PowerTrend Brief: Sharpening the Investing Pencil Heading into 2013

The last five trading days of the year tend to be reflective ones for investors as they look back at the trades they’ve made — some good, some bad and some that in hindsight they never should have made. The key is to try and to learn from those mistakes, as well as hone the instincts and data sources that were useful in making those better-than-market investments during the last year.

Those same last five trading days also are the time to sharpen your pencil for the coming twelve months. While the last few days of the year could have some wide swings, given the low trading volume associated with diminished staffing levels at trading firms as well as at mutual funds, hedge funds and other institutional investor groups, it’s also a time to be both vigilant and forward-looking.

Vigilance is needed during the slow and low-volume days because it’s a good time for companies to distribute, if not slip by, some unwanted news. Given the time of year, it tends to be missed revenue or earnings expectations, but it also could be charges and write offs, among other things.

In terms of looking forward, the quieter days are great for sitting back and assessing the plethora of forecasts in front of us. Be it from companies, trade associations, economists and others, the slower days are great for comparing and contrasting these to see what aspects look likely and to identify those that simply don’t add up.

Complicating that analysis this year is the continuing ping-pong match about resolving the fiscal cliff in Washington, D.C. As it stands today, the two parties have moved closer, but, as I have said before, the devil is in the details of the deal. Until then, companies will continue to hope for the best but plan for the worst in the near term and, at best, that situation will mean modest progress in job creation and business investment in the coming months. No wonder the National Federation of Independent Businesses’ Small Business Optimism Index plunged 5.6 points in November to 87.5, the lowest read since April 2009.

The National Association of Business Economics (NABE) recently presented its outlook for 2013. The consensus of 48 macroeconomic forecasts calls for an annual average growth rate for real gross domestic product (GDP) of 2.1% compared to 2.2% in 2012. Sifting through the details of that forecast, we see the consensus view is for the economy to improve throughout 2013, with GDP growth reaching 3% in the fourth quarter of 2013. Breaking down that information with some simple math, the first half of 2013 is poised to be far weaker than the second half.

That level of economic activity near-term, coupled with prospects for either direct or indirect higher tax rates in 2013, is unlikely to accelerate domestic job creation to the point where it reaches escape velocity from the 150,000 jobs per month on average that have been added in 2012. At least for the near term we will be in for more of the same — disposable income under pressure, high unemployment and underemployment, and ample slack in the manufacturing economy.

Turning to the stock market, current Wall Street analyst consensus expectations call for S&P 500 operating earnings to grow 6.5% year over year to $108.06 in 2013, according to Thomson One data. That forecast suggests the S&P 500 is trading at roughly 13.3x, which is more than twice the expected earnings growth rate. Keep in mind those same earnings are tracking to grow only 3.6% this year compared 2011. Before too long, companies will start to report their 4Q 2012 results. Among those earnings reports, most should offer forward-looking guidance for the coming 12 months. At that point, we’ll have a better sense as to how realistic that 6.5% earnings growth forecast is or if it needs to be adjusted.

To keep up on the latest investment activities, check out Eagle Daily Investor, where my e-letter appears each week. To read my e-letter from last week, please click here. I also invite you to comment about my columns, as well as the articles and columns of the other Eagle Daily Investor writers.

Talking with Gary Shapiro, CEO of the Consumer Electronics Association

In my latest installment of PowerTalk, I speak with Gary Shapiro, president and CEO of the Consumer Electronics Association. That organization boasts more than 2,000 members — from startup entrepreneurs to Google. Gary also is the author of two books — “The Comeback: How Innovation Will Restore the American Dream” and the upcoming “Ninja Innovation: The Ten Killer Strategies of the World’s Most Successful Businesses,” due out on Jan. 8. In our conversation, Gary and I discuss this year’s holiday shopping season and what it means for consumer electronics, as well as what are some of the key products and technologies to be featured at the upcoming Consumer Electronics Show this January. The interview is a wonderful talk on how consumer electronics have come to permeate every facet of our lives. To listen, just click here.

Merry Christmas and Happy Holidays

As most years tend to be, 2012 was a busy one with a number of things weighing on the stock market. As we enter one of the most joyful times of the year, on behalf of my family and me, we want to wish you and your loved ones a Merry Christmas and happy holidays.

Sincerely,

Chris Versace
Editor, PowerTrend Brief

Given the holiday week, there will be a minimum of economic reports and even fewer corporate earnings. With less than a handful of days until companies close their books for both 4Q 2012 and full year 2012, I’ll be sure to keep an ear to the ground for companies that try to sneak through negative earnings news during the quiet trading week. That said, more than 600 companies will be paying dividends this week ahead of the potentially higher dividend tax rates that commence in January. Here’s a more in-depth look as to what economic data and corporate earnings are on tap for this week:

Monday, Dec. 24 – Christmas Eve
U.S. stock markets close at 1 pm

Tuesday, Dec. 25 – Christmas Day
U.S. stock markets are closed

Wednesday, Dec. 26
• MBA Mortgage Index (Weekly)
• Case-Shiller 20-City Index (October)

Thursday, Dec. 27
• Weekly Initial & Continuing Jobless Claims (Weekly)
• New Home Sales (November)
• Consumer Confidence (December)

Friday, Dec. 28
• Chicago PMI (December)
• Pending Home Sales (November)

Upcoming Appearance

• Listen for my weekly appearance each Monday on Amercia’s Morning News to talk about the economy, the stock market, stocks and more.