put sale, plus some premiums on call spreads I’m continuously writing since the stock went down. That’s one of the advantages of dealing in options, instead of just buying stock. When things go against you there are various strategies to recover losses, not just waiting for the stock to recover.

So now I am “rolling” the Apple puts “down and out” (a lower strike price and an expiration date further away) each month at a breakeven price, thereby holding on to my initial premium ($12,000) and writing call spreads to try to take in an additional $2,000 a month in hopes of an eventual rebound in the stock. So far it’s working, but slowly. My breakeven point is about 550, but I consider it only 50-50 that the stock will hit that price during 2013. It depends on what they do with their cash. If they buy something exciting the stock will spike up.

I remain surprised by a lot of other actions taking place in the market. I’m surprised that the price of copper doesn’t go up more quickly in light of the rise in construction. I’m surprised that, after an initial upswing, digital printer company stocks, although rising, are not moving up more than they are; it seems like such an exciting technology. But DDD and SSYS have done well.

Another area of interest is Natural Gas Pipelines. There are at least 8 companies offering promising returns in this area, and a few look particularly good:

ENB.N at $43 yields about 3% in dividend and payout
KMI.N at $38 yields about 4%

Perhaps the best play there is an MLP fund or an ETF to have a basket of those companies. AMLP is an example.

With S&P yields leveling off at just over 2%, the average yield of this sector, at around 3.5% is attractive, and someday the US will figure out how to take advantage of all the natural gas supply we have.

Otherwise I’m stymied by the market’s treatment of top-notch companies with good, consistent earnings. Even though the volatility index is way down, there remain a few stocks every so often that experience extreme price shifts. My impression is that market psychology is becoming a stronger force in the price of stocks.

For that reason, I think 2013 is a good year to invest a significant portion of investment dollars in the S&P index. If the experts are right it will move up, primarily during the second half of the year. Couple that with the dividends, and the return is not so bad. And if you buy the S&P index and write covered calls against it way out of the money, you can enhance the yield and I would expect an overall return from that strategy of 8-10% for the year.

Merv Hecht
January 28, 2013